Q2 2022 Amkor Technology Inc Earnings Call
Good day, ladies and gentlemen.
And welcome to the EMCORE technology second quarter 2022 earnings Conference call.
My name is Diego and I will be your conference facilitator today.
At this time all participants are in a listen 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 now like to turn the call over to Jennifer <unk> head of Investor Relations Ms. Zhu. Please go ahead.
Thank you operator, good afternoon, everyone and thank you for joining us for EMCORE second quarter 2022 earnings Conference call.
<unk> me today are healed Ruetten, 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 the Investor Relations page of our website.
Along with the presentation slides that accompany today's call.
During this presentation, we will use non-GAAP financial measures and you can find the reconciliation to the U S GAAP equivalent on our website.
We will make forward looking statements about our expectations for <unk> future performance based on the environment as we currently see it.
Of course actual results could differ.
Please refer to our press release and other SEC filings for information on risk factors, uncertainties and exceptions that could cause actual results to differ materially from these expectations.
Please note that the financial results discussed today are preliminary and final data will be included in our Form 10-Q.
And now I would like to turn the call over to heal.
Thank you Jennifer and good afternoon, everyone and thank you for joining the call today.
EMCORE delivered record second quarter revenue of $1 $5 billion and EPS of <unk> 51 cents.
Demand for advanced packaging remains strong and drove our revenue in the automotive and industrial market to 16% year on year growth and then your record.
Revenue increased 14% year on year in the first half and advanced packaging grew 18%. Despite the COVID-19, lockdown in our Shanghai factory.
While the industry is facing macroeconomic headwinds and market forecast. So if we can get some area. We continue to see robust demand for our services, notably for advanced packaging.
And core strategic focus and leadership position in advanced packaging enable us to leverage the growth catalysts and five cheap premium smartphones automotive electronics high performance computing and Iot.
Now let me review the dynamics you know what end markets.
In the first half of this year, our communication business grew 10% compared to the first half of last year.
Although overall forecast for smartphone do you want to check a weekend to a mid single digit year on year decline.
<unk> you want this fall is expected to grow and reach an estimated 50% penetration this year up from around 35% in 2021.
Semiconductor content for premium tier five G phones continues to increase.
Our leading position in this market, we expect further growth through this transition to five <unk>.
The density and size advantages of our proof and package on package technology for high end processes and modems and the S. IP technology for integration of RF sensors and display components positions us well to capture this growth.
Solid performance in the automotive and industrial market drove first half growth of 16% towards this last year.
Although material constraints throughout the automotive supply chain persist, we observed improvement our lead times and anticipate a more balanced supply chain by the end of this year.
We expect the automotive semiconductor market to outgrow the overall industry.
After the semiconductor content per car is expected to increase 50% by 2000 and spent two five from around $500 in 2020 up to $750 per car in 2025.
Market forecast shows mid teens CAGR over the next several years driven by adoption of Adas electrification infotainment and telematics.
These new and expanding features required the use of advanced packaging to obtain the required performance quality and reliability needed in the automotive industry.
As the leading automotive oshatz with a global manufacturing footprint and advanced packaging solutions throughout the vehicle, we are well positioned to profit from this market growth.
And of course, 40, plus year track record as a trusted partner for leading automotive customers has built a solid foundation to enable technology innovations to support reliable automotive supply chain.
Continued strong momentum in the computing market drove revenue for the first half up by 27% compared to the first half of 2021.
This robust growth was driven by data centers infrastructure Mpc's.
And data centers. The introduction of AI is driving investments in high performance computing utilizing advanced packaging technology.
We see similar technology requirements, and wired and wireless infrastructure markets.
Notably in support of <unk> infrastructure.
Although the PC market is softening the trend to arm based PC architectures opens new business opportunities for amcor.
Besides the technology shift into PC markets, we observed a continue with trends towards an outsourced semiconductor supply chain.
But the big data producing companies, taking an active role in developing key semiconductors for Hyperscale data centers.
These companies tend to utilize a fully outsourced supply chain and are partnering with foundries and oshatz like amcor to accelerate innovation.
With our broad advanced packaging portfolio and established relationships with lead customers have foundries, we are well positioned to capitalize on opportunities in these growing computing applications and we continue to invest in advanced technology and manufacturing scale for this market.
Our consumer business increased 8% in the first half supported by strength in traditional consumer products and a broad portfolio and Iot variables.
Oh would advance S. I P Assembly and test platform offers a complete turnkey solution for the wearable market by enabling high levels of integration and a single module that small form factor.
Iot Wearables continue to be an important driver for growth.
Although we expect that this emerging product category is more prone to quarterly variability due to supply constraints and very unique product life cycles.
We've been advancing digital economy, and increased proliferation of connected wearable devices and kudos to the technology scale and expertise to support their strengths.
We continue to invest in our test business to broaden the scope scale and capability of our search services.
With increasing complexity and cost of our assembled products multi stage testing becomes an important part of our test portfolio.
EMCORE offers customers a broad range of test solutions for wafer probe and final test to system level test to ensure quality and reliability of the final product.
Our ability to support full turnkey services from wafer fab to final product shipment reduces cycle time and cost somebody sources to manage each individual surface.
Our global manufacturing organization continued to demonstrate <unk> commitment to operational excellence and support of our customers.
Our first program is widely deployed in the organization.
In close collaboration with our supply chain partners further improve supply reliability.
And the supply chain do you observe improvements in lead times of substrates lead frames and components and we expect a more balanced supply chain towards the end of the year.
The mandated COVID-19, lockdown of our Shanghai factory.
The utmost flexibility of the team to return to normal output levels in the second quarter.
Our team must focus on supporting our people and keeping them safe while closely cooperating with local government and customers to minimize the impact.
Now, let me turn to our third quarter revenue outlook.
Although market forecast have weakened in some areas, we are expecting a strong third quarter with revenue of $1 $93 billion at the midpoint of our guidance.
This one 3% a sequential increase of 28% in a year on year increase of 15%.
We expect solid demand across all end markets, especially driven by new product ramps in support of five premium to your phone models and the continued strength in computing automotive and consumer markets.
Make it will now provide more detailed financial information.
Thank you heal and good afternoon, everyone.
EMCORE delivered strong financial results with record second quarter revenue of $1 $5 billion and solid bottom line EPS of <unk> 51.
Factory utilization, excluding Shanghai remained high with revenue exceeding historical seasonal level.
First half revenue increased 14% versus first half 2021 a strong start to the year.
All of our end markets are also showing robust first half growth with most growing double digits compared to the prior year.
Our technology leadership position and focused execution drove first half revenue for advanced products up 18%, representing approximately 70% of our business.
Our Shanghai factory returned to normal output levels late in the second half of the quarter.
Regulatory approval to resume production with received later than expected and therefore, the revenue impact for the second quarter was more than we estimated in may.
We work closely with our customers to mitigate the impact.
In addition, upside demand, notably for advanced S. I P supporting the communications and consumer end markets resulted in Q2 revenue within 1% of our midpoint.
Gross margin for the second quarter was 16, 6%, primarily due to underutilization of our Shanghai factory and related incremental cost.
Operating expenses for the quarter were less than expected at $106 million benefiting from lower labor costs favorable foreign currency movement and timing of new product introductions.
Operating income margin for the quarter was nine 5%.
Net income for the quarter was $125 million, resulting in EPS of <unk> 51.
First half EPS of one dollar and 20 cents.
Is 20% higher than first half of last year.
Q2, EBITDA was $302 million and EBITDA margin was 20%.
Our balance sheet is solid we ended the quarter with $1 $1 billion of cash and short term investments and total liquidity of $1 $8 billion.
Our total debt as of the end of the second quarter is $1 $1 billion and our debt to EBITDA ratio is <unk> eight times.
Moving on to our third quarter outlook.
We see continued solid demand into the third quarter, specifically in the communications market due to the launch of premium tier smartphones.
We are expecting Q3 revenue between $1, eight 8 billion and $198 billion.
This represents a 28% sequential increase and a 15% year over year increase at the midpoint of guidance.
Gross margin is expected to be between 19, and 21% demonstrating the leverage and the financial model and an ability to execute a quick return to strong profitability.
We expect Q3 operating expenses of around $110 million.
We expect our full year effective tax rate to be around 15%.
Q3, net income is expected to be between 200 million and $250 million, resulting in EPS of <unk> 82 cents to one dollar in Tucson.
Our forecast for capital expenditures for the year remains at $950 million.
To support broad based long term demand and the expansion of our global factory footprint to Vietnam.
Oh year 2022 is tracking to be another record year with double digit growth expected for revenue operating income and EPS.
All end markets are expected to set new annual records.
We are monitoring macroeconomic and industry dynamics and the potential impact on near term demand in the overall semi industry.
We do not see a change in the secular trends and growth catalyst for advanced packaging.
And we remain confident in our long term outlook.
Amcor holds a leading position in advanced packaging and we expected that strategic focus to continue to drive long term growth.
With that we will now open the call up for your questions.
Operator.
Thank you.
And at this time, we will conduct a question and answer session.
If you would like to ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate that your line is in the question queue. You May press the star key followed by the number two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Our first question comes from Randy Abrams with Credit Suisse. Please state your question.
Okay. Thank.
Thank you good morning, and good evening.
The first question I, just wanted to ask on the Shanghai operation switch, which resumed a bit later than expected.
You could talk about how much impact in second quarter and then for this shifts do you expect.
And all of that to ship into third quarter, where some crude.
Some could continue into the fourth.
Discuss the timing how that impacted the flow of revenue.
Hi, Randy.
Good morning, good afternoon.
Let me start answering that question.
You know for the Shanghai Operation May Garner already indicated that the impact Walsh was slightly higher than we expected.
And so in our guidance, we indicated a number we don't want to be able to go further in specifics here when it comes to the recovery of that Oh, that's the business part of that will be recovered in the third quarter part of it to be recovered by utilizing our global manufacturing.
What trends you know we have a strong partnership with our customers that we support our factory in Shanghai, We have long term agreements in place should we expect that a majority of that business will be recovered later in the year.
Okay, great, yes, so it sounds like it's mostly third but could some of it could continue into fourth quarter.
Okay got it if I could ask.
Okay, if I could ask on the.
You have the foundries and some of the backend companies are indicating some risk of a correction.
Got into fourth quarter or first half.
It sounds like your markets are pretty robust.
Are you anticipating for factor again.
We're expecting some slowdown or do you see this strength continuing to year end and maybe initial view. If you think first quarter gets back to kind of the normal seasonal trends just factoring some of the macro.
Well Randy you know.
Guiding into the first quarter will be fairly difficult. That's what we normally don't do no with respect to two this year if.
We expect a strong second half of this year.
As indicated our third quarter will be strong and also we expect a solid fourth quarters. You know, we see microeconomic headwinds are.
If all of them into the share in the first half of next year, Although we also seek eh still.
Still.
Let's say balanced more balanced supply chain than the.
The key growth drivers in the market just as we were supporting be it <unk> be it automotive electronics high performance computing and Iot and all what if you were to fundamentals will continue to stay in place there may be some corrections in some segments, but overall I believe the foundation for.
The semiconductor industry and the growth drivers are still very strong also going into next year.
Hey, good.
And for the like you've seen a strong mix toward advanced packaging and highlighted that as the driver for the mainstream business.
You've seen the wire bonding.
Traditionally we've had more of an auto industrial footprint there.
Some of the.
A little more leverage to consumer and see more more correction.
How do you see.
Your utilization holding in.
So are you seeing any rising level of competition.
From some of your peers faced a little bit more.
Under utilization.
Yes, you know, Florida over the wire bonds and lead frame business, we operate our factories at a high utilization.
That will continue for the major part of the years same thing as photo what I've found packaging, we have long term agreements in place, which fit our customers we have a strong position in the automotive domain.
Yeah, you know on the.
Each of the wire bond business.
Should we see strength certainly in the automotive wire bond popped automotive.
Microcontrollers artist throw them thrive in that growth.
Some pockets of inventory corrections, specifically in Japan, which we expect to go over into the fourth quarter and even further going into next year.
<unk> strength in that business.
Accelerated competition, Ben that is open demand.
Yeah, you know D shim.
The segments that we are supporting for a.
For the buyer bought the lead frame business.
You know it it is not so easy for customers to switch and we asked for a bit of a long term agreements. We believe that's the alpha are well positioned there. So it is not we don't cater to the commodity part of this business. So we don't believe that there is a risk of death.
Yeah.
Okay.
Two other questions I wanted to ask one on the.
Gross margin might be one for Megan it looks like second quarter materials like the variable material costs went up a few points as a percent of sales.
That mix impact more sick or were there other factors like higher higher material cost higher substrate costs.
Hi, Randy.
Can can answer that yeah.
Yeah, So Randy with respect to the material content, increasing in the second quarter really two factors with the Shanghai.
Impact that factory tended to have a lower material content than our average and so that contributed to part of it and the other is as you've mentioned the increase in advanced S. IP for the quarter and the increase is not related to specifically increasing our material.
Cost and as we are able to pass that through to our customers.
And a follow up on that with the supply chain does that include the high end substrate like Theres been talk of multiyear.
Storage and some of the high end because it looked like with some of the shifts in the PC market.
By next year and some of the efforts you're making.
You'll be kind of imbalance or or do you see constraints there.
Yeah.
Yes, specifically in the high end substrate materials Thats, a good point to Randy and the a b F for substrates. We see continued short just going into into next years, Yeah, that's mostly for the computer market share in some segments of the automotive market.
Although we see some.
Proof months and the rest of the supply chain for the more lower end substrate, both ABF shops rates will be in short supply.
Yeah, you know more capacity comes online.
We also see that some of the capacity specifically in the D.
PC market can be redirected in all the segments. So with some corrections in the PC market that will bring some relief in other areas.
Okay, Great and the last question I wanted to ask on <unk>.
I sat with Congress, passing a bit maybe give michel scenario, how youre thinking about expansion.
Announce some interest in U S capacity.
And also for the financials.
How it could affect both the capex from an offset and R&D tax.
Tax credits like epic crude.
The federal tax rate from some of the investments.
Let me, let me share open up these share did did the answer here and then maybe Megan can give a little bit more details from the chair of the detection incentives.
First of all as a general statement, so Randy we're fairly happy that the.
Chip.
Walsh was approved.
We see this as an important milestone all for supporting a U S supply chain, you know amcor is uniquely positioned to support that and.
Already for a while I mean, we're looking what is the best scenario to engage in a more expanding U S supply chain, we are working on scenarios with different partners and customers.
Correct customers into supply chain to see what is the best way to support.
The local supply chain. So we will see that we see this as an opportunity.
The financials exactly work out.
There's still.
To be sure to be shared decided.
Megan can you can you take the detection checked that box.
Yeah sure. So Randy it's just too early to tell what that tax incentives. That's included Pal that would imply packed amcor, specifically, so we're monitoring that and to the extent we have updates we'll include that in the upcoming guidance.
Thank you.
Our next question comes from Tom <unk> with D. A Davidson. Please state your question.
Hi, Yes. Good afternoon. Thank you for taking my questions.
First question is revolving around capital spending it sounds like you're on plan here for 950 this year.
I'm curious what the linearity is adding the capacity through this year and when you see the impact of this on the balance sheet.
Okay, Let me share let me start to kicking this off.
Yeah, I think our Capex plan, Tom by the way good afternoon.
Still a targeted at 954 for the years you have to keep in mind that 100 million of that 950 is gift two hours to our new Vietnam.
The facilities.
We see a strong ramp in the second half of the years. So a large part of that capacity that was allocated to equipment expansion is already share comment on board for the ramp in the third quarter.
In the fourth quarter.
Sure.
You know that what hits the balance sheet and I don't know the accounting details here about Megan can properly.
I have two that are probably in the second half of this year.
Yeah.
Yes, sure Tom I can add to that I would say Q3 is the peak, adding to the balance sheet as far as supporting that the Q3 surge.
But as you mentioned it is going to be second half weighted specifically as it relates to our Vietnam.
Activities those are going to be mainly concentrated in the fourth quarter.
Okay.
Just just as a reminder, Tom Vietnam, well actually I mean, not want start depreciating till we complete those activities, which we're expecting to begin high volume late in 'twenty three.
Okay, great very helpful.
Just in general is there a rule of thumb, where dollar Capex gives you a dollar per year revenue or 50 cents per year revenue or how do you view capital spending on a holistic basis.
Yeah.
Megan can can you answer that question.
Yeah, Tom No specific rule of thumb at this point I think it's tricky given the different dynamics, specifically with material content changes to be able to have kind of a guideline for the the capital spend.
Okay, and then final capital are there any questions.
Fungible.
Honestly between the different end markets.
Tom Let me, let me try to answer that question.
Fungibility for Amcor is very important that we invest at a significantly over the last couple of years to assure that the capacity that's being installed is fungible no not everything is of course fungible and if we take test and test equipment to be such a large part of Overinvestment.
Generally we by industry standard platforms, and they are fungible between business a bit to with customers.
When it comes to Sam.
Assembly equipment.
Yeah of course in the specific technology Adios D. Sure. The capacity is fungible. So if fees. If we talk about S. E. N S. I P lines. These equipments are fungible, if you talk about flip chip these are fungible and wafer level packaging.
There is also a fungible across our cross market. So they are generally some dedications with respect to technology areas.
Okay, No that's very helpful.
And then moving over to the end markets.
The companies out there have seen some softness in consumer and mobility you guys are not seeing that and I'm curious when you look at the strength in the third quarter do you think that disparity is driven by.
Share gains on your part or is it just the complexity of the chips. This year round are such that it drives revenue growth, even if the units aren't really that high.
Yeah, let me start to give.
Giving some commence on the consumer market.
Consumer markets for EMCORE, our position in the consumer market is very much.
Towards a debatable Iot devices as well as smaller traditional consumer market.
And we see that specifically debatable category. This year is a strong in the second half specifically so that makes us confident to see further growth.
The mobility market I don't exactly know can you.
Give me. An example, there you see weakness in the mobility market is that it was more driven by the the softness in unit growth from advanced handsets.
Thing else.
Yes, I think on the mobility market. If you talk about the the smartphone market and indeed, I think on the global volume basis, We expect let's say a mid single digit decline now.
Of course, very much positioned towards the higher end premium tier smartphones, there is still strength in that market.
Specifically in Norway, and B, when we talk about this transition into five G premium tier smartphones. So although the overall market is declining we see the five G unit volume increasing.
Because you know last year, there was about 35% of the market was five G. This she is expected to be 50%. So it was an increase in five G and pre mid tier market continues to stay strong.
The global basis, so with our position in the premium segment of the market, we see continued strength.
Yeah.
Okay, great good to hear and then final question on automotive front.
Can you talk a little bit about the biggest driver near term or is it just the increasing chips in.
Normal cars or is it the EV market, that's growing drove all the growth near term.
Which of those segments do you think is the bigger long term driver.
Yes, that's that's a good point I.
I mean, we see them.
Driver for growth specifically this year Davis on the automotive the car units for this year, that's it that was it.
Single digit increase so that drives growth and on top of that we see the share.
The penetration of features like driver assistance features like Adas telematics digital.
Digital displays proliferating deep into that into that market for the semiconductor content per car.
Significant increasing and we are expecting that to continue and this goes for both <unk> as well as combustion engine cars on the EV side. So that was an incremental semiconductor content, that's increasing and that relates to the sheer electrical control of.
The share of transmission. So theres a lot of for example power electronics that power modules that increased transition from silicon to silicon carbide and silicon nitride and we also see that as a.
Go drive before Amcor, we hold a very strong position in the silicon carbide.
Assembly and test the market. So we believe that on the E V. Sorry, it's that incremental growth drivers on top of the electrification all foods that I mentioned before that all across the board for the automotive market.
Okay. So that's a good question Tom Yeah, no absolutely. Thank you both for your time today.
Yeah.
Yeah.
Thank you and just a reminder to ask a question press star one.
Our next question comes from Charles She with Needham <unk> Company. Please state your question.
Hi, good afternoon.
He'll Megan.
Thank you for allowing me to ask a question.
But here I want to go back to your comment about automotive semiconductor content per car.
You talked about 50% grow self content I believe you said plenty of 26, all plenty of 27 from 'twenty to 'twenty.
One I'm trying to ask you to help us how to reconcile dual comment with what my S. T Microelectronics sat back in May.
They basically said eating plenty 'twenty two they are seeing automotive semiconductor P M expanded 50%.
Compared to 2019 level, but.
The auto production as you also know that plenty of 'twenty two is not so different from 2019. So obviously their numbers seems to be a lot more aggressive than yours, and how do I reconcile the two views here maybe you. Both of you are right, but I would like to hear your thoughts. Thank you.
Yeah, Good point too Charles good good afternoon, Yeah, I mean, I cannot comment on behalf of Oh, St's I mean, we use different sources to referencing he as you know we talk about average semiconductor contents.
Cough.
Goes from $500 in 'twenty, 'twenty, 'twenty, two 711 and $50 in 2025.
Again, I cannot comment to DST Pos.
It may relate to certain transition from a combustion engine cars.
<unk>, we see some exploration death shortly in the European market, we have the share that's a participation of <unk> in the overall automotive market is increasing and death.
Definitely on the power components side. It is a you know that contributes.
Significantly to the semiconductor contents, so that may be one of the elements, but yeah frozen I cannot commit to that shops.
Thank you.
Maybe a second question. Maybe this is also my son final question, what do you see in terms of the pricing environment. Today I think your peer in Taiwan sort of commented that at least to put a mainstream packaging side pricing has been stable.
So far this year quarter over quarter, but that obviously does inflation, you've got that cost down somewhat but the input costs about well, what's the pricing outlook as you see going into Q story in Q4. Thank you.
Yeah pricing, that's an important point I mean first of all your comments on inflation.
So far this year, we work closely with our customer base.
That's true.
In Cluj.
Inflation in an hour prices show two were to increase prices, where they are needed to make sure that we're increasing cost is covered.
And secondly, with respect to the second half of the year.
We don't see an increased pricing.
The environment or the deteriorating pricing environment, yeah for several long term agreements in place with customers and our customers don't want to wear to renegotiate. These agreements. So so far I see a stable pricing environment.
In the businesses that we support.
Thank you.
Thank you.
And ladies and gentlemen.
I'm showing no further questions I would like to turn the call back over to heal for closing remarks.
Thank you.
Before closing the call I would like to recap our key messages.
And could delivered solid first half results with overall revenue up 14% year on year and advanced packaging revenue up 18% year on year.
We expect to have quarter revenue of $1 $93 billion, reflecting another quarter of strong year on year growth of around 15%.
Demand for our technology and services remains robust driven by our leadership position in advanced packaging supporting five G O.
Oh to motive high performance computing and Iot.
Although we observed macroeconomic headwinds and some weaker market forecast in some segments. We believe the long term growth drivers for the semiconductor industry remain in place and we are confident our strategic focus and leadership position in key semiconductor Mark which will continue to drive future growth.
I would like to close with a special 10-Q, four our Shanghai factory team on.
On the difficult conditions, they work diligently through the mandates attract III lockdown and unable to a successful return to normal output levels by the end of the second quarter.
Thank you for joining the call today.
Thank you.
This concludes today's conference all parties may disconnect have a great day.