Amkor Technology Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 29, 2024

There are 8 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to the Amkor Technology Second Quarter 2024 Earnings Conference Call. My name is Diego and I will be your conference facilitator today. Please note, we are having some systems issues with our webcast and slide technology. So if you're connected via the webcast, you may not see the slide presentation, but you will hear the audio of this webcast via the webcast link. And a reminder, at this time, all participants are in a listen only mode.

Operator

After speakers' remarks, we will conduct a question and answer session. As a reminder, this conference is being recorded. I would now like to turn the call over to Jennifer Ju, Head of Investor Relations. Ms. Ju, please go ahead.

Speaker 1

Thank you, operator. Good afternoon, everyone, and thank you for joining us for Amkor's 2nd quarter 2024 earnings conference call. Joining me today are Kjell Rotin, 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 the Investor Relations page of our website, along with the presentation slides that accompany today's call. During this presentation, we will use non GAAP financial measures and you can find the reconciliation to the U.

Speaker 1

S. GAAP equivalent on our website. We will make forward looking statements about our expectations for Amkor's future performance based on the environment as we currently see it. Of course, actual results could differ. Please refer to our press release and SEC filings for information on risk factors, uncertainties and exceptions that could cause actual results to differ materially from these expectations.

Speaker 1

Please note that the financial results discussed today are preliminary and final data will be included in our Form 10 Q. And now, I'll turn the call over to Hill.

Speaker 2

Thank you, Jennifer. Good afternoon, everyone, and thank you for joining the call today. EMCOR delivered 2nd quarter performance in line with expectations with revenue of $1,460,000,000 and EPS of $0.27 Total revenue increased 7% sequentially, driven by demand for advanced packaging, notably for premium tier smartphones and 2.5d technology for AI solutions. During the quarter, we maintained focus on our strategic pillars to elevate our leadership position. We successfully brought online additional capacity for 2.5p technology in Korea and qualified advanced SAP and memory technology in Vietnam to support production ramps in the Q3.

Speaker 2

Additionally, we are excited that we have reached a significant milestone in establishing a U. S. Manufacturing presence for advanced packaging. We aligned on a non binding preliminary memorandum of terms with the U. S.

Speaker 2

Department of Commerce for up to $400,000,000 in grants under the CHIPS and Science Act. These funds will support building a new facility in Arizona, enabling advanced packaging and test for high performance computing, AI, communications and automotive markets. We look forward to being part of a strong ecosystem of front end fabs, IDMs and suppliers in establishing a resilient U. S. Semiconductor supply chain.

Speaker 2

Now let me review the current dynamics in each of our end markets. Revenue in the communications end market increased 10% sequentially. Within the iOS ecosystem, we experienced a larger than seasonal increase driven by builds for the full launch of premium tier smartphones. Revenue within the Android supply chain declined slightly sequentially, but still showed a strong 20% year on year growth. Our advanced packaging technology supports a wide range of applications and functionality throughout the phone.

Speaker 2

With our advanced SIP technologies for heterogeneous integration, together with our proprietary flip chip package on package technology, We support the full range of applications from RF and camera to the latest AI enabled apps processors that require high speed and high density interconnect with fine pitch bonding. Revenue from our automotive and industrial end market was down 2% sequentially. Recovery in this market is taking longer than anticipated due to weak demand and ongoing inventory corrections. Despite these near term dynamics, we believe the long term drivers for growth remain intact. Semiconductor content per car expected to continue to increase driven by the proliferation of ADAS, electrification, infotainment and telematics all requiring advanced packaging technology.

Speaker 2

Amcor is the leading automotive OSAT and has multiple decades of experience meeting the stringent requirements of the automotive industry. With a broad portfolio of advanced and mainstream technologies and established large scale manufacturing base in critical regions like Europe and Japan and trusted relationships with key customers in the automotive supply chain, Amcor is well positioned to support the secular growth in this market when it exits the current cycle. Revenue from the computing end market increased 20% sequentially, driven by strength in AI devices and several new product introductions for ARM based PCs. We executed on our planned expansion for 2.5 gigabytes capacity for AI devices, more than tripling our capacity versus Q2 of 2023. In the 3rd quarter, we expect constraints and high bandwidth memory supply to limit revenue growth.

Speaker 2

EMCOR is leading the OSAT supply chain with the deployment of 2.5D technology. And with the robust demand and additional capacities, we now expect the full year 2.5 year revenue to quadruple versus 2023 levels. We continue to partner with multiple customers of next generation technology, utilizing organic interposers and expect those solutions to be brought to market in the first half of twenty twenty five. Revenue from the consumer end market decreased 6% sequentially, driven by the wind down of legacy IoT devices ahead of the expected ramp up of next generation products. Traditional consumer product demand has been muted, but the high volume production ramp of a new wearable product utilizing advanced SiP technology is expected to start in the 3rd quarter.

Speaker 2

Consumer IoT devices require miniaturization with increasing levels of integration. Our advanced SAP technology for heterogeneous integration positions us well to meet these requirements and our new Vietnam facility enables us to continue to drive manufacturing scale and innovation. During the Q2, our manufacturing organization had to manage multiple challenges. On one hand, several factories still showed low utilization where focus was on cost control, while maintaining high quality standards. On the other hand, we executed the capacity ramp for 2 and R D technology in Korea, qualified advanced SAP and memory technology in Vietnam and prepared for the steep seasonal ramp in the Q3.

Speaker 2

Additionally, the team further progressed with our advanced packaging and test facility in Arizona by advancing factory design and construction planning and working with customers to develop the technology road map and capacity loading scenarios. During the second half of the year, cost and quality together with managing a steep seasonal ramp will remain top priorities. Now let me turn to our 3rd quarter outlook. Considering current market conditions, we expect 3rd quarter revenue of $1,835,000,000 at the midpoint of guidance. This represents sequential growth of 26%, driven by advanced packaging in support of the seasonal launch of premium tier smartphones, the ramp of a new consumer wearable device and continued strong demand in high performance computing and ARM based PCs.

Speaker 2

The slower than expected recovery in the automotive and industrial markets together with the continued weak demand in traditional data centers has dampened anticipated growth in the Q3. Looking forward, we remain confident that the secular growth drivers for the industry remain in place. With our strong technology leadership in advanced packaging, a uniquely diversified global footprint and partnerships with lead customers, we are well positioned to accelerate while exiting this cycle. With that, I will now turn the call over to Megan to provide more detailed financial information.

Speaker 1

Thank you, Hill, and good afternoon, everyone. Amkor delivered 2nd quarter revenue of $1,460,000,000 This was in line with guidance and represents a 7% sequential increase, driven by strength in advanced SiP and 2.5D technology. 2nd quarter gross profit was $212,000,000 and gross margin was 14.5%. While gross margin declined modestly from Q1 due to higher material content, gross profit dollars expanded 5%. Operating expenses for the quarter came in lower than expected at $131,000,000 We expect Q2 to be the peak for operating expenses in 2024 due to preparation costs for our factory in Vietnam.

Speaker 1

We are on track to begin production in Vietnam in Q3 and we expect a portion of the cost to move to cost of goods sold when production begins. Operating income was $82,000,000 and operating income margin was 5.6%. Net income for the 2nd quarter was $67,000,000 resulting in EPS of $0.27 2nd quarter EBITDA was $247,000,000 and EBITDA margin was 16.9%. Our balance sheet remains strong. We ended the quarter with $1,500,000,000 of cash and short term investments and total liquidity of $2,200,000,000 Our total debt as of the end of the quarter is $1,100,000,000 and our debt to EBITDA ratio is 1 times.

Speaker 1

Moving on to our 3rd quarter outlook. We expect Q3 revenue of around $1,835,000,000 representing a significant sequential increase of 26%. Our Q3 increase is primarily driven by advanced SiP products, supporting the fall launch of premium tier smartphones as well as a next generation consumer wearable product. While we have expanded our capacity for 2.5D technology supporting AI devices, high bandwidth memory constraints may limit sequential revenue growth. Given the soft demand and ongoing inventory corrections in the automotive and industrial market, we anticipate this end market may stay fairly flat compared to Q2.

Speaker 1

We expect gross margin to be between 14% 16%. We are anticipating a higher than seasonal material content due to a product mix concentrated in advanced SiP. While this does constrain gross margin, absolute profitability will expand at a much higher growth rate than revenue. We expect Q3 operating We expect Q3 operating expenses of around $125,000,000 We expect our full year effective tax rate to be around 18%. 3rd quarter net income is expected to be between $105,000,000 $140,000,000 resulting in EPS of $0.42 to 0 $0.56 This represents more than an 80% increase in profitability compared to Q2.

Speaker 1

Our CapEx forecast for the year remains at $750,000,000 Our investments are primarily focused on increasing advanced packaging capacity for 2.5D and advanced SIP, as well as expanding select manufacturing facilities. Last week, Amcor signed a non binding preliminary memorandum of terms with the U. S. Department of Commerce to receive up to $400,000,000 in direct funding as a part of the CHIPS and Science Act. We are proud to be the leading advanced packaging and test OSAT headquartered in the U.

Speaker 1

S. And this milestone underscores our commitment to ensuring U. S. Semiconductor manufacturing security and innovation. In closing, Amkor continues to execute on our 3 strategic pillars.

Speaker 1

1st, technology leadership by providing expanded capacity to support growing demand for 2.5d enabling AI 2nd, expanding our broad geographic footprint by hitting a significant milestone with our U. S. Manufacturing plans and signing a preliminary memorandum of terms for CHIP's funding. And third, our focus on industry megatrends. We believe that the secular growth drivers for the industry remain in place and that our partnerships with leading semiconductor companies will drive growth as we exit the cycle.

Speaker 1

With that, we will now open the call up for your questions. Operator?

Operator

Thank you. And we will now conduct our question and answer session. And our first question comes from Tom Diffely with D. A. Davidson.

Operator

Please state your question.

Speaker 3

Yes. Good afternoon. Thank you for letting me ask a few questions. Megan, the first question on the model itself. When you look at the margin guidance versus previous expectations for incremental gross margins as you ramped up revenue, I'm curious how big of an impact is it moving from the operating expense line to the gross margin line of the new facility?

Speaker 3

What is the relative kind of quarter over quarter impact of that?

Speaker 1

Sure. Hi, Tom. With respect to the Vietnam production facility going online, that movement from operating expenses, the order of magnitude isn't going to be that much more than what you're seeing in our guide between Q2 and Q3 going down. So that's less than $10,000,000 That is not the biggest impact to the Q3 margin guidance.

Speaker 3

Okay. So when you look at the Q3 margin guidance and what is the biggest impact that's kind of counteracting with just the revenue growth incremental margin?

Speaker 1

Yes. So really what's happening with respect to our Q3 profitability is it's a function of utilization as it relates to certain products and product mix. So while we are anticipating an increase in our utilization in Q3 probably in the low 70s. The way that that's spreading amongst our factories is very dynamic. We have high utilization in factories such as Korea that are supporting advanced SIP, while others are much lower than expected and is what we had estimated previously.

Speaker 1

And that's really due to some ongoing lower demand in our traditional consumer, traditional data center and as we had mentioned in our prepared remarks in the automotive and industrial. So with respect to those dynamics, we are going to see a peak seasonal material content in Q3. So that's the biggest driver that will constrain flow through. That is just a function of demand and product mix. It's not a structural cost.

Speaker 1

So that's where your first question about the Vietnam cost, it's not structural. In fact, the manufacturing cost estimated for Q3, which we characterize as labor depreciation and OCOX that excludes materials, those are only going to increase in the mid single digits as compared to the 26% increase in revenue.

Speaker 3

Great. Okay. And I appreciate all the extra color on the margins. And then Hill, when you look at the PC and server market, you talked about how some of the new PCs were getting more active, but yet the servers are still pretty weak. Is that different than normal seasonality?

Speaker 3

Is there seasonality there? Or is it really just a cyclical impact that you see in the PC servers?

Speaker 2

Yes, Tom. Let me try to give a little bit of color there. Well, first of all, we see some initial recovery in the general PC market where we see specific growth for M core is in the ARM based PCs and they were ramping up starting Q1 and that goes into Q4 of this year with significant ramps and that goes across multiple customers here. So it's the general PC market gradually recovering and very specifically ARM based PCs that's where we have a good position. It's ramping up in the course of this year.

Speaker 3

Okay. And then just on the server side, what's your expectation for that recovery? Sorry, can you repeat? Just for the server chips and the server market itself?

Speaker 2

Well, I mean, the server market is a broad market. I mean, if we take the category of AI based servers, then we expect that to continue to grow into the remaining part of this year and also into 2025. For the conventional servers, we still see weakness. We believe that in data centers, the investments that are being made by the hyperscalers are really tuned towards the AI servers. And that means that the more, let's say, conventional servers are still fairly weak.

Speaker 2

So far, I cannot report an improvement there.

Operator

Thank you. And our next question comes from Charles Shai with Needham and Company. Please state your

Speaker 2

Hi, Hugh, Megan. I want to ask a couple of questions. First, glad to hear that you guys are getting instructions on the organic interposer. You will come to the market in first half next year, 2025. I wonder, can you provide us a little bit more color, because I believe you have 3 customers on the 2.5D.

Speaker 2

At least that was the case 90 days ago. I wonder if you can give an update. And 2, what's the mix in terms of the engagement with your customer? How many are sticking with the silicon interposer? And how many are actually looking at organic interposer ramp with you in first half next year?

Speaker 2

And if I may, just the third part of this question would be the tools you put in place for silicon interposer base at 2.5D versus organic interposer base at 2.5d? Are they fungible? Thank you. Hi, it's Charles. Good to hear you.

Speaker 2

Let me start with the last part of your question with respect to the tools that we are investing in. A bit more specifics there. I think we had a first tranche of investments finalized in the second quarter. And we went for a quantifying same order of magnitude of investment that will become available in the early part of 2020 5 late this year early part of 2025. Most of these tools are fungible of course across wafer based technologies.

Speaker 2

So that's both 2.5 D with interposer as well as what you call organic interposer or high density fan out technology. Now with respect to the transition from one technology to another, for this organic interposer, we are engaged with a broad range of customers, let's say between 510 customers where we're currently running pilot production initial runs and we expect to ramp into mass production early 2025. That engagement is broader from a customer engagement perspective and also from a product portfolio perspective. If we take the traditional 2.5 Ds with Interposer then we indeed have in the order of magnitude of 3 to 5 customers where we run let's say, a variable, let's say, volume production currently. And we expect that to continue into 2025 also.

Speaker 2

So although initially there was expected a faster changeover from one technology to another, we now see that 2.5Ds will continue well into 2025.

Operator

Thank you.

Speaker 2

Yes. That's great. May I ask a second question maybe to Megan. And Megan, I think you previously expect 30% half over half revenue growth. Understandably, there's a little bit of a softness still in auto, in traditional consumer, 2.5 dB ramp, but it looks like there's some upstream constraints on the HBM side.

Speaker 2

Does that change that the 30% half over half growth outlook you originally thought is going to be the case, let's say, 90 days ago?

Speaker 1

Hi, Charles. Yeah. So while there may have been some mix shift changes and we did perform slightly better in the Q2 than expected, our full year top line expectations have not fundamentally changed. We are expecting a muted first half followed by a stronger than seasonal significant growth in the second half. And what's driving that is also consistent with respect to our strong seasonal ILS launch cycle, our new consumer wearable program.

Speaker 1

We have installed and have incremental capacity for our 2.5 gs. However, that will be limited somewhat with some of the high bandwidth memory constraints. And really the only change then is with respect to the ongoing automotive and industrial continuing to be weak. However, for automotive and industrial, we do expect Q2 to be the trough and we are expecting some mild recovery and increase in Q3. So overall, with respect to the shape of the year with Q1 and Q2 outperforming somewhat that might have adjusted the shape, but the full year expectations are the same.

Operator

Thank you. And our next question comes from Randy Abrams with UBS. Please state your question.

Speaker 2

Okay. Yaniv, thank you.

Speaker 4

Yes, I wanted to follow-up just on that, the prior comments you made on outlook. Just a couple of clarifications, one on the HBM constraints. Is that in view, is it a productionary yield issue that's limiting the ramp up? And is there a visibility or how you're feeling is how long that constraint holds? And then I wanted to ask some help.

Speaker 4

I think your full year relatively unchanged despite a little bit of impacts on Q3. So the if you could give an initial view just the tailwind of the year 4th quarter, are you seeing above seasonal? And who do you see as kind of drivers continuing into Q4? Okay.

Speaker 2

Let me try to give a little bit color on the high bandwidth memory constraints. Currently, we're working with all 3 suppliers for high bandwidth memory. So we're fully qualified for all 3. The constraint is not related to yield. It's related to supply from high bandwidth memories, mostly from the biggest supplier there.

Speaker 2

It started by the end of the second quarter and it goes into, let's say, this month. And we expect that the next 2 months or the second of the third quarter it will normalize. But overall it has some impact on further revenue growth in the 2.5% business. With respect to your second part of the question, what are the drivers in second half growth? They are in line what we expected in the let's say at the end of the Q1.

Speaker 2

The main drivers are as Megan already highlighted are the ramp of a seasonal launch of the in the iOS system together with Android's recovering. So although that in the Q2 Android was sequentially slightly down, we still see a 20% year on year in the second quarter and we expect that strength to continue in the remaining part of the year. So definitely in the communication side, we expect strength in the second half. Also the ramp of the IoT hearable device that will be a meaningful contribution in the second half. We executed that qualification and we expect that ramp to go as planned as is the 2.5D capacity expansion that we put in place.

Speaker 2

And there the outlook, the forecast is in line with expectation and that will grow. Megan already mentioned the re balancing in the automotive and industrial markets that takes slightly longer than expected. Although we believe that the Q2 of 2024 is the trough and that from here on we see a much more balanced supply chain. The inventory situation on most of the sub segments in automotive is much more balanced than it was when we started this year. And the feedback from our customers is that going into Q3, there will be a slight recovery.

Speaker 2

And then going into Q4 and 2025, the automotive markets will go back to original seasonality.

Speaker 1

And Randy just to add to your question about Q4. Our historical seasonality for Q4 is usually a sequential flattish to up or down plus or minus 1%.

Speaker 4

Okay. And maybe to clarify, I guess, 2 follow ups, quick follow ups. The flat plus or minus, it sounds like your implied is it's rolling all those pieces up should at this stage seems like it's a little better. And I guess just another clarification, the iOS and it seems like your competitor also cited a little bit earlier build. Is that what you're seeing?

Speaker 4

Because I know the second quarter, I think you had a bit. Is it

Speaker 2

do you feel it was

Speaker 4

a little earlier, so it pulls back? And then or do you think it's actually strong it feels like it's actually stronger, so that kind of ties to the 4th quarter being better than that flat plus or minus?

Speaker 2

Yes. We believe it's for the iOS ramp, we saw 2nd quarter revenue better than expected. In my view there are two elements to this. 1 is indeed an early build for the second half ramp. And also we saw a very large correction in the Q1.

Speaker 2

So I believe that that correction was probably too significant. And therefore it needed to be corrected a little bit in the Q2. So two main effects. The net effect is more strength in the second quarter, but we also expect that to continue in the 3rd and the 4th quarter.

Operator

Thank you. And our next question comes from Craig Ellis with B. Riley Securities. Please state your question.

Speaker 2

Yes. Thanks for taking the question. I wanted to follow-up on some comments that seem to have been a theme through a number of prior questions and it relates to the changes in views versus 3 months ago in auto industrial, the traditional server part of the PC market and some of the upstream constraints and high stream constraints and high bandwidth memory. I'm wondering if it's possible to 1 just rent those in terms of how they're impacting the business in the Q3 versus what you would have expected 3 months ago? And then in aggregate, can you quantify what that impact is versus what you were thinking back in the April timeframe?

Speaker 2

Megan, can you comment to that?

Speaker 1

Yes. So Craig, I'll give some color there. 1, we didn't guide Q3 a quarter ago. So just want to establish that there that there's really not a baseline for us to compare to. But as far as it does really we did indicate margin profile, which would have had a product mix associated with that.

Speaker 1

The auto and industrial, we had expected that to start to recover faster than it is. So that's probably the largest of the 3 that you mentioned, followed by the traditional data center. That one also has continued to decline. It's more difficult to see that within our Computing segment, because that's being offset by the strength in ARM based PCs as well as the really significant 2.5D. And last, that's not that is impacting Q3 is, as Hjal mentioned, a bit of a slower start on the incremental capacity that we've installed given some of that high bandwidth memory constraints that we are seeing start to come back through.

Speaker 1

So from that perspective, that's the order of magnitude on those three items.

Speaker 2

That's really helpful. Thanks for clarifying, Megan. The second thing I wanted to do is just understand the ANI market dynamic a little bit better. So it's encouraging to see that the business should be up a little bit in 3Q. The question may be more for Hill regarding what you're hearing from some of your bigger customers in that area.

Speaker 2

And admittedly there might be a lot of smaller ones. But what are they indicating about the timing of when that business really starts to come back? Would it gain materially in the Q4? Are they setting an expectation that it really isn't coming back to something resembling prior health until 2025? Yes.

Speaker 2

That's a good question, Greg. From the customer feedback, I can give you a bit color here. 1st of all, on calling the Q2 this year the 12th quarter for automotive. That seems to be across our customer base a consistent message. There are a few exceptions there, but the portfolio that they serve for the automotive market is slightly different.

Speaker 2

So if you look to our own exposure to the automotive markets, then our customers really consistently give us the message the 2nd quarter is the trough. Going from here and if you take the impact on MCO's revenue on a year on year basis, it's roughly 20% down in Automotive and Industrial. So from here on, we expect a gradual improvement. Now if we take the let's say the improvement in the second in the third quarter, it's still moderate. Let's say, lowtomidsingledigitup versus the second quarter.

Speaker 2

But we expect that improvement to continue, but it will continue well into 2025 before we are back to our normal run rate. That's one thing. Second thing is, of course, for us it's very important to check our market position and validate that. And we're convinced that we're still gaining market share in the automotive markets. And you may have seen the announcements in Europe with one of the bigger power companies in automotive for silicon carbide where we're investing or co investing in our factory in Portugal.

Speaker 2

And that project continues as planned. And actually to some extent we're accelerating there because they expect that the demand going towards the second half twenty twenty five and twenty twenty six is actually increasing. So overall, yes, step by step improvements into Q3, Q4 and further improvement into 2025 To exactly predict where when we are back at the 4 run rate is difficult to say. Although some feedback from customers gives also the indication that the Tier 1s and the OEMs are actually sort of overreacting to the, let's say, inventory situation. So currently, some of these tier rounds seem to go back to a 2 week inventory level.

Speaker 2

So you may see a swing there of getting out of this correction in 2025. But for now, I think that's our assumption.

Operator

Thank you. And our next question comes from Ben Reitzes with Melius Research. Please state your question.

Speaker 5

Yeah. Hi. Thanks for the question. I wanted to talk about gross margin and utilization rates. So if you could just discuss the puts and takes on gross margin as we head into the second half.

Speaker 5

Looks like about 0.5. Improvement on the midpoint in the 3Q. And I was wondering if you were going to get more leverage in the 4Q, how material that could be given the pace of sales? And then I know you had a depreciation benefit in the prior quarter. I just was wondering if there's any other puts and takes we need to be thinking about with regard to what we just saw in your outlook?

Speaker 5

Thanks.

Speaker 1

Hi, Ben. Okay. So with respect to our Q3 guide with 15% at the midpoint for gross margin, Utilization is what is constraining that which has been I would say had an impact on the product mix based on the nature of the products that are underutilized or the factories that are underutilized. So with respect to our automotive and industrial being weaker than expected, that is having being weaker than expected, that is having an impact on what we would say are highly profitable products as well as the 2.5D where we're not seeing the magnitude of sequential growth that we would have anticipated. That being said, we are seeing really strong growth as it relates to communications and consumers that is primarily supported by our advanced SIP technology and that has a very high material content.

Speaker 1

So while that is constraining the gross margin to around 15%, we are seeing very significant bottom line earnings expansion. So you'll note that our bottom line EPS is growing more than 80%. So there continues to be significant leverage in our financial model. You've also asked about potential Q4 puts and takes. While we're not guiding Q4 at this time, we do anticipate some of those product mix items to have some growth as Hill has just mentioned with respect to automotive as well as our 2.5D technology specifically.

Speaker 1

And then you also asked about the depreciation change in useful life. That was a $0.05 benefit and had an impact of around 100 basis points in Q1. That's a fairly similar impact for Q2. That will also be similar, albeit it will somewhat decline as we get into the second half and some of those assets roll off. Does that address your question, Ben?

Speaker 5

Yes. So the depreciation was still a $0.05 benefit in the quarter you just had and it will diminish as you go throughout the year. Correct.

Speaker 1

Comparable to yes, comparable to Q1.

Speaker 5

Okay. And then just with regard to the interposer comment that Hill made that for the first half of twenty twenty five, is there anything that we need to be aware of with regard to seasonality or impact on margin as you make that transition and help those customers move to that? Is there something that with regard to the model that when it comes out that we should be aware of?

Speaker 2

Well, a few comments there Ben. With respect to the organic interposer versus the 2.5 d with interposer, the value add that we deliver in organic inter poser is more significant. It's larger than Fortune RV because there we procure the inter poser. That interposer is not present there, but we deliver basically an organic interposer ourselves. So we expect some uplift in margin in that transition.

Speaker 2

How that transition exactly pans out depends on the product changeover. And what we're currently seeing is that products in these older technologies seem to last longer and that some of the newer products may be launched a little bit later than expected. But that's the impact that we foresee.

Speaker 5

Okay. And so it's safe to say just going back that communications and are better than expected and that's continuing throughout the year. Is that the same case with the AI PC or is the AI because there's been some reports that the AI PC has been a little muted, but you're saying it's going to increase sequentially throughout the year. So I believe that hits in the Computing segment. So is are you seeing strength in the AIPC area like you are in smartphones?

Speaker 5

Or are you seeing it kind of below expectations? That's my final question. Thanks.

Speaker 2

Overall, the Excludes revenue in AIPC is still small. However, I mean the transition from X86 to ARM architecture is definitely an upside for Amcor. And we believe that we have a good market position there. We started with our lead customers 3 generations ago and they are currently ramping up. They're also expanding their own silicon in that same PC.

Speaker 2

So that gives us more traction. But also a second customer that launched their products that seem to be very attractive for the PC makers and they're now launching new products in the market with that architecture. So we believe it will have lacks and it will further grow. Some specifics over the growth during the year or in the year, we see that over the quarters there is a step up quarter on quarter. And from what we see now that will continue into 2025.

Operator

Thank you. And our next question comes from Toshiya Hari with Goldman Sachs. Please state your question.

Speaker 6

Hi, good afternoon. Thank you for taking the question. My first one is on Q3 your Q3 revenue guide. Megan, you mentioned auto industrial should be up modestly, if I caught that right. Curious how you're thinking about comms, consumer and computing.

Speaker 6

Coms from a seasonality perspective, I'm guessing strong double digits. But computing in particular with some of the HBM constraints that you spoke to, can that business grow double digits? Or is it more like single digits? Any sort of quantitative context there would be super helpful.

Speaker 1

Hi, Toshiya. Yes, I can give you some color there. So as mentioned, automotive, we said would have mild growth sequentially. As it relates to computing, we aren't seeing that double digit growth that was possible given some of the dynamics with the high bandwidth memory constraints. So that's also going to be in the low to mid single digits for computing.

Speaker 1

Communications is going to be very strong. Historically, we've seen very, very strong sequential communications ramp. That being said, we did have a stronger than seasonal Q2, so that Q3 seasonality will probably be a little bit softer, but overall it will be very significant. Consumer however with our new launch of a IoT wearable device that will have the largest percentage increase sequentially for the quarter and that can be up to 75% or more sequential growth given the scale of that launch.

Speaker 6

That's very helpful. Thank you. And then as my follow-up, a multipart question on the U. S. Facility.

Speaker 6

I know it's early, but just wanted to get a feel as to how you're thinking about Arizona. So timing of CapEx or capital spending outlay over the next couple of years, several years. In terms of CHIPS Act funding, how does that come through? And again, long term, what percentage of capacity do you expect to have in the U. S?

Speaker 6

And the cost competitiveness of your facility in the U. S. Vis a vis your current locations? Any color around that would be very, very helpful. Thank you.

Speaker 2

Okay. Well, let me start and then Meaghan can help on the financial part, Toshi. The facility that we're planning to build in the U. S. Is a sizable facility.

Speaker 2

I think we started off with a 40,000 square meter clean room. And currently, we're working with the design companies to look at closer to a 60,000 square meter clean room. So it's sizable. How much will it contribute to EMCOR's total? I think it will be less than 10%, significantly less than 10% of our total.

Speaker 2

But that's the order of magnitude that we will grow to in the future. Now the rate of growth and which customers and which technologies that we will ramp up, I think that's currently under evaluation. We are working with customers on the road map and on the ramp scenarios for and there is definitely a high interest in the high performance computing parts, but also in the communication part. So early to tell, but it's a significant sizable facility in the size of what we're currently having in our K5 facility in Korea. And the same technologies will run-in the U.

Speaker 2

S. As what we're currently running in Korea.

Speaker 1

I can add a few comments on the investment. As far as it relates to 2024, this won't have any material impact on our 2024 investment. We'll start to see some of that CapEx come into play in 2025 as we're planning to break ground in the second half of 2025. But the most significant investments, which will include our machinery and equipment, those will happen in 2026 and 2027. So as it relates to CHIP's funding, it's a bit too early to tell.

Speaker 1

Typically those will lag the investments themselves. So as we get closer, we'll update you. With respect to 2025, we do anticipate being able to continue in our low teens capital intensity.

Speaker 6

Very helpful. Thank you so much.

Operator

Thank you. And our next question comes from Chris Sankar with TD Cowen. Please state your question.

Speaker 7

Yes. Hi. Thank you for taking my question. I have a first question. You mentioned strength in AI and ARM based compute are strong.

Speaker 7

I understand it's still very small. Is there a way to quantify how much, how much percentage is the compute revenues or total revenue is this today? And where could it be exiting in 2024? And how do you think about the shape of that growth longer term?

Speaker 2

Hi, Krish. The line is not very clear. But the part of your question, the second part was as I understood it well, the revenue contribution of AI currently. What I can say there is that we shared the capacity ramp that we tripled our capacity by the Q2 of this year and we executed upon that. What we can share on top of that is that we share for 2024, we will quadruple our revenue versus 2023.

Speaker 2

So it's a significant ramp for the year. The exact percentage of total revenue for EMCOR is still in the single digits, but it's growing rapidly.

Speaker 7

Got it. Bahir, I was just asking more particularly on I could possibly get your confused revenues at 400 revenues. So it's simply small. Is it fair to assume that?

Speaker 2

Sorry, I think we missed the line. It's breaking up. Let me look here at Jennifer. Can you repeat, Krish?

Speaker 7

Yes. I was trying to figure out all the percentage of your compute revenues, how much is it to date?

Speaker 2

Our compute revenue to date as a percentage of total revenue let me find that for you. It's in the order of 15% to 17% of total revenue.

Speaker 7

And on PCs like the non X86 PCs, how much is that?

Speaker 2

We don't go into the details. I just mentioned before that that category of PCs is just ramping up now. We have 2 main customers being introduced in the market. It's still below $100,000,000 of revenue in the quarter. So it's still relatively small.

Speaker 7

Got it. Got it. And then a follow-up for Megan. Thanks for the follow on the $400,000,000 in P and T from Siksat. And if I understand this right, the $400,000,000 in P and T you get from Siksat, it implies a total of $2,700,000,000 in CapEx, probably $2,300,000,000 of your own profit.

Speaker 7

Is that fair assumption? And you mentioned that the majority income accounted for a 627. So should be as good as EUR 2,300,000,000 of expense from calendar 25 to calendar 1st November 28?

Speaker 1

So Krish, again, we're trying to make sure we heard your question appropriately. I think you're referring to the timing and magnitude of our U. S. Investment and how that counterplays with the CHIP funding. For the full project, we're expecting to spend about 2,000,000,000 dollars We are going to do that in phases, which is what this particular CHIP's program is aligned to.

Speaker 1

So as it relates to Phase 1, we expect that to within the next 3 years be up and running. So we will have an investment in the order of magnitude of $1,500,000,000 in order to get that phase up and running to its fullest. Timing of that investment will be concentrated in 2027 2026 and 2027 and the chips reimbursement traditionally will lag that investment as it relates to that. We can't share further details on that at this time.

Operator

Thank you. And our next question comes from Randy Abrams with UBS. Please state your question.

Speaker 4

Okay. Yes. Thank you. Just a couple of follow-up questions. First, for the gross margin, it seems like the one area lagging aside from SiP is the mature nodes.

Speaker 4

So curious, as you go into next year and you see pickup, how the leverage is? And then also how you see the thought group of leverage for investment in the advanced packaging given you have to spend to grow that business?

Speaker 2

Okay. Let me start to give some initial comments here on mature notes. Mature notes for EMCOR, if we take our mature nodes portfolio specifically related to wirebond and leadframe that's very much tuned towards the automotive and industrial market. So we're not exposed to the commodity segments of the mature node markets where there's significant competition from China evolving supply chain. So we believe that in the automotive market, although they declined significantly year on year, we were able to hold our market position for mature nodes in the automotive market and we work with critical customers there mostly in Europe, U.

Speaker 2

S. But yes on our manufacturing, but also in Japan. And the dynamics in each of these markets is similar, but not completely the same. But we expect that going towards the end of the year and early next year we'll see a gradual recovery there. That relates to the mature notes.

Speaker 2

With respect to the investment in Advanced Packaging, we already mentioned the profitability for that investment portfolio and the product and service portfolio is higher than corporate average. And we believe that's a good investment for the company. We also believe that the 2.5 dish and the high density fan out technology is a technology, let's say, is developing as a standard technology in the high performance computing and AI domain. We have a leadership position there. And given the interest we get from a broad customer base, we believe that that will be a sustainable position going forward.

Speaker 4

And the final question you said on the OpEx with the ramp up of all these more complex technologies. Do you see changed R and D intensity or OpEx level that you need to spend like absolute dollars have to pick up or OpEx ratio to advance some

Speaker 2

of these new technologies?

Speaker 1

Hi, Randy. Yeah, we continue to focus and invest in R and D in order to ensure that we're supporting our customers in these new technologies. We don't see what I would characterize as step function in R and D. That can be lumpy from time to time where we have programs that are accelerating before they move into production and move into COGS. I would say from a total OpEx perspective, I wouldn't see that increasing above 8%.

Operator

Thank you. And at this time, I'm showing no further questions. I would like to turn the call back over to Hill for closing remarks.

Speaker 2

Okay. Thank you. Let me recap the key messages. EMCO delivered 2nd quarter results in line with our expectations with revenue of $1,460,000,000 and EPS of $0.27 We successfully brought online additional capacity for 2 and R and D technology and qualified our Vietnam facility to support production ramps in the Q3. We are expecting 3rd quarter revenue to grow significantly with revenue of $1,835,000,000 at the midpoint of guidance, reflecting a 26% sequential increase.

Speaker 2

We reached a significant milestone with the U. S. Department of Commerce and aligned on a preliminary memorandum of terms for up to $400,000,000 in direct funding under the CHIPS and Science Act through support of our planned advanced packaging and pest facility in Arizona. Looking forward, we remain confident that the secular growth drivers for the industry remain in place. And with our strong technology leadership in advanced packaging, a uniquely diversified global footprint and partnerships with lead customers, we are well positioned to accelerate while exiting this cycle.

Speaker 2

Thank you for joining the call today.

Operator

Thank you. Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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Earnings Conference Call
Amkor Technology Q2 2024
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