Amkor Technology, Inc.
Q4 2020 Earnings Call Transcript

Published: 8 Feb 2021

[Operator:]

Greetings and welcome to Amkor Technology Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded. It’s now my pleasure to turn the call over to Vincent Keenan, Vice President, Investor Relations. Please go ahead sir.

[Vincent Keenan:]

Good afternoon, everyone, and thank you for joining us for Amkor's fourth quarter and full-year 2020 earnings conference call. Joining me today are Giel Rutten, our Chief Executive Officer; and Megan Faust, our Chief Financial Officer. Our earnings press release was filed with the SEC this afternoon and is available on our website. During this conference call, we will use non-GAAP financial measures and you can find the reconciliation to the U.S. GAAP equivalent on our website. We will also make forward-looking statements about our expectations for Amkor's future performance based on the environment as we currently see it.

[Giel Rutten:]

Thanks Vince. Good afternoon everyone, and thank you for joining the call today. Today, I will review our fourth quarter and full-year performance and will provide the outlook for the first quarter. I will also make a few comments on dynamics in the markets and technologies where Amkor is well positioned for growth in 2021. Strong demand for our advanced technology and a partial recovery of our mainstream business produced an all-term growth in the revenue records. Revenue of $1.37 billion was above the high-end of guidance, an increase of 16% year-over-year at 1% sequentially. The record fourth quarter through full-year 2020 revenue above $5 billion for the first time in Amkor’s history. An increase of close to $1 billion or 25% over 2019. Record revenue, high factory utilization, and cost control initiatives also pushed profitability above expectations, the $0.52 of EPS for the quarter and $1.40 per share for the full-year. Communications revenue continues to be robust for the fourth quarter, mainly driven by the launch of next generation 5G smartphones. Revenue increased 8% sequentially, and 43% year-on-year. For the full-year 2020, our communication business increased 35%, representing 41% of Amkor total revenue up from 38% in 2019. This growth is a reflection of Amkor’s solid position in the smartphone market and our broad footprint in 5G phones, particularly in the RF domain, as well as in modems, sensors, and peripheral devices. We expect that higher semiconductor content in 5G phones together with the further penetration of 5G technology in the smartphone market will be a key growth driver for us during the next few years. In the near-term, market data shows 5G penetration rate increasing from close to 20% in 2020 to around 35% in 2021. Fourth quarter performance in the automotive market was better than expected with sequential growth of close to 15%, demonstrating a continued recovery of this markets. This recovery did not fully eliminate declines earlier in the year. And for the full-year of 2020, automotive ended down 9% versus 2019. In the fourth quarter, we saw sequential growth in both advanced products, as well as mainstream products, as the majority of our customers continue to ramp their orders throughout the quarter.

[Megan Faust:]

Thank you, Giel and good afternoon everyone. Today, I will review our fourth quarter and full-year results and then provide some comments about our first quarter outlook. Fourth quarter sales exceeded expectations, increasing 1% sequentially, and 16% year-over-year to a record $1.37 billion. The year-over-year increase was driven by strong growth in the communications and computing end-market. The combination of high utilization and benefits from our Japan restructuring drove gross margin to over 20%, our best quarterly performance in four years. We delivered record fourth quarter operating income of $159 million, and operating income margin increased 160 basis points year-over-year to 11.6%. During the fourth quarter, the U.S. dollar weakened against Asian currencies, and the weaker dollar had an unfavorable impact on our results sequentially, and year-over-year. Despite the foreign currency headwinds, we earned $0.52 per share in the fourth quarter. This includes non-cash discreet tax benefits of $0.08 per share, which were not part of our guidance. We generated $288 million of EBITDA in the quarter, and EBITDA margin was nearly 21%.

[Operator:]

Thank you. Our first question today is coming from Sidney Ho from Deutsche Bank. Your line is now live.

[Sidney Ho:]

Thank you, and congratulations on the great quarter. My first question is on the first quarter guidance being down 4% quarter-over-quarter revenues, seasonally, you're down more like 10% ish, quarter-over-quarter except maybe for last year, which end-markets do you expect to see above seasonal growth this year? And kind of related to that, you mentioned supply constraint, I think a lot of suppliers also mentioned that, how may that have impacted your business in the first quarter? And where have you seen the most supply constraint? Thanks.

[Giel Rutten:]

Well, thanks to thanks Sidney. This is Giel. Maybe Megan can take the first part, and then I take the second part for the supply constraints.

[Megan Faust:]

First, so Sydney we're seeing a stronger than seasonal growth impacting Q1 with respect to communications. Communications is typically down, you know more than what we're expecting to see in Q1. In addition, we are expecting to see recovery, continued recovery in the auto end-market in Q1. So those are the primary markets that we're seeing outside of normal seasonal patterns.

[Giel Rutten:]

Yeah, on the supply constraints, Sidney, I can comment that in the recovery of the automotive market, we see supply constraints, not too much on the assembly and test side, but more on the wafer-supply side. I think it's well known that specifically in the older technology nodes on 200 millimeter silicon there is a supply constraints currently and that's hampering the recovery in Q1 for automotive. In the other markets, we see limited supply constraints. Of course, our factories are running at capacity, but we don't see fundamental supply constraints to do our revenue in Q1.

[Sidney Ho:]

Okay, that's helpful. Maybe my follow up questions on the communication side, given the strength you saw in Q4 and expect to see above seasonal in Q1, how are you thinking about the seasonality for second quarter, which historically was more flattish, kind of plus or minus? And if overall smartphone units are going to rebound from last year and 5G smartphones are doubling or more than doubling this year, can you help us understand what kind of revenue growth you could get – you should, you could expect this year and what are some of the puts and takes there?

[Giel Rutten:]

Sidney, thanks for the question. I mean, on the seasonality, to start with the first part of your question, we expect a similar seasonality as last year with some spring launches of new phones and then major launches towards the later part of the year. You already mentioned that the overall volume of the smartphone market is expected to recovery versus last year, this year with about 9% more volume, and also a further deployment of 5G from about 200 million units to about 500 million units in the market. So overall, that will drive growth on the semiconductor side. So, at the same seasonality, we see strength in the communication market, and that will drive continued growth.

[Sidney Ho:]

Okay, that's helpful. If I can squeeze in one more question on the CapEx side, can you talk about how you plan to spend the $700 million you talked about? Will that be first half loaded or more evenly distributed? What type of product are you investing in? Maybe some of the financial metrics we can monitor, perhaps revenue capacity you can handle once this CapEx is spent? And that's my last question. Thanks.

[Giel Rutten:]

Yeah. On the CapEx spend, you know, first on where in the year we will have capacities that was the first part of your question. You know, we share for the first quarter, I think we have the capacity in place, and also for a large part of the second , the majority of the capacity spent will come online, end of the second and into the third and fourth quarters. You know, we have an extension of lead time of equipment, and that's what we’re working now. I think it's not, it's on the wirebond side, I think that’s well-known, but it is also other manufacturing equipments with extend that lead times. So, we're managing that, but we expect end Q2, early Q3 to have a major capacity increase coming online. If we look to the, let's say, product areas that drive CapEx, this year is similar than last year, we continue to invest in our SiP manufacturing lines. We have a very strong pipeline there in that first markets from communication and to consumer, but also the automotive and compute market as from there. So that will continue. Then on the wafer level and flip chip side, there will be incremental investment to drive and sustain growth. Specifically on the larger body size flip chip BGA, an MCM we see increases, so that will be an important investment area for us, and for the compute segment. Then test continues to be an important area for us across individual market segments. So, sort of as similar as last year with the emphasis on SiP here, I would say.

[Sidney Ho:]

Okay. Thank you very much.

[Operator:]

Thank you. Next question today is coming from Randy Abrams from Credit Suisse. Your line is now live.

[Randy Abrams:]

Okay, yes, thank you and a good result and outlook. I wanted to ask the first question, following up on Sidney’s on the constraints, I'm curious through first half, if you mentioned on the wafer level, but I'm curious at your level, if there's semi-areas, your supply constraint whether on substrate or on certain areas of your business? And the second part is just on the automotive market. There's been a lot of feedback about the Taiwan foundries just struggling to kind of come back into that market, after auto slowed earlier in the year. How’s your take on, on auto being able to ramp up for and whether you have the supply to meet auto as they come back into the market?

[Giel Rutten:]

Okay, let me first start there. Hi, Randy. Good morning to you. Let me try to take the first part of your question first. Our own constraints within Amkor’s control, specifically the substrates impact, there is indeed, tightness in the substrate market. It's popular already, second half in 2020, and will continue the major part of this year. We're working with multiple parties in the supply chain to mitigate this and to bring up second sources to support our customers. I mean, recent events with disruption of supply chain of one of the major suppliers and in Taiwan didn't really help. You know, the impact in Q4 was very limited for us, I would say, and with respect to the impact in Q1, it may be, you know, a little bit bigger. But for now, I see that as a manageable element. Of course, we rely on flexibility working with customers by qualifying new suppliers to make up for the gaps that occur. Then on the automotive markets, on the supply side there, what we see is that, you know where the shortages in wafer supply in that market that may extend into the second quarter of this year. You know, a lot of actions are ongoing in the automotive supply chain. And you you've probably as also the end customers are getting involved. We expect some improvement, but it will be, you know, an impact for the major part of this year.

[Randy Abrams:]

If I could ask on the pricing for your services, I think some of your overseas peers have been opportunistically with wirebinding taking up price now. How is your view? Because I think it's through last year, for a short-time with auto slow to pick up it, it hadn't been as tight. But how is your view? One, just in terms of your pricing outlook for the different services here? And then, with your utilization, at least starting out from a lower base, is there opportunity to gain some market share with your competitors kind of tight and also dealing with a longer lead time on equipment?

[Giel Rutten:]

Yeah, let me start there saying that, you know, about 40% of our wirebond business is in the automotive market, and that business is very much with customers where we have longer-term contractual arrangements. You know, we see in some elements of the market that that cost is going up. To give you an example costs on gold cost on substrates. And of course, there we work with customers to work to push that cost into a price correction. But definitely not – we're not going in there because there's a shortage in capacity that we will increase prices. That's not the motors that we're operating in, certainly not in the automotive market. Now, we are expected to increase our capacity for wirebond in the first half of the year, close to 10%. If we count the number of , we were not fully utilized exiting the year. We were underutilized in Japan, and we're underutilized in some of the other factories, so we see that we can help support significant growth in the first and the second quarter once the automotive market continues to recover.

[Randy Abrams:]

Okay, great. If I could ask on the system and package where you're coming off of a huge revenue growth year, you talked some about the pipeline, I'm curious in terms of, if there's a few on the growth expectations and how your position the type of projects, you see ramping up this year on consumer and communications?

[Giel Rutten:]

Yeah, you know, if we first go back to 2020, and we added close to $800 million in SiP revenue for the year, roughly at the very high level, it was a growth of 50% of that 800 million was in communication, the other 50% in consumer. If we start with the communication market, then we see clearly strength in the market and itself, but also in the pipeline that we have in that market. For example, in the RF domain, where we will see stronger millimeter wave deployments, and therefore a higher need for and packaged solutions. We see that as a growth element. Also, WiFi modules is a growth area for us, as well as RF and other let’s say system modules going into the communication market. So we expect that to continue to grow on the consumer market. The similar storage, , we’re ramping up multiple projects with multiple customers there. You know, it's more of an emerging market. So, we see quarter-on-quarter variations, but structurally we have a strong pipeline and we believe that IoT wearable devices in the consumer domain will continue to be growth area for Amkor and certainly with the engagements that we're having, we’re confident that – also 2021 will continue to grow for us.

[Randy Abrams:]

Okay. And my final question, it might be more for Megan, just on the margins were you – and congratulations getting back to the 20% level. From here, I think you're adding CapEx, could you discuss the swing factors where it sounds like SiP is growing, but with a higher CapEx, if you could give a view just how margins factoring some of the costs and your outlook for depreciation, how you see margin as we go toward peak season, if there's opportunity, further leverage or 20% is ultimately at high utilization, the good level to try to achieve?

[Megan Faust:]

Yeah, thanks, Randy. So yes, for 20%, definitely, it's been, you know, a target for a while. And so hitting it this quarter was quite an achievement. As far as looking forward, you know, we see ourselves very well-positioned in the market. Giel outlined those growth areas. And we plan to prudently invest in both the capacity and capability. But with that, we do expect to improve on margins in 2021, both gross margin and operating margin. So, just touching on some of the factors that you outlined, product mix is one of them, utilization is the primary one, but also foreign currency and seasonality can all have impacts on gross margin. But looking back in 2020, you know, product mix changed by over 500 basis points, and yet, we still had gross margin expansion of 180 basis points. So, while in 2021, we're not expecting that significant change in product mix, you know, given the scale of SiP that we built, you know, there may be some moderate continued growth in the material content. As far as the depreciation, yes, with the increasing depreciation associated with our investments, I would anticipate some something in the range of mid-single-digit percentage growth in depreciation. And then foreign currency, we are anticipating some foreign currency headwinds, but with all that, I would still anticipate gross margin expansion for the full-year.

[Randy Abrams:]

Okay, great. Thanks a lot. Okay, good results.

[Operator:]

Thank you. Our next question today is coming from Krish Sankar from Cowen and Company. Your line is now live.

[Krish Sankar:]

Hi, thanks for taking my question. Giel I had a couple of questions. First one is, will the CapEx for calendar 2021 be higher than $700 million? If the industry will not supply constraints, or do you think $700 million is good enough to capture opportunities beyond the current component shortages?

[Giel Rutten:]

Well, that's a good question. We expect that the 700 million supports our growth plan for the year. Of course, we still need to manage the equipment supply chain very critically to get the capacity in time. But the 700 million currently we feel is an adequate number to support our growth for the year. Of course, if the market is changing on us, and we see a much stronger ramp in the second half of the year. You know, we may adapt our view here, but for now, as we see the market growing now, 700 million is adequate.

[Krish Sankar:]

Got it. Got it. And then how should we think about long-term capital intensity for the business, at least over the next couple of years?

[Giel Rutten:]

Yeah, I think we ended 11% in 2020. Going forward, we see a slight increase there. And Megan can give you more specifics on that.

[Megan Faust:]

Sure. So as Giel mentioned, ended 2020 at 11%. We would expect that to increase into the low teens over the next couple years, just as a reminder in 2019, we were at 12%, but that's still significantly lower than where we had been several years ago, which is in the high teens.

[Krish Sankar:]

Yeah, got it, got it. Good, useful.

[Giel Rutten:]

Yeah, important to note there is that, now currently we can expand in the current factory layout where we have sufficient factory floor space to expand this year and the early part of next year, or wherever when we need to start really expanding our factory floor space by adding modules, for example, to our Korea or China factory that will drive, let's say in that specific year would drive a slightly higher capital intensity.

[Krish Sankar:]

Got it. Super helpful. Another last question I had either for Megan or Giel in the past you quantified how much of your percentage of CapEx would go to like SiP wirebonders etcetera and I think Giel you mentioned earlier on, you're missing more in SiP, is there a way to quantify what percentage of 700 million is going to affect the advanced packaging wirebonders et cetera?

[Giel Rutten:]

Well, let me give you a flavor there. I mean, we don't go into too much detail for segments, but you know, at a high level, about, let's say, in the order of magnitude 30% of our CapEx is going into SiP than on the other main segment is our wafer level packaging and flip chip technology. It's also about 30%. And you know, that includes test expansion in the individual segments. Then this year, we spent, you know, about 20% on facilities, factory maintenance, floor space expansion etcetera. So that's, is . And then, you know, the remaining 10% goes across areas like memory, quality R&D.

[Krish Sankar:]

Thank you very much Giel. Thanks a lot Megan.

[Operator:]

Thank you. We reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further closing comments.

[Giel Rutten:]

Okay. Well, thank you very much. Before closing the call, I would like to recap a few key messages. 2020 was a remarkable year for Amkor. We generated over $5 billion in revenue and $1.40 per share, and initiate cash dividend program for our stockholders. We accomplished this while navigating through a challenging global pandemic. We are expecting the first quarter of 2021 to be another solid quarter with revenue of $1.32 billion at the mid-point of our guidance. 2021 is expected to be another growth year for Amkor. Semiconductor market forecasts predict growth of around 9% for the year. With Amkor’s position in key growth markets, we expect to outgrow the semi-market forecast in 2021. And last, but not least, I would like to thank the whole Amkor team for delivering another great year in 2020, with special thanks to the team's resilience and diligence in overcoming the many challenges we face as a result of the current COVID-19 pandemic. And thank you for joining the call today.

[Operator:]

Thank you. That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.