[This Week's Industry Insight] ISC, Semiconductor Test Socket Leader... Poised for Comeback Riding AI Wave

High-Value Products, Expanded AI Capabilities
Boasting Over 500 Patents

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Founded in 2001, ISC (I.E.S.C.) is a company that manufactures semiconductor test sockets. Although the company's operating performance shrank last year due to the semiconductor market downturn, this year, when industry conditions are expected to improve, is different. ISC is signaling a comeback by expanding production of high value-added products and enhancing its artificial intelligence (AI) response capabilities. With the rise of the 4th industrial revolution sectors such as the Internet of Things (IoT), artificial intelligence (AI), 5G, big data, autonomous driving, and electric vehicles, the demand for semiconductor testing is also expected to increase further. In the list of the top 20 company reports by inquiry volume over the past two weeks from the financial information provider FnGuide, two reports on ISC appeared.

"About 500 patents... Maximizing profitability by increasing non-memory share"

ISC is a global semiconductor test component company headquartered in South Korea, consisting of seven production and sales subsidiaries. Its competitiveness comes from its unparalleled technology. It holds about 500 patents, the most in the industry. ISC's main product, established in 2001, is test sockets. Notably, in 2003, it succeeded in commercializing the world's first test socket using silicon rubber material. It currently holds more than half of the market share in this sector. Additionally, it has product lines for semiconductor testing including pogo (copper alloy material) sockets, burn-in test sockets, and interface boards.

As major global semiconductor companies intensify technological advancement, the demand for testing is rapidly increasing. Silicon rubber sockets already account for over 80% of memory semiconductor test sockets, and rapid expansion is expected in the non-memory market as well. In ISC's sales, the share of memory and non-memory was 30% and 70%, respectively, last year.

AI-related sales are also on the rise. Following the recent on-device AI trend, smartphone-related sales are expected to increase this year. AI-related sales accounted for 13% of last year's revenue, with a target of over 20% this year and over 50% next year. About 95% of the company's total sales come from 10 major VIP customers including Samsung Electronics and SK Hynix (6 non-memory companies, 3 memory companies, and 1 foundry). By region, North American fabless (design) customers account for about 60% of total sales. Korea accounts for 15%, Greater China including Taiwan 15%, and other regions (Southeast Asia and Europe) 10%.

Researcher Ryu Hyung-geun of Samsung Securities said, "Currently, sockets are mass-produced in Korea and Vietnam at ratios of about 25% and 75%, respectively. The semiconductor socket business is characterized by a wide variety of products with short delivery times, so production efficiency through process automation is an important factor for cost and business competitiveness." He added, "To expand competitiveness, process automation capabilities are expected to improve, and the production share in Vietnam, where labor costs are low, will be expanded to 90% to enhance cost competitiveness."

An ISC official explained, "From a sales perspective, we aim to increase the share of mass-production socket sales to non-memory customers to a maximum of 40%, significantly improving profitability. Currently, the non-memory sales composition is 80% research and development (R&D) and 20% mass production."

Performance shrank due to semiconductor market slump... Rebound expected this year

ISC's overall performance last year was sluggish. The main reasons were reduced production volumes from customers and price declines. Except for some customers, overall customer production volume decreased by more than 30% compared to 2022. This includes non-memory customers; R&D remained at a similar level to 2022, but mass production dropped sharply. Price reduction pressure from memory customers was also significant, exceeding 10%.

However, recent performance is gradually improving. In the fourth quarter of last year, sales reached 25 billion KRW. Although sales decreased compared to the previous quarter and the same period last year, operating profit reached about 10.7 billion KRW due to increased orders for AI semiconductor sockets, successfully turning a profit compared to the previous quarter.

This year's sales target is 250 billion KRW. The target operating profit margin is set at 25-30%. An ISC official said, "This year is the period when non-memory mass production conversion is in full swing. We aim to raise the non-memory share to 80%. The goal is to expand it to 90% from next year," adding, "This plan is to expand the portfolio focusing on high-margin, high-quality products and avoid the memory cycle to maintain stable growth in both sales and operating profit."

He continued, "By product, performance is improving and mass production share is increasing mainly in AI servers, AI smartphones, wearables, and automotive SoCs (system-on-chips), showing high growth potential. In high-margin high-end memory such as server DDR5, based on a high market share, a significant increase in orders is expected from the second half of the year when the memory cycle recovers."

This year's management policy is maximizing profitability. Since the fourth quarter of last year, the company has been streamlining high-cost, low-margin items. It plans to complete cost structure improvements and cost reductions by adjusting some domestic and overseas subsidiaries by this year.

Acquired by SKC last year... Expecting external growth through M&A

ISC entered the KOSDAQ market in October 2007. Its stock price has recently been stagnant. Upon news that it would be acquired by SKC, a subsidiary of the SK Group, the stock price jumped from 49,500 KRW (closing price) on July 10 last year to 107,300 KRW on July 27. SKC purchased a 45.03% stake in ISC for 522.5 billion KRW at that time. However, the stock price has since gradually given back some of the gains, and as of the 19th, ISC's closing price was 74,900 KRW.

The market expects to see synergy effects from M&A starting this year. SKC acquired ISC to secure new growth engines in the semiconductor materials and components business, one of the three major growth pillars along with secondary battery materials and eco-friendly materials. Synergies are also expected through semiconductor glass substrate business and technological collaboration and integrated solution commercialization.

Researcher Park Jun-young of Hyundai Motor Securities said, "ISC plans to acquire or merge some of SKC's business units around the second half of this year, which will contribute to external growth of about 100 billion KRW annually," adding, "The goal is to complete M&A of test solution companies by the end of this year." Through this growth roadmap, sales are expected to reach about 393.3 billion KRW next year. Operating profit margin is also expected to continuously improve to 30%." He explained, "Through additional M&A strategies, external growth will accelerate, and considering ISC as a supplier to AI big tech companies that will lead the semiconductor industry in the future, its growth potential is viewed positively."

Researcher Cha Yong-ho of Ebest Investment & Securities said, "ISC's performance this year will be driven by the non-memory segment, which accounts for a high sales proportion," adding, "Recovery in memory companies' utilization rates, increased shipments of AI chips, and the expansion effect of SKC's semiconductor business restructuring will drive performance growth." He added, "Considering SKC's semiconductor business restructuring and future M&A contributions, the medium- to long-term growth direction is certain."