Q3 2022 Amkor Technology Inc Earnings Call
Good day, ladies and gentlemen, and welcome to the Amcor Technology third quarter 2022 earnings Conference call My.
My name is Diego and I'll be your conference facilitator today.
At this time all participants are in a listen only mode.
After the Speakers' 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 Ju head of Investor Relations. Mr. Yu. Please go ahead.
Thank you operator, good afternoon, everyone and thank you for joining us for M course third quarter 2022 earnings conference call.
Joining me today are healed root and 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 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.
Now I would like to turn the call over to heal.
Thanks, Jennifer and good afternoon, everyone and thank you for joining the call today.
EMCORE delivered excellent results in the first quarter, reaching a record quarterly revenue of $2 $1 billion and EPS of $1.74.
All end markets achieved new record right.
Driving revenue up 24% year on year.
Sequentially revenue was up 38%, which reflects growth in our successful recovery of our Shanghai factory.
Yeah.
While the industry is facing near term macroeconomic headwinds and market forecast have weekend and some areas demand for our advanced packaging technology remained strong and momentum strengthened during the third quarter.
Growth in advanced packaging came in at 33% year on year close to 80% of our business and the tariff costs.
EMCORE continues executing on its strategy to leverage our leadership position in advanced packaging and its broad geographical footprint to capitalize on the industry makeup trends or five chief Iot automotive and high performance computing.
Now, let me review the dynamics in each end market.
Our communication business experienced significant growth in the quarter driven by high volume ramps supporting the launch of premium tier smartphone.
Communications revenue for the quarter increased 76% sequentially and 35% year on year.
Although overall smartphone units are projected to be down this year 50 units continues to proliferate.
Premium tier five tier phones are reached in silicon content and ongoing innovations continue to add functionality.
And of course supports a wide range of applications in multiple package formats throughout the fall of <unk>.
Including devices for audio and power management, Mems sensors memory, and processors and modems and package and package technology.
In addition advanced system in package technology is deployed for RF devices display controllers in camera applications.
What I had found as a key platform for hits the genius integration, we enable continuous innovation in form factor functionality and performance by applying industry, leading technology and design rules.
Of course high fold your manufacturing capability together with its broad technology portfolio are key enablers for growing our footprint and premium tier smartphones.
Yeah.
Revenue within the consumer end market increased 31% sequentially and 14% year on year supported by new IAC ratable product ramps.
Well you have yourself a trend of further miniaturization and integration of new functionality like sensors and connectivity of random of Iot devices.
Together with lead customers, we further innovate our advanced assembly or test platform to incorporate these new requirements.
We believe that the Iot available segments will continue to diversify and grow.
To support future customer demands, we are expanding our footprint to Vietnam, which is expected to start high volume manufacturing in late 2023.
Revenue within the automotive and industrial markets grew 6% sequentially and 13% year on year.
We observed continuous improvements and material lead times and anticipate a more balanced supply chain by the end of this year.
Market reports project automotive electronics to grow at mid teens over the next few years.
And of course, 40, plus years of automotive experience together with our advanced packaging leadership global manufacturing footprint and trusted partnership with leading automotive customers positions us well to capture growth from the acceleration of semiconductor content in cars.
EMCORE works closely with lead customers both to develop this technology and to support changes in geographical manufacturing footprints.
We are expanding our capacity and technology portfolio for automotive solutions, notably in our factories in Europe , and Japan and support of regional supply chain for critical automotive semiconductors.
Yeah.
Revenue from the computing end market increased 12% sequentially and 22% year on year.
Although the PC market is soft we observe opportunities for growth driven by continued deferred the collaboration and the growing adoption of an outsourced manufacturing supply chain.
New Fabulous entrance and Oems spit in house Silicon design together with the introduction of an arm based architecture for Pcs laptops and tablets are expected to drive future growth.
Furthermore, the introduction of AI and anticipated upgrades from data centers and networks require advanced packaging and unharmed semiconductor contents.
Our test business grew 32% sequentially and 80% year on year to a record $266 million.
We have invested in broadening the scale and capability of our best services to our global factory footprint multi.
Multi stage testing has become more important with the increasing complexity and cost of assembled products.
So much value, our turnkey service to ensure quality reliability and reduce cycle time.
Yeah.
In the third quarter, our manufacturing organization demonstrated great flexibility to ramp our Shanghai factory back to full capacity after the Covid Lockdown in Q2 and to manage our records ramp in output from our Korea factory supporting new products for premium tier smartphones and Iot of animals.
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Geopolitical dynamics and Covid related disruptions continue to impact the semiconductor supply chain.
Globally, our customers are evaluating their supply chain strategies to reduce risk and secure sustainable and cost effective manufacturing basis.
We're working closely with our customers to adapt to these changing requirements.
In Asia, Our factory project in Vietnam is progressing as planned and we are expanding in R&D and manufacturing capability in Japan to offer a secure supply chain for automotive semiconductors and sensors.
In Europe , we are investing in technology and capacity and are partnering with lead customers in our Portugal factory in <unk>.
Both of our European automotive supply chain.
In the U S. We see more interest from customers following the passage of the chips and science backed.
We believe and of course broad geographical footprint is a key differentiator and positions us uniquely to support our customers and benefit from the shifting global supply chain trends.
While the U S exports controls announced in early October are not focused on offset operations. We expect regionalization trends may accelerate in response to these new U S export controls.
Now, let me turn to our fourth quarter revenue outlook.
After a record third quarter, we expect Q4 revenue of $1 $85 billion at the midpoint of guidance.
This one 3% a year on year increase of 7%.
The higher than seasonal Q4 sequential decline of 11% is primarily due to three factors.
First customers accelerating built in the third quarter, taking advantage of death of material availability in selected areas.
Second.
And impact of recently issued U S export controls estimated in the low single digits percent off revenue.
And finally softening at some areas of the market, reflecting inventory corrections by certain customers.
Second half revenue is expected to increase 16% of our prior year second half.
With all end markets contributing to the growth.
We expect that our strong position in advanced packaging and deep relationship with lead customers they'll moderate followed penalty throughout the sneakers term macroeconomic headwinds.
Megan will now provide more detailed financial information.
Thank you Hugh and good afternoon, everyone.
Amcor achieved record performance in the third quarter, reaching to new milestones one revenue crossed the 2 billion dollar Mark at $2 $1 billion and two E. P. S is over $1 at one dollar and 24 cents.
And of course outstanding topline and Bottomline herself are due to our leadership position in advanced packaging technology and quality execution on high volume ramps of new products.
Demand was better than expected primarily due to strength in the communications market supporting new launches a premium tier smartphones utilizing our advanced <unk> technology.
Technology.
And material availability, allowing for upside supporting customer demand.
With expanding content and market share gains the communications market grew more than 30% over prior year Q3.
Gross margin for the third quarter was over 20% the highest Q3 performance in over a decade supported by high utilization across our factory footprint.
We also set a new quarterly record for gross profit in Q3 at $421 million.
Operating expenses came in lower than expected at $102 million, primarily due to timing of new product introduction, lower labor costs and favorable foreign currency rate.
Operational excellence contributed to robust profitability and record quarterly operating income of $319 million for the third quarter.
Operating income margin for the quarter was 15, 3%.
Q3 income tax expense came in lower than expected due to foreign currency exchange rate movements and a discrete income tax benefit related to changes in the valuation of certain deferred tax assets.
Net income for the quarter was $306 million, resulting in EPS of $1.24 both of which are new all time quarterly records.
Q3, EBITDA was $481 million and EBITDA margin was 23, 1%.
Overall, we are very pleased with our Q3 performance, including quarterly revenue records in all of our end markets.
Our balance sheet remains solid and allows us to invest in advanced packaging technology to capitalize on the long term growth catalysts are five G Iot automotive and high performance computing.
We ended the quarter with $932 million of cash and short term investments and total liquidity of $1 $6 billion.
Our total debt as of the end of the third quarter is $1 $1 billion and our debt to EBITDA ratio is <unk> seven times.
Amcor is not immune to the near term macro economic uncertainty, but even in the case of a market slowdown we have the financial strength to continue to expand our global footprint in response to customer demand.
Construction on our new facility in Vietnam is progressing as planned and we expect to be ready in late 2023 to support high volume manufacturing for lead customers.
Vietnam is a strategic long term investment for Amcor is it will offer our customers an opportunity to diversify their global supply chains.
Moving on to our fourth quarter outlook.
We are expecting Q4 revenue between $1 8 billion and $1 $9 billion.
Representing year on year growth of 7% and contributing to full year growth of around 15%.
Well above the semi industry growth estimates for 2022 of mid single digits.
Gross margin is expected to be between 16 and 18%.
We expect operating expenses of around $110 million.
Assuming continued strength in the U S. Dollar, we expect our full year effective tax rate to be around 10% before discrete tax items.
Fourth quarter net income is expected to be between $150 million and $195 million, resulting in EPS of 60 to 80 cents.
Considering our fourth quarter guide, our second half 2022 estimated performance resulted in revenue growth at 16% and EPS expansion of around 20% compared to the prior year second half.
Our forecast for capital expenditures for the year is projected at $900 million about 5% lower than the previous target.
The update is due to timing of payment terms and delays in equipment deliveries.
Our plan to support long term growth is unchanged given the secular trends in the market.
To strengthen our advanced packaging leadership position, our investments are focused on increasing capacity and capability within technologies, such as advanced S. I P flip chip wafer level and test as well as associated investments in quality and fact.
Automation.
We are also selectively expanding our facilities in response to customer demand.
Our global footprint is a key differentiator for us and provide support for the development of regional supply chain.
We see strong interest in Japan, and Europe , which are attractive to many customers for introduction and ramp up of new technologies, notably for the automotive market.
Looking ahead to 2023, we are monitoring macroeconomic uncertainty and working closely with our customers to manage changes in the demand environment.
We are confident in our long term outlook as we do not see a change in the growth catalyst for advanced packaging, and which amcor maintains a leadership position.
With that we will now open the call up for your question.
Writer.
Thank you.
And at this time, we will be conducting a question and answer session.
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Our first question comes from Randy Abrams with Credit Suisse. Please state your question.
Hi, yes. Thank you.
Good set of results I wanted to ask the first question on the third quarter, you mentioned I think the better materials, which helped to ship more could you go through a couple of other factors one just the impact of the China recovery.
From China recovery, how much of a headwind is that high base.
From third quarter to fourth quarter that you shipped some additional product in a catch up.
And also how much of a factor are you seeing early early builds if you for some of the keep premium smartphones. So it's a bit of a shift in seasonality earlier.
Hi, Randy. This is this is Hugh let me start answering this question just to make sure that I understand as well.
So you're you're.
Asking about would be share impact of the China recovery on the SCHIP, Bill Cindy and the tariff to quarter correct Randy.
Yes, that's right and then also the impact if you saw any earlier shift of seasonality with.
With the component availability, where the premium you may feel it a bit earlier.
And so that might be affecting the fourth quarter compare.
Yeah, Let me start with the last part of your question should.
Should be sure Elliot bills or do you accelerate that builds into two quarters because of material availability you saw that.
Most notably in the communications segment.
On the share our U S as well as on the Android sites.
Randy.
And the availability was brought to you it was built components as well as some other materials, but that's made customers decided to award two prebuilt.
Also giving some other supply channels. So just later in the year.
With respect to the China recovery.
The impact of the third quarter.
I mean, when we look to the quarter on quarter.
Proof much.
All right.
Of revenue than we see about 25% of that being attributed to the recovery of our APC sector.
The rest is growth so 70%, 75% this growth 25% is.
Due to the callers.
Okay.
A good number on the core business.
Sure.
The forward look on fourth quarter, if you could give us just some with different applications, how youre seeing the.
Trends by application and then an initial view.
For 2023 at this stage like how you see your.
Our own business and how do you see the industry and.
The context with that just says as we go into early part of the year Theres, some calling for a kind of cyclical correction downturn.
If there's any initial view, how you see first quarter versus seasonal.
Yeah.
Well, let me start with the first part of the thing that's the core plus cost of revenue or change.
And then for application I mean, we don't guide per application, but I can give you some high level impacts I mean, the two segments, where we see the most prominent.
Changes in communication and consumer.
Oh 20 computing are less impacted on a quarter on quarter, but that's generally what's for what we see.
No go into.
Visits from Q2 Q3 into Q4 going into Q1, I mean, we don't we don't guide Q1, I mean, there are multiple uncertainties still going to be working closely with customers to understand therefore constant forecast changes.
We must also close he brought to market. This is doing so we don't we don't share guidance yet.
And therefore Q1.
Do you have anything to ask with respect to the quarter on quarter specifics.
Okay.
Hi, Randy it's Megan so I think he'll cover the color on the end markets well and with respect to your question about 23, <unk> and Q1, you know as Carol mentioned, we're monitoring we would say, though for the full year 'twenty three we would expect to continue to outgrow the semi market.
Can you see that well for 'twenty, two and then and the reason for that is our position in support of advanced packaging, where those needs are more diversified and we are less exposed than some of the areas of weakness.
Yeah.
Okay. That's helpful.
The one follow up question just on the gross margin.
So there's quite a bit of upside it was still good.
Gross margin on a historical perspective, but.
Just put a leverage like given the sales strength.
On the gross margin.
Because also in the fourth quarter with sales coming down there's a few points lower gross margin like traditionally at that revenue level, you could be a few points higher so if there's some mix impact.
Other factors affecting the gross margin.
Did fall little bit short on the on the leverage.
Sure. So with respect to Q3, we did have an increase in material content between Q2, and Q3 and that's product mix change is what's causing.
No I would say more mild gross margin percentage. However, we did have very robust profitability with records throughout gross profit dollars operating income dollars and EPS for Q3 and as it relates to the change for Q4 that sequential change.
<unk> Q3, Q4, having a decline in gross margin percentage is truly around the reduction in utilization that incremental margin is around 45%, which is what we typically guide with our financial model and so there is no change in our structural costs and I would also point to.
The full second half performance given the significant outperformance in Q3, followed by more than seasonal decline in Q4 with some of those accelerated builds mix shifting the profit levels are expanding on our second half new compared to the prior year second half so even with growth.
Margin percentage decline gross profit dollars operating income dollars and even bottom line EPS is expanding around 20% and again, that's even with significant increase in the product mix shift to advanced that's IP.
Okay. That's that's helpful actually gets set off one maybe one two part follow up just one clarification. The S. T. If you can give a framework how this here it looks like it'll it will track relative to last year, because I think that some of your mix impact and then the other the other question I wanted to ask was on the Capex.
I would like to do I, just be the nature of it because supply chain is improving a bit.
Where the delay is and then if there is an initial view on the capital intensity for next year.
We should think with the push out it would be at that capital intensity, plus the 50 million or you'll take into account that since environment. So it might be actually on a little bit of a lower a lower capital intensity into next year.
Okay, Let me stop there and EBIT to be should be <unk>.
And then maybe you can pick up on the capital intensity for the for next year.
I mean as I T shirt in the third quarter, perhaps significant growth also coming from <unk>.
Basketball, Josh no we see here in your changes, let's say.
Close to.
Close to 50% when it.
Comps for year on year changes in our cool.
Yes.
Audio so she can if it can change.
Of which the change in boats communication as well as consumer.
Well it's.
The launch will drive them to larger parcel of this of this growth.
With respect to the capital intensity is that.
Answering your question Randy.
Yeah, sorry, yeah that is helpful. Just the that close to 50% growth.
It explains I've been on the upside the mix for the margin.
And then the capital intensive I guess Meghan can can take that one.
Yeah sure so Randy the update to our guide of reducing 900 million is it's really around as we're fine tuning timing of payments and equipment delivery and S. As it relates to looking forward. You know we would still use a rule of thumb of you know, 13% or so capital intense.
City.
And we will have our spend for Vietnam included in that and then of course, we'll take into account any sort of changes in the environment, but at this time, you know I would say the rule of thumb of 13% is a good oh good mark.
Okay, great. Thank you. Thank you John Dugan.
Thank you and just a reminder to ask a question press star one on your telephone keypad.
Our next question comes from Hans Chung with D. A Davidson. Please state your question.
Hi, Thank you for taking my question so.
First I wanted to touch base on the full Q.
I know you're coming in.
China.
Some impact on China, the export restriction.
I remember, that's a low to mid single digit percent impact in the.
Should we think about that.
Just the everyday level going through 'twenty, three we will.
There will continue to do.
You see that kind of impact next year.
Oh Hi. This is if you let me try to answer that.
I mean, we're still evaluating how that sort of develops this is a judgment offer or the impact of the fourth quarter.
And the measures the new managers or the share restriction, so I'm just being announced.
You know, we don't know whether we can recover this but that's the end of the fourth quarter. It's a low single digit impact and that is an expectation that either it will continue at that level or if we are able to recover that share when it shifts to that same business that shifts with two other customers.
Yeah.
Yeah.
I see and then and then regarding the inventory correction, how would you characterize the inventory level in the supply chain or at your customers. When do you think that's correct she could end.
When do you think we could see a father and SEC Gov.
Q2, Q1 or even.
Like the second half.
Yeah, that's a that's a good question the homes.
We see the inventory N V industries be different in different parts of the market. If you take for example, the automotive markets than the launch of part of the market, we see inventories still being slightly below the target level of some of the customers. So I would characterize because thats low while.
In for example, the communication market species, specifically inventory pockets in the.
Low and mid range of androids smartphones and that will take and our expectation is still one quality of maybe one to two quarters to build that inventory down.
Now if he takes to communicate the computing markets than in the PC markets, we see similar trends that Patterson inventories at the midrange to lower end Pcs.
We also expect that that still let's say normalized towards the share the second to a.
Second quarter of 2023, all the parts of the computer markets. That's the case.
<unk> for the share data center and networking part of that market, we see inventories at the at the normal level.
No the consumer Pos over the markets. We also achieved some inventory in some pockets.
On the shelf for example of the Iot wearable markets, where we saw significant increase quote unquote performance second to the third quarter. We don't believe that there is a huge inventory built up so we see that are normal inventory. So in summary, I think inventory is theres difference in different segments of the markets.
That's in the market with high inventory, we expect that to normalize towards the second quarter of <unk>.
23.
Got it that's helpful. So.
So one other utilization right now.
How how is that trending.
Yeah. So both are trending down in the fourth quarter and then.
Just kind of curious like how what's occurring.
And then when do you think that could.
Good to know.
Yeah, let me make some comments on the utilization rates.
We don't report that specifically, but some indications here in the third quarter, you're running we were running at maximum utilization.
You know limited pockets bits a bit slides.
On the utilization and therefore, specifically in our Japan factories, but the deal the remainder of factories were running at full utilization.
Going into the fourth quarter, we still see a high utilization rates.
Some fold back in our Korea effect lease.
With respect to a correction in the communication markets.
In the consumer market, both the remaining factories will stay fairly high utilization.
Great and then.
And I think last one.
So as we are in the downturn of the industry cycle.
I was wondering how variable the cost structure in both Cogs and Opex.
Oh can I leave it to where to Megan Megan the question, it's about the cost structure going forward. When there was a slight correction in the industry.
Yeah sure Hans so from our financial models like you would expect on the behavior related to down cycles is you know typically we've shared a 40% to 50% incremental margin and that's how you can measure it.
Hayden here of our fixed cost structure with changes in revenue and that's what's playing out here in Q4 with respect to Opex Opex, it's fairly has been fairly well controlled even in the face of very significant revenue increases.
So I would anticipate there would only be mild changes in opex associated with potentially lower employee compensation as it relates to you know a downturn cycle.
Got it great. That's all I have thank you.
Thank you at this time I'm showing no further questions I would like to turn the call back over to heal for closing remarks.
Thank you Len.
Let me recap the key messages.
<unk> delivered a record third quarter results with revenue of 24%.
Year on year growth in EPS of $1 24.
Advanced packaging revenue increased 33% year on year to around 80% of total quarterly revenue.
We expect fourth quarter revenue of $1 $85 billion, resulting in a second half growth of 16% compared to the second half 2021.
And cost continues to execute on its three strategic pillars of leveraging all of our advanced packaging technology leadership, focusing on industry makeup trends and strengthening our broad geographical footprint.
Although we observed macroeconomic headwinds and weak market forecast in some areas. He believes the long term growth driver for the semiconductor industry remains in place and we are confident our strategic focus and leadership position in key semiconductor markets will continue to drive future growth.
Thank you for joining the call today.
Thank you ladies and gentlemen, this does conclude today's conference call you may now disconnect.