Q3 2020 Amkor Technology Inc Earnings Call
Of course actual results could be different. Please refer to our press release and other SEC filings for information on risk factors uncertainties and exceptions that can cause actual results May 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.
Good afternoon, everyone and thanks for joining the call today before reviewing our friends results for the third quarter. I would like to announce an important milestone for em, Co the boss decided to initiate a regular quarterly cash dividend of $0.04 per share with the first payment to be made in January 2021 this decision reflects confidence in our consistent financial performance good free cash flow generation and a positive long-term business Outlook.
Make and build provide additional information regarding the different later than our call.
Now, let me turn to a review of our third-quarter performance and the outlook for the fourth Port. I will also cover the important markets and Technologies where I believe em code is well positioned for growth.
Continued solid amount and advanced packaging Technologies resulted in the highest quarterly revenue and MCAS history revenue of 1.35 billion dollars was above the high end of June an increase of 25% year-over-year and 15% sequentially.
Broad-based amount in the communications and automotive and Industrial markets drove both revenue and profitability higher than expectations when combined with a strong first-half result of be generated $0.87 of eps in just the first three quarters. Please enabled us to further strengthen our balance sheets.
Communications Revenue was fairly robust in the third quarter mainly driven by the launch of next-generation Premium smartphones.
Revenue increased over 30% sequentially and the year and years
the strength is a reflection of em consultant position in the mobile market with engagements across a wide range of customers that leveraging our advanced technology portfolio. Although overall home phone units are forecasted to decline this year the introduction of 5G capability and the proliferation of high-end features as helps to expand our footprint particularly in the Arab domain ended modem sensors and peripheral devices.
2:00 performance in the automotive Market was better than expected with a low single-digit sequential growth Advanced products for automotive were double-digit sequential here. We saw a majority of our customers ramp up their orders throughout the quarters. The one exception was in Japan, which has been slower to recover and we have a spectacular 3 to be the drop quarters.
We also have another solid quarter in the consumer end markets with significant growth of 9% sequentially and 70% year-over-year. We continue to invest in capacity off and Technology to drive manufacturing scale and innovation in our Advanced as it Solutions. This allows us to capitalize on opportunities in the consumer iot and other growth markets, but also expanding our engineering teams by adding experts in areas like our F and System test to enable full TurnKey support to our customers.
Or having a performance in the Computing and park. It was in line with expectations with sequential growth of 3% and a solid year-on-year increase of 21%
You so good performance and all applications including data center infrastructure storage and personal computing.
Following a strong second-quarter. Our memory business was flat sequentially and was up 6% year and years.
Finally our test business grew almost 10% year-over-year in Q3 as we continue to focus on expanding Testa tax rates.
the continues from the amount of advanced products resulted in a high utilization of our race level flip-chip and as IP production line
Several factories delivered record output in this third quarters utilization rates and our lead frame and violent lines improved slightly to towards the end of the quarter reflecting sign a recovery in the automotive End Market where we do 40% of a lead frame a wired on business.
Old manufacturing organization continues to do an excellent job across factories to meet the growing customer demand while also maintaining necessary containment measures to mitigate the impact of the month at 19th and demek.
Factory Chief excellent quality performance in the terrorists water with the lowest quality instant level for over three years.
This resulted in several positive customer endorsements.
Our procurement team has been able to limit supply chain disruptions for components and materials Supply.
Now, let me turn to our fourth quarter Outlook. We are expecting the fourth quarter to be another solid quarter the revenue of one point three billion dollar at the midpoint of our guidance this represents a year and year increase of over 10% in Q4 and over 20% for the full year of 2020 performance will depend in part on the successful launch of a generation full models and a continued recovery of the automotive Market especially in Japan.
On capex, we expect to spend this year approximately $550 with the potential to increase up to $575 million.
The potential 5% increase is depending on new opportunities in advance as IP that could begin ramping in the first half of 2021. I would have majored Investments for this month include Advanced as IP capacity and capability test capacity and quality enhancement to factory automation.
Going forwards. I'm confident that the growth drivers in the semiconductor industry remain in place 5G communication high performance Computing variables and Automotive voltronix will continue to drive Innovation and Technology and Manufacturing in the old set domain the breadth and diversity of em course technology portfolio manufacturing scale and Footprints home together with his broad customer base at Global support structure positions the company very well to serve our customers in these high-growth areas.
Make it will not provide more detailed financial information.
Thank you heal and good afternoon everyone before I discuss our financial results. I would like to note how pleased we are to announce the initiation of a regular quarterly cash dividend month. We have taken a lot of deliberate steps to reach the significant Milestone. The principal driving force has been are sustained focus on generating free cash flow over the past several years. We have exercised capex discipline and increased flexibility in our manufacturing lines to reduce Capital intensity to around 12% off the emphasis on cost control and operating efficiency while improving manufacturing quality has resulted in optimizing our overall fixed manufacturing cost structure off and our focus on cost control has also resulted in relatively flat sg&a expenses, excluding restructuring charges over the past five years.
the same time
For capitalized on significant growth opportunities in advanced packaging technologies that Target 5G Advanced Automotive Systems coyote wearables and high-performance Computing all of which generates strong cash flows for the business. We not only invested in growth but also strengthened our balance sheet over the last few years back in the September quarter. We paid down $230 million dollars of debt and had over $900 in cash and short-term Investments at the end of Q3 off our net debt of four hundred million dollars is the lowest in our public companies history and our gross leverage ratio of debt to ebitda is 1.4 times at the end of June just below our long-term Target of 1.5 x with total liquidity of one point three billion dollars including undrawn credit facilities.
Our proven record for delivering consistent free cash flow. We now have the financial flexibility to continue to make investments in future growth opportunities while returning Capital to stockholders.
As a reflection of their confidence in our consistent financial performance and long-term Outlook, the board has approved the initiation of a regular quarterly cash dividend check the amount of $0.04 per share payable on January 7th 2021 to stockholders of record as of the close of business on December 18th, 2020 now onto the results are third-quarter Revenue represents the fourth consecutive quarter of record quarterly Revenue this strong top-line growth drove operating income for Life first nine months of 2022 nearly three hundred million dollars and operating income margin to over 8%
Gross profit dollars in Q3 increased 25% sequentially and gross margin increased 140 basis points to 17.8% off.
Q3 operating expenses were $114 including six million dollars for restructuring costs in Japan are Japan initiative is expected to reduce annual fixed costs by approximately $25 million dollars half of which we expect to benefit from in 2020, excluding restructuring costs. Operating expenses do the first nine months of 2020 were essentially flat with the prior-year comparable.
A combination of strong Revenue growth and continued spending discipline drove Q3 operating margin of two hundred basis points sequentially to 9.4%
Q3 even increased 20% sequentially to $250 and ebitda margin was 19%
Hang on to our fourth quarter Outlook. We expect Revenue to be between 1.25 and 1.3 $5 billion dollars gross. Margin for Q4 is expected to walk between 17 and 20%
We expect Q4 operating expenses of around a hundred and twenty million dollars including restructuring charges of approximately twelve million dollars primarily related to our Japan initiative with the increase in profit before tax. We expect a lower annual effective tax rate in the mid-teens.
We expect net income to be in the range of 68 million to $115 and earnings per share to be in the range of $28.47 off as he'll stated earlier our 2020 forecast for Capital expenditures of five hundred, and fifty million dollars may increase by up to 5% to $575 million dollars as we evaluate demand and growth opportunities for twenty Twenty-One with that. We will now open the call up for your questions operator. You may begin the polling now. Thank you.
Ladies and gentlemen at this time. We will be conducting our question-and-answer session.
If you would like to ask a question, please press star one on your telephone keypad. That's the star key followed by the number one key on your telephone keypad. The confirmation tone will indicate that your life in the question queue. You may press the star key followed by the number two key. If you would like to remove your question from the Q4 participants using speaker equipment. It may be necessary to pick up your handset before pressing a stockings.
One moment, please. While we pull up your questions.
Our first question comes from Randy Abrams with Credit Suisse, please State your question. Okay? Yeah, thank you and a good a good result and I'll send purging to see the dividend Implement. I wanted to ask the first question about the comment you made on the capex. If you could talk a little more about the 2021 be opportunities you're looking at and also it looks like most of the growth the past year has been in the advanced packaging. Um, if you're getting to the point of getting tight on capacity that into next year you may have to suck accelerating some of the Investments. Um, so if you could give an initial view on the at least that where it stands now the capex into next year
Hi Randy, this is this is a few random with respect to the Carfax and the potential increase of 5% going into the fourth quarter. You know, we see a theme song pipe line of specifically over Advanced as IP portfolio in the consumer Market, but also in the communication Market wage and they're everywhere on a couple of of of programs that may end up in the first ramp up in the first quarter and that will drive capex of pin over her fourth quarter wage, depending on the the exact timing of these programs the there will be a slight increase of about 5% towards the end of the year.
That was at least the first part of the question. What was it the second part of your question?
Okay. Yeah, it was to park but it's more the direction for next year and it's it's more factoring the advanced capacity has been growing quite well, if that's getting to the point you're getting pretty full and need to start to accelerate some Investments.
Yeah, I mean we expect that the the signal quality of some of the markets will not fundamentally change. So if you looked up our first and second quarter pack back to that to be slightly lower than our third and fourth quarter, that's a regular seasonality. So we we don't expect significant impacts sure to be ramping in the first half. However, you know with with some of the phone launches changing their schedule it may it may drive some incremental capacity required in in the second quarter. So we're open for that. But currently I don't expect and anticipate huge ramp in Quebec be spending or Capital spending in the first two quarters of next year.
Okay, and and maybe if I can I guess for maybe a rough Center for next year that Capital intensity then you're still expecting low teens for the capital intensity of this page.
Yes, I think that's that's our Target. That's our anticipation that we have which we keep our capex spending at the low teens and that's where we where we need to be here budgeting for Thursday.
Okay, when I ask one more question on the tightness the I'm curious if you're seeing any limitations on things like the high-end package. Yeah substrates, if that's any issue limiting some of your business and the other area of tightness. It seems like some areas have boundaries are getting tight. Um, I'm not seeing any limitation from that side. And then at the same time in the in the space that you're participating how you're seeing, um, overall industry tightness and wage implementation for pricing if if any change Works firming up or adjusting
Yeah, let's let's start with with the substrate supply chain that is indeed some tightness in the in the substrates supply chain that requires us to work very closely with both of our customers on one hand and with the suppliers on the other hand, you know, we we expect that to to last into the early part of next day next year currently. It's not really hampering our our Ram but it's getting it's getting tight and that also ties a little bit in your in the third party just questions on the pricing some of the material pricing is is trending upwards slightly and that is related. Of course to that show up in the market on the substrate now on The Foundry part your your second question, you know, there is some titles of supplies specifically in the in the 8-inch birth.
Probably side, you know, it doesn't really impact our self.
Sort of agnostic to The Foundry supply chain. It's something that is primarily a choice of our our customers. But what we see what we currently see is that that is that is tightness in in re for suppliers.
Okay. Yeah, I guess just to other questions one on the memory space where we had the emanate get announced by Banks acquiring entail beside have any impact on the memory nutrition. I think had a good business on the land side. But if you could talk about any any change for the better part of your business.
Yes, I think the announcement of acquiring the info part. Well, first of all, you know, it's built it will take a while before that that deal will close. I think that's what I'm reading is it may take up to two years and even a little bit longer. I mean, the the Intel meant part is is a is a group of three small part of our business. So we we see a potential Maximum Impact of low very low single-digits on over overall revenue for the company. So not not Material I would I would say and it will it will develop over time and we don't know exactly how the supply chain for that part of the share of the name business in Onyx at that point of time will change. I mean bringing it to their internal supply chain will take also some time.
Yep, makes sense. Okay, the last question I wanted to ask the it's more of the mainstream versus Advanced mainstream. It looks like turning a bottom which you mentioned of Japan, I guess your sense if there's um, if you're seeing that visibility we could get us a snapback or it looks like we bounced along the bottom for a while and then from the advanced packaging we're off in Communications. You can't racking up 30% if you maybe think the opposite effect given strong growth these launch a 5G if if maybe it sets up a high base where that starts to moderate or or if you see drivers for continued strength carrying into next year you let's start with the mainstream part, you know, we met in in the last quarter at the end of second-quarter. We anticipated trough quarter in the third quarter and we still see that to happen so from here we expect
Coverage in in the mainstream markets, uh, you know, we do about 40% of our total mainstream business and automotive and there we see a slight a slight recovery going off of what although you know it we don't expect the V shaped recovery. We see here. We will see a gradual gradual Improvement there is you know on top of the nth to recovery. We also see in effect with respect to to inventory where we reported also some some inventory build-up specifically in the automotive marketing at the end of the second quarter and we now see that that inventory level normalized. It's normalize is significantly so the recovery of the nth mark down down which together with the effect of a more balanced. Um, let's say inventory we are we are I would say fairly positive with respect.
recovery of these
Yeah, mainstream Mark and going going forward now to your second part of your question with respect to the high bar of the Communication business. And how do we expect that to grow? I would say, you know the overall communication Market this year in in the volume is still expected to be down. I would say it it's expected to be down. You know High Teens, you know, will that recall for next year? I think with respect to smartphone volume, I expect to be coverage and then an important driver that drives let's say semiconductor value is 5G and 5G proliferation this year. There are roughly about two on the million 5G phones in the market. We expect that to go to you know, a rough number between 300 and 350 million phones cuz it's Thursday.
The semiconductor increments and 5G phones. So that is that is a let's say an increase in the in the semiconductor content in these Mod market. We expect that to continue into 2020, but whether it will be at the rate of of this year, that's to be expected. We built for your continued to increase
Okay, great. Thanks a lot. He'll Megan.
Okay.
Thank you. Our next question comes from Sydney Ohio with Deutsche Bank, please State your question. Thanks for taking my questions. First of all congrats on the dividend announcement. My page first question is maybe a little shorter term question on the Communications business what this your spaceships on being pushed out by a few weeks. Do you expect the strength in communication with the second half of this year to extend into the first quarter of next year if if I look at the past five years the sequential growth in your columns business is somewhere between flat to down 30% Just curious how you think about that in the first quarter of 2021.
Well Sydney, I think it's it's not so not so easy to predict what will happen in the first quarter twenty Twenty-One, you know you refer to delay in the launch. I mean that may be a few a few weeks. You know, I I don't personally I don't see that much of a delay, you know how that that their business will develop in the first quarter next year specifically from a semiconductor perspective is difficult to forecast. It. All depends on on the sell-through of the phones that are being launched in the in the different ecosystems at the end of this year. You know, sometimes you see a very strong sell-through in in the in the main season off season and that then of course drives a lot of replenishment in the in the overall supply chain and that requires of course a much more stronger impacts of
That has a much more stronger in.
Back on the on the semiconductor supply chain. However, if the sell-through is is is not good. Then q1 may be impacted. So current view is dead got on view is that the you know, the the nth Market demands for the phones is good and that would drive a strong first-quarter, but we were we are currently offer you a dating what exactly that will is
Okay, thanks. Maybe follow-up question is related to inventory in the supply chain. I think you just talked about the inventory in the auto supply chain, but I'm not any other areas that you see inventory is being elevated right now. And do you think most of that would be worked down by the end of this year in particular in the smartphone market? We've been hearing same size in anticipation of some share games Curious. Just what you're seeing there.
Yes, I already mentioned Automotive, you know there can only be confirm that I expect too much the end of the year that that supply chain will be much more in balance with respect to the application markets. Also there be observed that in the second quarter. There was some some inventory built up both on the component material site just to manage the rep in the first and fourth quarter ramp, you know now there is much more confidence in the market that the the COVID-19 impact on the overall supply chain and it's limited certainly in Asia. So also for the communication Market at least from our perspective, I expect to supply chain to be much more imbalance in the in the fourth quarter.
Okay, maybe one last question from you. I'll go away in terms of gross margin with Q4 Revenue being down at the midpoint of the guidance. You had your gross margin is going up. Can you walk us through that Dynamics and kind of relate to this when I look at the mainstream products, you're still 25% below the roughly 600 million dollars quality run rate that used to. Is there a way to think about the gross margin impact of that underutilization for that business, but the act differently if your mainstream is back to that six hundred million dollars level one kind of an uplift you to the does that do to the company's gross margin. Thanks.
Hi Cindy. Yeah, I'll take that one with respect to the incremental flow through that you're seeing between Q3 and Q4. There are a couple of Dynamics happening there, The first one really is changes in product mix and given that we're expecting to see a recovery in the Japan auto market which is increasing our utilization. We're really getting a strong flow through on that. So the better utilization of those Japan assets is really helping the margin the second component is we are expecting to see some notable benefit recognize. Thank you for for our Jeep and initiative. So both of those are really contributing to you know, higher gross profit dollars higher margin on the lower Revenue with respect to how to think about the mainstream and yes, you're right. We're still below Revenue that we've achieved in Prior. The best way to think about that is really Arthur's.
Go through model. So we typically expect.
242 50% flow through on our incremental Revenue
Okay. Thank you.
Thank you. Our next question comes from Chris Shankar with Cowen and Company, please State your question.
Thanks using my question and congratulate David initiation. I told them first one for the heater Megan just to go back to the Catholics question. If you if you do upside it to five seventy-five thousand, but this here is it borrowing from next year? I mean if I look at the complex or the last several years has been running around a 550 million rate except for last year. So I'm just trying to figure out is the upside down for this year barring from next year or is it talk to say at this point and then add a follow-up?
Yeah, let me try to answer that here. Is it is it borrowing for from from next year? Yeah, that's that's a good good question. I think to some extent of it it it is on the other hand. We also see they're incremental projects that we didn't anticipate before that come in and that will drive higher capex. Of course, you know, the the method is also a timing across across the year-end is a little bit arbitrary, but normally I think this would be incremental capex for Thursday for the year.
Got it. Got it. Thanks. He'll and then I'll follow up a little bit next year. I'll give you like you also highlighted 5G should increase but arguably 4G my slow down south. In fact, you might be technology business for the auto front end module.
Well, that's that's a detailed question that Chris, you know, first of all, we expect the overall phone market to to recover next month next year. So referring to what I said earlier, we expect the phone markets to with respect to total volume to decline and that includes 4 + 5 GHz which you know, let's say between ten and 15% this year and there are many reasons for that. I think the coverts nineteen pandemic in the early part of the year one thousand off the let's say the reasons that there was a slow Market in that part of the year. So we expect that to recover to some extent and that will drive over volume Thursday. And then the second part is, you know, the increase of 5G will reveal will reduce the Forty volumes.
However, if you look to the to the semiconductor content in general and the content is specific for 5G phones that significantly higher for 5G. So certainly. Next coming years. We see that that's you know with that switch moving from more 4G from 40 to 5 G. That's the RF business will continue to to strengthen.
Got it. Got a tank filled. Thanks making and congrats on a good result of the dividend.
Okay. Thanks, Chris.
Thank you, and just a reminder to ask a question, press star one on your telephone keypad.
Our next question comes from with City, please State your question.
All right. Thank you for taking my questions and congratulations on the initiation of the dividend the question on smic any impact to your sales. You mention a boundary supply chain with them not being able to get equipment. Is there any impact to to your sales Outlook?
Yeah, this is this is he'll you know, I I did already mentioned that that is agnostic to the The Foundry supply chain and customers are working with Foundry partners. And we proceeded come from probably a or Foundry be so there is there is a switch application areas, you know besides the the way for supplies that is there's also another element to to Jay set which has a small upside potential upside for emcor and that's the name that that joint French. It's called Jay kept and they do bumping and probing services and that is part of the overall restriction and we see that month instead of the way for goes to Alternative found this I think that part will come to the old sets including including em Co so there's a there's a small potential upside on that part of, New Jersey.
Business, but overall, you know, I stick with with with our position that we're agnostic to to wait for supply.
Great, then the follow-up for Megan respect to the cash dividend. You talked about positive long-term Outlook which driving the initiation of the cash dividend. Can you just need some pointers in in terms of what do you mean by the the long-term Outlook semiconductor industry grows the techs. How do you think Amcor grows with respect to that? And if you can also comment on a long-term gross margin or operating margin Target?
Sure. If so we have not outlined public long-term metrics. However, just speaking in terms of General indication that we would expect that Amcor would grow with or you know ahead of the market given how well-positioned we are in those growth areas.
Anything on the profitability goal? Yeah, we have not outlined publicly our long-term profitability goals, I think as we've demonstrated over the last, you know recent quarters we've been able to to show sustainability and cash flow and and gross margin expansion. So we're going to continue on that track.
Great. Thank you.
Our next question comes from a negotiable with Bank of America. Please see your question. Hi. Hi. Thanks very much can call my operational questions have been covered but I did not ask you on the dividend. What what is the dividend policy or sort of the framework that management and the board decided on with regard to the size of the dividend is it you know, did you look at like potential kind of you know a thresholds of free cash flow coverage or were you looking more at you know, you know long term growth potential for the dividend?
Sure, Anna I can I can give you some color on that. So there was a lot of factors considered in determining the amount to initiate the dividend. I would say that the kind of big-picture is we felt that $0.04 which yields over about over 1% yield is a is a really good place to start as you look at the semi industry in the six t we didn't want to constrain ourselves with some sort of percentage of free cash flow. That being said we are very comfortable with what we have demonstrated, especially in the recent five years and that we will have sufficient cash flow in order to accommodate the dividend at that size.
Okay, great. Thanks for that color. And then secondly on the debt repayment that you did in the quarter. What did you repay? And you know was it higher interest at I think it was probably at that level and then could you also let us know but what is the average interest rate that you're paying now on on the country-level loans roughly sure and I can give you some colors and then of course when our ten K's on file all the details will be available the debt that was paid down in the quarter was as you said or thought it was foreign debt off and so, you know that rate that that averages is in the high 30s low fours on average. So that's that's the transactions that we took here in the in Q3.
Okay, and then finally you still have a pretty good amount of cash. What is your thought on a minimum cash balance?
Yeah, we haven't publicly put forth any sort of minimum cash balance. I will say we continue to evaluate what are optimal capital structure is including evaluating any further debt reductions. So yes, I agree nine hundred million is more than sufficient to operate our business just as a reminder, We had increased our liquidity in Covent just as a precautionary measure and so we continue to you know, be cautious even coming into Q4 given some of them and once we're comfortable will consider how you know to manage that.
Okay.
Okay, great. Well, thank you very much. That's very helpful.
Thank you at this time. I'm showing no further questions. I would like to turn the call back over to heal for a closing remarks. Thank you.
Thank you before closing the call. I would like to recap our key messages.
And Curtis streets an important milestone in its history with the announcement of a regular quarterly cash dividends.
We deliver the all-time record of quarterly Revenue with a solid profitability which we used for further strengthen our balance sheets.
We believe the medium a long-term growth drivers for the semiconductor industry remain and text and Empress. Well positioned for continued growth and last but not least. I would like to take the whole MP4 again delivering a great quarter and for the resilience and diligence in overcoming the many challenges. We face as a result of the COVID-19 demek and thank you very much for joining the call today.
Thank you. Ladies and gentlemen, this concludes today's conference call. You may now disconnect.