Amkor Technology : 2021 2Q Amkor Transcript

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AMKR.OQ - Q2 2021 Amkor Technology Inc Earnings Call

EVENT DATE/TIME: JULY 26, 2021 / 9:00PM GMT

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JULY 26, 2021 / 9:00PM, AMKR.OQ - Q2 2021 Amkor Technology Inc Earnings Call

C O R P O R A T E P A R T I C I P A N T S

Giel Rutten Amkor Technology, Inc. - President, CEO & Director

Jennifer Jue Amkor Technology, Inc. - Senior Director of IR and Finance

Megan Faust Amkor Technology, Inc. - Executive VP & CFO

C O N F E R E N C E C A L L P A R T I C I P A N T S

Arthur Michael Winston Pilot Advisors, L.P. - CEO, President, and Chief Operations Officer

P R E S E N T A T I O N

Operator

Good day, ladies and gentlemen, and welcome to the Amkor Technology Second Quarter 2021 Earnings Conference Call. My name is Diego, and I will be your conference facilitator today. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the call over to Jennifer Jue, Head of Investor Relations. Thank you, Ms. Jue. Please go ahead.

Jennifer Jue - Amkor Technology, Inc. - Senior Director of IR and Finance

Thank you, operator. Good afternoon, everyone, and thank you for joining us for Amkor's Second Quarter 2021 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.

Giel Rutten - Amkor Technology, Inc. - President, CEO & Director

Thanks, Jennifer. Good afternoon, everyone, and thank you for joining the call today. Today, I will review our second quarter performance and will provide the outlook for the third quarter. I will also make a few comments on dynamics in the markets and technologies where Amkor is well positioned for future growth.

We delivered solid financial results in the second quarter with an all-time quarterly revenue record of $1.41 billion, above the high end of guidance and an increase of 20% year-on-year and 6% sequentially. Following a strong first quarter, continued momentum resulted in better-than-expected performance in all end markets, most notably communications and consumer, where we saw a sequential increase of 6% and 9%, respectively. High factory utilization for our advanced technology portfolio, and continued improvement in our mainstream business resulted in a record second quarter EPS of $0.51.

The 6% sequential growth in communications exceeded our expectations after a strong first quarter in this segment. Year-on-year, our communications business grew 28%, representing 40% of total quarterly revenue. For the full year of 2021, we expect continued growth in this business, driven by

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JULY 26, 2021 / 9:00PM, AMKR.OQ - Q2 2021 Amkor Technology Inc Earnings Call

the strength in the smartphone market, particularly in 5G with current industry forecast of over 500 million 5G-enabled smartphones to be built this year.

Amkor has a leading position in the 5G RF domain. And over recent years, we have established a proven technology portfolio to address the advanced requirements needed to enable 5G. With our DSMBGA advanced SiP platform, we have established a preferred advanced packaging solution for this demanding application. Amkor's industry-leading design rules, dual-sided molding technology, conformal shielding together with in-line RF testing deliver best-in-class integration levels in high-volume,high-yield manufacturing process. We continue to develop technology and manufacturing scale to support our customers in this growing market segment.

In the automotive and industrial markets, we achieved another quarterly revenue record. Year-on-year growth of 33% underlines the recovery in these end markets. Some supply chain constraints, especially in the wafer and substrate supply, dampened even further growth. We continue to see strength in the mainstream part of our automotive portfolio and have received several customer endorsements, especially for the quality and delivery performance in our Philippines factories.

In the advanced product part of our portfolio, we ran several new products in the automotive sensor domain. For radar sensors, we utilize wafer-levelfan-out technology in our Portugal factory. Customers are rapidly adopting this technology due to the strict requirements of radar sensors. In addition to the growing sensor markets, we also ramped several new products targeting the automotive high-power domain accelerated by the growth of the EV market. For the second half of the year, we anticipate the automotive supply chain will gradually improve, resulting in further growth. Beyond the second half, we believe the growth drivers in this market remain in place, and we expect that semiconductor content per car will further increase due to accelerated proliferation of driver assistance electronics and the electrification of more car models.

Strength in the consumer market resulted in a better-than-expected sequential increase of 9%. We continue to diversify our product and customer portfolio in IoT wearables and ramped several new products in the quarter. We expect this market will be an important driver of growth, and our overall broadened customer pipeline for advanced SiP solutions in this domain remains strong. In addition to the wearable market, we also experienced strength in traditional consumer products like gaming, display and video devices, and we expect continued growth going forward.

Revenue in the computing market set another quarterly record with sequential growth of 6% and a year-on-year growth of 21%. We experienced solid performance in all computing applications and a further strengthening of our project pipeline. We are investing in technology and manufacturing scale to capitalize on opportunities across the computing domain, from personal computing to infrastructure and data centers. We see more opportunities in this market in emerging segments like AI and high-performance computing and in the changes brought by the ongoing deverticalization in these markets. Finally, our test business grew 12% year-on-year in the second quarter as we broadened the scope of our test services, 5G communications and system-level testing and expanded our test attach rates.

To prepare for the volume ramp in the second half of 2021, our manufacturing organization has expanded cleanroom space and capacity, most notably for advanced packaging in our factories in Korea. Also, we are encouraged by progress in the U.S. on investment policies to incentivize domestic semiconductor manufacturing. The Amkor team is exploring a possible factory location to align with the investments in the U.S. supply chain of other major semiconductor companies.

During the quarter, we increased our CapEx target for the year to around $775 million, partially in anticipation of some initial investments in a new factory location. Other major investments in 2021 are planned for wafer-level flip chip technology, SiP and test capacity as well as facility expansions and specific investments to support our Industry 4.0 program.

Now let me turn to our third quarter outlook. We expect significant growth with revenue of $1.7 billion at the midpoint of guidance. This would represent a sequential increase of 21% and a year-on-year increase of 26%. The ongoing short-term constraints in the supply chain of materials and equipment are expected to continue into the second half of 2021, and we are working closely with our suppliers and customers to help mitigate these risks. For full year 2021, we expect growth in all end markets, particularly communications. And we are well positioned to support the continued recovery in automotive. We remain confident in our strong market position and the overall demand environment and expect to outgrow the semiconductor market in 2021.

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JULY 26, 2021 / 9:00PM, AMKR.OQ - Q2 2021 Amkor Technology Inc Earnings Call

Megan will now provide more detailed financial information.

Megan Faust - Amkor Technology, Inc. - Executive VP & CFO

Thank you, Giel, and good afternoon, everyone. Today, I will review our second quarter results and then provide some comments about our third quarter outlook.

Second quarter sales were better than expected, up 6% from the first quarter to an all-time quarterly record of $1.41 billion. All of our end markets experienced growth this quarter. And as Giel noted, revenue in both automotive and industrial as well as computing were new quarterly records. Advanced products revenue grew 17% in the first half of 2021 over the same period last year, and represent approximately 70% of our business. Our mainstream products revenue also improved, driven by the recovery in automotive, and increased 20% in the first half of 2021 over the same period last year. Advanced SiP products grew double digits sequentially in Q2, primarily in support of the communications and consumer end markets.

With strong growth in both advanced and mainstream products, gross margin grew 300 basis points over prior year Q2 to 19.4%, and gross profit dollars of $273 million is a second quarter record. Material content increased 150 basis points sequentially and cost in support of second half growth moderately constrained gross margin.

Operating expenses for the quarter came in slightly lower than expected at $118 million, and operating income margin growth outpaced gross margin expansion, increasing 365 basis points year-on-year to 11%. Net income for the quarter was $126 million, resulting in record Q2 EPS of $0.51.

Q2 EBITDA increased over 40% year-on-year to $295 million, and EBITDA margin was 21%. We ended the quarter with $885 million of cash and short-term investments and total liquidity of $1.3 billion. Our solid financial position provides flexibility to continue to invest in growth opportunities.

Moving on to our third quarter outlook. We expect revenue to be between $1.65 billion and $1.75 billion. Gross margin is expected to be between 18.5% and 20.5%, Consistent with historical seasonality, Q3 expectations include a significant increase in communications, driven by advanced SiP products. We expect Q3 operating expenses of around $115 million. Our plans for controlling OpEx in a significant growth environment are expected to contribute to operating income margin expansion of around 150 basis points. We expect full year effective tax rate to be reduced to around 15% due to discrete tax benefits recognized in the first half of 2021 and favorable foreign currency movements.

Q3 net income is expected to be between $150 million and $200 million, resulting in EPS of $0.60 to $0.80. This would represent over 80% growth in EPS at the midpoint compared to the prior year quarter. We are increasing our planned capital expenditures to $775 million for the year to meet strong second half demand and for initial investments in a new factory location. Our target capital intensity remains in the low teens, and we expect free cash flow for 2021 to exceed prior year free cash flow.

With that, we will now open the call up for your questions. Operator?

Q U E S T I O N S A N D A N S W E R S

Operator

(Operator Instructions) And our first question comes from Haas Liu with Credit Suisse.

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JULY 26, 2021 / 9:00PM, AMKR.OQ - Q2 2021 Amkor Technology Inc Earnings Call

Unidentified Analyst

This is [Angela] on behalf of Randy, and congratulations on a great quarter. So if you can give a little more color on what has moved the strength of your third -- what will be driving the strength of your third quarter results and about like relative strength and weakness of application and your initial view for 4Q.

Megan Faust - Amkor Technology, Inc. - Executive VP & CFO

[Angela], let's just clarify the question. There was a little bit of audio on our side. So I think your question is to add some color with respect to any supply constraints that we might be experiencing heading into the third quarter to perhaps expand, by application, on those supply constraints and then whether or not we have any comments as it relates to impact in the fourth quarter. Did I capture your question appropriately?

Unidentified Analyst

Actually, my question is more so around these larger drivers of your performance.

Megan Faust - Amkor Technology, Inc. - Executive VP & CFO

Okay. So end market drivers. Okay, [Angela]. Giel, would you like to address the end market drivers?

Giel Rutten - Amkor Technology, Inc. - President, CEO & Director

Yes. [Angela], let's try to summarize that. I'm -- the main catalyst for growth is -- certainly in the third quarter is 5G communication then IoT, specifically IoT wearables. Generally, automotive -- and in automotive, we see strength in the driver assistance features and also in the automotive power domain and then, of course, high-performance computing in general. But if you look specifically into Q3, we see that the communication market is strong. We expect growth both in the volume of smartphones to be sold in the third quarter as well as an increase in the number of 5G handsets to be sold. Comparing to last year, it is expected that this year, 500 million smartphone 5G-enabled handsets will be deployed into the market, which is a doubling compared to last year. And that drives a significant semiconductor content, where Amkor has a good position in the RF domain but also in multiple other components in the 5G smartphones.

Megan Faust - Amkor Technology, Inc. - Executive VP & CFO

So [Angela], just to add to Giel's comments to give you some color, our 21% increase for Q3 at the midpoint. Our -- the last 5 years, we've had about 15% increase. So that significant increase in Q3 we're expecting, as Giel mentioned, is led by communications. Typically, if you look back at our Q3 performance, you'd see around a 30% increase for communications. And we're expecting something around 40% for the communications market. Any follow-up questions, Angela ?

Unidentified Analyst

Yes. Sure. About your third Q gross margin guidance, it -- does that -- you briefly mentioned about some costs factoring in. Can you elaborate upon that mid-20% margin?

Megan Faust - Amkor Technology, Inc. - Executive VP & CFO

Yes. [Angela], are you speaking specifically to the Q3 guide for gross margin or specific to the Q2 actuals? I just wanted to make sure I addressed the right question.

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