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

Hey guys, Joe Moore, again, Morgan Stanley [ semiconductors ] Research. Glad to be here today with the CEO of Amkor with Giel Rutten.

So I don't know if you want to start with just maybe a little bit of an overview of Amkor, and what you guys are focused on. And then I'm going to delve into specifically some of the geopolitics and AI stuff as well as the broad-based business.

Okay. Thanks, Joe. Amkor is now one of the leading manufacturing service providers for assembly and test. We have a global footprint across, let's say, Asia and Europe, and we recently initiated an investment in the U.S. Our core differentiators are related to technology, our global footprints, and we are well established with lead customers in the emerging growth segments. Let's stick to that, Joe, for now. And I think I can expand more once we go into deeper on some of the topics.

Maybe you could just start with the importance of advanced packaging geopolitically, the CHIPS Act set aside $3 billion for -- to sort of maintain U.S. leadership or drive U.S. leadership in advanced packaging. Can you just focus on that? Is that a concern that is shared by the end customers to people, and you -- we'll talk a little bit about what you're doing in Arizona, but what's the impetus of that? Why would you want [ package ] semiconductors in Arizona?

Yes, very good. No, advanced packaging is becoming a more important element of overall, let's say, product development and product introduction. So the technologies, let's say, differentiation there is important, while packaging, let's say, 15 years ago, was a bit of an afterthought. Currently, it's becoming an integral part of product development. Certainly, now we move into advanced packaging for AI products like GPUs. Now for the U.S., it is important because that will be with respect to the onshoring of manufacturing of semiconductors in the U.S. advanced packaging is considered to be an important element of that reshoring of advanced -- of semiconductors back to the U.S. So for Amkor, we consider that important. I think we work closely with lead customers as well as federal and local governments, and we announced an advanced packaging and test facility in Arizona later or last year to be opened by the year 2026. We established that facility close to the TSMC manufacturing location in Arizona, and there, with lead customers as well as with in cooperation with TSMC, we will ramp and initiate that facility.

And can you talk about that decision maybe the cost efficacy of doing this in the U.S. because I think of packaging historically being kind of more of a focus on low-cost labor, things like that. The importance of the location here. And then the relationship, you mentioned TSMC, but also Apple, the relationships that are sort of benefiting from this decision?

Yes. I mean, indeed, the cost base for establishing a manufacturing facility in the U.S. is higher than when we would do it in Asia. And that makes support from the CHIPS Act pretty fundamental to build a sustainable, let's say, factory here in the U.S. with strong support from customers as well as strong partnership with companies like TSMC. We consider that important to establish that. Now what makes us do this in the U.S. I think we are the only OSAT, which is headquartered in the U.S. We worked for quite a long time also with the CHIPS office as well as with local and federal authorities, and we find a strong support there to establish this. There's also a bigger realization in the CHIPS office that the advanced packaging is an integral part of a manufacturing supply chain. And therefore, we believe that given the assessment that we made, we can build a sustainable location here in the U.S.

Great. And then focusing on advanced packaging. I mean, I know at the moment, AI is the focus, but this has been happening for a long time. AMD was talking this morning about the investments that they were making both on the AMD side and the [ technology ] side, 5 or 6 years ago to promote multichip packages. Can you just talk about the importance of this, and what it does to sort of elevate the difficulty of what Amkor is doing. And we'll talk about AI specifically, but really across all of the markets.

Well, advanced packaging is for Amkor, a fairly fundamental and integral part of our strategy going forward. We started to focus on advanced packaging already 5 or 6 years ago, currently advanced packaging is about 80% of our total revenue. So Amkor is also considered the leader in advanced packaging. If we talk more about AI, advanced packaging has a broad portfolio on technologies for AI processors, specifically GPUs. We currently use 2.5D, which is similar to what is called CoWoS in the industry, which is a silicon interposer on top of a substrate with the customers that are currently working on that technology. We started working on the first generation in 2017. Currently, we are introducing the third generation of these products in the market. Of course, initially, it was not for AI. It was more for gaming applications. And it's now ramping up very, very rapidly. I mean we doubled our capacity by the end of 2023. We're tripling it by the end of the second quarter this year, and we continue to ramp during the rest of the year depending on demand.

And the specific technology you described as being similar to CoWoS. It has a lot of overlap with front-end equipment technologies. I mean you have your silicon interposer TSV layer. You're doing a lot of -- you're using a lot of equipment that's traditionally more for an equipment. So it's a little bit of a different direction for you guys. Can you talk about that? And I know you don't view TSMC as necessarily a direct competitor in that. But does that put you and TSMC into a little bit of an overlap where they start to offer these kinds of capabilities as well?

Well, let me start commenting to your last point. I mean do we see TSMC as a competitor or a partner. I think TSMC is a clear partner for Amkor. We are working with them already for the last 15 to 20 years on introducing multiple generations of technology. And the endorsement of TSMC here in the U.S. for a manufacturing facility underlines that cooperation. With respect to familiarity with the technology, CoWoS is actually an extension of what we call a bumping production line. So I mean currently, we have a long-standing experience in doing advanced bumping it started with, I would say, 15, 20 years ago with leaded bumping and it now goes to micro bumping. I think that technology is a wafer-based technology, that introduced in the OSAT space already a long time before. And we're building on that experience to introduce technologies like CoWoS, and we go in the next generation to an RDL kind of structure. Now we acquired in 2017, a company in Europe. It was NANIUM at that point in time. They were a leader, a technology leader in wafer-level fan-out. And that combination actually brings us the capability that we need for advanced packaging also when we move into 2.5D or CoWoS got like technology.

Okay. Can you talk about, I mean, specifically supportive GPUs. You've been an important part of that now as you're starting to ramp up your supply. There's been anecdotes of Intel pushing into that space as well, although they support an active interposer, and so there's some complexity to what they're doing. And they actually had a big shortfall in non-advanced packaging this quarter, which wasn't even a business that I knew Intel was in. But are you seeing those kinds of overlaps, and can you talk about, again, your ability to enable, specifically the AI space, we have these bottlenecks in back-end packaging. Can you talk about [Indiscernible] in resolving that?

I mean let's look at the current bottlenecks in the AI space, specifically on 2.5D or CoWoS. I think there's still a shortage, and there will continue to be a shortage in capacity this year because demand is expanding very rapidly. We are expanding capacity. In the broader sense of high-performance computing, let's say, beyond AI, but also with respect to accelerated computing, we work with all the leaders in that space not only in, for example, package concepts like multichip modules, large body size, flip-chip BGA modules, 2.5D, let's say, high-density fan-out. These are the package families that will support, let's say, the high-performance computing space. In the broader sense, beyond AI, we believe that for companies like Amkor, the high-performance computing space has a huge number of opportunities. Also because we see what is called the deverticalization there. Traditionally, of course, the Intel is a vertically integrated company. They dominated that space. But we see with a lot of newcomers coming in they use an outsourced supply chain, and that works to the benefit of foundries on one side and [ all sales ] on the other side. So we believe that the high-performance computing space, including AI, but also other computing applications will bear fruit for us.

Okay. And last question on this AI portion. The benefits of this are clear, it's a higher-margin business, more differentiated addressing really high-growth markets, but it also seems a little bit more capital intensive. And in general, some of these new markets put you into a little bit more of a higher fixed cost business potentially. Do you agree with that? And does that -- does it help with the cyclicality because you have those growth drivers and differentiation? Or could it make the business a little bit more cyclical?

Well, is -- the capital intensity is indeed slightly higher, although if you look to our business profile 15% to 20% was already wafer-based business within Amkor, so we're used to invest in that sort of business. So overall, I think for the company, we don't expect that our capital intensity will go up. It will stay roughly in the 12% to 14% range. And that gives us sufficient lead way to invest in wafer-level packaging like 2.5D. It has the benefit. It's more accretive to the margins. But overall, we see that as a standard part of our package portfolio.

Okay. And you also had an announcement with GLOBALFOUNDRIES in Portugal. Maybe you could talk a little bit about that as well.

Yes. GLOBALFOUNDRIES has a manufacturing facility in Dresden, in Germany. They support, let's say, the European automotive industry, and we worked with them already for a while to offer our customers a seamless European supply chain, where they would do wafer manufacturing, and we do bump, probe and assembly out of our Portugal facilities. We formalized that cooperation where they transferred their bumping capabilities into our Portugal factories, and we formalized also that with the lead customers there. So that is part of offering from wafer manufacturing up to assembly and test its product a seamless supply chain. And overall in the industry, we see a trend that customers are actually looking for manufacturing services that offers them a turnkey solution. So cooperation with GLOBALFOUNDRIES on one hand, but also TSMC on the other hand, is important. And therefore, I want to underline the TSMC, I don't see them as a competitor. I think we have, I think, a joint goal to offer a seamless supply chain to the industry. And the fact that we currently have a little bit of a hiccup and shortage of supply of 2.5D also triggers the need for that cooperation.

Yes, they want to resolve that as much as anybody, yes. Okay. That's helpful. So in terms of the business, when we talked after earnings, you guys seem pretty confident about a second half recovery. Can you talk about what drives that confidence?

Yes. Yes, this year, we definitely see a weaker first half and a stronger second half. I think the weaker first half was the typically -- the typical seasonality of the communication market. And then on top of that, we saw some inventory corrections in the automotive and industrial part. Strength in the second half, I think, for Amkor, there are a few unique elements there. First of all, in the end of the second quarter, we see significant incremental capacity coming on stream for 2.5D to support AI processors. We are also expanding our portfolio of customers there and also offer -- our technology offer will be broadened. So I think that will lift our second half revenue in that part of the business. The second important element is that currently, we're qualifying a wearable products for one of our bigger customers. That will come online and goes into mass production in the third quarter, and that will add significantly to what we do. And then overall, we see a recovery of the market, let's say, market segments like PC, memory, et cetera, to recover there. So all in all, I think this is the foundation of the second half. And on top of that, of course, we see the seasonality of new phone launches in the third quarter, driving upside. So we're pretty confident that with these, I would say, unique effects that we have a strong second half of the year.

Okay. Maybe if we could talk about some of those dynamics. Starting with automotive and industrial, when did you start to see that correction taking impact? What's your confidence that we're burning inventory now and that will run out of inventory at some point this year?

Well, in general, a difficult period during the COVID years where there was a shortage of supplies for mature silicon in the automotive domain. They change their supply chain model from just-in-time to just-in-case kind of model. And we believe that currently with, let's say, the supply chain being more in balance. They change back to a just-in-time model. So they start reducing their overall inventories certainly for the more mature products. And these are the products that currently see being corrected, that's the microcontrollers in mature technologies, where there's plenty of supply. So that's -- we expect to be corrected by second quarter, end of second quarter, and that will help in the second half of this year. And a similar product portfolio goes into the industrial market also. The remaining part of the automotive, if you look to 2023, our advanced products in automotive was still growing year-on-year, and we see a slight correction there. But overall, they are holding on strong. So there is high confidence that the second half will be corrected.

And the reshoring incentives in automotive seemed pretty strong, like it feels like there's real OEM pull that people want the supply chain to be not Taiwan.

Yes, for sure. I think we see that in automotive specifically, there needs to be supply shortages of at least 10 years. And some of the companies consider supply assurances out of China or Taiwan for 10 years high risk. So that works in our advantage to supply that industry out of Europe, or later on, out of the U.S. or out of other parts in Asia like Japan or Korea.

Okay. Great. And then smartphone, big market for you guys. Can you talk about the different dynamics you might see between Android and iOS and generally, the trajectory you see in phones?

Yes. I mean if you go back to 2023. 2023 was a very strong smartphone year for Amkor. I think we grew in 2023, 4% year-on-year in a declining market, where there were 2 years in a row of declining volumes in the smartphone business. For 2024 -- and specifically, Android was weak. I think we had a very strong year in iOS, where we gained market share, but the Android market was weak, specifically due to the China inventory situation and also other players didn't do too well. I expect that what we're currently observing for '24 is that the start of the year is better than the start of 2023. We see some last minute orders for the Android processors, and that is an indication that the inventory situation is improved. For the iOS market, we still have a strong pipeline there. I think we expect that, although we see some corrections in the first half of the year, that the launches of new iPhones in the second half of the year will drive upsides. We have a strong project pipeline there, and we had a record year last year. So we're building on a strong foundation.

And the smartphone market has been a pretty good market for different packaging technologies as well, advanced packaging and different sensor modules and things like that. Can you talk to your capabilities there?

Yes. Within smartphones, we have, I would say, a complete portfolio of package technologies that support all functionality, where we hold significant market positions in the phone. Let's start with the RF front end part, certainly going into 5G millimeter wave, I think that's a big part of the semiconductor content of the phone. We hold the leading position in apps processes and Androids. Hold a leading position in modems across the ecosystems and then modular solutions when it comes to advanced camera systems, let's say, recognition or facial recognition in the phone, and these functionalities are being upgraded. Other elements of the phone like battery management, like connectivity share, all of these functions, we hold good positions in different packaging formats and technologies.

And you've talked about this big wearables win and presumably if you could tell us more you would. But can you sort of talk about the wearables market generally? And I would think that puts a lot of pressure on form factor and packaging as well.

Yes. I mean the wearables market, and we all know the well-known wearables. They are, I would say, exclusively going to system and package, where more and more functionality is packaged into 1 package format. If we take, for example, a watch or a hearable or an earphone, 80% to 90% of functionality -- electronic functionality, it's packaged in 1 system and package up to 250 components into 1 package, and you basically wrap only your plastics around it. That trend, we started to invest in that -- in these package formats in 2015, and we're now into the third or fourth generation of package test. So we have the capability the capacity and also the scale to support these applications. And we are also expanding our range because we believe that this, let's say, wearable electronics that, that will continue to be an important market for us.

Okay. Great. Maybe talk a little bit about the competitive dynamics that you see both with your traditional direct competitors as well as newcomers in China, and how that may impact you guys?

Well, I mean, what we see in the competitive landscape is that geopolitics is starting to influence that. And actually, that's -- that seems to be more prominent now than it was 2 years ago. That we almost reach a point of no return, where 5 years ago, the belief was that the majority of the packaging would move into China. Currently, we believe that the China players have a disadvantage there because many of the more advanced applications are being moved out by end customers. I mean we talked about the automotive part, but also high-performance computing also communications, let's say, technology is more pulled out of China, and that's an advantage for us. On the other hand, I think the China players, there is more -- becoming a local for local market for them. For our competitors in Taiwan, a similar, let's say, dynamics occur where customers make a conscious choice whether they want to manufacture 100% of their business in that jurisdiction or they want to balance it with other jurisdictions. We see that definitely on the automotive side, customers are making a choice to look for other jurisdictions. And that is initiated not only by semiconductor companies, but also, for example, by governments. It's in Japan, you see a transition of local manufacturing in Japan, same holds for Europe, same holds for the U.S. and that's definitely a geopolitical trends that, in our belief, will continue. Amkor in that environment has a significant advantage, and we also devise our strategy around that future trends of diversification of that supply chain.

All right. That's helpful. So I have a couple of more questions if we can turn it to the audience. Maybe on the financials. Can you talk about the gross margin path? You've talked about trying to get back to the 20% level that you were at kind of in 2022, what's the path to getting there?

Yes. I mean Amkor is a manufacturing service company. We have 20 factories around the world. We are an asset-rich company. Our margin structure is very much related to our utilization of our assets. Currently, the market is relatively down. Our asset utilization is around 65%. At peak, we run about 85%, let's say, if we take 2021 as a reference. Our average flow through to the margin is about 40% revenue. So from the 15% that we're currently running, you see that there is a part to go back to 20-plus percent based on improved utilization. And we believe that with the market improving, certainly in areas that we are currently significantly underutilized that we can go back to that sort of levels.

Okay. And then along the same lines, can you talk about capital spending? You talked about long term wanting to maintain an intensity 12% to 14%. Where are you for the next year or so?

Yes. Last year, our capital expenditure was $750 million. We had a significant investment that we decided to continue in our Vietnam factory because we wanted to have the factory ready to take production when the next upswing in the market occurs, and we expect that to be in the end of this year, early 2025. So we qualified new customers in that facility now. So out of the $750 million, we spent about 65% on facilities and new factories, only 35% on equipment to expand capacity. This year, the total will be the same, but we increased our equipment spending for capacity announcement with 50%. So we invest significantly more in equipment expansion, but less in facilities expansion because the Vietnam factory is basically online to speak.

Okay. Okay. Great. I see if we have questions in the audience. One in the back.

[Indiscernible]

If you could repeat, otherwise okay.

Okay. I think the question was, and correct me if I'm wrong, this was the question on hybrid bonding. That's -- and how that relates to Intel, TSMC and what Amkor would do in hybrid bonding. Hybrid bonding is a technology that's being used in the industry already for many decades, and we use hybrid bonding for other applications. But what you're referring to is hybrid bonding in a chiplet SoC architecture. What we see there is that that's typically an extension of front-end manufacturing. So hybrid bonding or chiplet architectures, where you go from monolithic integration to chiplets integration, I consider that the domain of, let's say, wafer manufacturers of wafer foundries. Hybrid bonding, as a technology SEC, we have that in-house, and we use it for certain sensors, so it's not uncommon to the industry.

Any other questions? Okay. If not then, we'll wrap it up there. Okay, thanks, Giel.

All right. Thank you.

Okay. I appreciate that.