AMKR 2022Q1

Good day, ladies and gentlemen, and welcome to the Amkor First 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 first 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 solid results in the first quarter with both revenue and profitability at the high end of guidance. Revenue of $1.6 billion and EPS of $0.69, our first-quarter records, reflecting year-on-year increases of 20% and 40% respectively. Continued strong demand for our advanced packaging solutions, particularly in the communication market, led to better-than-expected results. Now, let me review the current dynamics in our end markets. Our communications business grew 22% year-on-year, driven by demand for advanced SiP and flip chip technology for the latest 5G processors and peripheral devices in new smartphone models. Some weakness in the China market was offset by strength in high-end smartphones, as well as the spring launch of new models. With Amkor’s leadership position across multiple semiconductor devices in 5G phones, we expect the ongoing proliferation of 5G to remain an important growth driver. Solid performance in the automotive and industrial markets drove 15% growth compared to the first quarter of 2021. In the automotive supply chain, we observed an increased attention to risk management. Both semiconductor suppliers and Tier-1 companies are exploring multiple sourcing arrangements, as well as options to establish regional supply chains. With Amkor’s manufacturing lines in the main automotive geographies, we are well positioned to support our customers in implementing these changes. In Korea, we have a strong automotive manufacturing hub for advanced packaging. In Japan, we offer a well-established manufacturing base supporting a broad range of automotive solutions, including emerging silicon carbide power products for electric vehicles. In Europe, we are expanding our technology portfolio in our Portugal factory, where we have started production of automotive sensors using wafer-level fan-out and MEMS technology. In all locations, we are working with lead automotive customers on the next generation products, and we have multiple new product introductions ramping this year. With our global manufacturing footprint and broad technology offerings, we expect ongoing strength in this market, as ADAS, electrification, infotainment, and telematics will drive continued expansion of semiconductor content per car. As the leading automotive supplier, Amkor has a strong track record of partnering with customers who demand automotive grade quality and supply reliability. Automotive-qualified manufacturing lines are a critical differentiator, and we are proud to have received recognition from top automotive companies for our commitment to quality and supplier reliability. Our consumer business increased 11% year-on-year, supported by strength in traditional consumer products and a broad portfolio of IoT wearables. Our advanced SiP assembly and test platform offers a turnkey solution for the IoT wearable markets. Our high-volume, cost-effective flip chip technology offers excellent value to customers for traditional consumer applications. We expect the consumer market to further expand, and overall product and customer pipeline remains strong. 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 chain constraints and varying product life cycles. Continued strong momentum in the computing market drove year-on-year growth of 36%, with 10 consecutive quarters of sequential growth. We achieved robust growth in all computer applications. In data centers, the introduction of AI, as well as the trends of increased data traffic, is driving investments in high-performance computing utilizing the latest silicon nodes with advanced packaging technology. We see similar technology requirements in the wired and wireless infrastructure markets, notably in support of the 5G infrastructure. Although the PC market is softening, we observe trends towards ARM-based PC architectures. In this emerging PC segment, Amkor is able to support our customers with a proven multi-chip modular solution. With our broad advanced packaging portfolio and established partnerships with lead customers and foundries, we believe we are well positioned to capitalize on opportunities in these growing computing applications. We continue investing in advanced technology and manufacturing scale for these markets. Finally, our test business grew 14% compared to the first quarter of 2021. We have established broad test expertise by supporting both industry leaders and emerging companies in new application areas. Through early engagement in customer product lifecycles, we are able to define test strategies and intelligent equipment selection to provide differentiated test solutions. We are broadening the scope of our test services in areas like 5G communications, computing, and system-level testing to enhance our turnkey support for our customers. Our manufacturing organization continues to demonstrate Amkor’s commitment to quality and supply reliability to our customers. The ongoing semiconductor supply challenges require diligence and flexibility from our global organization to meet customer requirements while maintaining industry-leading quality standards and high factory utilization. In late March, the Chinese government mandated the COVID-19 lockdown of our Shanghai factory. Demonstrating utmost flexibility, our manufacturing team is closely cooperating with local authorities and customers to minimize the impact and resume regular operations. We anticipate that our Shanghai factory will return to normal production during the second half of the quarter. Our guidance reflects this. As we work through this dynamic situation, we are doing what we can to support our people and keep them safe. We're leveraging our global factory network to support our customers, and we work with authorities to enable a controlled restart of production. In addition to managing the supply chain challenges, the Amkor team continues to expand our global manufacturing footprint to ensure we can capture future growth opportunities and meet expanding customer requirements. Besides supporting a changing automotive supply chain, we are also expanding our footprint to offer customers broader geographical diversification. In November 2021, we announced our plans to expand our global factory footprint by building a state-of-the-art facility in Bac Ninh, Vietnam. The project is on schedule to start pilot production in the second half of 2023. When completed, our Bac Ninh manufacturing campus will offer our customers an attractive, large-scale, cost-effective manufacturing location with a diversified technology portfolio. Now let me turn to our second quarter revenue outlook. We have included an estimated revenue impact for the Shanghai lockdown of around $120 million in our guidance. Assuming that the situation continues to improve, including this impact, we are expecting second quarter revenue of $1.52 billion at the midpoint of our guidance. This will represent a year-on-year increase of 8%. Megan will now provide more detailed financial information.

Thank you, Giel, and good afternoon everyone. Amkor delivered strong financial results in Q1, setting first-quarter records for revenue, gross profit, operating income, EPS, and EBITDA. First-quarter revenue of $1.6 billion was up 20% year-on-year and down 7% sequentially. The communications end market led the strong performance versus guidance with strength in both the iOS and Android ecosystems. All of our end markets grew double digits year-on-year and computing achieved another quarter of record revenue. While we were able to exceed our Q1 expectations, this did not come without challenges. We continue to successfully manage the ongoing supply chain constraints on wafers, substrates, lead frames, and components to support robust customer demand. Revenue for advanced products grew 26% year-on-year in the first quarter and represents approximately 70% of our business. Demand for advanced SiP and flip chip solutions within the computing, automotive, and industrial and communications end markets is strong and is driving this significant growth. Our mainstream products make up around 30% of our business and demonstrate continued strength with a year-on-year increase of 9% in the first quarter. Gross margin of 20.4% exceeded the high end of our guidance, driven by disciplined cost control. Gross profit of $325 million is a first-quarter record. Operating expenses for the quarter were in line with expectations at $115 million, resulting in an operating income margin for the quarter of 13.2%. Net income for the quarter was $171 million, resulting in record Q1 EPS of $0.69. Q1 EBITDA increased 30% year-on-year to $363 million and EBITDA margin was 23%. Our balance sheet is solid; we ended the quarter with $1.2 billion of cash and short-term investments. During the first quarter, we executed a new $600 million revolving credit facility, replacing a $250 million revolving credit facility. Total liquidity increased to $1.9 billion, providing us with financial flexibility. Our total debt as of the end of the first quarter is $1.2 billion, and our debt-to-EBITDA ratio is 0.9x. Moving on to our second quarter outlook. As Giel mentioned, a government mandated COVID-19 lockdown impacted our Shanghai facility beginning in late March. Our factory team has been working closely with local authorities to resume regular operations. We anticipate our Shanghai factory will return to normal production during the second half of Q2. Market demand continues to remain strong across our portfolio and geographic footprint, and we don't expect the short-term disruption to have a material effect on our mid and long-term results. With the reduced Shanghai factory output included, and assuming that the lockdown ends as currently anticipated, we expect revenue to be between $1.47 billion and $1.57 billion. Gross margin is expected to be between 16.5% and 18.5%. The Shanghai lockdown is estimated to have an approximately 300 basis point impact on gross margin, reflecting underutilization and incremental COVID lockdown costs. We expect Q2 operating expenses of around $115 million. We expect our full-year effective tax rate to be around 15%. Q2 net income is expected to be between $90 million and $140 million, resulting in EPS of $0.37 to $0.57. Our forecast for capital expenditures for the year remains at $950 million to support strong demand expected in 2022 and beyond. With that, we will now open the call up for your questions.

Thank you. At this time we will conduct our question-and-answer session. Our first question comes from Randy Abrams with Credit Suisse. Please state your question.

Yes. Good morning and good result for the first quarter. I wanted to go into the Shanghai factory impact and just have a few follow-ups to that. I think, first, it seems like it's been different by supplier. Some suppliers have kept going or offering partial utilization. So was there a factor that mandated the total shutdown? And in terms of timing, like the date you expect to get the production back up and if you're still waiting for that clearance? And given the loss of impact, I think you mentioned $120 million? How much do you see as a make-up that in the third quarter? It would supplement what we would normally expect to have a seasonal ramp. But how much do you anticipate incremental revenue versus some of that production may have shifted to other non-China sites impacting competitors that might be lost revenue?

Good Morning, Randy. This is Giel. Let me try to answer your questions here. First of all, on the lockdown in Shanghai and why this is different across multiple companies: what we experienced in Shanghai was very much about the location where the factory is situated depending on the local measures that are taken. Currently, we see that, for example, we are in Pudong where there are very strict measures. It actually varies region-by-region. This forced the local authorities to impose a lockdown of most manufacturing locations in Pudong. They kept it very strict also in the Zhangjiang Hi-Tech Park, where we are situated. Other areas in the Shanghai area may experience slightly different measures. Although we see that similar restrictions are proliferating there. As for the share impact: we work closely with customers, because many of them have long-term supply agreements, where we utilize our global manufacturing footprint to shift volume to other factories in areas outside of Shanghai. It is also a relatively low season for the business, so we have a bit of excess capacity, and our customers have a bit more flexibility there. We expect that on an annual basis, we will be able to compensate for a large extent, Randy, maybe not to full extent, but to a large extent.

And just with regard to the status, do you have a date for resuming production or is it still set to depend on how the conditions evolve in the coming weeks?

Yes, there are a couple of strict conditions that you need to meet. Currently, we're working with customers, and we feel that we have a way forward where we meet all of the conditions. So it could be a matter of days before we can start again.

And if we think in a worst-case scenario, the $120 million is for about the first half of the quarter. In a worst-case, if it were to extend like say half a quarter, how much revenue impact are we talking about here? Would it be similar in magnitude given that you would have more time to shift orders?

Yes. So I think the longer it would take, the more options would open up to utilize all factories. But we're fairly confident that there is a way forward where we are back to normal operations before the second half of this month.

I wanted to ask on the demand side: since we last had results with the Russia-Ukraine situation, there’s been a demand side in China from these lockdowns and inflation has been persistent. Have you witnessed changes in demand that affects your view on customers slowing down their rates?

Well, that’s a good question, Randy. Currently, we are very alert to demand changes, but we have not seen any demand changes; in fact, we still see upsides that we cannot fulfill because of hiccups in the supply chain, materials supply, or certain components supply. So we still believe that the end markets are strong, even in the communication market, where there is some weakness in the China communication market. But on the other hand, we see upside on the premium tier Android smartphones, where we hold a strong position. So all in all, we believe that the demand side remains robust. We're keeping a close eye on inventory levels in the supply chain, and so far, we don't see any indications of concern.

To follow up on the inventory, it appears that the IDMs are still in reasonably good shape, or slightly low. There was some buildup over the past couple of quarters, but the absolute level is somewhat elevated. Are you noticing if this is more related to wafer banks awaiting substrates, or do you think it pertains to finished packaging test chips that are resulting in higher inventory levels?

Well, the wafer bank in the foundry sites, we have limited exposure; I can't comment on their inventory levels. On the finished products, so the packages and tested products, we have a bit more insight. I mean, on the distributor side, we see a slight increase, but still below their target level. At both our fabless customers and the IDMs, we believe that the inventory levels are still below their target. That is our observation at this point in time.

Final question: I want to ask for a little preview into the second half, given comments on demand side. Is it rough expectations that you can do your catch-up and could see above seasonal quarters? Is it difficult to make it up given relative tightness? And then, with regard to the margin where you have a bit over 20%, if we start to pass that, do you see leverage pushing back into low 20s again?

Yes. From the revenue perspective, and also from the margin perspective, I expect it to be very positive. We believe we can make up the loss in the second quarter in the remaining part of the year, maybe not in the exact portfolio elements. But we believe that the market is strong. We see upside for Q4, so we feel confident that we can make up for the Q2 correction caused by the lockdown.

Absolutely. I want to ask one final question: the Sunbeam advanced versus mature, is the bottleneck more on the advanced side? But just your capacity for flip chip test and substrate, or do you see also some bottlenecks on mainstream where you're running for capacity or at the lead frame constraints?

Yes. On the mainstream side, we still see constraints on the lead frame sides, a little bit on the substrate side, but that's lower than in the advanced side. So mainly lead frame on the mainstream side, which is still having a significant impact. If you look at the revenue and the forecast that we are unable to deliver upon. On the advanced product side, there are a couple of things. If you look to SiP, it's still the more mature silicon nodes and related components that are a bottleneck in the industry and force end customers to make decisions on their portfolio. As for substrates, specifically in the high-end substrate segments, we see constraints in the compute segment, particularly in the infrastructure side, and on certain parts of the automotive market. There are still constraints on high-end substrates.

One word I may have missed: is the mainstream video a significant or insignificant impact?

Significant.

Okay, great. Thanks.

Okay. Thanks, Randy.

Thank you. Our next question comes from Krish Sankar with Cowen and Company. Please state your question.

Yes. Hi, thanks for taking my question. I had a few of them. First, I want clarification, Giel. You mentioned that the Shanghai lockdown impacted $120 million and you expect it to come back online in the second half of the quarter. Just simplistically speaking, if Shanghai was shut down for the whole quarter, would it be a $240 million impact or lesser or higher?

Well, I mean we don’t quote the revenue per factory specifically, Krish, but the mathematics adds up to about that level? Yes, I think the Shanghai factory on a revenue basis is about 15% of Amkor revenue.

Got it. Very helpful. You mentioned about the China smartphone business being offset by high-end smartphones, having more high-end in the mix, is that a positive, negative, or neutral impact of both modules?

Let me try to repeat the question, Krish, so your question is related to the premium tier smartphones and our position there and strengthening the segment. Would you be correct in considering that a positive impact on our gross margin compared to our average gross margin?

Exactly. Is the impact positive, negative, or neutral?

Yes. I think we hold a strong position in the premium tier smartphones, and we have had success in that area for multiple years. So I would consider that to be a positive as we deliver comprehensive turnkey solutions, which include bump, assembly, and final testing. Overall, adding that business will contribute positively to our average gross margin.

Got it. And then you mentioned about the automotive and the diversifying supply chain there. I'm curious about your exposure: if I’m right, it's more on the wire bond side. Is that correct? And how do you see automotive through the second half of this year?

Yes, let me first try to answer your first question regarding the diversification of the supply chain in automotive. Actually, we see that more pronounced on the advanced package side. The driver behind the diversification of the supply chain in automotive is driven by security of supplies, IP protection, and more control on the factory base by Tier 1 semiconductor companies, but also end customers. If you'd like to see where that’s most prominent, it would be in the advanced product side. In terms of automotive in the second half of the year, we are very confident that the automotive market will have a strong year. The volumes in produced cars are expected to grow significantly this year compared to last year. There are some hiccups because of the Ukraine disruption, but overall, the industry expects that 6% more cars will be built this year versus last year. Also, the penetration rate of EVs and hybrids is faster than expected. So with that, we expect this will contribute to a solid year with strong performance in the second half, which is factored into our numbers, Krish.

Got it. Very helpful. And then a final question for Megan. The $950 million CapEx have kind of maintained for this year. I remember last year you said $100 million goes into Vietnam. So the rest goes into advanced SiP packaging, wire bonders. Is there any color you can provide on the remaining $850 million? How to think about what goes into SiP advanced packaging, wire bonders, etc?

Sure. I can do that, Krish. So out of our $950 million, around 30% is for infrastructure, including the incremental $100 million for Vietnam that you mentioned. Then about 5% to 3% for quality and R&D, leaving approximately 65% for capacity and capability that you mentioned. The majority of that, I would say, 90% of the equipment CapEx will be geared towards advanced SiP, flip chip, and wafer services, with about 10% allocated for wirebond mainstream business.

Got it. Thank you very much, Megan. Thanks a lot to you.

Thanks, Krish.

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

Yes. Good afternoon. Maybe just a quick clarification on the Shanghai facility. Did that completely close down? Were the doors shut essentially to zero production when it closed, or is there such a thing as a central business that would allow you to run some capacity through there?

Hi, Tom, let me try to answer that. It was completely closed, no. We still maintained about 1,000 people on site. Facilities kept running, and we made sure that equipment was maintained; all of that continues, but there was no effective production going through. Hence, no shipments were leaving the facility, but we still had a significant number of people on site. Currently, we’re working on bringing more people in to ramp up production as we get back to operating normally.

Okay, that's helpful. Thank you. You mentioned that there's a little bit of slowing in the PC market. I'm curious, is that more a seasonal trend? Is the weakness in end market demand or a supply chain issue? How would you characterize the softness?

Hey, Tom. I missed the first part of your question. Which market are you referring to?

The PC market.

Yes. On the PC market, we see a broader weakness in the traditional PC market. Currently, we note some slowness in this time of the year. Be aware that this is public knowledge; we see a trend from traditional PC architecture to ARM-based architecture. The traditional PC market largely relies on a vertically integrated supply chain. If the market shifts to an ARM-based architecture, the companies involved tend to be utilizing an outsourced supply chain, which is beneficial for Amkor.

Thank you. And then last question: when you look at the supply chain, is there any way to quantify the impact either on results or output from either a revenue or margin perspective?

Megan, can you comment on that?

Yes, Tom. When we look at the constraints that we've faced in the quarter, it’s very difficult to quantify both on the top line, because Amkor and our customers are both working to refine their forecasts considering our material supply and their downstream. So it's challenging to quantify that. Without having that number, it's also tough to quantify the margin impact. That being said, I would say that the margin impact is not significant, given that we've still been able to deliver upside results, which offset some constraints due to demand.

That's very helpful. Maybe I'll sneak in just one more. Has there been any COVID outbreaks or impacts in any other regions besides your Shanghai facility?

Tom, no. As you know, the COVID pandemic has been ongoing for well over two years now. During this time, we implemented very strict procedures in all our global factories. When there were flare-ups in places like Malaysia, the Philippines, and other jurisdictions, we managed the situations very well with our manufacturing organization. The Shanghai situation in our case is an exception. Currently, we don't see any other locations experiencing COVID impacts.

Okay, that's nice to hear. And thank you for your time today.

Thank you. Before closing the call, I would like to recap our key messages. Amkor delivered strong first-quarter results, with revenue of $1.6 billion and EPS of $0.69, both first-quarter records, and up 20% and 40% year-on-year, respectively. Including the anticipated effect of the Shanghai factory lockdown, we expect revenue of $1.52 billion, reflecting year-on-year growth of 8%. Demand for our technology and services remains strong; Amkor is well positioned within key growth markets of 5G, IoT, automotive and high-performance computing. Finally, I would like to thank our global Amkor team for delivering an excellent first quarter. Special thanks to the factory management team and employees in our Shanghai factory for their diligence in managing the mandated factory lockdown and the continued focus on bringing the factory back to regular operations. Thank you for joining the call today.

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