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

[Interpreted] Good afternoon. Thank you very much for joining the earnings conference call of Samsung Electro-Mechanics. We will start with a presentation by the company followed by a Q&A session. [Operator Instructions] Now we will start the 2026 Q3 Earnings Call of Samsung Electro-Mechanics.

[Interpreted] Good afternoon. This is EVP Dong Woo Lee, Head of IR and Planning team at Samsung Electro-Mechanics. Thank you for joining our 2026 Q3 earnings conference call. On today's call, I am joined by CFO, Sung Jin Kim; EVP Tae-Gon Lee, Head of Strategic Marketing; VP Gyu-taek Park, Head of Support Team Component Division; EVP, Tan-Bae Kim, Head of Support Team Package Solutions Division; and Hyun-joong Kim, Head of Support Team Optics Solutions Division. We will start with a presentation of our Q3 company level and divisional business results, followed by market trends and outlook by product before taking your questions. First, our 2026 Q3 results. Our Q3 revenue was KRW 3,763.3 billion, which is approximately 9% increase Q-o-Q and 30% increase Y-o-Y. The details regarding revenue increase, decrease factors by division will be explained later during the divisional results. Q3 operating profit was KRW 691 billion, which is approximately 57% increase Q-o-Q and around 165% increase Y-o-Y. Pretax profit in Q3 was KRW 609.7 billion. Net profit, KRW 468.7 billion. Next, in terms of our financials, as of end of Q3, total assets was KRW 17,061.2 billion, a roughly 3% Q-o-Q increase. For major financial indicators, liability to equity increased 6 percentage points to 63%. Debt to equity was 33%, an increase of 5 percentage points from Q2. Equity ratio was around 62%, which is a 2 percentage point drop. Next are the divisional results and future outlook. First is a look at our Component division. Component Division's Q3 revenue was KRW 1,883.0 billion, a roughly 14% increase Q-o-Q and 36% increase Y-o-Y. Revenue growth continued across all applications once again in Q3, and our AI-related revenue jumped as high-end product mix increased around AI data center servers, network switches and power modules. Q4 MLCC market is expected to see continued strong demand for AI data center-related high-end products. Accordingly, we plan to increase supply of AI-related MLCCs, such as our small-sized ultra-high capacitance MLCCs and focus on early development of new cutting-edge products to maintain market leadership. We will continue to respond to major big tech customers' long-term supply agreement demands. Automotive MLCC demand is expected to remain solid, driven by xEV and ADAS adoption, and we will continue to drive up penetration in ultra-high capacitance and high-voltage products. Next is the Package Solutions division. Q3 revenue was KRW 939 billion, a roughly 22% increase Q-o-Q and 58% increase Y-o-Y. For the FCBGA, supply of high-end products for data center-related server CPU, AI accelerators and network modules increased and supply of high-performance automotive substrates tied to ADAS and autonomous driving also increased in Q3, resulting in revenue growth across all applications. BGA revenue also increased with growing supply of substrates for memory and ARM CPUs. In Q4, customer demand for high-end FCBGA for AI data center is likely to continue to increase. Accordingly, we will focus on timely supply of our new high-end FCBGAs for server CPUs and AI accelerators and increase capacity across our production hubs on schedule to actively capture customer needs and maintain our strong growth trajectory. Lastly, the Optics Solutions division. The division's Q3 revenue was KRW 941.3 billion, a roughly 9% decrease Q-o-Q, but a 3% increase on a Y-o-Y basis. IT camera module revenue decreased Q-o-Q due to soft demand from overseas customers, but we started mass production of the new 200-megapixel folded Zoom module and increased our supply for foldable phones. Automotive camera module revenue increased, thanks to increased supply for the global EV customers next platform, increased supply of high-pixel all-weather camera modules for EV and robotaxis and starting mass production of high-pixel sensing modules for humanoids. In Q4, for IT camera modules, we will focus on on-time mass production of the high image quality slim camera modules for the strategic customers' next flagship. And for automotive, we will focus on timely supply of specialty products for the global EV customers' next-generation platform and increasing supply to the Korean auto OEM. Also to capture humanoid robotic-related demand, we will increase new design-in activity by leveraging our automotive camera technology and developing integrated sensing modules. That completes the presentation on our Q3 results. And now Head of Strategic Marketing, Tae-Gon Lee, will talk about market trends and outlook by key product.

[Interpreted] Good afternoon. This is Tae-Gon Lee, Head of Strategic Marketing. I will share market updates and outlook for MLCC, substrate and camera modules, respectively. First, MLCC. MLCC Q3 demand increased Q-o-Q across all applications, including IT, industrial and automotive. For servers, demand increased along the entire AI data center-related infrastructure, including GPU, CPU and network. Demand for high-reliability MLCC such as the high-voltage products required for stable power supply also jumped significantly. By application, data center MLCC recorded unprecedented growth, thanks to the strong AI server and infrastructure demand. Rapid increase in compute capacity has been driving a rapid increase in MLCC content per AI chipset, leading to a significant boost in demand. Also, the next-generation AI super chips developed by global AI big tech companies went into mass production from Q3, which has significantly increased share of our high-end MLCC, and this trend is likely to continue in Q4. Automotive MLCC market also continued growth with increased penetration of EVs and advances in autonomous driving, leading to adoption of more sensors and computing systems. Even in IT applications, MLCC demand grew, especially around high-capacitance high-end products, thanks to effects of new flagship phone launches, wider adoption of SOCAMM in response to AI server power efficiency needs and rapid increase in DDR5 modules. In Q4, MLCC demand is expected to grow across once again, all applications, unlike the usual Q4 patterns. For data centers, number of dies for AI GPUs or ASICs continues to increase from 2 in 2026 to 4 dies in '27 and 8 dies after '28. Power consumption increase is in proportion, which means that MLCC capacitance requirements for GPUs or ASIC core power will also double each year. We have been referring to this as the AI MLCCs law and have been actively capturing growing demand for small-sized ultra-high capacitance MLCCs. Our key product, the 1005 47-microfarad, is currently being supplied to all big tech new platforms and expected to see a roughly 8x demand growth in 2027. We are closely talking with global big tech customers about the mid-, long-term road maps and demand forecast, and we're preparing to launch next-generation high-capacitance products according to the AI MLCC's law. A large part of our mid- to long-term capacity has already been occupied by long-term supply agreements. MLCCs for optical modules for high-speed GPU links is expected to be SEMCO's new growth engine next year with 3x revenue growth expected on a Y-o-Y basis. The 1.6 terabit per second optical module requires MLCC capacitance per module similar to that of smartphones, and we are planning lineup expansions to target the increasing optical module MLCC content. More data centers are adopting the 800-volt power systems and 800-volt DC/DC converters are likely to adopt the 1 kilovolt plus high-voltage MLCCs. This is the same specification as the MLCCs used already for automotive onboard chargers, and we can leverage our existing automotive product lineup to quickly capture this growing market. Increasing power consumption by AI chips is quickly generating growing demand for silicon capacitors to remove noise and stabilize power supply right next to the chips. We are currently producing an embedded type which are inserted in the interposer or main board as well as a land side type, which are mounted on top or bottom of the substrate. As already announced, we have signed 2-year supply agreements with global big tech accounts and plan to start mass production in 2027. We are currently engaged in supply talks with several other big tech customers right now and expect to further increase our supply. In automotive MLCCs, the share of high-capacitance products is increasing in order to suppress power noise and maintain stable current supply as high-performance SoCs and ADAS modules now use more power for compute. We have increased our design-in activities with key SoC companies to engage them from the early platform development phase and ensure that our products are designed in. Preempting the shift from the existing 12-volt to 48-volt power systems, we were the first in the world to develop the 100-volt class 100-microfarad high-capacitance product and has completed key customers' qualification process, securing new volume. The 48-volt power system is being quickly adopted across not only automotive applications, but also new applications such as humanoid robots. And we are focused on preparing the right product and technology to capture the early growth opportunities in not only automotive but physical AI markets. For IT applications, we are focusing on new qualification activities of the ultra small size and ultra-high-capacitance MLCCs for the LSC of key SoC customers in anticipation of further advances in chip packaging technology. Our plan is to secure volume early on through long-term supply agreements with key customers and to develop the new low ESL for terminal MLCC products on time to maintain market leadership and revenue growth. On the memory side, with more detailed DDR6 standards becoming available and better visibility of SOCAMM2 specifications, we will preemptively develop and design in high-temperature, low-profile MLCC products for the next-generation memory chips to lock in a strong position from standard development phase. Lastly, regarding our long-term agreements and pricing, we have signed or in the process of signing LTAs with multiple customers around high-end products, including high capacitance and high-voltage MLCCs. This is expected to account for more than 60% of our next year MLCC revenue. Regarding MLCC pricing, even though we have been proactively increasing capacity to meet AI demand growth, customer demand is growing faster than expected and the tight supply situation is further aggravated by the capacity erosion caused by high-end MLCC production. With supply expected to get tighter, we will continue to strategically respond to pricing. Next is substrates. Q3 FCBGA market demand increased significantly Q-o-Q with demand for high-spec FCBGAs from data center applications triggered by high-performance AI model and frontier AI competition among global AI players. Our revenue also increased significantly around data center-related applications, such as server CPU, AI accelerators and network switches. We have signed LTAs with a leading North America big tech company. And currently, we're supplying various high-end products for data center applications, which we plan to further expand and increase. Q3 BGA market demand increased significantly, driven by strong AI data center memory demand and pricing adjustments to reflect the supply-demand situation and higher raw material prices. Our BGA revenue also increased, thanks to increased supply of new products for the ARM CPU and increased supply for DRAM and data center SSD controllers. Q4 FCBGA market supply is expected to remain tight due to strong data center demand. Adoption of advanced packaging that mounts multiple chips on a single board continues, driving larger area and higher multilayer trends in FCBGA, leading to greater supply shortage of not only high-end substrates, but across all products in the substrate group. Considering the shortage in production capacity versus market demand and higher raw material prices, we are in price talks to improve our profitability and will aim to continue above-market revenue growth. We have been leading this ultra-large-sized substrate market by combining our differentiating embedding and multi-core technology with our warpage control know-how, we are already mass producing server CPU substrates with embedding and multi-core technology and plan to double our supply volume in Q4. In 2027, next year, we plan to supply equivalent products for AI accelerators, network switches and automotive applications in addition to the server CPUs, to significantly increase the revenue share of embedding and multi-core products. Also, the Sejong and Vietnam plants, where new investments are taking place according to the mid-, long-term product and technology road map aligned with global big tech customers will be developed as the hub for next-generation ultra-high specification products. Q4 BGA demand is expected to be similar to Q3 due to seasonality. That said, demand related with AI servers and data centers is expected to continue growth even in Q4. We will continue to actively respond to the technology inflection point of new APs for flagship smartphones to capture this new market and maintain our focus on SSD controller, cable, SOCAMM-related demand for AI data centers where growth is expected to continue. We will also continue new design-in activity in high-growth potential sectors such as satellite antennas and industrial power module substrates. Lastly, our camera modules. Q3 IT camera module demand decreased Q-o-Q due to sluggish smartphone sales and higher smartphone prices tied to increased memory prices despite the positive effect from the strategic customers' strong foldable phone sales. But automotive camera demand increased Q-o-Q with strong EV sales continuing. In Q4, year-end inventory adjustments would have some effect, but we are planning to supply camera modules for the strategic customers' new model and actively pursue revenue growth around high-end products, including aperture, large angle OIS and folded. Also, we will focus on early mass production of parts for the new North American customer onboarding next year and follow up with new applications and customers. Q4 automotive camera demand relevant to SEMCO is expected to be similar to Q3. We will focus on further expanding high-pixel product lineup for next-generation autonomous driving platforms and active design-in on new autonomous driving projects of key customers to drive continued revenue growth. From Q3, we started supply of camera modules for humanoid applications to a North American customer, leveraging our differentiating technology, including high-pixel, ultra-precision proximity sensing. We are currently increasing our supply capacity in North America in anticipation of future humanoid market growth and aim to lead the market and develop new business opportunities by leveraging our IT and automotive camera technology. Thank you.

[Interpreted] [Operator Instructions] The first question will be provided by Hyun Ji Cho from DB Securities.

[Interpreted] I have 2 questions regarding the MLCC business. First question is about the supply agreements. Since June, you've been announcing various long-term supply agreements with your customers on MLCC. Can you give us a bit more detail of the supply agreements and also your future plans regarding supply agreements? Second question is data points on your Q3 MLCC shipments, inventory ASP and your fourth quarter guidance.

[Interpreted] To answer your first question about our MLCC long-term supply contracts, we have continued in Q3 to sign long-term agreements with key accounts, especially for the 1005 47-microfarad and 1608 100-microfarad, these cutting-edge MLCC products that are mainly used in data centers. Until now, we have either signed or in the process of signing long-term agreements with about 50 customers for high-capacitance, high voltage, so these high-end MLCC products as well as cutting-edge MLCC products that are in very tight supply currently. So at this point, we expect more than half of our next year MLCC revenue to be generated from long-term agreements. Long-term agreements have many benefits. It lets us secure customer demand early on, but it also allows us to efficiently plan out our production for maximum productivity. And also it naturally leads to adoption of our next products, new products in customers' next-gen products -- projects. And therefore, it continues to contribute to boosting our mid- to long-term growth. To answer your second question about Q3 MLCC shipment inventory ASP and Q4 guidance. In Q3, revenue and shipment increased across all applications of industrial, IT and automotive with a significant jump in the high-capacitance high-reliability cutting-edge products for data center-related AI accelerators and power infrastructure, combined with the launch of the new smartphone by global OEM customers as well as continued xEV penetration and ADAS upgrades. Shipments have increased and as a result, overall inventory has decreased. Blended ASP in Q3 increased double digit on a quarter-on-quarter basis, driven by increased share of high-end applications such as industrial and automotive, combined with increased supply of the 1005 size 47-microfarad for AI server applications and increased sales of ultra-high capacitance 0603 10-microfarad and the 1608 100-microfarad driving productivity mix improvements. Q4 usually is a slow quarter due to IT customer inventory adjustments and seasonality. But this year, we are expecting automotive MLCC demand growth to continue in Q4, and this to be supported by strong growth in cutting-edge MLCC demand for AI servers. Therefore, with increasing share of high-end products, combined with higher ASP, we are expecting another significant revenue increase in Q4.

[Interpreted] The following question will be presented by Hyung Wou Park from SK Securities.

[Interpreted] I have 2 questions. The first question is regarding your package substrate investment plan that you announced last September. You announced that you'll be investing KRW 6.8 trillion in the Sejong site and Vietnam. Can you give us a bit more details about the scale of mass production, mass production schedules as well as how much upside revenue increase you expect from this new capacity? Second question is about AI-related MLCC demand, which is very, very strong right now. Given that strong demand, can you give us some updates on your line operation and capacity increase plans?