Amkor Technology, Inc. (AMKR) Earnings Call Transcript & Summary

Okay. Good morning, everyone. Welcome to the Deutsche Bank Tech Conference. I am Sidney Ho. I cover semiconductors and semi cap equipment at DB. And for this virtual fireside chat, we have Amkor Technology. Amkor is a leading provider of contract packaging and testing services to the semiconductor industry. Today, we're joined by Amkor's CEO, Giel Rutten; and CFO, Megan Faust. Welcome Giel and Megan. Before we start, maybe for those investors who are listening to the webcast portal, if you want to ask a question, there is a box on the left-hand side, I think it's the bottom of left-hand side of your screen where you can type in your questions. I will ask the questions as we go through our discussion.

So Giel, why don't we start with you. You have now been the CEO for about 3 months, but I can imagine that, in my view, much longer than that. Can you give us a little background of yourself? And I know while you have been in leadership role at Amkor since maybe 5, 6 years ago, can you talk a little bit about your experience as CEO so far? And if there are areas that you want to focus more on or look at differently compared to prior management?

Very good, Sidney. Thank you. Good morning to everyone on the call. Yes, I indeed have been with Amkor for 6.5 years now. And in my previous position, I was responsible for the advanced products business unit and that is currently driving most of the growth in Amkor. I took over end of June. So indeed, I'm in the role for about a quarter. A couple of things that we will continue and a couple of things that we may change. We will continue, of course, the basic strategy in advanced products, which is very much driven by our position in system and package, wafer-level packaging and flip chip package technology, where we hold strong market positions and we proliferate into different markets and a broader customer base from these positions. Now overall, an area where we're going to make some changes is the way that we drive new technology into the market. What we observe is that previously, let's say, over the last couple of years, it was mostly the mobile market, the smartphone markets that drove innovation in the semiconductor industry, but certainly also in the OSAT domain. While going forward, we see upcoming markets taking also a very innovative stance in the industry. Like, for example, in IoT wearables in the consumer markets, but also with the automotive market, the further digitization of the automotive platforms, but also in the high-performance compute segment, where introduction of artificial intelligence, for example, opens up quite some opportunities for companies like Amkor. So we will diversify our innovation effort and accelerate our technology introduction in these 4 individual growth markets where we work more closely together with the lead customers that drive the technology in these individual market segments. Of course, what we will continue to do also is within Amkor, we are mainly a manufacturing service company. So we will continue our focus on manufacturing excellence, and manufacturing excellence is broader and quality only. It's also cost, quality and supply, and we made significant progress in improving our quality, but also our cost structure. It requires continuous optimization. Another strong element that we will accelerate is partnership throughout the supply chain. Looking forward, to see that supply chains are actually getting shorter and shorter. So we go more from, let's say, individual package assembly and test services to more supply chain solutions where we work together with, let's say, suppliers in the supply chain like material suppliers, but also companies like foundries, and we work also closely with our customer base when it comes to introducing innovative solutions. And lastly, our automotive position where we hold a strong footprint in the automotive industry. We're accelerating that also to work -- together with key players. Currently, that's 25% of Amkor business, but we expect going forward that automotive will grow faster than the average semiconductor market. So a couple of things that we'll continue as is and a couple of things that we will accelerate. And that basically summarizes it, Sidney.

Great. Maybe just a couple of follow-up questions, staying at high level. I think advanced packaging, you started off saying this is an important -- it's always important for you guys. This segment really shines in the first half of the year, up more than 60%. Within this segment, advanced SiP is probably a very sizable portion of it. How do you see advanced packaging growing in the future versus your mainstream products? I'll start with that.

Yes. I see advanced packaging having significantly more growth potential than our mainstream products. Of course, mainstream products will continue to be a large part of our business. And there are pockets of growth that we try to explore and grow further. However, in advanced products, we see clear acceleration in some markets take, for example, communication. That's a big driver in this year's growth in advanced products with 5G entering the communication space, both on the terminal side, the handset side as well as on the infrastructure side. We see significant more silicon being going into these devices and into the infrastructure and then drives a lot of new package technologies that are going to be introduced, certainly on the SiP side because the component count in the same, let's say, dimensions is increasing. And therefore, system and package is definitely the form factor or the package technology going forward. Other markets like automotive is also accelerating, and the most growth in automotive is coming from advanced packages. So the number of cars being sold worldwide is not really growing. Actually, sometimes this year, it's significantly declining. However, the semiconductor content is increasing per car by features like driver assistance, in-car networking, digital displays, et cetera. And all of these applications are realized through advanced product technology, the same in the consumer market for IoT. Also that is mostly advanced products. And then also on the compute space, similar thing, that growth engine is also mostly driven by advanced silicon using advanced package technology. So all the key drivers in the industry in these 4 identifiable growth segments, they drive that advanced package technology grow forward.

Excellent. Thinking of automotive, that's an area that you guys have very high exposure to. Obviously, this year is not a good year for auto. But how do you think about the growth prospect of that business? I think you talk about units as not the only thing, there is more content. But what kind of growth rate should we be thinking about once that auto market start normalizing for you guys?

Well, if we take, for example, predictions of Gartner in the automotive market, then they expect that over the next 4 to 5 years, the semiconductor industry grows with about 9%. And the auto industry is growing with a higher rate than that. And that's not the number of cars increasing. It's mostly the semiconductor content per car. And actually, there, we see an acceleration even in this corona situation, where the end market suppliers are actually pushing more technology into the mid segment of the automotive market. And therefore, the average semiconductor content per car is increasing. So -- and also new features are being introduced. I mean, it started with the driver assistance with quite a bit more, let's say, camera modules, with quite a bit more radar sensors and driver assistance processors. But now it goes into digital displays. It goes into in-car networking. It even goes to dashboard control, like radar control for your dashboard. It goes to visual functionality like face recognition to assure that the driver is being monitored. So we see not only the semiconductor content in specific applications being driven down the range of the cars from high-end to mid-range, but we see a continuous influx of new applications in the car. So we have a high level of confidence in that car industry, and we're talking to them on a regular basis. This is not a good year, I agree. On the other hand, the longer-term prospects for this industry are very positive from a semiconductor perspective.

Okay. Maybe switching a little bit, still staying at high level. Greater China has been a priority for Amkor for quite some time. I know you have a big factory in Shanghai. There are certainly more competitors than China now. Curious where you see your biggest growth opportunity there is? And does the U.S.-China trade tension change the way you think about your growth strategy in that region?

Well, the U.S.-China trade situation certainly has an impact on the semiconductor industry in China as a whole. Where there is -- and I think that's public knowledge. I think there is an acceleration top-down in the China semiconductor industry to accelerate the local industry. On the other hand, we have a significant facility in Shanghai where we cater for both domestic customers as well as international customers. And these international customers either cater for the local market or for the international markets. And we will continue to do that. And actually, that's a factory that's running very well. And as long as we're able to differentiate from the local suppliers in this industry, we see that we can attract local business. With respect to the China growth engines, by far, the biggest customer in China in the semiconductor industry was Huawei or HiSilicon. We never had a huge business with them. The other ones are small, but we have a couple of pockets of business in China, which are doing well. But our exposure is not that big.

Okay. Lastly, on the high level subject. In terms of competition, there are not that many OSAT suppliers in the advanced packaging market. But we're starting to see some of the foundries building some advanced packaging capabilities. Some of the, maybe the local Chinese companies are trying to move, call it, upstream. How do you see competition in advanced packaging evolve, especially given the growing opportunities in a lot of different applications, as you mentioned earlier.

That's a good question, Sidney. I mean the evolution on the growth scenarios in the individual market segments will differ a little bit. I won't go too much into the detail. But you see that the barrier of entry for, for example, the automotive industry is relatively high. While if you look to the high-performance compute market, barrier of entry is also high. On the other hand, TSMC in their post fab strategy, they hold a position there. On the other hand, if we look to the foundry market, I see actually opportunities there for Amkor to engage. I mean, TSMC has been a long-standing partner for Amkor. I see their plans very much as, let's say, an extension of their front-end manufacturing. While we are still able to work with them on more of the traditional package technology or in a model that we have similar technologies, but we cater for different foundries or in a model -- in an overflow model with TSMC. So there, I see complementarity and it's not a heads-on competition. With respect to the local China players, I would consider them -- through acquisition, they hold some position in advanced products. They play mostly in markets like the communication markets. But I would say they're still one notch below the Tier 1 companies in this industry.

Okay. Very good. Maybe switching subject, I want to ask a few questions that I plan to ask every company at this conference. And the first question -- the first topic is Huawei is definitely getting a lot of headlines. And you kind of answered that a little earlier in the -- in discussions that you don't have a lot of direct impact. But how do you think about those restrictions impacting maybe the OSAT industry as a whole, maybe in terms of both the short-term and the long term? And maybe related to -- well, maybe related to that, in the near term, have you seen any acceleration of the Huawei supply chain business before the restrictions kick in? And if you were to continue to serve the supply chain, whose responsibility is that to get a license? Is it Amkor or is it your customers?

Well, there are a couple of questions, Sidney, let me work my way from the back to the front. Who want to be requiring to have a license or basically an approval to ship products to Huawei. I think it's our customers basically. On the other hand, I think we need to make sure that we comply to the rulings that are out there. And that's what we do. We have a team in place that work with our customers. But you have to keep in mind, if you look to the current rulings, that very much the wafers are already, to some extent, call it, tainted if they enter into our factories. So I would say, yes, we watch this closely. But it's up to our customers to comply with the rules that are out there. Then your second question is, do we see any impact in the industry. And I think you refer to more of an inventory build up prerulings. No, we are not too exposed to the Huawei supply chain. Of course, we hear the messages out there. I think there's definitely inventory in the industry. We are not too exposed to Huawei and HiSilicon. Actually, our business was very limited, either direct or indirect. So I can only bring you secondhand messages here, which doesn't add value. Then with respect to the overall business in the mobile market in the assumption that Huawei's business would come down because they have this supply chain constraints. I mean, in my -- my belief is that the end market will resolve that and basically, it will be a zero-based game. So whatever Huawei is losing, somebody else will pick that up. It's most likely one of the China competitors, like Oppo, Vivo or Xiaomi, or Samsung, which had a huge market share loss in China the last couple of years, maybe they could come back to one extent. And on the high end, maybe Apple, but that's all speculation. I think the current belief in the industry that it's a zero-sum game. And there are -- Huawei is -- was a big player. I think they were the #1 or #2 volume supplier, and that volume will come down and that will be distributed over the current players in the market.

Great. Great. Maybe another topic that has come up lately is the potential for SMIC to be put on the entity list. It could very much be the same answer as the previous question that you just answered, but how do you think that potential could impact you?

Yes. I mean, a similar story there. I think there are customers of us that use SMIC for wafer manufacturing. Basically, Amkor as a company is agnostic to their wafer supply, whether they come from factory A, B or C or foundry A, B or C, the supply chain choice is made by our customers. They decide where they contract these wafers, and we receive them and we process them. So also there, I assume, if SMIC will be impacted, I think that is still out there on the final decision-making. It's -- SMIC is not a player in the very advanced silicon nodes. I think their best node is 14-nanometer, which has sufficient supply in the industry. So the industry will resolve this itself also as a zero-sum game. So they -- the wafers will be processed at any other foundry in the industry. It can be at UMC in Taiwan or TSMC or even at that level of technology, GLOBALFOUNDRIES could pick up part of that business.