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

Okay. Thanks, everyone, for coming out for the Credit Suisse Annual Tech Conference. Good to be back in Arizona. I'm based out in Asia. So in Taiwan, I had to miss the prior 2 years. So it's good to be back here. And for this session, we have Amkor, one of the leaders in semiconductor package and test, about 15% global market share and quite a strong position in some of the key growth areas, which -- here today we have Giel Rutten, he's the CEO of Amkor; Megan, CFO, couldn't join us, but Giel can go through the tough financial questions as well.

Thanks, Randy.

So yes, so format, we'll do fireside chat. I'll open up a couple of times, if any audience questions. I think the way I'll start with is really more on the lines of business, just what you're seeing in business trends, especially given your position in the industry -- has certainly been a volatile year, went from supercycle last year to now mixed feelings, potential downturn. But I'm curious if you could recap third quarter was still quite strong. And if you could recap for Amkor, I think going into it, even investors we talked to were thinking we'll start the downturn, see a slowdown. And for Amkor, you still put up very strong results. So if you could recap the drivers and also how you recovered because you had a Shanghai disruption during the lockdown since second quarter. So we could start with that, and then we'll go a bit more into how the outlook is looking going forward.

Very good, Randy. Yes, let me share -- let me indeed focus on the third quarter's results. With respect to the Shanghai lockdown that we experienced in the second quarter, we were able to recover in the third quarter. So the factory came back to normal output in the third quarter. It was full in the first quarter. Unfortunately, we had a lock down in the second quarter, but it came back to full capacity in the third quarter. Third quarter performance was actually quite good across all market segments. We did $2.08 billion, which was strong. It was above the high end of our guidance. Main drivers there were actually outperformance of the communication market, where we saw good strength in the launch of premium Tier 5G smartphones where we hold a good position. We were extending our market share in that part of the communication market, both on the iOS ecosystem as well as on the Android ecosystem. Overall, we see the smartphone markets declining slightly in this year's single-digit decline. But in the high-end premium tier smartphones, we see still see growth certainly on the semiconductor content. Now overall, let's say, looking at all the other market segments that we cater for, all market segments outperformed our guidance. So we have a very strong base. Automotive did very well. We believe that the supply chain situation in automotive is normalizing, and that helps us further growth. In the compute segment, yes, we see some weakening in the PC market, certain segments there, we see inventory buildup. But in our presence in that market, specifically tuned towards the infrastructure, networking infrastructure as well as data centers, we still see strength. And then the fourth segment is the IoT markets, IoT wearables, specifically, we saw the launch of 2 new product generations, and that helps us to push that business up. So overall, we were pretty happy with our performance across all market segments. And one thing to note is our outperformance in advanced packaging. Our advanced packaging portfolio grew to 70% of our business, which is an all-time record in this quarter. Mainstream business is still doing well. It's very much tuned to wire bond business in automotive, but advanced packaging across all market segments outperformed in the quarter.

Okay. That's a segue. I'll follow up a few of those points about wire bonding. But the outlook for fourth quarter, if you could just recap because I think you were talking about after a very high base and quite a bit of strength, a bit of deceleration. So if you could talk about how broad based, how those applications are faring as we go into year-end?

Yes. With respect to the fourth quarter, we see a slight slowdown. This doesn't per se mean that the market is slowing down across the board, but we had a couple of unique events that we anticipate to come in the fourth quarter. First of all, normalization of the supply of components, specifically substrates made customers do pull in builds or early builds in the third quarter. So there was a bit of the strength in the third quarter was prebuilds, and that means a little bit of less builds in the fourth quarter. We also experienced a bit of a setback because of the U.S. -- recent U.S. measures related to Chinese companies, and that gave us -- this is not per se that OSATs are restricted, but one of our China-based customers wasn't able to sell to a U.S.-based company, and that impacts, let's say, single digits or low single digit revenue in the fourth quarter. And then, of course, we experienced broadly a little bit of cautioning slowdown in the market and that impacts also. So overall, I would say, still, we see a 7% year-on-year increase in the fourth quarter, but the third quarter to fourth quarter decline of 11%, this is larger than we normally experience.

It's a bit here and now, but we've had these disruptions in Zhengzhou and China just as we've gone into some of these lockdown or COVID cases. Has there been any volatility or packaging flows haven't really changed too much because they can disrupt some of these flagship products at least downstream. But curious if you've seen any movement?

Yes. So far, some of the, let's say, China, let's say, final assembly companies that could impact the supply chain. We didn't experience that. We didn't see any slowdown because of that. It may come, but we also saw that some of the bigger suppliers that shifted volumes from other manufacturing sites. So no, not significantly.

It sounds like from your fourth quarter, I mean, it's a little bit just unique things like the substrate, the China restriction. For overall business outlook, how are you thinking -- it feels like it changes every month, but into next year, if there's like an initial view how you think -- one is just a seasonality as we go into the first half, because it looks like foundries are going to go through some utilization correction. What type of outlook you see for first half, but then for a full year at this stage, if it still looks like a growth year for Amkor, for industry or you're preparing for -- and your customers are kind of telling you it might be a bit of a slowdown?

Yes. I mean let me first start sketching the mid, longer-term outlook hunting. We still believe in the basic drivers in the business basically being 5G, automotive electronics, data-centric economy when it comes to infrastructure and data centers and IoT wearables. We believe that long term, these are the key drivers in the business, and we're focusing our product portfolio along these lines, working with lead customers on advanced package solutions. When it comes to next year, it's a little bit in a changing environment. We see market forecasts coming down. I mean, every month, we see a lower forecast for next year. We believe that with our market footprint in the less vulnerable segments of the market, we're not exposed to the low and mid-range part of the phones. We are not exposed to the PC market or limited exposure there. So we believe that we can outperform the market. How the market specifically will develop in the course of next year, it's difficult to say. I mean multiple views there, but we believe we can outperform the market trend.

Yes, I understand. Okay. Actually, the part -- and you have a bit lower exposure. But to the extent those consumer areas like PC, Android, it feels like they corrected harder, faster earlier. Do you see that business profile as far as your business, that part fell off, but you're actually seeing it stabilize or still coming down, you're just seeing it continue to shift to the better markets?

Yes. Let me talk to these 2 segments that had an exposure to an earlier correction. I think the low and mid-range part of the mobile phone in my view, in our view, it was centered around the China smartphone market that was impacted by a couple of elements, COVID measures that impacted consumer behavior and that weakened the cell -- in the mobile or the sale of mobile phones in China. So I believe that that will be temporary, that will be sold off over time, but there's an existing inventory. And it will take a while on that low and mid-range part of the smartphone market to normalize and come back to normal inventory levels. Now our position is mainly in the higher-end premium tier phones, specifically on the iOS ecosystem. We see strength there. We also don't see significant inventory being built up. Actually, there's a little bit still undersupply of some components in some parts of that market. So going into next year, we believe that will show strength. Of course, there may be macroeconomic headwinds, but overall, that will be -- that will still be strong. Now with respect to the PC markets, similar stories. I think on the PC market, there is inventory in the supply chain. It was not specifically to the China market. There was a lot of root cause to that, but we also believe it will take a while before end product as well as component-based inventory will be sold off. How long it will take? Is it 1 quarter? It will be 2 quarters? You hear many lenses there, but definitely towards the second half of next year, that should normalize.

Yes. Actually curious the undersupply because you don't -- you hear it in just pockets. I'm curious just from an IC side where you see undersupply. So that's one part. The second is substrate -- high-end substrate was under supply for quite a long time. How do you see that? Just both short term because you have some markets like PC and graphics go through their correction. And then midterm, do you think that reemerges as a top area again, like as we go through kind of this correction period?

Yes. That's a very good question, Randy. With respect to the high-end power substrates, specifically ABF substrates that are being used in the higher-end compute market, but also in some segments of the automotive market. We see that the situation improves, but it's not in balance yet. And although that the PC market, which is a big user of these substrates is currently underperforming, it's not so easy to shift volumes from that market into other segments. So ABF substrates will continue to be in short supply. It's improving. And we expect that in the course of, let's say, 2023, we will see a more balanced supply chain. I also have to note that the new capacity that the main suppliers invested in is not yet on stream. So we're still, let's say, utilizing the existing capacity for that and the new capacity for ABF substrates, you expect to come on stream in the course of next year, actually towards the end of the next year. Could cause a bit of an oversupply at a given point in time if the market demand is not sufficient.

Okay. Curious about broader inventory like we publish every quarter, just look at all the balance sheets. And so -- and companies can always manage what sits on there, but it looks high. Like when you look at fabless hardware, at least seems like it's stabilizing. But I'm curious the feedback from chip companies, how they're telling you the inventory balance. Like are they telling you it's high, they want to work down or it's a new normal at appropriate levels? And how much do you see inventory is like a headwind into next year?

Yes. I mean what we're observing there being exposed to multiple market segments is that the dynamic is different in each market segment. Let me start talking about automotive a bit here. We believe that in the automotive market, there is still a situation that there is no excess inventory neither at the OEM or Tier 1 level or at the semiconductor company level. There's a bit shortage of supply of mature node silicon, so not advanced silicon but mature node silicon is still a bit in short supply. And we expect that to normalize into 2023, where we also see a bit of a behavioral change where the traditional automotive companies are willing and actually changing their strategy to take more inventories in the supply chain to manage the risk. So that's one market. And we believe that that the inventory situation is improved, but not yet fully stabilized. In the compute market, we believe that for networking infrastructure, data centers, also because of the ABF substrates, I would say, no inventories access, but in the PC market, there's clear inventory access in multiple components. It's not so easy to shift that into other segments. So that will need to be burned off in that market. In the communication markets, we just talked about it, yes, there is inventory pileup definitely in the lower end entry-level smartphone markets, most notably in China. Higher end, less -- do we see customers adjusting their inventory? Yes, we see that. But fortunately, I think our exposure is not for these markets too much.

Yes. Wondering you had a lot of expression, you had like in Japan, quite a bit of auto, like taking on J-Device some years back. I think that area a few months ago, you talked about there was a bit of digestion. If you could say where that's at and what are the trends for that part of auto? Because it felt like it was different than the global picture.

Yes. That's correct. I think there was in the Japan automotive supply chain, there was some inventory built up, and that was the result of some unique events in Japan related to an earthquake and some customers now had a fire in their factory. They recovered that and that had a little bit of an over push of inventory. We believe that it is actually now sort of normalizing in Japan. No shortages in that supply chain. Although what we see in Japan, and we see a similar thing in Europe is that they are changing their supply chain strategy more from a global supply chain more to a regional supply chain. And they are investing that. One thing in Europe, we see that we have a factory in Portugal, and we get a lot of interest from customers to start manufacturing critical parts there, specifically for the EV markets because that's considered the market that's critical for them. And because of global competition, companies want to protect their IP and manufacture regionally. You see the same thing happening in Japan, and that positions us well to cater to these customer requirements.

I'd segue just talking about the geopolitical. It sounds like for foundry, a lot of existing products is quite a big effort for existing products to go and take it out if it works to exert the engineering. So new products, they're starting to react to geopolitical a bit more. Curious package and test, we have a lot of capacity in Taiwan, some in China. How do you see the customer behavior? Do you see much in terms of existing products where they want to diversify or is it more when you're bidding out new projects? And how big is that activity? Are you seeing a lot more interest in your diverse fab network and where these products are actually located for package and test?

Yes. I mean we see a lot of activities there. And to start with, I would say that, yes, I think in China, a large part of the assembly and test is being done, and that will continue to be big. However, a change in customer behavior is relates to risk management. I mean, where they do now, maybe 90% in China, they want to balance that not to 50-50, maybe to 60-40, and they look for alternatives outside China just to secure a diversified supply. It's not only driven by the semiconductor companies, what we see that the semiconductor companies are pushed hard by the OEMs. Whether it's in automotive or in other markets, OEMs want to have a diversified supply chain. And for critical components that they consider critical IP, they actually want a regional supply chain. So we see that things are happening. It will take a while, and it will not be black and white. It will be -- it's part of a derisking effort.

Yes, makes sense. How do they view Taiwan? Is it in that same place of diversifying or they put a little bit separate bucket about China versus how they're viewing the capacity? Because there's quite a bit of package and test in Taiwan.

Yes, it depends. I mean the way that we see the industry reacting is different. Again, looking at the individual segments, I would say, for the communication market, there's not a real urgency to move out of Taiwan. However, on the other hand, for the automotive market, generally, automotive semiconductor companies need to make a 10-year commitment on a stable supply chain to their end customers. 10 years is a long time. A lot of things may happen. So there is a tendency to look for lower risk areas. And lower risk, I mean there's a lot of perception in there. It's all about psychology, but psychology currently is that it's considered higher risk.

Okay. And just another business environment question on pricing. Your competitor actually mentioned return to normal pricing, which to them it means like small discounts, like might have a little bit of ASP coming down. They also talked about LTAs getting retired or kind of the ones they wrote a year or 2 ago no longer really having much or dropping out. How do you see kind of both? Because I know you've signed -- I don't know if you've been as aggressive to sign LTAs. But how do you see that environment like if you did sign contracts? And how do you see overall pricing environment into next year if macro is a bit choppier?

Let me first comment to the contractual framework that we have with our customers. I mean if you take our top 20 customers, about 90% of the top 20, we have longer-term agreements in place. And they vary, let's say, customer by customer. It can be co-investment agreement. Can be take or pay agreement. It can be product development agreement. It can be market share agreements, but some form of an agreement in place. Currently, we didn't retire any of them. We don't -- and of course, if things change in the market, we are willing and able to discuss with customers how we best manage that interface. I mean nobody is really interested to pilot finished products in the supply chain. So overall, I think in that sense, we're happy with the trends and even in the trend that I discussed before, moving more automotive in Japan or in Europe that's all covered by a contractual framework that relates to a longer-term commitment from both parties, by the way. With respect to the pricing environment, we see that different across the supply chain on the advanced products and advanced products is 70% of our business. We see there a fairly stable price environment. And yes, you have annual price negotiation, which customers are sensitive to arguments that cost is increasing, and we are able to pass through cost and increases to our customers to a large extent. On more the commodity side of our product spectrum or service spectrum, let's say, more the wire bond and the lower end wire bond, I think you see more commodity pricing. We're not too exposed there. About 90% of our wire bond business is in automotive and industrial. And there, we have also longer-term agreements. But yes, I think there are certain segments where there's a bit of overcapacity in the market and you see some price elasticity and you need to move with the market.

Okay. I'll ask a couple, but after that I'll open to audience. Just turning to midterm growth drivers. I think at the start, you mentioned a few things like 5G has been a growth driver, high-performance computing, automotive and everything going on. Like if we took those, smartphone, we had high end already, like we had Apple pretty much we had China gets to about 80% of devices. How do you see 5G and smartphone overall as a bucket into next year, just volume? And are there areas for Amkor, whether through share gain or content or 5G transition where you can actually grow within smartphone next year or 2?

Yes. I mean to me, smartphones, you need to look at 2 main drivers for potential growth for companies like Amkor for semiconductors in general. One is the transition to 5G as a standard. A 5G phone by technology has more semiconductor content just to enable the 5G functionality, specifically in the RevPAR of the phone in power management. Currently, 50% of the smartphones is transitioned from 4G into 5G. So there's still 50% to go. And that overall drives further growth. And specifically, in that enabling part of 5G, we have a very solid market share. I mean we launched a technology standard, it's called DSMBGA, where we can integrate most part of the RF part of the phone and that now becomes a standard in the industry. Then 5G as a standard in a 5G-enabled phone, of course, enables more functionality in the phone, different applications that require higher video standards, higher camera standards, more data processing, more advanced power management, different displays. All of that content that is enabled by functionality of 5G drives more semiconductor content. If you look where our growth is this year in the smartphone market is mostly centered around the camera functionality where there are huge upgrades to cameras to enable advanced video processing, which is again enabled by 5G functionality. So -- and we believe that that will continue and that will drive a higher semiconductor content and we also believe that we have the right customer contacts to codevelop with customers that next-generation functionality. Because if we talk about camera modules or advanced connectivity standards like WiFi 6 in the phone integrated and that it's -- now the silicon package and phone manufacturing is a co-development. So you need to work with lead customers there to develop that functionality. And over the last couple of years, we invested significantly in doing that.

Yes. Do you think it's another acceleration? I felt like camera, had the dual camera, triple camera, there was an upgrade cycle and then it got slower, I think, through the COVID cycle. If you look at next year or 2 years, how do you see like the iOS and Android ecosystem on that camera and continue to drive more value or content?

Yes. I'm not a phone expert. But let me give you my opinion here. New functionality will be unleashed in the phone. And I think that has to do with the AI coprocessors that come with the apps processors in the phone, and that relates to functionality like augmented reality, for example, which is very real. In order to have augmented reality in the phone, you need to have a very advanced camera system. So that will drive upgrades, both on the processing side, but also on the power management side because you don't want to drain your battery in 10 minutes when you do -- when you use the phone to look around you and get an augmented picture of what you see around you. So I think we're just at the beginning of portable devices that enable you to access all data and information that's in the cloud. So you need a fast connection, that's 5G, and then you need to upgrade your phone. It's now called a smartphone, but the name will change over time.

Okay. Right. We'll go to the audience. We have a few minutes, if any questions. Yes, go ahead.

So you noted that in the current quarter you're not seeing the premium smartphone business come down despite the fact that we're having major dislocations within their manufacturing base in China. What is your visibility indicating to you with respect to Q1?

Yes. I mean I can only refer to the visibility that we have now in the supply chain. And I think we don't have all the details of the manufacturing impact in China because of the lock down in the southern part of China on final assembly of smartphones. There are 2 things to this. One is the company that you referred to was able to divert part of the production to other parts in their manufacturing base. Also, the end customers could divert part of the manufacturing to other locations. The total impact, I think it's too early to assess. But as far as we can look into the supply chain, we don't see a huge impact. Our outlook forecast is still fairly solid. Although you have to keep in mind that in the general smartphone market, the first quarter has never been the strongest quarter.

I mean, traditionally, as a big picture, does your -- like when you have these production volatility in the spring, do they tend to just keep taking the components so you won't see all the downstream disruptions? Or would you see the same thing if they're disruptive now, but it actually pushes some build-out -- does that -- would that actually affect your flows so you would actually see...

I mean the supply chain planning is very sophisticated. I mean it's a day-to-day planning on components because a large part of our portfolio in that ecosystem is system and package up to, let's say, 100 to 150 components in the system package. So material management is a large part of that success to avoid obsolescence to assure availability. There, we don't see hiccups. And we have a very sophisticated supply chain there. I mean not we.

Yes, I do understand. Okay. Good. I think with that, we ran out of time. There's plenty of things we can talk about. But yes, thank you all for coming out. Thank you, Amkor, and thanks, everyone, again for joining.

Okay. Thank you.

All right. Thank you.