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

All right. Okay. Thank you, everyone, for coming out. [indiscernible] based out in Taiwan. And we've actually covered Amkor for a number of years. They're a leading company in package and test. And now on the UBS platform, we also recently picked up coverage. And they're a company at the central place of a lot of the key end markets in tech, have always had a good exposure to automotive, smartphone. And this year, has also been involved quite a bit in some of the high-end AI systems as well. With that, we're pleased to have the Amkor management team, Giel Rutten, CEO for Amkor. He'll start with a quick presentation about 5 to 10 minutes, and then we'll go to fireside. If you have questions, send it here and then I'll try to ask your questions as well. With that, I'll turn it to Giel.

Okay. Randy, thanks for the introduction. My name is Giel Rutten, I'm the CEO of Amkor. I will do only a few slides for the introduction of the company, so I will leave some space for questions later on. Now, Amkor is part of the semiconductor supply chain already for a long time. I think Amkor was founded 55 years ago. So we're actually were pioneering the business model of outsourced semiconductor manufacturing. Now, over that period, we built strong relationship with all key players in the industry. But on top of that, we also built a very strong manufacturing base globally where we were able to work with lead customers to bring new technology to the market, but also to ramp it to high-volume manufacturing. We are the only at-scale OSAT headquarters in the U.S. And given the current geopolitical tensions, I think that gives us some advantage. Now, we invest about, in 2022, close to USD 1 billion, $900 million, in both capabilities as well as in manufacturing scale. We are considered the technology leader in our industry. We have a team of about 700 people in Korea, mostly in Korea for R&D on new package developments. And overall, our manufacturing staff is about 30,000 people around the world. We have a couple of leadership positions. Certainly, in automotive, automotive semiconductors, where we have a presence in the key automotive areas, both in Japan as well as in Europe, as well as the critical customers in the U.S. we serve with our services, with automotive electronics being expanding, that gives us a good leverage there. But besides the automotive position, we also have strong positions in the smartphone business as well as in high-performance Computing and Consumer segments. We are centered around advanced packaging. That's our strategy going forward, and I will show you a few slides later on. Advanced packaging is the core of our business, 75% in 2022 of our business was in advanced packaging. We're part of an integral semiconductor supply chain where we are closely operating with semiconductor foundries, but also we work with internal factories of our customers where we receive these wafers, and we assemble and test them. We -- the next step in that supply chain is we send packaged products out to contract manufacturers. And there are a couple of important trends in their supply chain. I already mentioned the geopolitical shifts in the supply chains where we see that core locations of manufacturing are moving away from the traditional locations. So that's the reason that, for example, we built the last manufacturing location in Vietnam that we opened recently, but also we have a good presence in Europe in our Portugal facility that caters for the European automotive industry. Another trend is that a larger percentage of the manufacturing is being outsourced. So if we would go back, let's say, 10, 15 years ago, there was a significant percentage that was internally manufactured by, what we call, IDMs. But if things now move into more advanced technology, we see that the outsourced percentage is increasing. Now in that environment, Amkor strategy is built on 3 pillars. Though the first one is our technology leadership where, and I already mentioned that 75% of our revenue is in advanced packaging. Customers knock on Amkor's door generally because they are looking for a technology partner, company that has the capability to work in an early stage of product development with customers to bring new technology to the market, but also to ramp it at scale very rapidly. So the technology availability, in combination with operational excellence is one of the core strength of Amkor and is also a critical differentiator. Geographic footprint is the second one. I think we are present in all the core supply chains for semiconductors and with the shifts that are occurring there, that work towards our advantage. I think we are present in Japan. We're working with all the critical automotive suppliers there, we're present in Europe, and we're currently -- and that's announced in our latest earnings call, we applied for -- let's say, we did a pre-application for chips funding in the U.S., and we believe that, that offers a good opportunity for Amkor going forward. From a market perspective, we believe that the semiconductor industry is built and is growing along, let's say, 4 core secular growth drivers. In these growth drivers, we are focused on the leaders that drive innovation. We engage with them. We bring new technology to the market. And while we have the technology available, we ramp the subsequent parties in that market. We do that for the communication market in 5G or an RF application in automotive with functionality like ADAS and infotainment, but also in computing, 2.5D high-performance computing, but also in IoT devices. Now our performance over the last year, we had strong performance on the financial side. We grew significantly at an average scale over the last 4 years of 13%. This is 2022. This year, of course, we're in the cycle year, we're a little bit slower. But on average, we are growing faster than the market. Our profitability and our cash flow is strong. I think we hold a very strong balance sheet. And our earnings per share actually grew sixfold over the last couple of years. So our investors like that. Now overall, in summary, and then we can go to questions. I think our investors -- investment appeal is, first of all, advanced packaging. That's the foundation of all the core drivers in the semiconductor industry. Geographical diverse position, I mentioned it before, and then we are very much leveraged to industry megatrends and have a strong working relationship with the leading customers in these individual industries. So that's the introduction. Okay. Randy?

Yes, let's -- we'll start actually near term. Actually, start with third quarter because there were a lot of companies actually already seeing a bit of slowdown, areas like auto, industrial. Your business still grew 25% sequential. So could you recap that, the strength you were seeing for third quarter, just by the key when you went through applications like communications, auto, industrial, high-performance computing?

Yes. I think we had a very strong third quarter. We grew sequentially, indeed, well over 20%. The drivers there are related to our position in premium tier smartphones. I think we hold a very good position in the premium tier market and the launch of new phone models drove our growth in the third quarter. We work with the leading players there and we bring, I think, innovative solutions, both on the RF side, for example, but also in display and cameras, et cetera, and that drives our growth. Now if you take a year-on-year view, we even grew year-on-year in a declining market. So if you take the smartphone market, volume-wise, it declined over the last 2 years about 15%. But we were still able to grow on a year-on-year basis with 3%. So that's underlining our strong position, but also our market share growth in some of these segments. Now automotive, it is -- it was sort of flat, and we see a slightly decline towards the end of the year, and that's inventory correction. I wouldn't see that. I see this more as cleaning up excess inventories coming out of the COVID years where the automotive industry built up some inventory, and we now see with a more balanced supply chain that they built that down. I wouldn't -- I don't see -- we don't see any structural corrections. I think we still believe the automotive industry midterm and long term, is a very strong contender. High-performance computing, a little bit mixed. I think, we very strong on the high-performance computing side with our 2.5D solutions. We are the only OSAT currently that drives a full turnkey 2.5D solutions with leaders in the industry, and that gives us upside. I think we see the PC side in that market still correcting. Not fully in balance yet. But overall, longer term, also in this market, we believe that continues to grow.

I mean, if we take the second part, how do you see as we go to year-end and initial cut on first quarter, like you normally have seasonality? But how do you see the correction playing out? Could we go through a couple of quarters below seasonal, and then we clear the decks and we're actually into a good recovery as we move through '24?

Yes. I mean, if we talk to our customers, we see that customers are still very conservative to guide into next year, also to put forecasts out or to have orders in the books for next year. I would say, there's a strong psychological effect because generally, whether it's the fourth quarter or early next year, I think we expect that we reached the trough and there should be a year-on-year recovery. As I said, that is conservatism on the customer side. On the other hand, on the wafer foundry side, we see good optimism going into next year. So in that overall view, my personal view is that there will be a recovery next year. And there will be, although small, but a year-on-year growth.

Okay. I'm curious the disconnect. What do you think is driving foundry, like a bit more optimism. When you speak to the foundry partners, what's driving their optimism? And then from the customer conservatism, is it worry about inventory level, demand level, macro? Like what are kind of their concerns to keep conservative?

Yes. I think that on the customer side, the conservative position is still related to inventory. If you talk, for example, the smartphone markets, they are conservative in putting new orders in the industry. If we take the foundry optimism, the mix of markets in the foundry is different than, for example, in our business, they are very much exposed to the compute market and specifically the data center and the AI market, and that gives them an uplift, which has given us an uplift also, but they are exponentially bigger.

Yes. That makes sense. On that, you mentioned earlier, okay, when AI took off, I'd say, late spring, it felt like you were seeing that opportunity. Some of the OSATs we cover in Taiwan have been a little more conservative going after that. What's been Amkor's approach? Like why have you kind of been aggressive on the front foot, seeing big opportunity to expand? And could you talk about maybe your technology there, capability and what you're seeing for growth opportunities from like AI, high-performance computing?

Okay. Yes, good point. I think we were indeed early in building up that capability, but also expanding capacity. We started our first engagements with lead customers there in 2017. So currently, we're in the third generation of technology development. And besides these technologies, you also need to have the manufacturing capability to do that. So we went through 3 cycles of products to build up that capability. And we now see the market taking off and that gives us that head start. And we believe that midterm as well as longer term, this will be a significant growth opportunity for us. I mean, with AI functionality specifically enter into the data centers with a huge installed base on data centers, I think we believe that over the next 3 to 5 years, this is an upside, barrier of entry is very high. On the foundry side, this business is supported, but it's not part of their core business. So we believe that this has given us a good opportunity in AI.

And can you recap, just to explain for a lot of investors, some are probably newer, just exactly the role TSMC has CoWoS. They usually talked about vertical integration. But where do you come in as a -- like in package and test, what are the opportunities you can come in on?

Yes. So I think on the -- and let's take the example of high-end GPUs, graphic processors that are being deployed for AI functionality in data centers. Generally, these GPUs are packaged together with high-bandwidth memory. And the package technology that you use in order to provide an interconnect structure between the memory and the SoC, we call that 2.5D. Of course, you package them on a certain substrate, it's called an interposer. And then that will go into an overall package. I think that technology initially was launched by TSMC. I would say, in their standards, you could call it the waterfall model where they enable customers to utilize their advanced silicon. And later on, when the technology matures, it's being proliferated further into the market. So TSMC has that capability. We started first in 2017 to further develop that with a lead customer there. And I think we now have both that capability. Of course, we also cater for the supply chain where customers can get and procure their interposers from third parties, while TSMC only caters for a vertically integrated supply chain. So we offer more flexibility. And I believe that when this market is, let's say, deverticalizing, that positions us well to capture some of that growth.

Two parts to that. I mean, one is, do you have any concern TSMC, they were a bit on the back foot or everyone was like [ Invidia ] about how fast this took off. Is there any concern they finally put in a lot of capacity in place? Like how is the comfort as far as your orders for the business that's not going through TSMC to continue to grow? And second part, I think the investor concern is, it's so strong in 2024. There's a fear it's a mini bubble that will come off a high base and have a correction. Do you have any initial indications, sustainability, if you see further growth in the '25 continuing?

Well, long term, we believe that this is a strong market and strong technologies domain. Midterm, yes, I think there can be some cyclicality to that. Two things as a comment for our investment and return on these investments. For Amkor, the investments are highly fungible. That means we buy equipment for this technology domain, but we can also use that same equipment for other areas like wafer-level fan-out, like bumping, et cetera. So I think underutilization is less of a risk for us. For TSMC, it's more of a risk. But okay, let's put it at the side. If we look to how the supply chain is developing, then we see multiple alternatives being developed for specifically the interposer supply chain. And ultimately, the end customer decides where to get their packaging technology or their packaging manufacturers. There are advantages to do it vertically integrated with TSMC, but there are also advantages to do it in a different supply chain model. In that sense, we see TSMC more as a complementary partner for us than a strong heads-on competitor. We have advantage, ultimately, we know how to cost down, and bring this to a cost level that it can be broadly proliferated.

Actually, just one final question here. It's mostly a silicon interposer now, but the market has been talking about a shift. It's an expensive piece of silicon, and they want to move to redistribution interposer, where you don't actually need the piece of silicon. Like when do you see that trend? And if that takes off, would it be less captive to foundry, it would be more opportunity for OSAT to play in that space?

Yes. We believe that that's the next step in the technology road map that the interconnect structure changes from an interposer to an RDL structure. That capability is in place. The equipment is similar to a large extent than the equipment that we use for the 2.5D. Actually, all customers are evaluating that at this point in time. And we believe that it would be ready for ramp-up probably in 1 to 2 years from now. Yes.

Okay. One other area getting more attention here. So a lot's been about the cloud AI, which you're participating now with CoWoS, Edge AI, how do you see an opportunity on edge devices, smartphone, PC? And there's a related area, I think on CPU was always x86 market, but now you have Qualcomm with an ARM-CPU. You've got others trying to come in. How do you see the, both Edge AI, but also these alternative compute, alternative processors driving the opportunity for your business?

Well, for Amkor, we see the computing domain as a significant growth area also beyond the AI functionality. I think there are a couple of important trends. One you already mentioned, the trend from -- of a shift of x86 architecture into ARM architecture, and not only for the consumer devices, but also for the computing devices and data enters. Drivers are there, for example, power consumption, and we see that being deployed already quite broadly in the data center domain. In the PC domain and in the handheld devices domain, the smartphones are completely ARM-based, I think, to a large extent. In the PC domain, they were the first pioneers that moved into an ARM-based architecture. They now have a full range of products. We see some of the China players also moving into ARM-based architectures, and we see that Qualcomm publicly announced that also with the NUVIA core. Now, I believe that there is a structural advantage in that architecture that relates to power consumption, but also computing performance. And they will coexist next to each other. But I believe there is a significant opportunity for that architecture to gain share. And that's good for Amkor. Basically, it's good for Amkor because we go from a vertically integrated supply chain to a horizontal supply chain where there's an outsourced manufacturing base to companies like TSMC and to companies like Amkor.

If we take the smartphone market, maybe 2 questions. One, the short term. Qualcomm last half hour talked about stabilizing market inventory, finally getting back to normal. How are you seeing it? Are you seeing signs of life? I think you talked about, there's a little bit of seasonality coming off a high third quarter. But do you see more optimism that there's a bit of a turn? That's kind of the short term and then midterm because it's a key part of the business. Do you still see growth drivers for that? Or it's going to come more from these other applications, auto, PC, compute?

Yes. Let me try to answer your first question. There is indeed optimism on the smartphone market. The optimism is very much, let's say, triggered by a shift to high-end devices in smartphone market. So currently, we see that -- and that is triggered by, for example, the launch of the Huawei P30 phone. That's clearly positioned as a high-end phone. The new smartphones launched by Apple in the iOS ecosystem. There is a high interest in high-end, high-functionality smartphones. Customers seemingly, and that's the feedback that we get from customers, are willing to spend a significant amount of money on high-end phones. And that favors that segment of the market, and that's also the segment where the innovation takes place. And that's also the segment where we hold a good position. So we are quite optimistic, and we also see that now back in, not only in the iOS side, but also in the Android side with an increasing order portfolio for these high-end devices.

Okay. That's good. The adjacent market, you've had a lot of SiP business. Some of that goes into smartphone, also goes into consumer products. Could you remind everyone what the driver has been, like SiP, where you see opportunities both in that smartphone platform and the consumer platform where you've had good position. Where do you see the opportunities for that business over there?

So let's start with the consumer platform. We indeed have a proven platform where we integrate, let's say, the majority of the electronic functionality in a very small form factor, and that can be customized to the form factor to the electronic device. So that we deploy mostly in wearable devices, whether it's audio, whether it's smart watches, et cetera. There's a weakness in that market based on an economic downturn, but we expect that market will pick up. We have a fairly strong pipeline there. So going into next year, that market, I believe, will recover. In the smartphone part, that platform of system and package integration is used in multiple parts of the smartphone. I mean, whether it's display and display components, whether it's connectivity and connectivity components, the RF part of the phone, and more and more also in the optical part of the phone where camera modules and all the integrate mechanical things that relate to autofocus are actually packaged into a system in package. So these 3 domains, whether it's RF, whether it's the camera, whether it's the display, whether it's the connectivity in the phone, are all moving from single package components into system and package. And that's a big opportunity for us.

Yes. It's a segue way just here factory network. When you gave the introductory talk, it was more geographic. I mean, there's kind of the focus now on geographic diversification. Talk at a high level, the -- how you see yourself positioned? Any gaps in the portfolio like where Greater China, like how you're positioned in that area? But then also the opportunities with your footprint elsewhere and also with the new Vietnam facility.

Yes. I think we see a couple of trends in that supply chain. I think even independent of the geopolitical situation, we see that the experience during the COVID, let's say, period, woke up companies that they had to revisit their supply chain strategies, specifically in industries like the automotive industry. To give you a few examples there. I think there's, I would say, a revitalization in Japan to bring back a semiconductor manufacturing into Japan. We hold a good position in Japan. We have 5 factories in Japan. And we see also there that, that will continue. I think from the manufacturing being built, TSMC is investing there. And I think, with our presence there and a strong team in Japan, we see that as an advantage. Similar trend in Europe, I think, initiated by the European automotive industry, supported by actually governments in Europe, and the EU, we see a reshoring of semiconductor manufacturing there. Again, TSMC is also reaching in that domain. But -- and this was a public announcement, we're teaming up with GlobalFoundries in Dresden and our Portugal factory to offer a seamless supply chain in Europe. We see huge interest there. I think we're ramping up our factory in Portugal for multiple applications. So we see that as a positive trend. Vietnam is a bit separate. I think Vietnam, you need to position in the grander, let's say, Asia supply chain shifts where the bigger companies that have strong presence in semiconductor manufacturing. In China, they are looking for balancing their risk. And that doesn't mean that everything is massively out, moving out, but it's more balancing between different countries. You see a trend into India. You see a trend into Vietnam. And our Vietnam investment was also triggered by some of the customers that actually motivated us to give them an alternative. And so we believe that although Vietnam will be the smaller player, it will still be a very strong presence for Amkor.

The 2 last geographies. So China, you have quite a good facility in Shanghai. How is that factory positioned, both the international business in China and then also for domestic customers? Or what's the main focus? Also, with a lot of back end, a lot of capacity investment in China, like how do you see that operation positioned?

Yes, our China factory was an excellent performing factory, and is an excellent performing factory for Amkor. Of course, also, they saw an underutilization during this year downturn. In that factory, we roughly balance our loading 65% non-China customers, 35% China customers. And we now are working to shift more to a local-for-local manufacturing support out of that facility in China. And that means that we already had strong relations with local customers, but we're going to intensify that. We still believe that since the, let's say, some of the customers like the performance of the factory for noncritical components, China is not out of the question even for non-China customers.

Yes. Makes sense. Actually, I'll ask one more, we're running close to time. But U.S., could you talk a bit more about the opportunity there? Because you mentioned about the chips funding. What kind of scale do you see or what type of operation are you planning for U.S.? And how's the economics running a package and test from U.S.? I think the concern has been cost, geography, labor force. So how do you see that opportunity playing out?

Yes. In putting together a plan for a U.S. facility, there are a couple of elements. One is the choice of technology. I think we're not going to put a wirebond factory in the U.S. That's clear. That would be advanced packaging, supporting certain applications in the U.S., I think that's related to advanced computing, high-performance computing, automotive and some of the mobile devices. I think that would be the technology scope. If you would say, what makes sense in the U.S.? Well, it would be a highly automated factory. And that would make sense in the U.S. where we would basically use our learnings in our Korea factories. Then when it comes to business models and cooperation models, we need a stronger engagement with lead customers in the U.S. because you need to basically see a part to a fully utilized manufacturing facility. That's one part. That's on the customer side. And then on the government side, I think you need to have support, financial support to prime the pump in the U.S. I would say, on all these ingredients, we're working. We have not finalized our plans. But if you would compare the situation now as it was compared with the last year ago -- a year ago, I would say, we're much more optimistic now that this is feasible, that it can be executed, and that customers are willing to see the value of U.S. manufacturing. And if there's value, then we can also build an economic model around that.

It will be here, in this area.

I cannot comment on that.

Okay. Good. But with that, we'll have to wrap up. I want to thank everyone for coming out to the conference and also to Amkor. So thank you and the management team from Amkor as well.

Okay.

Okay. Thank you.

Thanks.