Semiconductor packaging and testing company Amkor Technology (NASDAQ:AMKR) missed analysts' expectations in Q1 CY2024, with revenue down 7.2% year on year to $1.37 billion. On the other hand, next quarter's outlook exceeded expectations with revenue guided to $1.45 billion at the midpoint, or 4.3% above analysts' estimates. It made a GAAP profit of $0.24 per share, improving from its profit of $0.18 per share in the same quarter last year.
Amkor (AMKR) Q1 CY2024 Highlights:
- Revenue: $1.37 billion vs analyst estimates of $1.38 billion (0.9% miss)
- EPS: $0.24 vs analyst estimates of $0.11 ($0.13 beat)
- Revenue Guidance for Q2 CY2024 is $1.45 billion at the midpoint, above analyst estimates of $1.39 billion
- Gross Margin (GAAP): 14.8%, up from 13.2% in the same quarter last year
- Inventory Days Outstanding: 26, up from 24 in the previous quarter
- Free Cash Flow was -$82.07 million, down from $336 million in the previous quarter
- Market Capitalization: $7.54 billion
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 unimpressive, averaging 7.7% annually. This quarter, its revenue declined from $1.47 billion in the same quarter last year to $1.37 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 7.2% year on year, missing analysts' estimates by 0.9%. 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 0.5% next quarter, analysts are expecting revenue to grow 4.4% 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 26, which is 4 days below its five-year average. These numbers show that despite the recent increase, there's no indication of an excessive inventory buildup.
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 14.8% in Q1, up 1.6 percentage points year on year.
Amkor's gross margins have been trending down over the last 12 months, averaging 14.9%. 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 16% in Q1, up 11.3 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 8%. This is a welcome development for Amkor, whose cost structure isn't as efficient as it could be, as indicated by its slightly below-average margins.
Earnings, Cash & Competitive Moat
Analysts covering Amkor expect earnings per share to grow 50.2% 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 negative $82.07 million in Q1, down 206% year on year.
Amkor has generated $361 million in free cash flow over the last 12 months, or 5.6% of revenue. This FCF margin enables it to reinvest in its business without depending on the capital markets.
Return on Invested Capital (ROIC)
EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit a company makes compared to how much money the business raised (debt and equity).
Amkor's five-year average ROIC was 16.3%, somewhat low compared to the best semiconductor companies that consistently pump out 35%+. Its returns suggest it historically did a subpar job investing in profitable business initiatives.
The trend in its ROIC, however, is often what surprises the market and drives the stock price. Unfortunately, Amkor's ROIC has stayed the same over the last few years. If the company wants to become an investable business, it will need to increase its returns.
Balance Sheet Risk
As long-term investors, the risk we care most about is the permanent loss of capital. This can happen when a company goes bankrupt or raises money from a disadvantaged position and is separate from short-term stock price volatility, which we are much less bothered by.
Amkor is a profitable, well-capitalized company with $1.57 billion of cash and $1.23 billion of debt, meaning it could pay back all its debt tomorrow and still have $341.3 million of cash on its balance sheet. This net cash position gives Amkor the freedom to raise more debt, return capital to shareholders, or invest in growth initiatives.
Key Takeaways from Amkor's Q1 Results
We were impressed by Amkor's strong gross margin and inventory improvements this quarter. We were also glad its operating margin and EPS beat analysts' expectations, driven by better-than-expected performance in its advanced product segment.
Looking ahead, the company's revenue and EPS guidance for the next quarter beat estimates as it expects demand to return after a multi-quarter industry downturn.
Overall, this quarter's results still seemed fairly positive and shareholders should feel optimistic. The stock is up 6.9% after reporting and currently trades at $33.7 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 uninspiring over the last three years, and analysts expect growth to deteriorate from here. On top of that, its gross margin indicate some combination of pricing pressures or rising production costs, and its operating margins reveal subpar cost controls compared to other semiconductor businesses.
Amkor's price-to-earnings ratio based on the next 12 months is 17.4x. While we've no doubt one can find things to like about Amkor, we think there are better opportunities elsewhere in the market. We don't see many reasons to get involved at the moment.
Wall Street analysts covering the company had a one-year price target of $36.34 per share right before these results (compared to the current share price of $33.70).
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