Q3 2019 Earnings Call

This time all participants are in listen only mode. After the speaker's remarks, we will conduct a question answer session.

During this conference is being recorded.

I would now like to turn the call over <unk>, Vincent Caintic, Vice President Investor Relations Mr. Kenan. Please go ahead.

Thank you Judy.

Good afternoon, everyone and thank you for joining us for Emcores third quarter 2019 earnings conference call.

Joining me today are Steve Kelly, our Chief Executive Officer, and Megan Faust, Our Chief Financial Officer.

Our earnings press release was filed with the FCC. This afternoon and is available on our website.

During this conference call, we will use non-GAAP financial measures and you can find a reconciliation to the U.S. GAAP equivalent on our website.

We will also make forward looking statements about our expectations for Emcores future performance based on the environment as we currently see it.

Of course actual results could be different.

Please refer to our press release, another FCC 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 discuss 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 Steve.

Good afternoon, thanks for joining the call.

Today, I'll review, our third quarter performance in fourth quarter outlook.

Then provide color on some of the markets and technologies.

Which are driving our second half revenue growth.

Well, that's a review airport strong position and the fastest growing parts of the semiconductor market.

Third quarter revenue was above the high end of our guidance.

Because of stronger than expected demand for advanced packages.

Operating income net income and he P.S. also exceeded guidance.

Largely due to our <unk>, 21% sequential revenue growth.

And continued cost discipline.

Successful watches a flagship phones with high input content.

Drove our sales in the communications market.

In the consumer market, we benefited from the ramp of a new high volume advanced it's I'd be product.

Our revenue in the automotive and industrial market increased 10% sequentially.

We have roughly equal gains in advanced mainstream packages.

Yes, and other digital intensive applications.

Real demand for advanced packaging.

Pipeline replenishment.

New product launches drove growth in mainstream automotive packaging.

In the fourth quarter.

We expect revenue and profitability similar to the third quarter.

At the midpoint of our fourth quarter guidance.

We expect second half 2019 revenue to be 22% higher than the first half.

Yeah of course strong position and the communications.

Hi volume consumer.

Automotive markets are driving that growth.

Despite our revenue gains and advanced packaging, we have not yet seen similar recovery and the overall mainstream business.

We expect our mainstream business to improve in 2020.

As channel inventory issues are resolved.

The return of mainstream demand to normal levels.

Should provide a substantial upside opportunity for EMCOR.

As we look to 2020 and beyond.

We're pleased with our position.

And many of the fastest growing areas of the semiconductor market.

And communications.

The deployment of Fiveg technology.

For a new smartphone upgrade cycle.

Driving up unit demand.

Fiveg technology will also be deployed in cars.

Factories.

In other applications, which require high speed wireless connectivity.

Advanced package technology from Amcor has been chosen for many key fiveg circuits and modules, including a pea.

Base band RF.

Our management transceiver.

Sensor.

And then tenda functions.

We also see significant growth potential in the high volume consumer market.

Yeah of course advanced as I'd be technology can be used to increase the functionality.

And improve the reliability of wearable.

In other small form factor products.

In automotive we are benefiting from the widespread adoption of advanced packages for Adas.

Infotainment.

In other digital intensive high pin count products.

Imports flip chip.

Yes I P.

Yeah wafer level fan out packages are all being used by automotive customers.

Our automotive flip chip and that's I P packages are built in high volume in our Korea factories.

Which for years have delivered outstanding quality.

And yield performance to a wide variety of demanding customers.

Wafer level fan out products for automotive applications are built and our Portugal factory.

Which has a strong quality orientation well suited for the automotive market.

In summary.

Our focus on delivering advanced technology.

Quality and high yield has allowed us to establish a leadership position.

In many of the fastest growing semiconductor markets.

These markets had been key to our revenue growth in the second half of 2019.

And we expect them to drive revenue growth in future years.

Megan will now provide more detailed financial information.

Thank you, Steve and good afternoon, everyone.

Today, I will review, our third quarter results and provide some comments about our fourth quarter outlook.

We delivered a strong quarter of growth and profitability driven by strength across multiple end markets.

Sequential revenue growth of 21% and cost discipline drove gross margin up 300 basis points to 17%.

At the high fixed cost manufacturing business.

When we had upward or downward changes in revenue, we typically see 40% to 50% of the revenue change dropped through the gross profit.

As a result of our cost reduction measures only 30% of the third quarter year over year revenue decline drops through to gross profit.

The combination of strong revenue growth manufacturing cost control and disciplined discretionary spending drove operating margin up nearly 500 basis points sequentially to 7%.

EBITDA increased over 40% sequentially to $210 million or 19% of revenue.

The bank refinancing we did in July 2018 reduced annual interest expense by $11 million.

Interest expense in the third quarter was $3 million lower than a year ago corridor.

Earnings per share of 23 cents it nearly back to Q3 2018 models.

We closed out the quarter with a strong balance sheet, including $600 million at cash on hand, total liquidity of over $900 million and lower debt and a year ago corridor.

We are well positioned to support future revenue growth, which will drive operating leverage as capacity utilization improves and our factory.

Moving onto our fourth quarter outlook, we expect revenue to be similar to the third quarter around $1.1 billion.

Fourth quarter gross margin is expected to be flat to the third quarter.

Operating expenses are also expected to remain flat for the fourth quarter.

Generally our effective tax rate is around 25% subject to minimum level of taxes not dependent on our income.

We expect net income to be in the range of $26 million to $78 million an earnings per share of 11 cents to 32 cents.

We have a goal of generating positive free cash flow and 29 team at down here, which would represent our fifth consecutive year, that's positive free cash flow.

We are holding our target for 2019, capex payments and changed at $475 million.

Capex is one of the key levers we used to control free cash flow and we will continue to stay disciplined and strategic on spending moving into 2020.

With that we will now open the call left for your questions. Operator, you may begin the pulling now.

As a reminder to ask the question you wanted to press Star one on your telephone.

To withdraw your question press the pound Keith please stand by what we compile the Q and a roster.

Our first question is from Sidney Ho from Deutsche Bank. Your line is now fan.

Thanks, and congrats on the strong resulting died.

Maybe first question I have is just looking at your Fourq guidance understanding that both comps and consumer with quite a bit about seasonal growth in Q3, how should we how should we think about the Q4 revenue growth by segment.

So oh I'll take that and then Megan can fill in any gaps that oh, leaving the answer.

But Q4 is looking a strong we just are finishing up October and it's going to be very strong month for us.

Normally we would see a seasonal decline.

I remember in December is the flagship phone cycle start to happen.

And how many customers focused on yearend inventory control. That's that's a typical Q4.

It could be somewhat different this year since inventory control has been the focus for my neighbor customers for most of 2019, So we may see a little bit more aggressiveness.

In November and December due to.

Early Chinese new year, it's late January this year.

And also I think some customers are starting to come out of these inventory correction mode.

Okay great.

Maybe moving on a along the same line on communications.

Five really to Fiveg, clearly, there's a huge uptick and expectations for Fiveg, Kansas mixture and Steve you walk into you talk about all the different.

Components, you are doing for Fiveg.

Your your comps revenue in general is down about mid teens. This year in Fiveg Hans has come in as people expected 200 to 215 million units do you think your coms revenue can get back to the previous high maybe you can talk about some puts and takes there.

Yeah, I think looking back on 2019 now the first half is pretty difficult for comps given their inventory corrections, we were seen in China and also a in the iOS ecosystem.

That's obviously changed a lot in the second half.

With the launch of some a pretty successful new phones.

But I think the real upgrade catalyst is gonna be next year with Fiveg. So I think as they look into 2020 I see a combination two things I think you're gonna have some very.

A good value fourg phones to be selling well next year. In addition, you'll have some very.

Good performance Fiveg phones and together.

You're going to drive some nice unit volumes in 2020.

So I think the short answer to your question is.

Yes, I think the volumes get back to where they used to be next year and there's a bonus and that Fiveg offers additional content on top of what we currently do the delivered a fourg phones.

That's great last question for me in terms of Capex you guys have cut back on this year on the tough environment. How should we think about Capex for next year, maybe not it's not a point estimate if you're not ready for that yet, but how should we think.

What is a normalized levels and capex and when it next year will be a bulk that because some catch up with capex. This year.

Yeah, Let me make a few comments into making can give you some more specific numbers.

But we did exercise capital discipline in 2019.

And we're going to bring that capital discipline into 2020.

We still have a substantial part of our capacity, which is under utilized the general market remains in the doldrums.

So I think when the general market comes back that's going to basically use capacity, we already have in place.

Investments next year, we focused on high growth advanced packages in particular.

And I really think we'll be investing more in system in package van system in package capacity and other high growth advanced packages.

And so Sidney just to give you a figure for modeling purposes, I think maintaining a similar 12% capital intensity.

Would be appropriate.

Thank you.

Thank you. Our next question is from Randy Abrams from Credit Suisse. Your line is now fan.

Yes, okay. Thank you I'm could result, <unk> I wanted to follow up just on the general markets outlook.

There's been some mixed signals like T. I had that high profile guess still guided that it's still a soft environment I'm curious from those general markets.

How you're seeing it does I know a few months ago, it sounded like you're starting to bottom and see pick up I.

I guess first from global customers and then also from the Japan basis, and then the second end market related question just in the PC compute data center related I mean, it looks like that this this might still be a softer from the mix, but we're seeing a bit a pickup in data center.

I'm curious how you see leverage to the some of these new like high performance compute server odd where I kinda nephew, Jay just a few city content gains were maybe less leverage to that channel.

You really let me talk about the general market first.

So the German market I think is a mixed bag right now.

We're seeing signs of life in automotive.

And that's a perfectly content story of course, it's also the function of our strong position in that marketplace, we've got to a.

The big lead in automotive.

And you know very good position, both an advanced in mainstream packages.

I think in the rest of the general market, it's very customer specific as you've noted I would say most of the customers are still working through inventory issues, but we have some that are coming out of that.

Yeah, I think a in total.

As we look at a our history would these types of inventory cyclical corrections, we expect the most where customers should be out of the inventory correction mode by.

Mike you want them next year.

Okay great.

And then maybe to follow up on the data center, maybe what's driving a bit of where it's a little bit more flattish and how you see that part of the market.

Yeah on the data center a there's various.

They used to go into that I would say right now.

You know, we're seeing some strength on the memory side, but we're seeing some weakness on some of the a six and a PGS and so forth.

And so love it has to do with.

The timing of the shipments.

Into the end application.

And I think some of the things that were happening in China, probably accelerated some of the shipments those products into China last year in early this year.

And now it creates a a difficult comparison right now.

Okay. Yeah. That's a good secondly, just a question I'd I want a task on because now it seems like the tariffs kind of move to consumer if they're on again off again for December .

But to what extent are you seeing and things like smartphone tablet PC any pull in demand the fourth quarter and guess at this stage, it's unpredictable what happens with the tariffs, but given the builds in third and fourth quarter and maybe an early look at how you see that.

Like where you think a normal seasonal first quarter is and.

If at this stage tickets it looks normal to you.

Yeah, it's hard to gauge exactly how much of the demand in Q4's for pull in versus just the you know better selling phones.

But I think as we look at Q1 20, obviously, we don't provide any specific guidance.

But the normal seasonality in Q1 is typically done around 8% sequentially.

As I look at Q1 this year.

I see some tailwinds in some potential headwinds.

The tailwinds or.

At least a couple of flagship phone launches in the March April time frame.

And that would require a builds in Q1.

I see potential recovery in the general market, which will be gaining steam in Q1.

And I think the consumer market will do to be strong for us in Q1. So those are all tailwinds.

I think the headwinds I'd like you mentioned you know, if it's a potential December tariffs or or or causing pull ins than we could see some some hang over in Q1.

I think the early Chinese new year could be a problem.

And then I think the last who just general overall world economy, and you know which way the economy is going.

In early 2020.

Okay. That's helpful.

Last question, it's related to the China business just in terms of Theres a lot of talking to localization and you have the big Shanghai facility, but I'm curious the net impact because it looks like China customers, where you've had a bit less exposure, our local I think to local sources and potentially I guess.

Local OSAT.

But then flip side is whether there's any pickup.

In international customers coming back or away from the China supply chain. So if you could kind of give a view how how you see this any shifts from localization between your push into greater China and then also from the international customers.

Sure.

So from a localization standpoint, obviously, there's a big push.

Today to localized wherever possible for.

For mainland Chinese customers.

But for us that's.

Nothing new.

You know we've had that.

Issue to deal with for as long as we've been operating in China. So our strategy is always to try to compete with the leading edge packaging.

So our factory in Shanghai, which is the second biggest factory and Amcor Oh. It does is advanced packaging and we compete very effectively.

With a local suppliers so.

Our job is to deliver a bundle of services.

In quality in yield to the customers in China, that's better than they can get locally.

And that's how we sustain the business there with local customers.

In general if the local Osats could do everything that we could do them or lose the business. That's why we have to stay one step ahead.

Okay, and maybe give a perspective that greater China business, how it is now and whether or how you see that growth is trending from that greater China percent of the business.

Yeah, I think you know it's flattened out a it's been an area of focus.

For the company, but we flattened out in greater China.

So I think we're seeing more growth from international customers at this point.

And.

That's gonna driver business in 2020.

Okay, great. Thanks, a lot Steven.

Thank you as a reminder, ladies and gentlemen, if you have a question. Please press Star then the number one key on your Touchtone telephone.

At this time I'm showing no further questions I would like to turn the call back over to Vince for closing remarks.

Thank you Judy.

This ends the question and answer portion of our call I will now turn the call back to Steve for his closing remarks.

I'd like to recap our key messages.

First a third quarter revenue grew 21% sequentially driving a significant improvement in profitability.

Secondly, we expect fourth quarter revenue.

In profitability similar to the third quarter.

And finally, we are pleased with our position in the fastest growing areas. The semiconductor market. Thank you very much for joined the call today.

Ladies and gentlemen. This concludes today's conference call you may now disconnect.