Samsung Electro-Mechanics Co., Ltd. (A009150) Earnings Call Transcript & Summary

Good afternoon. This is EVP Dong Woo Lee, Head of IR and Planning team at Samsung Electro-Mechanics. Thank you for joining our 2026 Q2 earnings conference call. On today's call, I am joined by our CFO, Sung Jin Kim; EVP, Tae Gon Lee, who is the Head of Strategic Marketing; VP Kyu-Taeck Park, Head of Support Team of the Component division; EVP [indiscernible] Kim, Head of Support Team, Packaged Solutions Division; and [indiscernible] Kim, Head of Support Team of the Optic Solution division. We will start with a presentation on our Q2 company level and divisional business results, followed by market trends and outlook by product before taking your questions. Then first, our second quarter results. Q2 revenue was KRW 3,457.2 billion, which is an approximately 8% increase Q-o-Q and 24% increase on a Y-o-Y basis. The details regarding revenue increase or decrease factors by division will be explained later during the divisional results. Our Q2 operating profit was KRW 440.4 billion, which is approximately 57% increase Q-o-Q and around 107% increase on a Y-o-Y basis. Pretax profit in Q2 was KRW 433.3 billion, and net profit was KRW 315.7 billion. Next, in terms of our financials. As of end of Q2, total assets was KRW 16,566 billion, which is roughly a 6% Q-o-Q increase. For major financial indicators, liability to equity increased 2 percentage points to 57% and debt to equity was 28%, which is an increase of 2% versus Q1. Equity ratio was around 64%, similar to Q1. Next are the divisional results and future outlook. First is a look at our Components division. The Component division's Q2 revenue was KRW 1,649.4 billion, which is a roughly 17% increase Q-o-Q and 29% increase Y-o-Y. Data centers related revenue tied to applications such as AI servers, networks and power equipment recorded strong growth, and automotive revenue also increased advances in ADAS and ex EV demand. So revenue grew across all applications, but particularly in the industrial and automotive MLCCs. Q3 MLCC market is expected to see continued growth, demand for high-capacitance, high-reliability MLCC demand driven by ongoing AI infrastructure investments and AI chip performance gains. So we'll focus on timely development and effective supply of cutting-edge MLCCs for AI applications, and we've entered into long-term agreements with 10 or so customers, including the top tier hyperscaler and major semiconductor companies. And we are currently actively responding to additional long-term supply request from big key accounts. The growing penetration of ADAS and growing xEV market is expected to support solid automotive MLCC demand. And so we're we will expand market penetration of our high-capacitance products for ADAS applications and high-voltage products for xEVs. Next is the Packaged Solutions division. Q2 revenue was KRW 771.6 billion, roughly 6% increase Q-o-Q and 37% increase Y-o-Y. For FCBGAs, supply of high-end substrates for major big AI accelerators and server CPUs continue to increase. And we started the full-scale supply of new AI data center network application products for a new customer. Also, supply of automotive substrates for ADAS and autonomous driving increased leading to revenue growth led by AI, server and automotive applications. BGA revenue also increased with increased supply of mobile AP and memory substrates. In Q3, FCBGA market is expected to see continued strong demand for high-end FCBGA for AI data centers. So we will focus on increasing revenue with mass production of new substrates for AI accelerator and server CPUs for a global big tech customers to capture and expand production capacity overseas to capture demand from almost all of the top class semiconductor customers related with AI and data centers to increase supply of our high-end substrates. Lastly, the Optic Solutions division Q2 revenue was KRW 1,362 billion, a roughly 4% decrease fuel, but a 10% increase Y-o-Y. Even though IT camera revenues slightly fell Q-o-Q due to seasonality, our supply of differentiating products for new flagship smartphones of Korean and overseas OEMs increased, including new mass production of the 200 meg pixel folded zoom cameras and high-resolution large angle OIS and slim OIS. Automotive camera revenue increased, driven by increased supply of high pixel sensing and all weather cameras for the global EV OEM and adoption of in-cabin caverns in more vehicle models of the Korean OEM. Looking at Q3, IT camera module market is expected to enjoy increased supply of high-performance cameras for the new foldable phone unveiled by the strategic customer and continued demand from mobile OEMs for differentiating camera modules. And we will focus on strengthening our high-spec camera module lineup, including high image quality slim OIS and power person folded zoom. Also further advances in ADAS and new camera applications such as humanoid are expected to grow in the future, so we will focus on timely supply of specialty cameras for global EV OEMs next generation platforms preparing pilot mass production of our high pixel sensing modules for humanoids and focus on development of differentiating products such as AF and long distance 3D sensing. That completes the presentation on Q2 results and now Head of Strategic Marketing, Tae Gon Lee, will take you through the trends and outlook by key products.

Good afternoon, this Tae Gon, the Head of Strategic Marketing, and I will share the market update and outlook for MLCC substrates and camera modules, respectively. First, MLCC. Q2 MLCC demand increased across all applications, including IT, industrial and automotive. In particular, with AI infrastructure investments continuing and the accelerated increase in electric content in vehicles, demand for high-end MLCCs grew significantly. By application, industrial MLCC demand was particularly strong for high-end MLCC such as the high temperature, high voltage, high capacitants MLCCs that are paired with high-performance AI accelerators and next-generation CPUs because AI servers have highest technology requirements. Only a few companies are able to supply, making MLCC supply even tighter. Such growing supply uncertainties have led to long-term supply contracts already signed with 10 or so accounts, including top-tier hyperscalers and key companies. And we're also actively engaged with additional long-term supply requests from key customers. Automotive MLCC market also continues to grow, driven by penetration of eco-friendly vehicles and higher autonomous driving levels. In addition, in the MLCC content per vehicle is increasing and high-end MLCC for powertrain and ADAS is also continuing to drive solid demand growth. MLCC for IT applications also saw Q-o-Q demand growth. Regarding 4Q outlook for Q3, MLCC demand is expected to see another quarter of growth across applications. For industrial MLCC, supply is expected to become even tighter due to AI technology advances driving significant increase in MLCC content per box and greater demand for higher reliability MLCCs with high temperature, high voltage, high capacitance characteristic needed for the harsh AI server environment. In particular, in the case of the 1005-millimeter 45 micropharic product, demand is expected to grow by more than 7x in 2027 versus this year, given the large quantities of the product being adopted in the big company's new platform. So considering the limited physical space in AI servers, demand for high capacities, MLCC is likely to increase, and so we are focused on launching next-generation new products, including 68-microfarad and 150-microfarad to preempt this demand. In response to data center adoption of 800-volt systems and higher heat levels, we have been increasing the 1-kilowatt high-voltage lineup and design and activities of the 125-degree, 150 degrees ultra-high-temperature MLCCs. Meanwhile, the increasing power consumption and AI chips has been driving rapid increase in demand for silicon capacitors, and we have announced last May that SEMCO has successfully joined the key supply chain of global big tech companies and is in a great position to expand supply to wide varieties of semiconductor customers. For automotive, we continue to capture the increasing demand for small-sized ultra-high-capacity MLCCs needed for advanced ADAS. We're also expecting demand for 100-fold high-capacity components used for 48 voltage power systems to increase in the future. And so we are ready to respond quickly to this market shift. Growing competition over EV range and charging time is driving wider deployment of ultrafast charging infrastructure. And so we will actively seize opportunities to increase our market share. For IT applications, we expect to see another quarter of growing demand for high-end MLCCs, including the high, ultra-small and ultra-high capacitants low ESL products, driven by strong demand for semiconductor packages and memory such as [indiscernible]. So we're working with key semiconductor companies, a new qualification of our ultra small-size ultra-high-capacitance capacitors and we'll focus on timely capture of growing demand for next-generation low ESL MLCC products. We're also focusing on timely capture of high-temperature, low-profile MLCC products for next-generation memories such as DDR6, LP6 [indiscernible], to benefit from memory demand growth. Regarding long-term supply agreements, MLCC demand is continuing to grow from a variety of applications, including AI, automotive and industrial. And so we're engaging in strategic talks with major big tech customers. Regarding MLCC pricing, with even tighter supply expected due to increasing AI demand, we will take a strategic approach to pricing while carefully monitoring supply and demand situations. Next is substrates. Flip to BGA market demand recorded solid growth in Q2 as the shift from generative AI to genic AI drove server CPU demand. Demand for AI accelerators also recorded solid growth as big tech investments continued. This has led to a significant Q-o-Q increase in our data center-related revenue and we started full-scale supply of our new AI data center network products to the new North American big tech account. The Q2 BGA market demand grew Q-o-Q despite soft smartphone and PC set demand, thanks to the pricing adjustments in the industry to reflect higher raw material prices for BGA. Our revenue also increased driven by increased supply of BGA for data center SSD controllers. FCBGA is expected to remain a sellers market in Q3 with demand for server CPUs and AI accelerators continuing to remain strong and driving market growth. With supply remaining tight, we will continue to have pricing discussions with key customers. Supply of high-end products for data centers is expected to grow significantly on a Q-o-Q basis in Q3, therefore, driving further profitability gains. In data centers, larger area semiconductors require larger, high multilayer substrates, leading to even greater shortage of FCBGA supply. We will leverage our strength in multicore and embedded technology to continue talks with almost all of the top class semiconductor customers related with AI data center projects about capacity expansion and long-term supply arrangements to maintain our edge in advanced substrate markets by adding new capacity at the right time. Q3 BGA demand is expected to increase Q-o-Q with mobile customers planning new product launches in the second half. So we will focus on capturing demand from increasing supply of new ARM CPUs for PC and tablets and the demand from data center SSD controller customers. At the same time, we will develop new applications tied to satellite antennas and data centers with heightened design-in activities. Lastly is a look at camera modules. Q2 IT camera demand decreased Q-o-Q due to seasonality of major customers' flagship smartphones launched in Q1. However, automotive camera demand in our addressable market increased slightly Q-o-Q with growing xEV demand. Q3 camera demand may be affected by the adjustment in Chinese OEM handset launch schedules to cope with memory supply issues. But we look forward to strategic customers foldable phone launch and also the U.S. OEMs new flagship launch. We will differentiate ourselves with performance Ultraslim new feature actuator technology and the lens integrated PRISM and miniature lens technology to break into new customers and applications. Q3 automotive camera demand is expected to be similar to Q2, and we will continue to expand high pixel camera lineup, targeting next-generation autonomous driving platforms and actively capture the growing automotive camera markets by winning new design-ins of major North American customers to reinforce our technology leadership in the autonomous driving market. We will also scale up mass production of camera modules for a global humanoid customer and pursue design in on high-resolution recognition modules to gain an early lead in the newly emerging physical AI market. Thank you.

[Interpreted] [Operator Instructions] The first question will be provided by [indiscernible] from Hana Securities.

[Interpreted] I have 2 questions regarding MLCC. The first question is related with the recent announcement of your additional MLCC supply contracts for AI applications. I'm wondering if you have additional supply contracts that's currently being discussed. Also, what would be your MLCC capacity operation plans for this year? Second question regarding MLCC is your actual MLCC shipments inventory ASP data points in Q2 and your guidance on these data points for Q3.

[Interpreted] To answer your first question regarding our supply of MLCCs for AI servers. As you've mentioned, with the continuing investments by hyperscalers in AI data centers and also advances in GPU performance and also the higher-speed networks that are being adopted on servers, there is continuing demand for adoption of cutting-edge high-end MLCCs in AI data center servers. And we expect this steep growth curve to continue for some time in the future. When we talk about cutting-edge MLCC products, those would be the high capacitance products with 100 mega farens or above or those that have high temperature characteristics of 125 degrees and above. These are products that require the highest level of technology in terms of performance and reliability. And only a few companies, including SEMCO, is able to supply at that level. This is resulting in growing tension on the supply side of the market, and therefore, customers, especially those that have AI server needs are showing stronger needs and wishes to secure long-term supply agreements in order to secure stable MLCC supply volume going forward. Based on this, we have already signed long-term supply agreements with 10 or so customers, including the tier hyperscalers and key semiconductor companies. And in addition to the already signed LTAs, we are currently actively responding to additional long-term supply agreement requests from other major customers. You've also asked about our plans of running our MLCC capacity this year. We are focusing on improving the yield of our cutting-edge MLCC products and improving the productivity in order to further strengthen our lead in the MLCC market for AI servers. We've also budgeted a larger CapEx size versus previous years so that we'll be building a production that could maximize supply. Also, we're noticing that the technology demand for MLCCs for AI servers is rapidly becoming more and more sophisticated. And so we will be leveraging the already wide high capacity and product lineup that we have. to launch a diverse combination of different cutting-edge products, MLCCs in different size, voltage or temperature conditions so that we'll be able to capture the variety of needs coming from our customer base. Overall, this year, we'll remain focused on continuing our technology leadership in the MLCC market for AI servers to deliver revenue growth that once again outpaces the market. Your second question was about MLCC Q2 shipment inventory ASP and our third quarter outlook. In terms of second quarter MLCC shipment, shipment increased across all applications, but particularly around industrial and automotive applications. We saw a double-digit level of growth in industrial and automotive MLCC shipments supported by strong demand from data center applications, including AI servers, network and power equipment as well as increasing demand for xEV applications with growth in shipments, our overall inventory decreased. In terms of second quarter blended ASP with growing share of the high-end industrial and automotive MLCC and overall makeup or ASP, blended ASP once again increased on a quarter-on-quarter basis. Regarding outlook for Q3, we do expect once again, there to be continued increase in demand for MLCCs for AI servers, especially coming from hyperscalers Also, on the automotive side, according to third-party sources, the shipment of EVs are expected to grow by double digit in Q3 versus Q2. And therefore, we think that there will be solid demand being maintained for automotive MLCCs as well in Q3. So overall, Supported by such strong market demand, we expect our MLCC revenue to increase on a quarter-on-quarter basis. And with the higher share of high-end MLCCs, we expect our blended ASP also to increase.

[Interpreted] The following question will be presented by Jay Kwon from JPMorgan.

[Interpreted] My first question is about the flip chip BGA. We've been told that you are considering increasing your capacity of FCBGAs. If possible, can you share with us some details about that capacity expansion and how you plan to operate this additional capacity in the future? Second question is about the silicon capacitor. You've announced that back in May that you signed KRW 1.5 trillion silicon capacitor supply contract. Can you give us some market outlook on silicon capacitors? And is there a possibility of winning additional contracts?

[Interpreted] To answer your first question about our FCBGA capacity expansion and our operational plans, with the AI paradigm shifting from training models to inference and reasoning, the global big tech companies are now focused more on developing their own proprietary chips that specialize for reasoning and inference. And more and more companies are participating in this development. Also, with higher performance of AI chips, chips are getting larger in sizes and adopting more and more HBM together, which means that the package substrate itself has to become ultra large size and high multilayer. This is actually aggravating the capacity consumption of the substrate suppliers. On top of that, recently, we're seeing that key customers are having stronger demand for high-end substrates that have multicore or have embedded components. But at this level, there's only a few companies that are able to supply this with the right technology level and the mass production capacity. And this limited supply is further aggravating the shortage in supply of high-end substrates. Given this market situation, we are talking with almost all of the top tier, top class AI and data center-related semiconductor companies about long-term supply contracts, including investment support and we will plan our capacity expansions based on these talks. Also, we are strengthening our collaboration with customers about developing next-generation substrate products and focusing on securing differentiated technology. So our key priority would be to respond timely to customer demand by preparing our capacity expansion smoothly and to focus on expanding our business in the mid- to long term. To answer your question about our silicon capacitor and whether there's possibility of additional orders versus MLCCs, silicon capacitors have better electric characteristics such as low ESL also versus MLCC silicon capacitors are thinner. Therefore, they are key components that is mounted nearest to the semiconductor chip on an AI servers semiconductor package and play a critical role in guaranteeing overall system performance and reliability. There's been a shift of our early expansion of silicon capacitor applications from the traditional mobile to AI data centers, and we are expecting there to be an increase in silicon capacitor adoption in AI data centers and market size, therefore, to continue to grow. Based on the mutual complementary characteristics between MLCC and silicon capacitors, we are currently in additional talks about supply contracts with key semiconductor companies related with AI. Also, SEMCO is the only company in the world that can provide on a turnkey basis not only the silicon capacitor, but MLCC and package substrates. Therefore, we're using that unique strength and leverage, we will focus on gaining a lead in the market, early market and to deliver significant revenue growth going forward.