Amkor Technology : 2022 2Q Amkor Transcript

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AMKR.OQ - Q2 2022 Amkor Technology Inc Earnings Call

EVENT DATE/TIME: AUGUST 01, 2022 / 9:00PM GMT

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AUGUST 01, 2022 / 9:00PM, AMKR.OQ - Q2 2022 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 & Treasurer

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

Randy Abrams Crédit Suisse AG, Research Division - MD and Head of Taiwan Research in the Equity Research Department

Thomas Robert Diffely D.A. Davidson & Co., Research Division - MD & Director of Institutional Research

Yu Shi Needham & Company, LLC, Research Division - Senior Analyst

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 2022 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. 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 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.

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

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 a new record. Revenue increased 14% year-on-year in the first half, and advanced packaging grew 18% despite the COVID-19 lockdown in our Shanghai factories.

While the industry is facing macroeconomic 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 catalysts 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 communications business grew 10% compared to the first half of last year. Although overall forecasts for smartphone units have weakened to a mid-single-digityear-on-year decline, 5G unit volume is expected to grow and reach an estimated 50% penetration this year, up from around 35% 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

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AUGUST 01, 2022 / 9:00PM, AMKR.OQ - Q2 2022 Amkor Technology Inc Earnings Call

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 observed improvement in lead times and anticipate a more balanced supply chain by the end of this year. We expect the automotive semiconductor market to outgrow the overall industry. Average 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 CAGRs 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 OSAT 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 the 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 datacenters, infrastructure and PCs. In datacenters, 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 observed 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 datacenters. These companies tend to utilize a fully outsourced supply chain and are partnering with foundries and OSATs like Amkor to accelerate innovation.

With our broad advanced packaging portfolio and established relationships with lead 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 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 these trends.

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, multistage 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 Quality First program is widely deployed in the organization and close collaboration with our supply chain partners further improved supply reliability. In the supply chain, we observed 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 required the utmost in 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

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AUGUST 01, 2022 / 9:00PM, AMKR.OQ - Q2 2022 Amkor Technology Inc Earnings Call

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. Megan will now provide more detailed financial information.

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

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 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 0.8x.

Moving on to 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-basedlong-term demand and the expansion of our global factory footprint to Vietnam. Full 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. 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) Our first question comes from Randy Abrams with Credit Suisse.

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AUGUST 01, 2022 / 9:00PM, AMKR.OQ - Q2 2022 Amkor Technology Inc Earnings Call

Randy Abrams - Crédit Suisse AG, Research Division - MD and Head of Taiwan Research in the Equity Research Department

The first question I just wanted to ask on the Shanghai operations, which resumed a bit later than expected. If you could, talk about how much impact in second quarter. And then for the shift, do you expect any or all of that to shift into third quarter, or some could continue into fourth quarter. If you could, discuss the timing, how that impacted the flow of revenue.

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

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.

Randy Abrams - Crédit Suisse AG, Research Division - MD and Head of Taiwan Research in the Equity Research Department

Great. Yes, it sounds like it's mostly third, but some of it could continue into fourth quarter. Okay. If I could ask on the -- you have the foundries and some of the backend companies are indicating some risk of a correction into fourth quarter/first half. It sounds like your markets are pretty robust, but are you anticipating factoring in or expecting some slowdown? Or do you see the strength continuing to yearend? Maybe an initial view if you think first quarter gets back to kind of the normal seasonal trend just factoring some of the macro.

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

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 let's say a balanced, a more balanced supply chain. Than the key growth drivers in the markets that we're supporting, be it 5G, be it 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 also going into next year.

Randy Abrams - Crédit Suisse AG, Research Division - MD and Head of Taiwan Research in the Equity Research Department

Good. And for the -- like you've seen a strong mix towards advanced packaging and highlighted that as a driver. For the mainstream business, how have you seen the wire bonding? I think traditionally, you've had more of an auto industrial footprint there versus some of the OSATs 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 underutilization?

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

Yes. For our wire bond and lead frame business, we operate our factories at high utilization. That will continue for the major part of the year. Same thing as for our advanced packaging. We have long-term agreements in place with our customers. We have a strong position in the automotive domain. On the wire bond business, we see strength certainly in the automotive wire bond part. Automotive microcontrollers are a strong driver in that growth. Some pockets of inventory corrections, specifically in Japan, but we expect going into the fourth quarter and even further going into next year, we see strength in that business. Accelerated competition when there is open demand, the segments that we are supporting for the wire bond and lead frame business, it is not so easy for customers to switch. And we have, with our long-term agreements, we believe that we are well positioned there. It is not -- we don't cater to the commodity part of this business, so we don't believe that there is a risk there.

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