Q3 2024 Amkor Technology Inc Earnings Call
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Paul: Good day, ladies and gentlemen, and welcome to the Amcor Technology Third Quarter 2024 Earnings Conference Call. My name is Paul, 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 Jue, Head of Investor Relations. Ms. Jue, please go ahead.
Jennifer Jue: Thank you, Operator. Good afternoon, everyone, and thank you for joining us for AMCOR's third quarter 2024 Earnings Conference Call. Joining me today are Giel Rutten, our Chief Executive Officer, and Megan Faust, our Chief Financial Officer.
Jennifer Jue: Our earnings press release was filed with the SEC this afternoon and is available on the investor relations page of our website along with the presentation slides that accompany today's call.
Jennifer Jue: 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.
Jennifer Jue: We will make forward-looking statements about our expectations for AMCOR's future performance based on the environment as we currently see it.
Jennifer Jue: 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.
Speaker Change: Please note that the financial results discussed today are preliminary and final data will be included in our Form 10-Q. And now, I'll turn the call over to Giel.
Giel Rutten: Thank you, Jennifer. Good afternoon, everyone, and thank you for joining the call today.
Giel Rutten: MCOR delivered third quarter performance in line with expectations, with revenue of $1.86 billion and EPS of 49 cents.
Giel Rutten: Total revenue increased 27% sequentially, mainly driven by demand for advanced SIP technology.
Giel Rutten: In the quarter, we successfully ramped high-volume production for devices supporting the launch of new premium-tier smartphones, a new consumer-wearable program, and several products for AI-enabled ARM-based PCs.
Giel Rutten: In support of the continued demand increase for the high-performance computing market, especially for AI processors, we ramped volume by utilizing our incremental 2.5D capacity.
Giel Rutten: Although demand for traditional servers, networking, and automotive remained weak, MCOR's year-to-date advanced packaging revenue increased 6% over 2023.
Giel Rutten: The continued weakness in the automotive and industrial and consumer markets significantly impacted our mainstream business with a year-to-date revenue decline of 24% versus 2023.
Giel Rutten: Throughout this unique and challenging environment, MCOR has maintained focus on its three strategic pillars.
Giel Rutten: Our technology leadership in advanced packaging has enabled us to win programs in AI and high-performance computing, ARM-based PCs, and consumer IoT.
Giel Rutten: Our continued investment in a global manufacturing footprint offers customers a resilient and reliable semiconductor manufacturing supply chain.
Giel Rutten: In Vietnam, we start the production and our plans to bring Arizona online are progressing well.
Giel Rutten: Our engagements in the secular growth markets are strengthened by strategic partnerships with industry leaders, including what we have announced with TSMC and Infineon.
Giel Rutten: We are confident the strategic direction positions MCOR well to benefit from the secular growth drivers in the semiconductor markets.
Giel Rutten: Now let me review the current dynamics in each of our end markets.
Giel Rutten: Revenue in the communications end market increased 36% sequentially, driven by multiple device ramps to support the launch of premium tier iOS phones.
Giel Rutten: Revenue within the Android supply chain was flat sequentially, but showed continued year-on-year recovery.
Giel Rutten: Our strong position in the premium tier phone market is built on our advanced packaging technology.
Giel Rutten: Over the last few years, we have expanded our technology portfolio by investing in RF capabilities to support integration of Bluetooth and Wi-Fi functionality in a broad range of devices.
Giel Rutten: In 2024, we saw returns on those investments in communications and other areas like wearables and PCs.
Giel Rutten: Revenue from our automotive and industrial end market remains stable. Recovery in this market is taking longer than anticipated due to weak end market demand and ongoing inventory corrections.
Giel Rutten: Here to date, automotive and industrial revenue is down 17%.
Giel Rutten: Customers continue to work through inventory and timing for recovery remains uncertain.
Giel Rutten: Despite these headwinds, NPI activity remains solid. We are qualifying new programs for automotive ADAS processors, utilizing flip-chip technology, and for radar and lidar applications in wafer-level technology.
Giel Rutten: Our Portugal facility continues to ramp production for automotive sensors and is progressing well with the factory expansion for power modules as previously announced with Infineon.
Giel Rutten: We ramped volume for full-flow 2.5D technologies for AI devices in line with plan.
Giel Rutten: The on-substrate flow experienced some constraints in material availability, which limited Q3 revenue growth in this part of the business.
Giel Rutten: Demand for AI devices remains strong and we still expect that 2024 revenue for 2.5D will quadruple versus 2023.
Giel Rutten: Our traditional server and networking business has been weak, with a year-to-date decline of 33%.
Giel Rutten: However, early signs of recovery with modest improvements in Q4 are noted.
Giel Rutten: And we observe new product RAMs for multiple customers supporting different areas in the data center, including CPUs, retimers, and switches.
Giel Rutten: Revenue from the consumer end market increased 70% sequentially, driven by the high volume production ramp of a new wearable IoT device.
Giel Rutten: Volume is expected to remain strong in Q4 before tapering down throughout 2025.
Giel Rutten: Business from traditional consumer applications increased modestly in Q3 for the first time after four quarters of sequential decline. And feedback from customers is that the gradual recovery is expected in the next few quarters.
Giel Rutten: During the third quarter, our manufacturing organization continued to manage multiple priorities across our geographically diverse manufacturing footprint.
Giel Rutten: In Korea, we focused on executing the steep advanced SIP ramps for multiple communications and consumer programs, setting a record advanced SIP revenue in the quarter.
Giel Rutten: We are also bringing up another HPC customer for 2.5D technologies and the manufacturing and R&D team progressed well with qualification of next generation organic RDL interposer solutions for 2025.
Giel Rutten: Our new Vietnam location started initial production in Q3 with anticipated volume ramps in the fourth quarter.
Giel Rutten: In Portugal, we are expanding our technology portfolio for wafer-level processing, advanced flip chip and test solutions in support of the European automotive supply chain.
Giel Rutten: Additionally, our panel line is being evaluated by multiple customers for next generation devices.
Giel Rutten: Thank you.
Giel Rutten: Besides the manufacturing and R&D priorities, the organization is focused on key strategic projects in the U.S., including progress on CHIPS funding and preparing the technology portfolio for our Arizona factory by signing an MOU with TSMC for advanced packaging technology.
Giel Rutten: Now let me turn to our fourth quarter outlook by revisiting the assumptions we had for growth in the second half of the year.
Giel Rutten: We expected stronger-than-seasonal second-half growth to be driven by additional 2.5 D capacity coming online mid-year.
Giel Rutten: a meaningful ramp of a new consumer wearable program, a strong communication cycle, and a gradual recovery within the automotive and industrial markets.
Giel Rutten: However prolonged weakness in automotive and industrial and a weaker than anticipated communication cycle has dampened our second half outlook.
Giel Rutten: With this backdrop, we are expecting a more than seasonal decline in the fourth quarter, with revenue of $1.65 billion at the midpoint of guidance.
Giel Rutten: This decline is primarily driven by dynamics within our communications end market, specifically by a phone bill plan that deviates from historical trends.
Giel Rutten: For full year 2024, we anticipate communications will decline single digits and automotive and industrial will decline double digits, offset by growth in computing and consumer.
Giel Rutten: Despite the short-term dynamics within our communications business, we remain confident in our long-term growth prospects, supported by our leading technology portfolio, global manufacturing footprint, and strategic partnerships.
Speaker Change: With that, I will now turn the call over to Megan to provide more detailed financial information.
Megan Faust: Thank you, Giel, and good afternoon, everyone.
Speaker Change: Amcor delivered an outstanding third quarter with revenue of $1.86 billion, a 27% sequential increase driven by a quarterly record of advanced SIP revenue supporting communications and consumer end markets.
Speaker Change: Gross margin was constrained due to higher than seasonal material content driven by a product mix concentrated in advanced SIP.
Speaker Change: Operating expenses for the quarter came in as expected at $123 million.
Speaker Change: Operating income increased sequentially over 80% in Q3 to $149 million, and operating income margin was 8%.
Speaker Change: Net income for the third quarter was $123 million, resulting in EPS of 49 cents.
Speaker Change: Third quarter EBITDA was $309 million, and EBITDA margin was 16.6%.
Speaker Change: We continue to maintain a strong balance sheet. We ended the quarter with $1.5 billion of cash and short-term investments and total liquidity of $2.2 billion.
Speaker Change: Leveraging our financial stability, we've strategically invested in expanding our geographic footprint to support future growth by constructing our new Vietnam facility.
Speaker Change: We commence production in Q3 and are pleased with the progress.
Speaker Change: Regarding our fourth quarter outlook, we anticipate revenue of approximately $1.65 billion, representing an 11% sequential decline.
Speaker Change: The more than seasonal decline is mainly due to a premium tier smartphone build plan that surpassed expectations in the first half and was less than projected in the second half.
Speaker Change: Still, considering the Q4 guide, our second half of 2024 is expected to be up 24% over the first half.
Speaker Change: While this is softer than our original expectations, it represents a solid second half underpinned by the successful ramp of a high-volume consumer wearable product.
Speaker Change: qualifying incremental 2.5 D capacity and scaling it to high volume and a seasonal ramp of multiple products supporting the launch of new premium tier smartphones.
Speaker Change: We expect Q4 gross margin to be flat to Q3.
Speaker Change: Gross margins continue to be impacted by underutilization in our mainstream factories.
Speaker Change: We expect Q4 operating expenses of around $120 million.
Speaker Change: We expect our full year effective tax rate to be around 18% excluding discrete tax items.
Speaker Change: Fourth quarter net income is expected to be between $70 million and $110 million, resulting in EPS of $0.28 to $0.44.
Speaker Change: We are holding our CapEx forecast for the year at $750 million.
Speaker Change: In this challenging environment, we remain dedicated to executing our three strategic pillars.
Speaker Change: Advancing our Technology Portfolio in High-Performance Computing Supporting AI and Arm-Based PCs.
Speaker Change: Further expanding our broad geographic footprint by successfully beginning production in Vietnam and progressing our plans to build a U.S. manufacturing location, supported by CHIPS funding.
Speaker Change: and strengthening our relationships with industry leaders in secular growth markets.
Speaker Change: With that, we will now open the call up for your questions. Operator?
Speaker Change: Thank you. We will now be conducting 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 your line is in the question queue. You may press star two if you'd 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.
Speaker Change: Thank you. Our first question is from
Speaker Change: Please proceed with your question
Speaker Change: Bye-bye.
Speaker Change: Hi, good afternoon, and thanks for all the colors so far. I was wondering if you could talk a little bit more about
Speaker Change: How we think about capacity additions, if you've changed any plans, given the slower demand in some of your core markets into next year, or whether we should consider anything different, like how underutilization charges progress from this level into the first part of next year. And then I had a follow-up.
Speaker Change: Hello Steve, this is...
Speaker Change: Let me give a bit of color on the capacity expansion.
Speaker Change: I mean, as Megan already mentioned earlier, most of our investments in capacity expansion were in the computing domain, specifically 2.5D capacity expansion that came online in the second quarter this year, and we're currently fully utilizing that to further ramp up with main customers.
Speaker Change: We expect that to be fully utilized going forward, including into 2025, where we actually plan to further invest and expand that capacity.
Speaker Change: to enable the RAMP of the wearable consumer device. Also that will continue into 2025 and we are running currently at a high utilization of that capacity.
Speaker Change: I think these are the most prominent investments that we made in capacity expansion, Steve.
Speaker Change: That's helpful. And then on the underutilization...
Speaker Change: and Chargers going forward.
Speaker Change: Go!
Speaker Change: that are manufacturing the automotive and industrial products, mostly, and that also referred to our earlier remarks.
Speaker Change: in our mainstream business, and this is in the Philippines.
Speaker Change: very underutilized, currently running at roughly 60% utilization.
Speaker Change: some of that in Japan.
Speaker Change: automotive lines in Korea.
Speaker Change: during 2025 if the automotive and industrial market slowly starts to recover.
Megan Faust: And Steve, this is Megan. Just to add to that, with the Vietnam factory coming online this quarter,
Megan Faust: There is some dilution effect given that's just starting.
Megan Faust: And then moving into Q4, where we'll have a full quarter of, I would say, burden transitioning to COGS. That will be, you know, around 100 basis points.
Megan Faust: We expect that will taper off in 2025 as we build scale in Vietnam, such that exiting 2025, we would be more at a break-even.
Speaker Change: Great, that's helpful. And then some of the comments led into my follow-up, which was specifically on auto Depending on the company and the supply chain we talked to this seems like there's different Impacts from what's going on in the auto supply chain. Is there any way you can narrow down? What you're seeing relative what you saw 90 days ago that maybe is on the disappointing side
Speaker Change: Thanks.
Speaker Change: With respect to the auto market, we believe it's stabilizing. We had foreseen a slight improvement, a better improvement, in the course of this year.
Speaker Change: you know, getting feedback from our customers.
Speaker Change: But, you know, we see a modest growth in the fourth quarter, with some further gradual growth into 2025.
Speaker Change: The main reasons are still inventory depletion that takes longer than expected, but also end market demand is weaker than expected, specifically also in the EV part of this market.
Speaker Change: Great, that's helpful. Thank you.
Speaker Change: Okay.
Speaker Change: For more information visit www.FEMA.gov
Speaker Change: Thank you. Our next question is from Steve Barger with KeyBank Capital Markets. Please proceed with your question.
Speaker Change: Thanks.
Steve Barger: For the uncertainty on the premium-tier smartphone build plan, how is your visibility into early 2025 relative to what you would normally see at the end of October? Can you give us any commentary on what mobile progression could look like next year?
Speaker Change: you know what we saw in 2024 is a seasonality of our bills for this market that deviated from normal seasonality with a stronger first half and a weaker second half
Speaker Change: We also saw a slight changeover, anticipated changeover, that impacted our fourth quarter, but we expect that to recover in 2025.
Speaker Change: So overall, difficult to say. I mean, I can only repeat what the information that's out there that...
Speaker Change: We believe that there is a stronger, let's say, cycle next year driven by AI functionality in the premium T-phones.
Speaker Change: to be launched and that would trigger an up-cycle in phones. They were expected to start earlier, but currently that's expected to happen in 2025.
Speaker Change: Thanks I appreciate that commentary and for the hundred million dollar range between the high end and the low end of the four key revenue guide
Speaker Change: Is the phone...
Speaker Change: Do you have a build plan, the primary swing factor you built into that forecast, or is there something else that is hard to nail down at this point?
Speaker Change: Yeah, I think if we take the bill plan and the seasonality versus the normal seasonality, specifically we had a strong second quarter and a weaker fourth quarter.
Speaker Change: There is a slight additional effect, I think that seasonality is explaining about 75% of the total weakness in the fourth quarter.
Speaker Change: an additional 25% of that weakness is due to a device changeover that we see in the fourth quarter, mainly in the fourth quarter, but we expect to recover that in the next generation models in the second half of 2025.
Speaker Change: That's great. So it sounds like communications is the only one that you can...
Speaker Change: and expect to be down sequentially for 4Q?
Speaker Change: Yes, correct. I think we expect if we take a little bit more color on the fourth quarter, we expect auto and industrial to stabilize slightly up, computing to continue to be up, and a slight correction down for consumer. That's on the current ramp of the IOT wearable devices, but that's a relatively small correction seasonally. The main correction is in communication.
Speaker Change: For more information visit www.FEMA.gov
Speaker Change: Thank you. Our next question is from Peter Peng with JP Morgan. Please proceed with your question.
Peter Peng: Hey, good afternoon and thanks for taking my question.
Peter Peng: As we kind of look into the first half of
Peter Peng: next year, how would you categorize, you know,
Peter Peng: your business versus seasonal trend. It sounds like the communication.
Speaker Change: joining us live. I hope to see more of your persecutors on our social channels.
Speaker Change: Thank you. Thank you.
Speaker Change: and I'm going to go into the first half and make sure.
Speaker Change: Thank you.
Speaker Change: Well I cannot be quantitatively analyzed that first half next year but you know on in general terms we believe that in the first half next year only in the communication side
Speaker Change: You know, we see some headwinds in the iOS ecosystem. On the other hand, we expect Android to gradually continue to recover.
Speaker Change: There may be some tailwinds also if the spring launch and the upwards correction due to AI functionality in the phone really materialize.
Speaker Change: Out of an industrial, we expect to continue a gradual recovery.
Speaker Change: with potential acceleration, you know, feedback from customers is that they see that inventory is starting to balance out.
Speaker Change: and maybe some of the end customers overshooting a little bit the minimum value of inventory. But that's a bit speculation still.
Speaker Change: Computing, we expect continued growth for 2.5D, for AI processors and generally data centers. Also, the ARM-based PCs, we expect continued growth.
Speaker Change: And then on the more mature computing applications, we gradually see a recovery there. So also computing, we foresee a strong start of the year. And then consumer...
Speaker Change: It will be a progressing build of the current devices with a gradual improvement of more mature consumer devices. So all in all, we believe that the first half looks promising.
Speaker Change: Thank you for watching!
Speaker Change: Got it. And then, moving more towards the AI. So, AI, as you say, accelerates and makes
Speaker Change: rapidly rising, right, and we think that it could probably be close to half of the overall FQ market sometime in the next, you know, one or two years. Can you just talk about your engagement with some of these other hyperscalers and how you think about customer diversification?
Speaker Change: optic and a strong growth, continued growth in that market.
Speaker Change: If we take customer diversification, we're currently onboarding another customer for standard 2.5D technology, and that will ramp up in the fourth quarter and going into next year.
Speaker Change: and that will also ramp towards the second half of 2025. So we are diversifying our customer portfolio but also our technology portfolio.
Speaker Change: in 2025 in a market that we believe will continue to grow going forward.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question is from Craig Illis with eRiley Securities. Please proceed with your question.
Speaker Change: Dr. Thomas Diffely, Dr. Thomas Diffely, Dr. Thomas
Craig Illis: Yeah, thanks for taking the question.
Craig Illis: Giel and Megan, I wanted to start just by going a little bit further into the question that Peter asked on dynamics in the first half. Megan, how do we think about gross margins?
Craig Illis: if we have strength in parts of the compute business like traditional server applications, but if communications has more of a downward bias just given seasonality in the iOS ecosystem, does that put upward pressure on gross margin or are there other things?
Craig Illis: Going on, we should be aware of.
Speaker Change: Thanks, Craig.
Speaker Change: With respect to go forward expectations in 2025, I mean we've been basically under a pretty impacted underutilization in 2024, so the two markets that you mentioned, automotive and industrial, actually I'll add to that, the traditional
Speaker Change: We expect those will gradually increase in 2025, which should bring margin expansion related to those markets.
Speaker Change: We also see continued growth in Compute, specifically around what Giel just mentioned in our 2.5D. That business is running higher than corporate average gross margins, so we see tailwinds associated with that as well.
Speaker Change: That's helpful. And then maybe a longer-term question for Heal, and it's more on calendar 25. Not looking for guidance here, Heal, but as we think about 2024, we had numerous
Speaker Change: real meaningful programs. We had ARM-based PCs. We had
Speaker Change: a real nice wearables program that has legs into next year. And then we had 2.5 DAI. It's we think about 2025.
Speaker Change: What are some of the things you're starting to see or maybe have closed in the funnel that That would offer similar types of benefit to help grow the business and expand your sand. Thank you
Speaker Change: Well Greg, let me try to give a bit of color there. Fundamentally, we don't see a change for 2025.
Speaker Change: Yes, we have, let's say, a temporary headwind in IOS in communication, although we believe that the health of our position in that market is still there.
Speaker Change: Let's say a record SIP year, and we also believe that there will be an up-cycle in communication with AI edge devices taking off. It may be a little bit longer. It's difficult to predict what the timing is, but we believe it will come and will drive.
Speaker Change: for Opposite Volumes.
Speaker Change: and all the things that we have in the pipeline.
Speaker Change: is in the automotive and industrial markets.
Speaker Change: You may have seen the announcement we made with Infineon on power modules, specifically for electrical vehicles.
Speaker Change: Once that market takes off, that's an accelerator that we anticipate to come. There is a slight weakness now in the EV market, but in the course of 2025 and certainly in 2026 we expect that to take off.
Speaker Change: Computing continues to be strong, I think we have a good position there, we're diversifying, as Megan said, I think we see there is an above average company's profitability for that business, so that's good. Consumers
Speaker Change: Let's give you a bit of color on the different market segments.
Speaker Change: That's very helpful and if I could sneak in one more. Could you help us just with milestones as we think about the further ramp next year in Vietnam as we go through 2025? What are some key signposts we should look for and then
Speaker Change: How should we look at the progress you would expect to make ramping up Arizona next year? Thanks for all the help, team.
Speaker Change: Dr. Thomas Diffely, Dr. Thomas Diffely,
Speaker Change: Yes, with respect to Vietnam, a few data points there, I mean, we're ramping up our SIP portfolio in the fourth quarter this year, the lines are qualified.
Speaker Change: for 2.5D. We qualified our install base, we're ramping that up now and we expect additional capacity to come on stream at the end of Q2 2025.
Speaker Change: Thank you for watching!
Speaker Change: Thank you. Our next question is from Randy Abrams with UBS. Please proceed with your question.
Randy Abrams: Okay, yes, thank you. I wanted to ask the first question, two separate things.
Randy Abrams: First on the Arizona, the new additional expansion, could you go through just the...
Randy Abrams: additional technologies you're taking on or the additional relationship you have with TSMC to ramp up and any any change in your
Randy Abrams: expectations for the Arizona project.
Randy Abrams: And then the second question is on the test business, how you see the opportunity for AI GPUs if you have that process chain to do the final test, the burn-in, the system level test, to do some of those for final tests.
Randy Abrams: Thank you.
Speaker Change: Okay, Randy, let's start with Arizona and U.S. manufacturing. First of all,
Speaker Change: the MOU that we signed with TSMC.
Speaker Change: Now, it's intended to offer our mutual customers a seamless manufacturing supply chain and a technology offering between Asia and the U.S.
Speaker Change: and that will happen in our Peoria factory. It will be for the compute segment, but also for the communication segment technologies.
Speaker Change: Now, we have to remember that our Peoria factory, our Arizona factory, is not captive to TSMC.
Speaker Change: but we will run TSMC technology in that factory specifically for joint customers, and on top of that for other customers, MCOR will install MCOR advanced packaging technology.
Speaker Change: Now, with respect to the test business, you know, we see for tests, specifically for AI devices, currently a high concentration of tests in Taiwan.
Speaker Change: We believe that the industry is ready.
Speaker Change: and actively pursuing to invest in tests in general, but also specifically in that segment of tests.
Speaker Change: Shhh
Speaker Change: Okay, and maybe a quick follow-up, I guess, just in your pursuit, does it look like potential or it's still a bit further out? Just curious how close it is to the engagements. And then the second question was more broadly, I think you commented the investment in CapEx.
Speaker Change: for now on track. If you could give a view into 25 on either a capital intensity basis or how you see absolute dollars and I'm curious if any panel level packaging how soon you see
Speaker Change: the development converting to handle some of the larger dives or more advanced projects on panel level.
Speaker Change: Let me try to answer the additional question on test and then Megan can cover the capital investment question. On test, the timing is difficult to predict.
Randy Abrams: here, Randy. As a starting point, my view is that
Randy Abrams: All wafers that are being manufactured ultimately in the U.S. will be assembled and tested in the U.S. and not being shipped around the world for test. That's the starting point.
Randy Abrams: So, I mean, to find the right timing for diversifying the current existing test supply chain, I think that's...
Randy Abrams: That's to be seen, but over the next few years I expect some changes.
Speaker Change: And Randy, just to give a little color on capital investments for 2025, while we're not guiding the, you know, 25 at this time, we have started to make plans.
Speaker Change: We do intend to have incremental investments in 2.5D, as we mentioned, that should be coming online mid-year. You mentioned PANEL. That is a program that we have had in development for some time and we would continue.
Speaker Change: to invest in that, specifically in our Portugal factory. We have been evaluating with several customers opportunities to bring those to large volume on that line.
Speaker Change: So I would say that we would expect our capital intensity to remain in the low teens moving into 2025.
Speaker Change: Thank you. Our next question is from Tom Diffley with DA Davidson. Please proceed with your question.
Speaker Change: Sooner Ramp, or the ramp of the iOS phone last year, a quarter before normal.
Speaker Change: Well, Tom, good afternoon. I mean, what we're currently seeing is that, you know, yes, we had a very good second quarter in the communication segment and we anticipated a normal seasonality throughout the second half of this year.
Speaker Change: That turned out to be slightly different, the seasonality turns out to be different with the first half stronger than expected, especially Q2, and the second half weaker than expected, especially Q4.
Speaker Change: I can only speculate, Tom, what it will be, but my speculation is as good as anybody's. So we don't have a distinct explanation for this.
Speaker Change: Okay, and then you also mentioned there was a substrate issue during the quarter, maybe a little more color on that.
Speaker Change: I mentioned two things that happened in the quarter. One is in the communication market, let's start with that. You know, the change in seasonality is underpinning about 75% of all Q4 deviation.
Speaker Change: The second dynamics that we see in the second half of the year
Speaker Change: is an anticipated device changeover where the end customer changes from one device generation to another.
Speaker Change: and that means that, you know, we see a moderate impact there.
Speaker Change: a good for about 25%, but we are confident that we are back in the next generation models in second half of 2025.
Speaker Change: Okay, and maybe as a follow-up, Megan, when you look at the Vietnam facility ramping up, the burden associated with that, is that going to be a step function or is that going to slowly ramp over time?
Speaker Change: Thank you.
Megan Faust: Yeah, Tom, so in Q3 that impacted our gross margin about 60 basis points
Megan Faust: As you would compare it to Q2, but that was included in our guide for Q3. That will step up in Q4 to about 100 basis points, but that would be, I would say, the full onboarding costs moving in to COGS at that time. So during 2025, as we scale, I would expect that dilution factor to start to taper off.
Speaker Change: Okay, well thank you.
Speaker Change: Thank you. Our next question is from Ross Cole with Needham & Company. Please proceed with your question.
Ross Cole: Thank you for taking my question.
Ross Cole: So, I was wondering if you can provide any additional quantitative color on the planned incremental investment in 2.5D capacity.
Speaker Change: I'll leave that to Megan.
Megan Faust: Hi Ross, yeah, so we have shared that we're going to expand
Megan Faust: Our capacity in 2025. We have not tried to quantify that given the multitude of different business models.
Megan Faust: that are currently projected. You can consider that we had shared that we tripled our capacity in 2023, excuse me, 2024, as it compares to 2023. That is allowing us to quadruple our revenue.
Megan Faust: The capacity expansion in 2025 is sizable, but it would be somewhere in the vicinity of what we were able to do in 2024.
Speaker Change: to pick up and normalize, I believe, in August. And did you see this happen? And what are your expectations relative to your initial thoughts there? Is it going higher or lower?
Speaker Change: Yeah, a few comments there. I mean we had indeed a slight impact last quarter. We reported that.
Speaker Change: With respect to the ramp of our full flow to an RFD where most of our capacity expansion in 2024 was, we didn't see any impact on high bandwidth memory constraints. So we were able to fully utilize that expansion.
Speaker Change: on the, let's say, on substrate part where we also have...
Speaker Change: and that's a different business model. We are also running that.
Speaker Change: And in that specific part of the business, we saw some short supply of high-bandwidth memory in the third quarter. And that was specifically related to the transition of high-bandwidth memory 3 to 3E.
Speaker Change: and that in the 3E version there were some constraints that had, although not a big, but it had an impact in our Q3 ramp.
Speaker Change: For more information visit www.FEMA.gov
Speaker Change: Great, thank you.
Speaker Change: Thank you. Our next question is from Joe Moore with Morgan Stanley. Please proceed with your question.
Joe Moore: Great, thank you. I wonder if you could talk about, you mentioned kind of a stabilization.
Joe Moore: in automotive and industrial, you know, what's your visibility there and, you know, your customers are seeing sort of mixed trends, but they seem to have pretty high balance sheet inventory and distribution inventory as well. So just, you know, what's your visibility into that business going forward?
Speaker Change: Well, the visibility is what we hear from our customers, Joe. Last quarter, I think you may have heard it from the, let's say, the major
Speaker Change: semiconductor companies supplying in that automotive supply chain. They called the second quarter going into the third quarter as the trough of their inventory impact.
Speaker Change: and they were reporting a more balanced inventory.
Speaker Change: There's still some moderate impact on inventory correction, but there's also the end market demand and the automotive market is slower than expected. So although they called it a trough in the second quarter this year,
Speaker Change: It's still extending into the third quarter, but we believe that inventory is getting more stable.
Speaker Change: and market recovery. You know, you hear different feedback, but we believe specifically the EV market in early part of 2025 will start to pick up. So overall, it's a good starting point for a recovery in 2025.
Speaker Change: Great, thank you.
Speaker Change: At this time, there are no further questions. I would like to turn the call back over to Giel for any closing remarks.
Giel Rutten: Thank you.
Speaker Change: MCOR delivered third quarter revenue of 1.86 billion dollars, reflecting an increase of 27% sequentially.
Giel Rutten: During the quarter, we achieved record advance SIP revenue and ramped volume for full-flow 2NavD technology supporting AI devices.
Speaker Change: For the fourth quarter, we expect revenue of 1.65 billion dollars, a more than seasonal decline driven by dynamics in the communications and market.
Speaker Change: Despite these short-term dynamics, we remain confident in our long-term growth prospects, supported by our leading technology portfolio, global manufacturing footprint, and strategic partnerships.
Speaker Change: Thank you for joining the call today.
Speaker Change: Ladies and gentlemen, this concludes today's conference call. You may now disconnect.