Amkor Technology (AMKR) Earnings Call Transcript & Summary

Okay. I want to thank everyone for joining this next session at the UBS Tech Conference. And I'm Randy Abrams, I head up the Taiwan Research, also now covering hardware and have Sunny Lin covering semiconductors out of Taiwan. And we're pleased to have Amkor with us. Kevin Engel, we can congratulate him, he will be the incoming CEO after a long history at Amkor, moving up through the organization, so good appointment. And we also have Megan Faust, the CFO. So feel free to add your questions, and we'll try to weave it into the conversation.

So -- and I'll kick off. I think for Kevin just coming in to Amkor, give an overview, how do you see the business? What you're coming into with Amkor? And if you take an initial cut and get appointed, any changes if you think the business is already running or we could see some fine-tuning around the strategy?

Yes. Thanks, and good morning, everybody. So for me, a couple of things. First, really honored obviously, that the Board and the Kim family has the confidence in me to take Amkor on the next phase of our journey. So a really exciting opportunity there. When I think about the strategic pillars, which hopefully some of you have heard these before, but we kind of have 3 pillars that we continue to adapt. So I'd say these are our pillars that we've been modifying over time, and we'll continue to modify moving forward but kind of step through them a little bit. We think about our first pillar, which is our technology leadership, and that's really to work with our customers to drive the advanced packaging leadership into the market, and make sure that we're giving the customers what they need in collaboration with them. Then we think about our second pillar, which is our geographical footprint and really the diversity that Amkor has in multiple regions, multiple countries. And you can think about that also as customers try to build in resiliency into their supply chain that enables us to really help them when we think about advanced packaging, specifically where most OSATs today in advanced packaging are in the Taiwan region, maybe a few in China, whereas Amkor has optionalities in Korea, where we're continuing to expand and obviously in the future in the U.S. So that's a good footprint for our customers. And then our last pillar there is focusing on megatrends in markets that we want to grow in. And with close collaboration with our customers, and obviously, AI plays into that, and we have a lot of strong engagements there. So I'll try to kind of talk about some of those pillars as we go through the rest of the questions because I think that's important to think about how this transition looks for me. I think those pillars align with our future direction, especially where we are in the AI scale out. All 3 of those components play into that market dynamic. So I wouldn't expect any significant changes there. I think potentially some fine-tuning on some things, and we'll talk more about that at our Investor Day, which will be coming up around the middle of next year.

Okay. Yes, I look forward to that. Actually, a follow-up question on AI. That's -- seeing a lot of interest in activity. Sunny has been raising the CoWoS forecast. So it feels like a good outlook. Could you talk about how Amkor is positioned, the solutions you have for high-performance computing, whether across GPU, ASIC, some of the CPUs.

Yes, sure. So I think there's a few things there also, I'll again kind of tie it back to the pillars a little bit. From the geographical footprint perspective, again, customers really want diversity in the supply chain to make sure they have resiliency built in, so that's really creating some opportunities in our Korea location where we're expanding in that footprint from a couple of different dimensions. Number one, from a capacity perspective, but also from a building perspective. and then obviously in the U.S. in the future. When we think about our platforms, so 2.5D, which is something we've been -- we've had in volume production for quite some time now, that platform, we've continued to see increased interest from multiple customers. So we've gone from a couple of customers that have been in production in the GPU and then other space. And then what we've seen over time is that that's grown to over 5 customers, again, with new products being introduced. And I highlight that more from the perspective of we see legs in that platform. I think if we go back a year ago, a lot of people thought that -- or commented that all customers were going to migrate from 2.5D into organic interposer and they were asking us about what we would do with those assets, even though the assets are fungible back and forth, what we're seeing is we're still seeing customer interest in that 2.5D platform. So I think that's very positive. Then we look at the HDFO platform. So now we're talking about our -- again, the organic RDL type platforms. We've talked about how we've ramped our first volume product this year. We have our second product qualified and beginning ramp. And over the next several months, we have another several products that are continuing to migrate from qualification into production. So we're really excited about that. And that gives us a good tailwind for that to continue to grow. And then when we think about the next-generation products, more of the bridge type applications, we're still in development phase with some customers in that area. So again, broad platform, I think when you tie it back into our strategic initiatives and where we're investing, that's definitely a high level of our investment percentages.

Okay. Maybe a quick follow-up to that. How are you seeing 2026 scale up? Like when you talk about backfilling the existing 2.5D and then also ramping up high-density fan-out or some of the bridge solutions. How should we look at the AI business into '26?

Yes. So if I think about the products that are coming in the market, some of our first HDFO products were CP -- or sorry, were PC-related products. So again, kind of think of the AI in the PC market, and the next-generation products are getting more in the data center now. And so I think that's obviously an exciting trend. So going into 2026, we've invested pretty heavily this year to prepare for 2026. We've talked about how that was a little bit of a margin challenge for us this year as we invested heavily. So depreciation increased a little bit. We invested on the people side to make sure we have the right amount of labor resources available that were trained and skilled up, so there's room to grow going into next year just with that type of space that we've already invested for. And then we're already investing for incremental capacity going into 2026 -- later in 2026. So feel very confident if you look at our compute segment, over the past 5 years, we've been growing at around a 12% CAGR. And that's almost double kind of what Amkor total has been growing. So I think that's obviously a positive direction and we continue to see that level of growth moving forward.

Yes. Well, so maybe a few more questions on the compute segment overall for both of you. And so compute at this point, roughly 20% of your total sales. Could you remind us what are the key product drivers at this point? And how is that evolving going to 2026?

Yes. So like, let's talk about our compute segment in general. So within that, we have the PC space and then we have data center, a couple of other small things. So in the PC space, as I talked about, we're still seeing momentum on some of these AI applications. And typically, maybe in the past, there were a lot of standard flip chip or multi-chip module type applications. We're starting to see some of these products getting launched in more of an HDFO platform. And then when you think about the data center, like we said, that's continuing to grow. We see a lot of different application spaces there from ASIC players to direct engagements with foundries and others and you think about the application space, that's a mix of things like you can -- kind of across the board, we have switches, NPUs or NICs, different CPUs, lots of different application spaces there. So I think all of those are areas where we're going to continue to see that growth.

Right. So we're seeing the 20% of sales from computing overall, would you be able to quantify how much is driven by advanced packaging and testing?

I don't have that number off the top of my head. I'd say if we look at the compute segment in general, it's a significant portion, and it's -- again, that's what's driving the growth. That CAGR is driven by the advanced packaging space.

Got it. And then with the stronger demand opportunities across maybe also PC and also server. How should we think about the CapEx going into 2026?

The what?

The CapEx, capital expenditure.

So we'll talk about CapEx for '26 in our earnings call coming up in a few months. So I think that will be the key. But as I mentioned, if you go back to this year, we invested heavily to be prepared for early 2026, and we'll continue to invest in that area going through the year.

If I could follow up about the profitability. You talked about this year you put in place investments that there was a bit of OpEx. How do you see the fall-through? So if you grow this high-performance compute. I think you've talked about a 30% fall through of margin, for advanced packaging, is the margin structure different? And is it reaching that potential, where do you still have teething issues to ramp up and it will take that time to get that leverage?

Sure, sure. So generally, our financial model would suggest a 30% fall- through, as you mentioned, Randy. What we're seeing with a very advanced high-performance computing is, this does demand a premium. And there is a higher margin profile for that high-performance computing. And we see that today in our Korea facility as we are bringing on incremental headcount and incremental CapEx, there is some, what I would call, short-term operational efficiency that we need to gain. But as Kevin mentioned, we see that those products are coming online. We have line of sight and that growth and that scale is going to come in '26, which will definitely help that short-term margin perspective. And that's really what we're planning to do here in Arizona. And so the margin profile for that very high-performance computing space is at an accretive -- will be accretive to our overall gross margin.

So it sounds like, to clarify, next year by '26, you're kind of through that learning curve? So you could be accretive to the 30% fall-through as we see advanced packaging growth.

Yes.

Okay, good. Actually, I think when you were talking about the different expansion, Korea test, that's been an area that you've added capacity. When I look long term at Amkor, I feel like there's been a strategy to grow test, but then you look at the revenue mix, and it's 10% to 15% of revenue, do you see with the test investment inflection where it could be growing at a premium to advanced packaging? Or does it scale up with advanced packaging. Maybe talk about the test opportunity if you see.

Yes. So if I think back to, again, those strategic pillars and how the resilience in the supply chain is bringing opportunities to the Korea location, customers, ultimately, they want test and packaging to be done in the same location. They don't want it to ship back and forth between different regions. So as we grow our advanced packaging within the Korea site, customers also want to tie on the test. So what we -- and then I'd say there's another opportunity there, so we're not passed up on that opportunity. As we think about some of these custom ASIC type players, they don't really have a significant test infrastructure. So those types of customers are also looking for what is their test strategy, how do they build out that infrastructure. And I think that's a good opportunity. So in Korea, as you mentioned, we've been working on expanding the footprint within the existing building and that will be -- that space is becoming available this year. And then we look at another building, which we just broke ground a couple of weeks ago on that facility, that will be more focused on test at scale, and that will be ready going into 2027.

Is there a way to think about the capacity addition because you have 2 buildings, quite a bit of test capacity will be a pretty significant scale up in your test field.

It will be significant. I think the other thing you got to think about is we have a significant amount of test in the K5 building today. So that would migrate into this new test building so that we can expand the assembly footprint in the existing building. But in general, that -- the new building has the ability to also continue to scale and go even bigger. So as the test area grows, that will definitely be an area that we have a lot of room to expand.

Also on your expansion here in Arizona. What drove the expansion to second phase before you complete the first phase, and how should we think about the time line for your $7 billion CapEx? While, I think for us a CapEx, it's only approaching USD 1 billion?

Sure, sure. So obviously, there's been a lot of announcements, a lot of expanded investment, especially here in Arizona with respect to the semiconductor supply chain. And so really, our announcement of expanding our investment is following the demand of our customers and our partners. And so to think about that $7 billion investment, that is going to be a multi facility, multi-phased approach. We've broken ground on our first phase. We expect that to be completed mid-27 with production beginning in '28. The timing for Phase 2 is really going to be a function of demand. And so we can accelerate that. We can time that as far as when that demand is ready to come online to -- and make sure that we're managing that CapEx.

Well, so if you look at TSMC, they had started to build a fab show for the third phase, while they are only moving tools for the second phase going to 2026. So I wonder for Amkor, would you also consider maybe setting up the fab show before the demand start to emerge. So that would shrink the lead time for your expansion?

We're evaluating all scenarios. We're looking at parallel passing, we're looking at serial, and those are all in discussion with our customers today.

Got it. And TSMC has also announced 2 other packaging sites in Arizona, so how should we think about the dynamics and your collaboration with TSMC? Should we assume a full part of your capacity will be related to the collaboration with TSMC maybe on substrate or fan-out.

Yes. So the partnership with TSMC is very strong. We're talking to them a lot about, again, how we both support the mutual end customers. So I think that's the overall goal. And when we think about their packaging facilities coming online, I think that creates more opportunities for Amkor, especially when you think about, again, like you mentioned, on substrate opportunities, things like that. I do want to make sure that it's clear that the Arizona facility is not dedicated to TSMC. We'll have several different business models. In some cases, TSMC would be the direct customer for Amkor. In other cases, the end customer the end-end customer would be the direct customer, directly to Amkor. And so I think there'll be lots of different dimensions and dynamics related to what kind of customer agreements, what kind of capacity planning we're working through but ultimately, them continuing to scale in the U.S., it has additional value for Amkor.

Got it.

Okay. If we look at timing for Arizona, it comes up, I think you talked about middle of '27, you'll have tools moved in, [ '28 ] that starts up. How should we think about the ramp-up of profitability with the higher cost in the U.S. and it takes time to get scale, could '28, we see the type of pricing where that could be at corporate average, accretive? Or is there a period we have to ramp it up to scale to get to a profitable model?

Sure. So I would say, from an order of magnitude, we're anticipating our first phase will be around 10% of our portfolio on a revenue basis. As we move in tools and we ramp up in '28, we would expect that to probably take 2 years would be where we would get to comfortable scale where we would see profitability that would be accretive to margins. And when we think about the broader aspect of high-performance computing, as I mentioned before, with that being on the very advanced side, that general portfolio there is also what's going to enable that profitability. We've also -- are in discussions about how to manage the higher labor costs. This factory is going to be more of a level loading. We're going to ensure that we have level loading agreements given that there's a portion of capacity happening in the U.S. We want to fill that capacity first. We also see this factory being more low mix, high volume in order to manage utilization. Turnkey, as Kevin mentioned, we're going to offer that broad portfolio of services, which also supports profitability. And it will be our highest automated factory worldwide. So all of those are going to contribute to the profitability and some of those labor challenges.

Okay. And when you talked about 10% of the portfolio, how quick do you see the demand to scale it up, I think you took 2 years to break even or be accretive. But could we see the revenue scale up to that 10% of the footprint pretty quickly?

Yes. The exciting thing about Arizona is the demand -- the U.S., the demand is here. So it's really a function of how fast can we scale up. So it's a bit of a different environment than some of our other the Vietnam greenfield, that's progressing and even better than expected. But as far as the demand, that isn't the issue. It's how fast can we bring that scale up.

Okay. You up Vietnam, one part of the business, you have quite a bit of system and package Vietnam has been a good site for that business. How do we see SiP, one, as a growth area, if you can build that business further? And then the other part of it's more material content, so a bit of a drag on margin. Is that just the structural margin for the business? Or are there ways to improve the profitability of the SiP business?

So I think there's a few things there. So if you think about Vietnam specifically, that region we went to because it has some benefits from a cost structure perspective. So that ramp that we've been going through, there's a couple of product -- a couple of different portfolios. We have our memory products that are ramping. And I think that's been very successful with our end customer. We're in the mode now with them of talking about as the memory market recovers, how do we split between the 2 different manufacturing sites we have for memory. Then on the SiP side, specifically, again, we're ramping -- we've been ramping this year. Those ramps have gone very good. We've now kind of proven to the customers that we have, the quality the reliability of the yields that you would expect from an advanced facility. So that's creating more momentum for that customer to start introducing additional products going into 2026. And then in addition to that, we have another customer qualified already ramping in production and then a couple more customers in the qualification phase just for SiP. So that is an interesting dynamic in that if we go back to this year, we -- again, we have a very large factory, not as much scale to really get the profitability we would have liked but we should project that forward. Now we have the labor force beginning to be more trained and more skilled, we'll get more operational efficiency from that. We have much higher volumes from customer dynamics. So overall, on a profitability perspective, we think we'll see some benefits as we continue to scale in a lower-cost region over time. And then as these products migrate from some products migrating from our Korea facility into Vietnam, that frees up additional space in Korea to put in more of our advanced package portfolio.

It sounds like we're back to growth. I mean, you recovered that, I think, a key socket with a key customer this year but you see continued opportunity to grow SiP with additional products, additional customers.

Yes. I don't know that I would kind of envision that as really accelerated growth. Again, if we think about where are we really focused and what are our fastest-growing markets, the computing segment is definitely where we see the most growth, and that's where we're very highly focused.

So maybe a question for short term. So you have guided down quarter for Q4. So any upside downside that you're seeing across smartphone, PC, industrial and auto, and with a down quarter in Q4, should we expect a better start going to Q1?

Okay. So let's talk about Q4 first. So Q4, we're guiding about 8% down from Q3. That's going back to more kind of average levels of seasonality. We saw similar levels in 2022 which was kind of before we started seeing the downturn in the market. If we look at last year as an example, that reduction from Q3 to Q4 is around 12%, so definitely a better seasonality for Q4 this year. If you look at Q1, obviously, we're not ready to guide there. But I would say from a forecast perspective, we feel optimistic about how Q1 is performing. So obviously, we'll provide the details in our earnings call coming up.

Sure. Also any view on the strength or weakness across applications?

Yes. So again, if I kind of think about Q4 for communications, we've -- from a very strong Q3, we saw a little bit deeper declines in the Q4 than normal but again, really off of a high, for automotive and industrial, I'd say pretty much as expected. We continue to see a little more strength in the mainstream automotive products, again, very slow, but at least in a recovery mode, and then advanced is, again, doing pretty well on the automotive side. When we think about computing, we did see a little bit of a decline in Q4 as we went through some product mix changes, but I think the demand is there going into next year. So we feel very positive about that. And then the consumer space, kind of similar from some of the product launches a little bit of declines as expected and then kind of in the standard communication -- consumer market, we're seeing a little more strength than typical.

Right. Also now looking at 2026, maybe full year, how should we think about some of the tailwinds, headwinds for the sector and whether we should think about maybe Amkor outperforming or growing in line with the sector?

Yes. So -- how do I think about '26. Obviously, we're not going to give a lot of color on that yet. But I'd say in general, what we see on the communications side, I think market projections are to grow low single digits from a unit perspective. We feel our position within Android as well as iOS is pretty solid. So we feel comfortable with those market dynamics. When we look in automotive and industrial -- focus on automotive first, in automotive, on the mainstream side, again, seeing that different customer dynamics, but overall, kind of a slow, slow growth out of that trough, something positive there. And then on the advanced side, so think ADAS, in-car infotainment, things like that, definitely seeing continued momentum there. And some of that is in IDM space, but also in fabless companies. So positive momentum in that space. When we think about compute, obviously, we talked about that a lot already. So we expect strong compute market, mostly driven by the AI data center space but also some opportunities in PCs related to transitions to ARM, things like that. And then in consumer, that will be strongly tied to product launches. So in general, we -- 2026 is feeling positive.

Also, maybe if I could squeeze in 1 more question. So have you started to sense any concerns from -- especially consumer clients and the rising bond cost because of DRAM and NAND and therefore, potential impact on end-demand if they have to raise the pricing?

I would say from our customers, we're not hearing too much about that yet. So maybe just a little bit too early for that question.

Okay. I want to ask how it translates to profitability. Margins, when I look back in the late -- like before 2020, you could get closer to 20% gross margin with the rise of SiP, it's been mid-teens. How do you think about that margin outlook? It sounds like compute will be the strongest growth driver and you've gotten through some of the learning curve. Do you see margins starting to creep back up how do you see the leverage in the model?

Sure. So our margins did come down, I would say, starting in '23, which was at the beginning of the semiconductor cycle. And I would say Amkor has demonstrated tremendous resilience during that cycle. In fact, a lot of our investment decisions were strategic investment decisions, that do have some short-term impact on profitability but our intention in order to set ourselves up for future growth, which is what we're experiencing now. So it's really going to be 3 factors that we see that are going to drive that profitability back up and beyond where we've been. We've talked a lot about Vietnam. So as we now build scale, we have what I would call operational excellence has been demonstrated, so we can pivot to operational efficiency. We've got our top 10 customers, all engaged in looking at what products that we're going to bring up in Vietnam. So we see that, that margin drag that has been throughout 2025, is really going to lift as we move forward. The second area is the very advanced high-performance computing. We've had made some very significant investments, not only in R&D, CapEx, but our people in order to ensure that we have successful ramps and as that scales going forward at a higher growth rate. And then the last is the recovery of mainstream. So while SiP has become a higher proportion of our revenue, that's really a function of how deep this cycle has been for our more mainstream business. And as we see that start to gradually recover, we'll definitely see an impact on our profitability moving forward. So all those, the timing of how all those kind of comes into play and then adding that Arizona facility on top, we definitely see expansion in margins.

Okay. How should we think about CapEx? Does it start to move to a much higher level where you're bringing on Arizona. And if you could talk about the implication, free cash flow and ability to increase payout while you go through this expansion phase?

Sure. So we're not -- we haven't yet guided '26 CapEx, we'll do that in February. We need a little more line of sight in how this Arizona build is going to progress. But you may expect to see some temporary increase in CapEx as we put in this very strategic investment here in Arizona. So there may be fluctuations in free cash flow. Amkor has exhibited very disciplined and prudent capital allocation, and we'll continue to do so. And we would expect to continue to grow our dividend modestly as well.

Okay. Great. I think with that, we have to wrap up. I want to thank everyone for coming out. Also thanks to Kevin. Congrats on the new role and also to Megan. Yes, thank you.

All right. Thank you, everybody.

Thank you.