Q4 2020 Amkor Technology Inc Earnings Call
Greetings and welcome to the EMCORE technology fourth quarter 2020 earnings Conference call. At this time all participants are in a listen only mode. If anyone should require operator assistance. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded if somebody.
Or to turn the call over to Vince Keenan, Vice President Investor Relations. Please go ahead Sir.
Good afternoon, everyone and thank you for joining us for <unk> fourth quarter and full year 2020 earnings conference call.
Joining me today are heal rutin, 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 our website.
During this conference call, we will use non-GAAP financial measures and you can find the reconciliation to the U S GAAP equivalent on our website.
We will also make forward looking statements about our expectations for <unk> future performance based on the environment as we currently see it.
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 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-K.
And now I would like to turn the call over to heal.
Thanks, Vince and good afternoon, everyone and thank you for joining the call today.
Today I will review all the fourth quarter that fully of performance I will provide for the outlook for the first quarter of.
I'll also make a few comments on dynamics in the market some technology that amcor of smell position for growth in 2021.
Strong demand for all of our advanced technology, and a bunch of recovery of our mainstream business produce an old saw growth from the revenue records.
The revenue of $137 billion was above the high end of guidance, an increase of 16% euro for the year at 1% sequentially. The record fourth quarter total full year 2020 of revenue of about $5 billion for the first time of impasse history.
The increase of close to $1 billion or 25% over 2019.
With the revenue.
The effects of the utilization and cost control initiatives also pushed profitability of boss expectations at 52 cents of EPS for the quality of ups and the $1 40 per share for the full year.
Communications revenue continues to be robust for the fourth quarter.
Mainly driven by the launch of next generation five G smartphone.
Revenue increased 8% sequentially and 43% year on year.
For the full year of 2020 of our communication business increased 35 per cent, representing 41% of of EMCORE total revenue up from 38% of 2019.
This growth is a reflection of EMCORE solid position in the smartphone market and all of a broad footprint in five G false, particularly in the latter half of domain as well as in modems sensors for the problem.
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We expect that the highest semiconductor content in five of defaults together with a third of the penetration of five G technology in the smartphone market will be a key growth driver for us during the next few years.
In the near term.
Market data shows five G penetration rate increasing from close to 20 per cent in 2022 around 35% in 2021.
Fourth quarter performance in the automotive market wasn't bad the unexpected good sequential growth of close of 15% demonstrating the continued recovery of this mock ups. This recalled for dish.
Not fully eliminate the clients earlier in the year and.
And for the full year of 2000, Twenty's automotive ended the down 9% for since 2019.
In the fourth quarter, we saw sequential growth in both of advanced products as well as mainstream products as the majority of our customers continued to ramp that all of this throughout the quarters.
We anticipate this recovery to continue in the first quarter of 2021, although some broad the supply chain constraints may have an impact on the the rate of growth.
And the consumer the ens market Iot of out of bowls and all the applications showed considerable growth, resulting in the revenue increase for 2020 of 60% over the prior year to year.
Revenue in Q4 was down 23% sequentially as we book to some supply chain constraints and expect that the product pipeline changes in the quarter.
Our overall product and customer pipeline for devices and advanced etch I'd be solutions in the consumer market is strong we of course.
For them that the ens market for the I T devices will continue to be a growth area for EMCORE and expect to return to sequential growth in the first school of of 2000 and sense of what.
Yeah.
We continue to expand capacity and invest in our advanced the technology to drive manufacturing scale and innovation for this growing product categories.
As part of these efforts we are strengthening all the engineering teams by adding experts in the areas like all of that and system test to expand or the ability to deliver for full turnkey support to all of the customers.
This allows us to capitalize on opportunities not only in the consumer Iot of communication markets, but also in all the growth markets.
Yeah.
Revenue in the computing end market growth was also better than expected the six.
Rental growth of 9% and full year of 2020 growth of 15% over 2019.
Throughout the year, we saw good performance in all applications, including data center infrastructure.
Storage of personal computing.
Finally, our pest business grew 6% year over the years in Q4 and 12 per cent for the full year as we continue our focus on expanding test attach rates.
Strong factory utilization helped drive our profitability.
Although we experienced in Q4 of shifts in demand from consumer to communication devices and all the advanced manufacturing lines, we were able to maintain the high utilization in the slides about reallocating capacity.
Also all the wafer level the flip chip production lines from the highly utilized our utilization rates and our lead frame of why it about the factories continue to improve the quality of the departure of the cultivation and the automotive market, which accounts for over 40% of all of neat crime and wire bond business.
Our manufacturing organization continues to do an excellent job across factories to meet growing customer demands while also maintaining the the necessary containment measures to mitigate the impact of the COVID-19 pandemic.
All of factory achieved excellent quality and supply performance in the fourth quarter of.
The limited number of capacity constraints, but manage the close cooperation with customers to avoid supply chain interruptions.
The procurement team as always for being able to limit disruptions despite tight supply conditions for some components and materials.
The capex for the year was five from under $50 million the capital intensity of 11% major investments in 2020 include advanced as I P test wafer level packaging of flip chip technology.
It also allocate specific investments for quality enhancement to the factory automation. These investments are also yielding improvements in the equipment connectivity data generation and data and Olympics.
For 'twenty 'twenty, one we expect to increase our capex to around $7 million, an increase of more than 25% over 2020 in anticipation of continued growth over the next few years.
Now, let me turn to our first call for outlook.
We are expecting the first quarter 'twenty 'twenty one of them to be another solid quarter with revenue at 1.32 billion dollar of at the midpoint of our guidance.
This represents a year on year, the increase of 15% in Q1.
We believe that the more moderate of smartphone seasonality together with further recovery of the automotive market, we have a hell of a drive our results in the first quarter.
2020 volume is shaping up as another growth year for amcor.
Recent forecast for the semiconductor market estimate growth of around 9% for the year.
The key growth drivers for the M call remain in place.
Part of G deployment high performance computing, Iot Wearables and automotive electronics are all expected to drive strong demand for all of the surfaces.
But the EMCORE superior technology portfolio global manufacturing scale of broad customer base. We believe we can outperform the semiconductor market forecast for 2020, you Bob as we focus on the fastest growing applications in these growth markets.
Making the will now provide more detailed financial information.
Thank you heal and good afternoon, everyone.
Today, I will review, our fourth quarter and full year results and then provide some comments about our first quarter outlook.
Fourth quarter sales exceeded expectations, increasing 1% sequentially and 16% year over year to a record $1.37 billion.
The year over year increase was driven by strong growth in the communications and computing end markets.
The combination of high utilization and benefits from our Japan restructuring drove gross margin to over 20 per cent, our best quarterly performance in for years.
We delivered record fourth quarter operating income of $159 million and operating income margin increased 160 basis points year over year two of 11 six per cent.
During the fourth quarter the U S dollar weekend against age of currencies and the weaker dollar had an unfavorable impact on our results sequentially and year over here.
Despite the foreign currency headwinds, we earned 52 cents per share in the fourth quarter.
This includes the noncash discrete tax benefits of eight cents per share, which were not part of our guidance.
We generated $288 million of EBITDA in the quarter and EBITDA margin was nearly 21 per cent.
During the quarter. We also entered into a new foreign syndicated term loan of approximately $105 million with the fixed interest rate of 1.2 per cent.
We paid down approximately $250 million of foreign debt during the quarter.
Together these steps are expected to reduce interest expense annually by around $5 million.
As Hugh mentioned earlier 'twenty 'twenty was a record year, we grew by nearly $1 billion to over $5 billion in a challenging environment due to the global pandemic and its impact on the supply chain.
Gross margin improved 180 basis points to $17 eight per cent.
Operating income nearly doubled and operating income margin improved 330 basis points to over 9% demonstrating the leverage in our model.
We generated record net income in 'twenty, 'twenty of $338 million or $1.40 per share.
Net income and EPS include a noncash discrete tax benefit of $20 million or eight cents per share.
And of course, the record revenue and profitability as notable I'd like to highlight some of our other accomplishments in 2020.
Our manufacturing team reacted quickly to the pandemic and rolled out a number of new policies and procedures to keep our employees safe.
We substantially completed our restructuring in Japan, which is expected to reduce manufacturing cost by $25 million annually.
For these savings were realized in 2020.
Our advanced S. I P revenue grew 75% in 2020 to $1 $9 billion.
This reflects strength in the communications and consumer end markets and our expanding business with a broad range of S. E T customers.
We invested $550 million of Capex or 11% capital intensity, primarily for new capacity and quality initiatives.
Our emphasis on flexible manufacturing line increased automation and smart manufacturing system allowed us to increase revenue by 25% of our manufacturing cost excluding materials increased only 4%.
We generated $960 million that EBITDA and $221 million of free cash flow.
'twenty 'twenty free cash flow of more than doubled over 2019 and constituted our sixth consecutive year of positive free cash flow.
Amcor initiated a regular quarterly cash dividend of four cents per share net.
This decision reflects confidence in our long term outlook.
We strengthened our balance sheet by reducing total debt of approximately $300 million and also refinancing to lower cost of debt ultimately decreasing our interest expense by more than $7 million.
Our net debt at December 'twenty 'twenty was at an all time low of $322 million and we lowered our leverage ratio at December 20 of 20 to 1.2 times debt to EBITDA.
Finally, we ended the year with $832 million of cash and short term investment.
And total liquidity of $1.2 billion.
Our strong balance sheet positions us well to continue to invest in future growth, while returning cash to shareholders through our quarterly dividend.
Moving onto our first quarter outlook.
We expect revenue to be between one point to seven and $1.37 billion.
Gross margin for Q1 is expected to be between 17 and 20 per cent.
We expect Q1 operating expenses of around $120 million.
We expect our full year effective tax rate to be around 18%.
And we expect net income in Q1 at between 70 and $118 million or 29 to 48 cents per share.
Given the momentum for growth in the overall semiconductor market for 'twenty 'twenty, one and beyond our forecast for capital expenditures for the year is increasing over 25 per cent to approximately $700 million.
With that we will now open the call up for your questions operator.
Thank you and I'll be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad of confirmation tone will indicate your line is in the question queue. You May press star two if he like Trimble great question from the queue for participants using speaker equipment may be necessary to pick up your handset.
Before pressing star one one moment, please while we poll for questions. Our first question today is coming from Sidney Ho from Deutsche Bank. Your line is now live.
Thank you and the congratulations on the great quarter.
My first question is on the first quarter guidance being down 4% quarter over quarter for revenues seasonally you are down more like 10 percentage quarter over quarter, except maybe for last year, which end markets do you expect to see of both seasonal growth this year and kind of related to that you mentioned supply constraint I think of lot of our suppliers.
Also mentioned that.
How many that have impacted your business for the first quarter and where have you seen the most of license strength. Thanks.
Well. Thanks for Thanks, Sidney said this is true maybe.
Maybe if the maybe Megan can take the first part and then I should take the second part for the supply constraints.
Sure. So Sidney we're seeing a stronger than seasonal growth or impacting Q1 with respect to communications.
Communications is typically down you know more than what we're expecting to see in Q1 in.
In addition, we are expecting to see a recovery continued recovery in the auto end market in Q1. So those are the primary markets that we're seeing outside of normal seasonal patterns.
Yeah on the on the <unk>.
The constraints of Sydney, Yeah, I can comment that in the recovery of the ultimate.
The market, we see some supply constraints not too much on the assembly and test side, but more on the wafer supply side I think it's well known that specifically in the all the technology nodes on to one of the millimeter silicon Dennis of supply constraints currently and Thats hampering the recovery in Q.
The one for automotive and the other markets, we see limited limit the supply constraints of course, our factories are running at capacity. Most of you don't see fundamental supply constraints are true.
To do over revenue in Q1.
Okay. That's helpful. Maybe my follow up question is on the communications side given the strength you saw in Q4 and expect to see above seasonal in Q1, how are you thinking about the seasonality for second quarter, which historically was more flattish kind of plus or minus and its overall smartphone units are going to read.
Down from last year, and five key smartphone is the doubling of more than doubling this year can you help us understand what kind of run the growth you could get Oh.
You should you could expect this year and what are some of the puts and takes there.
Yeah Sidney Thanks for the question I mean on the seasonality to stop the the first part of your question, we expect the similar seasonality of slashed yes.
That's from spring launches of new phones, and then of major launches towards the later part of the year you already mentioned that the overall volume of the smartphone market is expected to recovery for instance, last year. This year the bit about 9% more volume and also of a third of deploying.
For the five <unk> from about 200 million units to about 500 million unit share in the market. So overall, that's what will drive growth from the semiconductor side. So at the same seasonality, we see strength in the communication market and that will drive continued growth.
Okay. That's helpful. If I can squeeze in one more question on the Capex side.
Can you talk about how you plan to spend the $700 million. She talked about would that be first half loaded of more evenly distributed what type of product of investing in maybe some of the financial metrics. We can monitor perhaps revenue capacity you can handle.
Once the Capex is spent and that's my last question. Thanks.
Yeah on the on the Capex spend.
First on their end of year. We believe we will have the capacity that was the first part of your question.
You know we share for the first cohort of the things we have the capacity in place and also for a large part of the second quarter ramp the majority of the capacity spend will come on line and of the share in the second and into the third and fourth quarter.
You know we have an extension of lead time of equipment and Thats, what the book now I think it's not a it's.
It's one of the wire bond side of the thing that's well known but it's also all of the manufacturing equipment with extended lead times. So we should get managing that book. We expect Q2 early Q3 two of the major capacity increase coming on line. If you look through the share.
And that's a product area that drives capex.
This year, the similar than last year, and we continue to win the personnel over the peak manufacturing lines.
The very strong pipeline, there and that for those markets from communication into consumer, but also the automotive and the compute market us from there so that will continue.
On the very flat on the flip chip side, there will be incremental investment to drive and sustain growth spin.
Specifically on the launch of body size flip chip bgh, an MCM module sock sides, we see increases so that will be an important investment area for us and vacate the for the compute segment.
And then test continues to be an important area for us across across individual market segment. So.
Sort of a similar as last year with the emphasis on Sap's, yeah, what's the state.
Okay. Thank you very much.
The next question today is coming from Randy Abrams from Credit Suisse. Your line is that a lot.
Okay, Yes, so thank you and the good result and outlook.
The first question following up on Sydney some of the constraints.
I'm curious through first half if.
You mentioned on the wafer level, but I'm curious at your level, if there's any areas.
Your supply constraint, whether on the substrate or an uncertain area of some of your business and the second part of the splits on the automotive market.
Been a lot of feedback about the Taiwan foundries, just struggling to kind of come back into that market.
After the auto slowed earlier in the year How's your take on an auto being able to ramp up for that market demand and whether you have the.
So quite of meat auto as they come back into the market.
Okay, Let me first stock the hi, Randy.
Good morning to you.
Let me take the first part of your question first our own <unk>.
Strange within the maiden and of course, the control specifically the substrates of impact net of status indeed tightness in the substrate market.
It's top of the already second half from 2020, and we will continue the major part of this year.
Working with multiple parties in the supply chain to mitigate their sense of bring up the second sources to support of our customers.
The reason of for any events with disruption of supply chain of one of the major suppliers in Japan, Taiwan didn't really help you know the.
The impact in Q4 of US was very limited for.
For us I wish.
Okay.
And with respect to the impact in Q1.
It may be yes.
You know a little bit bigger, but for now I see that as a manageable.
The elements of course, we rely on flexibility for working with customers by qualifying the.
New supply us to make up for the GAAP stats occur.
Then on the automotive market.
On the supply side there are what we see is that you know where the shortage in way for supply in that market that may extend into the share of the second quarter of this year.
You know a lot of actions are ongoing in the automotive supply chain in Europe.
You've probably read to that also the end customers are getting involved in.
We expect some improvement, but it will be in all of them.
The impact for the major part of.
Of the of.
This year.
Okay.
Can I ask on the.
The pricing for your services Inc.
Some of your overseas peers have had been opportunistically.
Wire bonding.
Taking up price now of how does.
The European because I think it's true last year for a short time with auto slow to pick up but it hasn't been as tight.
But how is your view.
One just in terms of.
Your pricing outlook for the different service this year.
And then.
With your utilization at least starting out from a lower base since the opportunity to.
Gained some market share with your competitors kind of tightened loss of dealing with the longer lead time on equipment.
Hum.
Yeah, Let me stop the saying that's a you know about 40% of our via bonds.
The business is in the automotive market and that business is very much.
With customers, where we have for longer term contractual arrangements.
We see in some elements of the market that the cost is going up to give you. An example of course on gold cost on the substrates and of course, there we work with customers to push that to the depths.
Is that the cost into a price correction, but definitely not a we're not going in there because there's a shortage in capacity that we will increase prices that's not the motors that we're operating in a in the certainly not in the automotive market.
No we would expect it to increase our capacity for for wire bond in the first half of the year close to 10% if we counted the number of bomb the.
We were not fully utilized the exiting the year. If we were under the utilized in Japan and later on the Luther license from of the other factories. So we should we see that we can support significant growth in the first from the second quarter.
Once the automotive market share continues to recover.
Okay great.
If I could ask on the.
The system in package, where you're coming off of a huge.
Revenue growth here.
You talked to them about the pipeline I'm curious for it in terms of.
If there's the appeal and the growth expectation and <unk>.
How you're positioned the type of projects you see ramping up this year on consumer and communications.
Okay.
Yes.
The first go back to work through 2020, and we added close to $800 million and are in the S. IP revenue for the year roughly at the part of the high level. It was the growth of 50% of that 800 millions of lives in communication of the other 50% in consumer.
If we start with the communication market than we see clearly strength in the market in itself, but also in the pipeline that we have in that share in that market.
For example, India array of domain, where we will see a stronger millimeter wave deployment and therefore, a higher need for at the tenant in package of solutions, we see that as the growth element also of Wi Fi modules is a growth area for us as well as out of from fence head on.
On the other.
Let's say, it's just the modules going into the communication market.
So that's we expect that to continue to grow on the consumer market. The similar story.
We are ramping up multiple projects with multiple customers of day F.
It's more of an emerging market. So we see quarter on quarter variations, but structurally we have a strong pipeline and we believe that Iot wearable devices in the consumer domain, we will continue to be a growth area for EMCORE.
And certainly with the engagement of shows with having the confidence that's yeah. That's oh for 2020 of them they'll continue to grow for us.
Okay and my final question, maybe it might be more for Megan just on the margins for you and congratulations getting back to the 20% level.
From here out of Europe.
Adding capex.
Would you discuss the the swing factors for it sounds like S. IP is growing.
But with the higher Capex.
If you could give a view just how how margins factoring some of the costs.
In your outlook.
Look for depreciation how you see margin as we go toward peak season, if theres opportunity.
Further leverage or or 20% of its ultimately at high utilization the good level to try to achieve.
Yeah.
Yeah. Thanks, Randy So, yes for 20% definitely spend you know of target for awhile and so of hitting it. This quarter was it was quite an achievement as far as looking forward and you know, we see ourselves very well positioned in the market heal outlined those growth areas and we plan to prudently invest in.
Both of the capacity and capability, but with that we do expect to improve on.
Margins in 2021, both gross margin and operating margin. So just touching on some of the factors that you outlined our product mix and is one of them utilization is the primary one but also foreign currency and seasonality can all have impacts on gross margin.
But looking back in 'twenty 'twenty, you know product mix.
Change by over 500 basis points and yet we still had gross margin expansion of 180 basis points.
So while in 'twenty 'twenty, one we're not expecting that significant change in product mix you know given the scale of S. IP that we built and you know there may be some moderate continued growth in the material content.
As far as the depreciation, yes, with the increasing depreciation associated with our investments I would anticipate some something in the range of mid single digit percentage growth in depreciation.
And then foreign currency, we are anticipating some foreign currency headwinds and but with all of that I would still anticipate gross margin expansion for the full year.
Okay, great. Thanks, a lot okay. Good results.
Yeah.
Thank God for a reminder of that star one to be pleased from the question queue.
The Star Wars for your place in the question queue. Our next question today is coming from Krish Shankar from total company. Your line is now of lives.
Hi, Thanks for taking the question here.
Couple of questions. The first one.
What's the Capex for the calendar 'twenty, one to be higher than 70, and the Milligan is the industry, leading us looked like country Oh.
Do you think $700 million isn't good enough to capture opportunities beyond the current component shortages.
Well that's the that's a good question, we expect the debt the 700 million supports our growth plan for the year.
Of course, we still need to be need to need to manage the equipment supply chain very critically to get the capacity in in time. Most of the 700 million. Currently we feel is an adequate number to support our growth for the year of.
Of course of the market.
Is changing on us and we see a much stronger.
<unk> in the second half of the year.
You know, we make a depth overview here, but but for now as we see the market growth for now $700 million of ethics.
Got it got it and then of how should we think about the long term capital intensity for the.
Business.
The case for the next couple of years.
Yes, I think we ended the 11% in 2020 going forward, we see share of slight increase there and Megan can give you more specifics on that.
Sure. So as Hugh mentioned ended 2020 at 11% and we would expect that to increase into the low teens over the next couple of years just as a reminder, in 2019, we were at 12%.
But that's still significantly lower than where we had been several years ago, which is in the high teens.
Yeah got it got it.
And then of that.
The good thing.
Yes, the important to note the areas that are no currently should we should we can expand in the current practice each layouts for we have sufficient effect the floor space to expand the skiers in the early part of next year of wherever when we need to start really expanding over effect of the floor space by adding multi.
For example, two of our Korea, or China factory that will thrive, let's say yeah in.
In that specific year will drive.
Slightly higher capital intensity.
Got it kind of Super helpful.
The last question the head.
And the for making money in the past the quantified how much of it personally that the Capex would go to like well, it's like the wild bonds et cetera, and I Didnt hear you mentioned the idea of all the admin.
The modem inside the literally the quantified what percentage of the 700 million is going to affect the advanced packaging, while bond is et cetera.
Well, let me give you a flavor that I mean, we don't go into into too much detail per segment, but are you know at the other.
At the high level about the let's say in the order of magnitude of 30% of our Capex is going into into S. IP.
Then on the all the main segment is our wafer level packaging and the flip chip technology. It's also about 30 of 30%.
And you know that includes test expansion in the individual segments.
Then this year, we spent you know about 20% on the on facilities.
The factory maintenance, a small span of expense base expense pension et cetera. So that's what drove the buckets as 30, Turkey and 20, and then you know the the remaining 10% of goals across areas like for like memory quality R&D.
Think of anyone Sheila thanks, a lot of the Mega.
Thank you we reached out of our question and answer session I'd like to turn the floor back over to management for any further or closing comments.
Okay, well. Thank you very much before closing the call of a block to recap a few key messages.
2020 of US a remarkable year for them of course, we generated over 5 billion dollar of revenue earned $1 40 per share and initiate the cash dividend program for our stockholders. We accomplished this while navigating through its challenging global pandemic.
We are expecting the first quarter 'twenty 'twenty, one to be another solid quarter with revenue of $1 $2 billion at the midpoint of our guidance.
2021 is expected to be another growth year for them of course semiconductor market forecast predicts growth of around 9% for the year with EMCORE positioned in key growth markets, we expect to outgrow the semi market forecast from 2021.
And last but not least I would like to thank the whole EMCORE team for delivering another great year in 2020 with special thanks to the teams for resilience in diligence and overcoming the many challenges we face as a result of the current COVID-19 pandemic.
And thank you for joining the call today.
Thank you that does conclude today's teleconference. You may disconnect. Your line at this time and have a wonderful day, we thank you for your participation today.