Q2 2020 Amkor Technology Inc Earnings Call
The only mode. After the speaker's remarks, we will conduct a question and answer session. As a reminder, this conference is being recorded I would not like to turn the call over to Vincent Caintic, Vice President Investor Relations Mr. King. Please go ahead.
[music]. Thank you.
Good afternoon, everyone and thank you for joining us for EMCOR second quarter 2020 earnings Conference call.
Joining me today are he'll <unk>, 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 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 heal.
Thanks, Vince good afternoon, everyone.
I'm pleased to be with you on my first call as President and CEO <unk> EMCORE.
On today's call I plan to share some of my background with you I will discuss the important markets and products, where I believe EMCORE to spell position for growth.
I will also come up our second quarter results and expectations for the two quarters.
I don't and put in 2014 and most of the lead off over that fonts blocks of business for more than five years.
During that time, the advanced for the business grew by close to 50% on the strength of wafer level flip chip and advanced as IP technology for communications computing and consumer end markets.
I've worked closely with the lead cost too much to win some use ramp these technologies and manufacturing solutions.
Prior to joining EMCORE I served in a variety of senior management position that companies in the semiconductor and electronics industry through all cure.
Yeah, and the U.S., including NXP and Philips.
Over the past months I spent a lot of fine with customers and suppliers.
That's wellness fit our factories sales and business teams.
The feedback only reinforces my fuel that incorporates the combination of key technologies.
Highly skilled manufacturing base.
And deep customer relations necessary to expand.
And strengthen our leadership position as a trusted partner in the semiconductor supply chain.
Going forward.
I see significant growth opportunities for EMCOR any marching grow checked much like five Chico medication.
Performance computing.
You see radicals and automotive electronics.
These markets spoke continued to drive innovation and technology and manufacturing expertise in the old said domain.
The bread and.
I'm supposed to tee off and of course technology portfolio manufacturing scale up footprints to get it but its broad customer base and support structure.
Positions the company very well, so our customers and these high growth areas.
Before we move call recent results.
I would like to update you on our progress responding to the Corona virus.
Across our factory network, we continue to keep measures in place to contain the impact of corporate 90.
We were able to afford significant disruptions in our factories.
No were purchased chasing team has been able to mitigate supply chain in fact, one component and materials and supplies.
Our robust I T infrastructure has a lump employees to transition to work from home environment, while maintaining high levels of cost them a surface.
Now, let's turn to the second quarter results.
Continued strong demand in the communications and consumer end markets resulted in another quarter the revenue recognized.
Revenue increased 31% year over year.
Broad based amount role both revenue and profitability above the high end stuff expectations.
Combined with the strong first quarter results, we generated nearly 50, Samsung yes in the first top of Twentytwenty, while strengthening our balance sheets.
Communications experienced better than expected revenue across all ecosystems and major customers.
Although we expect overall smartphone units to decline in 2020.
The first half we experienced growth in over 40 products as well as a steady ramp of Fiveg products.
Including auto from Pence modems sensors, and a act piece.
[noise] computing, which grew 15% both sequentially and year over year also exceeded expectation in all applications, including data center infrastructure Stoneridge MPC laptops.
I would have memory business has shown steady gross bid over 50% sequentially and over 55% Utopia, you and the second quarter.
And then flash memory business remains a growing portion of our portfolio have you got a real positions to catch a growth in both the communication and the computing markets.
Consumer of animals continued to four quarter trends, both sequential and year over year gross.
Customers increasingly choose and of course advanced as like the technology.
Combined with our strong engineering support and high volume manufacturing to deliver industry, leading quality attributes.
Finally, I want to test business grew 5% sequentially.
25% you get open D.S.S., we continue a multi quote the trend of increasing test attach rates.
Strong first half revenue performance was driven by all what advanced product portfolio. This resulted in a higher level of utilization of our Sip chip and base level production lines, that's compared to the first half of 2019 during the inventory correction.
Advanced S&P wherever you have been adding capacity for the past four quarters at some of the highest utilization rates in the company driven by new auto <unk> ratable products.
The one area that our utilization rates decline this quarter.
In our lead frame and wire bond lines, the recently weakness and automotive has reduced utilization and these factories.
Over 40% of our lead frame and Wirebond business is tied to the automotive and industrial end markets.
Oh, what factory team did an excellent shelf to secure supply to our cost much on the current difficult conditions also the quality performance across fact leasing the second quarter of 2000 spends he was at its best level for the last three years, resulting in several positive endorsement.
From our customers.
Well the semiconductor supply chain has responded very well to the Corona fighters challenges, we are still dealing with an environment of dynamic for cost changes as customers try to balance limited visibility with inventory levels in their supply chain.
With a robust product pipeline, we expect to maintain our capex budget at five from a 50 million this year with investments focused on capacity.
And capabilities and quality improvements.
Page and investments include advance S&P and test capacity and capability, that's fellas quality enhancement through automation.
Turning to what was to quote the outlook.
Well that is macroeconomics uncertainty related to the pandemic, we had expected Q3 revenues to grow six 9% sequentially and 15% you don't put you at the midpoint of the guidance the launch a flagship smartphones, including more Fiveg models that we have strong footprint is expected to drive this gross.
Along with consumer of animals.
Automotive business is expected to show continued weakness, but further revenue declines in the automotive supply chain, particularly in Japan.
Most of customers tell us that Q3 will be likely the trough quarter, but slowly coffee in Q4, and the first top of Twentytwenty wall.
In closing, we have strong position into key growth areas for semiconductor packaging attached services.
And I'm confident in and of course future and over long term prospects for revenue growth and sustained profitability and positive cash flows.
Megan will now provide more detailed financial information.
Thank you heal and good afternoon, everyone.
Today I will review, our second quarter results and then provide some comments on our third quarter outlook.
We delivered a third consecutive quarterly revenue record as revenue rose, 2% sequentially and 31% year over year to $1.17 billion.
Through the first six months of 2020 revenue was up 30% from 29 team and operating income margin increased 530 basis points to 7.3%.
The increase in revenue is primarily due to continued strong demand for advanced packaging products supporting the communication and consumer markets.
Q2 gross margin of 16.4% was flat with the first quarter and expanded 260 basis points from the prior year quarter.
Gross margin was dampened by the ongoing shift in product mix to higher bill of materials packages like advanced S&P and low utilization of certain mainstream production lines as a result of weakness and the automotive market.
Operating expenses were flat sequentially and also flat year over year. After adjusting for the 3 million dollar gain in Q2 19 for the sale of real estate.
Our strong revenue performance and disciplined spending drove operating income margin to 7.4% for the quarter.
Net income for the quarter with $55 million an earnings per share was 23 cents.
EBITDA increased over 40% from the year ago corridor to $209 million, an EBITDA margin was 17.9%.
Our focus on free cash flow has resulted in more consistent cash generation.
We delivered free cash flow for five consecutive years through 2019.
With our strong performance in the first half of 2020 and expected growth in Q3, we are well positioned to deliver a six year as positive free cash flow.
This financial flexibility has allowed us to de lever over the last five years.
We ended the quarter with $1.4 billion, that's total liquidity.
Which consisted of $1.1 billion of cash and short term investments and $300 million availability under our debt facility.
Since 2015, we have reduced net debt by $610 million and net debt now stands at $450 million the lowest in the company's history.
Moving to the outlook as a reminder, we wind or guidance range for the second quarter, given the level of uncertainty related to the overall macro economic environment and we are maintaining the wider range for the third quarter outlook.
We expect revenue to be between $1.2 billion and $1.3 billion.
Gross margin is expected to be between 15 and 18%.
This reflects the expected shift in product mix to higher bill of materials packages for advanced S&P products supporting communications and consumer market.
We expect Q3 operating expenses of around $110 million.
Which includes approximately $10 million for restructuring cost in Japan.
Our Japan restructuring initiative includes a streamlining of operations and the closure of one factory.
We expect to substantially complete these activities by the end of this year.
This restructuring will have a quick payback and is expected to reduce fixed costs by approximately $25 million half of which we expect to benefit from in 2020.
We expect our annual effective tax rate to be around 20%.
We expect net income to be in the range of $42 million to $85 million and earnings per share to be in the range of 17 to 35 cents.
Our 2024 cats for capital expenditures remains at $550 million.
Appeal stated earlier, we believed that the mid and long term growth drivers for the semiconductor industry remain intact.
The combination of a broad technology portfolio, a global manufacturing footprint and a trusted customer base together with a strong balance sheet for me solid foundation for profitable growth in 2020 and beyond.
With that we will now open the call up for your question.
Operator.
As a reminder, task a question you want me to press Star one on your telephone to withdraw your question press the pound King please standby well, we compile the Q and a roster.
Our first question comes from the line of Sidney Ho from Deutsche Bank. Your line is now open.
Thank you and congrats on that gets corridor in the guide.
Maybe first question is for he'll congrats on the near all first he'll what what maybe what are your business priorities and maybe changes that you would like to implement and open next six to 12 months.
And are there certain financial metrics that we can track the progress you guys are making.
That's my first question.
I certainly think.
Does this feel and appreciate your from your congrats.
On the on the priorities for the year I'm not new to amcor on bid to company for over six years, So I'm pretty much a a familiar with the advanced product business and we will continue our focus on that's public segments of the company.
So from a priority perspective, I think that growth in phones to as a piece is pretty ought to teach in the markets that we just to mention to across communication five cheese or high performance computing.
Our you tube edibles and.
You know each you know we of course look very carefully at the automotive for a second I'm sure. You're also so from a market approach from a product segment approach I don't intends to make a significant changes.
From an organization to the point of view I think you have all the key ingredients in place when it comes to technology development and manufacturing as skills. So I don't expect any share from stage staff pick Megan already share.
Show to the probably ought to piece on the financial sorry.
I mean, if you haven't sold its cash base.
We will focus on continued to focus on cash generation for the company and also there I don't expect significant changes in the pretty ought to <unk>. So you know overall.
Yes. It is a continuation of what we have a from a style perspective, maybe you know we should be focused more no acceleration off some let's say a decision making across the company, but that's model for coal for children cultural change inside.
The company.
That's great very helpful.
They follow up question is I think last quarter. The team talked about getting indications from the number of customers that are near term demand is expected to weaken because it accretive virus. It looks like things were better than you expected in may and June so one month into the third quarter are you sensing similar cautiousness, where the customers I think last time, you guys will talk about.
<unk> communications industrial I, just want to get out there.
Thanks.
Well, let's let's talk for the ultimate business I mean, I spent quite a bit of time bits players in the automotive supply chain and we had last go off and we expect that some recovery towards the end of the yes, we yeah overcoat them for you or my code on fuel based currency that that's recall he will take longer than expected. So.
Oh, Yeah current view is a trough quarter in a in Q3, but to me the fairly slow recovery in Q4, and the delayed the Pablo <unk> 20 expense you want.
When it comes to the mobile markets are clearly see that's the did to the basic assumptions that we had four <unk> Q2 Q2.
Full costs are still in place, we expect strong, let's say launch off.
Premium smartphones in the second time, if the if so.
Pretty optimistic no and all the mobile markets of course also or Q2 performance. If you look to Oh warfare.
Overperformance in beach, Yeah, let's get into second football took about 60% loss in the mobile markets and the mobile market the 60% three pounds or improved performance was very much driven by two ingredients wellness.
Decree ball over the China markets.
And if successful launch off some smart phones in Q2.
As we continue to to have a fairly constant fuel also going forward in Q3, when it comes through the ramp or can you phones, but also the overall sell through in the shift and the key markets for trip for mobile.
That's great maybe I can squeeze in one more and I'll go away I'm.
Just looking at the comps that he'll you just mentioned if I look at the past few years third quarter for your comps business generally up somewhere around 25, 30% should we expect assembly increase this year and men's wearhouse appalling fault falling quarter. If you have enough visibility right now if you look at the second half versus first half it was up again going back.
A few years up between 20% to 45%, which end up the spectrum do you expect that to be for this year. Thanks.
Well in a loss here of course, the dynamics and the comps.
Different than we should be expected to see this year last year, we had a significant infant took our inventory correction that the first half the year.
Which we currently don't see so if you look to let's say quarter on quarter performance in Q3 should we still see an improvement will probably not as high as speech you have seen that last year.
Megan can give you a little bit more detail on the percentages and so you know first half second Pos and high level of confidence definitely if it looks to the overall comps markets. We see that do units a number of smartphones is declining.
We are expecting a high single digits or low teens a decline.
Boss the Fiveg models are still expected to address a show you. The second top according to plan I would expect said, let's say high double digits. So, let's say between humbling to 75 familiar to to 25 million Fiveg phones in the second mainly in the second time over the year.
So Dan over over footprint is strong on the other than.
That's still somewhat certainly being in the markets ER and so old, albeit relatively shouldn't I think that's that's a difficult 50 with respect to develop in the second half with you.
Great. Thank you very much and congrats again.
Thank you Echo kills comments about as far as what were expecting in the second half for Com. It is your typical seasonal second half launch sometimes the strength of that between Q3 in Q4 is dependent on the timing of that launch.
But as far as the strength, we would say that's a typical.
I strength for Com he'll is correct Q3, 19 had an unusually significant sequential increase given the inventory correction that we felt in the first half of 19. So looking further back in 18 is where you would seem more typical strength.
Thanks Megan.
Thank you. Our next question comes on the line of Randy Abrams from Credit Suisse. Your line is now open.
Okay, Yes, thank you and I want to congratulate you on the new role as CEO.
The first question I'm since its top of mind with Intel and they are discussing a bit more of a outsourcing as a contingency or or potential on the foundry side.
I'm curious opportunity on package in Texas traditionally they have a pretty big in house.
But if there's any discussion along with foundry of any any shift in potential opportunity I to to capture more opportunity there.
Yeah. Thanks, Randy Yeah. That's that's a good question I mean with respect to teach the Intel or supply chain and I cannot comment in full detail of course, Intel has very much forensically integrated supply chain certainly in there and if.
That's changed it 10 on 10 nanometer.
Compute segments.
You know, but bringing that's for future technologies into let's say foundries or supply chain or at least biopsy.
No we didn't look in into full details it big opportunities that could bring I mean teasing C is a long term partner for EMCOR bad behalf in multiple business segments.
Business.
You do it.
You know in a in a model. They have you book has that's right. That's the second source or a model that on specific technology platforms, we share and bring incremental.
Innovation or or capabilities, so I expect that to continue.
So if anything I would say from the current situation bad it's completely forensically integrates it's to the future situation, where it wouldn't be foundry base that is so definitely your no some positive upside can be expected.
Okay, Great appreciate that and then I wanted to ask on the other piece, which has been a good growth Trevor the advanced EHF IP, if there's a way to think I kinda current year run rate how that business is tracking and if you could discuss pipeline of opportunities in different segment on how you think about growth I can.
Continuing there.
And there's also been from the pass through the margin impact. So if there's a way to think maybe the how much dilution to margin is coming from that business and if that might just stay there just given the different nature that business.
Okay. Thanks, Randy.
Let me try to capture the first part of the off your question and then.
Maybe you could can give a little bit more detail on the share margin impact, let me talking about product pipeline or you know, we didn't and quarter. We stopped it's a engaging a bit oh, what as like the technology platform about four to five years ago no in first in different ways in India, India.
Three from RF front end solutions, that's still continuing into automotive.
No definitely ratable category is another and all the parts of the market that is showing significant growth.
Now if we look to both product pipeline I think yes, we have strengths across all the segments. We have strength on the auto Pos BAF scolding into Fiveg.
Lot of the incremental value or incremental sell you, yes for the semiconductor five isn't the RF part of the phone I think we're well positioned today. If you have a strong let's say platform solution for all that if we look to automotive.
Similar thing I think the F., a you know digital applications in automotive from digital displays infotainment.
Even sends us like I guess, just sensors, a you know facial recognition census that it's a you know that's going into automotive. So I would say belt position data, we proliferating overstate, how we should there and if we look to I would see wearables or consumer Vanderbilts, if you want.
I'm also das or you know, but yes, a good engagements are certainly into were indeed, yeah.
Ratable audio space, where we work with multiple customers a and B F. Confirmation of course also on future five flights and that show strength, but beyond let's say the audio products. We also see that's a strong demands in other available solutions like.
That's it helps track house, Smartwatches et cetera, because there's a certain common denominator and all these products is that they bounce to push more electronic functionality in a ever smaller space.
That's functionality ghosts, let's say crossties product ranges from wireless connectivity sensor technology more compute performance and that I think we give you can offer a I'd be put in place over the last couple of he is a pretty strong.
Last fall that can do that integration I mean, it's you may call. It if you call on one hand, you know you off course digital integration. This chance you know you talk about him. He's for gene. This integration of functionalities I think that's we should be we currently.
Let's say a proposed for multiple customers in the second much.
[noise] Megan can you talk little bit more on the margin impacts.
Sure. So Randy is skills outlined I mean advanced a sapiens then one of our most significant growing markets, it's more than doubled.
From a year ago quarter, and it's about one third of our business here in Q2.
This is really the main driver for our three consecutive record revenue corners.
And so even at 45% materials in Q2, we had really good operating margin and cash flow Q4, again 40 cents P.S. and so that brings us to the first half of 2020 at 49 cents. So this demonstrates that although this growing market with the high.
Material content.
It's dilutive to the gross margin percentage, it's definitely accretive to earnings.
And I think one of the key benefits is the fact that advanced S&P its capital efficient compared to some of our other technology and so that capital is fungible and that really helps drive effective utilization and that's where we can really ultimately generate good cash flow.
Okay, Great and last question I want to task just relative to a few months ago, where the outlook has picked up.
Could you discuss maybe how much you're seeing it our customers see demand picking up or better than feared for some desire to carry more inventory.
And then implications like where do you think inventory levels are now.
And the second part it's also.
On a bigger picture, how you see fourth quarter like traditionally a can be a growth quarter. If things are in the right track.
But I'm curious for this year balancing everything out how it how it works.
Yeah, Yeah regular let me stop.
We tried to give a little bit more color on the inventory situation.
Again, the initial thought he says situation and I would have you is different across markets on the communication markets.
Generally in this part of the you could we see some prebuilts to prepare for the sheer second top Ram and we should be continued to see that's all the also Dan I think that depends very much.
Lets say on the policy and strategy also some nice trucking companies some do with strong pre build and take some inventory, although said do less of a pre built.
It does she is supposed to solve yes, I would say I see a little bit more.
Inventory building up in this quarter.
You know there, but also some material.
Shortages, that's loss cost specifically on the substrate sites.
There are companies about pulling in a nutshell these components to prepare for inventory bills.
Yeah, I would say not not significant difficult to judge how much it will be.
Compatible so over the years, maybe a little bit on high side on the automotive side. However.
You know we saw I would say significant in some sort of built into second set second quarter.
You know the recent for that was very much the share the very good 2019 years and the automotive markets, where they end that's been an exit philosophy that was very good certainly internal factories are off to be I'd, Ams, where yeah running at very high utilization level at the end of two.
<unk> 90, and that inventory was pushed into the market in Q2 long Q2, and that's Phil you know resulted in significant the inventories in that in this quarter. If you saw that's not of course actually a utilization is down I mean, I talked to some of the.
Let's say it plays into Japanese supply chain, I'd think day of dead wrong effect for the some cases at said, 20% to 25% utilization so that off corrections, calling on already but before that inventory is a is it bleeds that'll that'll take sometime.
You know the other markets I would say up a pretty much in balance if you look to our you tube edibles and mocking the strong limited inventory. If you look to the sheer high performance computing markets also DAF limits. Its a you know limited inventory is different than others, yes.
And memory markets.
No, but not playing into different markets on but on the NAND flash markets.
She now that's a that is you know that instead of snow inventories.
Strong sell through into the communication segment. This well after the date, that's kind of the segments.
Okay.
Great. Thank you and and maybe the front over the second part of the question was just impact on the I guess the normal at this stage fourth quarter, how you see it if it could still be a quarter on knowing it could change within a few months, but but just a directional outlook at this stage if you have that.
Yeah, Let me ask Megan to commence on the fourth quarter Megan.
Yeah. So Randy we typically don't guide the fourth quarter I'm also some of the direction I mean, our historical we can be down slightly in Q4. If you look at a 10 year historical average, but it's really a function of the timing and the success of the you know the premium phone launches that's.
Going to depend on how Q3 in Q4 perform.
Okay, great. Thanks, a lot here on that can.
Thanks, Randy same.
Thank you. Our next question comes on line of Chris Thinker from Cowen and company. Your line is open.
Hi, Thanks for taking my question again, congrats on the neutral right. A couple of questions close one recently there was some press releasing that Foxconn is looking at doing a packaging sobbing, China kind of curious move at this point does that increase the competition for you folks can do you see that as an emerging theme, but given the M.I.E.
Those folks getting into advanced packaging.
Well Krish, that's a that's a good question and obviously supply chains in the semiconductor industry.
Certainly because of the cheered geopolitical changes currency pretty much regionalize, so folks going investing in a Chinese facilities is very much to support a local China supply chain, that's how I see its.
You know folks calling has you know I would say limited exposure to this part of the business, but I would say they anticipate foster growth of the China semiconductor industry and they anticipate that Dan, bringing a advanced package technologies will be.
A good growth opportunity.
From an EMCORE perspective, we don't see this immediate a immediately as a as a significant competition.
Our factory in China caters to boats or local less well us a international clients Oh, we have a full portfolio off <unk> packaged technology death and for the foreseeable future. If I was still expect that to work to continue certainly with the here continued growth in Chile.
Indeed, local China and supply chain.
Got it got it it's really helpful view and then HM two other quick questions. One is for liquid you ought to exposure I understand now you're going to cyclical downturns should improve next year, but over the last two years. Your auto has been roughly you know a quarter. If you see it took effect when if it wasn't able to dig do you see that trend increasing.
The futures well I understood <unk> outlook on like for me continent auto, but what do you think it's gonna drives incremental upside given the fight that it's gonna being roughly flat for the last two years.
Yeah, I mean currency.
Make it needs to correct me share, but I'm down I mean currency <unk> said, the ultra business is about 29% said all four.
Of our revenue into second quarter.
Your question is also very much started grow faster than other segments, that's got sick catering for.
You know I'm pretty optimistic here with respect to the automotive business. It plays very well to EMCORE strengths.
[noise] bills and invested in and in a trusted automotive supply chain for the last couple of years. Its typical of play off to you'd want old sets. Its requires deep customer intimacy too you know to be able to qualify your supply chain. So I'm very optimistic from.
I would opportunity, but also for the increased yeah electronic content and the car I mean moving to more electrification in costs, but also more.
Digital electronic content in the car or will help to drive that's done folio. It's no I would say the currency to cut on percentages that you'll read from its about let's say yeah high single digit growth.
For you get NBC that that's a little it's realistic this is a sold an extraordinary year.
Content is coming from a driver assistance.
Functionalities digital displays infotainment or you know a lot of sensors I mean, we even dollar have projects with customers on a radar I guess just sensors in a car.
You know.
Facial recognition.
All of these things drive increased electronic component the car and I will say with just at the beginning of that said growth curve.
Maybe just total volume of costs I mean last year in 2009 thing about 90 million cost. This year is expected to be sure roughly 20% less it's not really increasing well definitely the electronic content will continue to increase and we are actually happy with service position. That's good having death, we will continue to invest.
The technology and manufacturing portfolio.
Got it got it it's very helpful deal and then a final housekeeping one for Megan.
The 550 million in Capex, a little bit.
It's kind of being the same since you initially said it in January the recalled the same I.E. 50 person goes advanced packaging and maybe 10% to wire bonders.
Yes, the break out of that has stayed the same there's about 70% for equipment capability, 30% for infrastructure, which includes R&D quality facilities built out and the split of the equipment is the same where that's mostly advanced packaging tick.
He person and then 10% for a wire bond.
Thank you I'd make it thank you folks.
Thank you. Our next question comes from the line of a T money from Citi. Your line is now open.
Hi, Thanks for taking my questions it.
One took yields went from Megan Q, what changes or areas of improvement.
You envision at EMCOR as you take will would from Steve.
Well like this.
That's a good that's a good question I mean, if we if we go forward look that's the do it the routes, but also the position in the supply chain or better EMCORE is you know get rid of manufacturing service company. So we.
We definitely will continue to focus on probably a little bit more focus and the Pos.
On our manufacturing base.
Core value driver, so definitely quality manufacturing quality.
In time deliveries, but also flexibility and customer intimacy.
And you know it's in place, but it's it oldest can improve then when it comes to technologies I would say also death, we clearly need to focus on working together with lead customers in the emerging markets to build value add its solutions.
You know doing that on your ROE internally doesn't create that immediate value you need to do that in close cooperation, but although with customers all with all the supply chain partners. So that's across the supply chain cooperation is very important for me ads and and I will say yeah.
It said that is a priority I mean financial performance I think be sure. We are doing definitely be drove some incremental let's say technology corporations and smaller acquisitions. We will continue to look to look for that but they have no immediate plans to work to pick that up.
Great and Megan you talked about.
Gross margin to be being a headwind that you too because the increasing mix up advance.
Packaging.
What is your long term model on gross margin than does the mix changes that and and can you talk about one point.
The capacity, that's fungible and advanced packages become a more of a tailwind for gross margin.
Sure.
So just to recap as far as the you know increasing advanced S&P, which has somewhat diluted margin. There's also the function of some underutilized mines that are.
Causing some benefit the dampness there as well for example.
The auto revenue being down from Q1 to Q2 more than $30 million. You know that can have an 80% 80 basis point excuse me impact to gross margin percentage. So is it looks to the future and what you know the long term model is you know we can't speculate per se on.
With that material percentage wouldn't look like you know our goal is to grow all of our technology solution, but as we increase increase our test business, which has a significantly lower material content as well as the recovery of auto in mainstream.
Those will not only impacting material content, but it will increase utilization and so that will also be Alaska gross margin.
Thanks.
Thank you at this time showing no further questions I would like to turn the call back over the Vincent Keane for closing remarks.
Thank you Gigi. This ends the question to answer portion of our call I'll now turn the call back to heal for his closing remarks.
Thanks Vince.
For close to the call I would like to recap our key messages.
To live up to two consecutive quarters of record revenue and solid improvement of theater in U.S. profitability.
Our colder Corona hardest mitigation efforts have allowed us to keep up or factories running well further improving quality and maintaining a high level of customer service and support.
We also believe the medium or long term growth drivers for the semiconductor industry remain intact and EMCORE is well positioned for continued growth.
We further strengthened our balance sheets, and we are well positioned to invest and cause future as a trusted partner in the semiconductor supply chain.
And last but not at least I would like to thank the whole EMCORE team for delivering this great quarter and for that resilience and diligence and these unprecedented times.
Thank you for joining the call today.
Ladies and gentlemen, this concludes todays conference call you may now disconnect.
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