Semiconductor packaging and testing company Amkor Technology (NASDAQ:AMKR) missed analysts' expectations in Q2 FY2023, with revenue down 3.12% year on year to $1.46 billion. Amkor made a GAAP profit of $64.4 million, down from its profit of $125.5 million in the same quarter last year.
Amkor (AMKR) Q2 FY2023 Highlights:
- Revenue: $1.46 billion vs analyst estimates of $1.48 billion (1.32% miss)
- EPS: $0.26 vs analyst estimates of $0.21 (23.8% beat)
- Revenue guidance for Q3 2023 is $1.78 billion at the midpoint, in line with analyst estimates of $1.78 billion
- Free cash flow of $62.7 million, down 19.1% from the previous quarter
- Inventory Days Outstanding: 38, down from 41 in the previous quarter
- Gross Margin (GAAP): 12.8%, down from 16.6% in the same quarter last year
Operating through a largely Asian facility footprint, Amkor Technologies (NASDAQ:AMKR) provides outsourced packaging and testing for semiconductors.
Semiconductor manufacturing begins with a silicon wafer upon which circuit patterns are transferred. The fabricated material (the die) is then separated (dicing), typically using automation and precision tools such as lasers. Packaging comes next and serves three key purposes: connects the chip to an external environment (e.g. a circuit board), protects the chips against physical damage, and dissipates excess heat.
Amkor’s customers are semiconductor foundries (manufacturers), fabless semiconductor companies (designers who outsource manufacturing), and original equipment manufacturers (OEMs). The company’s packaging aims to meet customers’ requirements for size, electrical and mechanical performance, and interconnect technology (wiring systems to connect chips). For example, one of Amkor’s key packaging offerings is the ‘Flip-Chip Chip Scale Package’, where the package is no larger than the chip. This supports increasingly small form factors found in smartphones, tablets and other mobile devices. In addition to packaging, Amkor also offers testing services to ensure that semiconductors are defect-free and meet specifications before being deployed or sold.
Other companies offering outsourced semiconductor packaging and testing services include ASE Technology (TWSE:3711), Powertech Technology (TWSE:6239), and Siliconware Technology.Sales Growth
Amkor's revenue growth over the last three years has been mediocre, averaging 14.8% annually. This quarter, its revenue declined from $1.5 billion in the same quarter last year to $1.46 billion. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions (which can sometimes offer opportune times to buy).
Amkor had a difficult quarter as revenue dropped 3.12% year on year, missing analysts' estimates by 1.32%. This could mean that the current downcycle is deepening.
Amkor may be headed for an upturn. Although the company is guiding for a year-on-year revenue decline of 14.8% next quarter, analysts are expecting revenue to grow 2.88% over the next 12 months.
Product Demand & Outstanding Inventory
Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business' capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.
This quarter, Amkor's DIO came in at 38, which is 9 days above its five-year average. These numbers suggest that despite the recent decrease, the company's inventory levels are higher than what we've seen in the past.
Pricing Power
In the semiconductor industry, a company's gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor. Amkor's gross profit margin, which shows how much money the company gets to keep after paying key materials, input, and manufacturing costs, came in at 12.8% in Q2, down 3.7 percentage points year on year.
Amkor's gross margins have been trending down over the last 12 months, averaging 15.9%. This weakness isn't great as Amkor's margins are already far below other semiconductor companies and suggest shrinking pricing power and loose cost controls.
Profitability
Amkor reported an operating margin of 26.8% in Q2, up 17.3 percentage points year on year. Operating margins are one of the best measures of profitability because they tell us how much money a company takes home after manufacturing its products, marketing and selling them, and, importantly, keeping them relevant through research and development.
Amkor's operating margins have been trending up over the last year, averaging 14.7%. This is a welcome development for Amkor, who needs to improve its cost structure and subpar margins.
Earnings, Cash & Competitive Moat
Analysts covering Amkor expect earnings per share to grow 45% over the next 12 months, although estimates will likely change after earnings.
Although earnings are important, we believe cash is king because you can't use accounting profits to pay the bills. Amkor's free cash flow came in at $62.7 million in Q2, down 45% year on year.
As you can see above, Amkor produced free cash flow of just $208.7 million in the last year, resulting in a measly 3.46% free cash flow margin. Amkor will need to improve its free cash flow conversion if it wants to stay competitive.
Over the last five years, Amkor has reported an average return on invested capital (ROIC) of just 15.8%. This suggests it struggled to find compelling reinvestment opportunities within the business.
Key Takeaways from Amkor's Q2 Results
With a market capitalization of $7.28 billion, Amkor is among smaller companies, but its $1.2 billion cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.
We were impressed by Amkor's strong operating margin improvement this quarter. We were also glad that its inventory levels shrunk. On the other hand, it was unfortunate that its revenue missed analysts' expectations and its gross margin declined. Overall, this was a mediocre quarter for Amkor. The company is down 2.89% on the results and currently trades at $28.27 per share.
Is Now The Time?
When considering an investment in Amkor, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter. We cheer for everyone who's making the lives of others easier through technology but in the case of Amkor, we'll be cheering from the sidelines. Its revenue growth has been a little slower, and analysts expect growth rates to deteriorate from there. On top of that, unfortunately its gross margin indicate some combination of pricing pressures or rising production costs and growth is coming at a cost of significant cash burn.
Amkor's price to earnings ratio based on the next 12 months is 13.4x. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.
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