Magnachip Semiconductor Q3 2023 Earnings Call Transcript

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November 2, 2023

Key Takeaways

  • MagnaChip reported Q3 revenue of $61.2 million, down 14% year-over-year but up slightly sequentially, with gross margin at 23.6%, down 60 basis points year-over-year but up 140 basis points sequentially on higher fab utilization.
  • In the display segment, OLED revenue remained muted due to China design-win delays, but the company secured two OLED DDIC design-ins at global smartphone OEMs and launched development on fourth and fifth OLED DDIC projects targeting mass-market and affordable tiers for revenue growth in H2 2024 and beyond.
  • The power business delivered Q3 revenue of $45.2 million (-19.9% YoY, +8.4% QoQ), benefited from premium product mix and strong consumer and computing demand, and added two automotive power design wins including advanced IGBT and 150 V MOSFET products.
  • For Q4, MagnaChip expects power segment revenue of $50 million–$55 million with gross margin between 22.5% and 24.5%, anticipating weak demand from normal seasonality and ongoing inventory corrections.
  • Effective January 1, 2024, the company will complete an internal separation of its Display and Power businesses into a new operating entity to enhance P&L focus, transparency, and strategic flexibility.
AI Generated. May Contain Errors.
Earnings Conference Call
Magnachip Semiconductor Q3 2023
00:00 / 00:00

There are 6 speakers on the call.

Operator

Standing by, and welcome to the MagnaChip Semiconductor Corporation's Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Yujia Zai, Managing Director of The Blueshirt Group.

Operator

Please go ahead, sir.

Speaker 1

Thanks, operator. Hello, everyone. Thank you for joining us to discuss MagnaChip's financial results for the Q3 ended December 30, 2023. 3rd quarter earnings release that was issued today after the market close can be found on the company's Investor Relations website. The webcast replay of today's call will be archived on our website shortly afterwards.

Speaker 1

Joining me today are YJ Kim, Nanachip's Chief Executive Officer and Shin Young Park, our Chief Financial Officer. YJ will discuss the company's recent operating performance and business overview. Hsing Young will review financial results for the quarter and provide guidance for the Q4 of 2023. There will be a Q and A session following the prepared remarks. During During the course of this conference call, we may make forward looking statements about MagnaChip's business outlook and expectations.

Speaker 1

Our forward looking statements and all other statements that are not historical facts Our first question comes from the line of Mr. Alexander. Please go ahead. Thank you, operator. Thank you, operator.

Speaker 1

During the call, we will also discuss non GAAP financial measures. Non GAAP measures are not prepared in accordance with generally accepted accounting principles. We are intended to illustrate an alternative measure of Magnitude's operating performance that may be useful. Reconciliation of the non GAAP financial measures to the most direct Comparable GAAP measure can be found in our Q3 earnings release in the Investor Relations section of our website. With that, I will now turn the call over to YJ Kim.

Speaker 1

YJ?

Speaker 2

Hello, everyone. Thank you for joining us today, and welcome to MagnaChip's Q3 earnings call. Starting with our financials, our Q3 results were in line with our expectations. Q3 revenue was $61,200,000 down 14% year over year and up slightly sequentially. Gross margin was 23.6 percent, down 60 basis points year over year, primarily due to unfavorable product mix And higher fab costs, but recovered 140 basis points sequentially on higher fab utilization.

Speaker 2

Overall, market conditions were challenging, but we remain focused on driving towards smartphone design wins in our display business and launching competitive products in our power business. Let me provide updates to each of our business segments. Beginning with our display business. Q3 revenue was in line with our expectation at $6,400,000 up slightly year over year and down 33.7% sequentially. Our OLED revenue remained muted due largely to slowdown planned design wins in China from our large Korean panel customer.

Speaker 2

During the quarter, we worked to expand our footprints with new global panel makers and smartphone OEMs. We are disappointed that our OLED ramp lagged our original expectations, but our confidence In the longer term, display business remain intact. We are now engaged in projects that span the entire smartphone market spectrum from mass tier to premium tier segments. Our goal, as always, is to deliver Differentiated and competitive products to drive long term growth as an industry leader in display. At our new global Tier 1 panel customer, Our 3rd OLED DDIC chip successfully passed qualification at the end of the quarter and is now in the design in phase with a leading Chinese smartphone OEM for its flagship model that is scheduled to be launched at the end of the year.

Speaker 2

As previously announced in the Q2, we successfully qualified a second chip with our global Tier 1 panel customer and entered into the designing stage with a global smartphone maker for smartphone Expected to launch in mid-twenty 24. We now have 2 design ins at leading smartphone OEMs outside of Korea, and we are optimistic that they will lead to design wins and production shipments that will contribute to revenue in 2024. In the Q2, we also announced that we began developing a 4th OLED DDIC project with our global Tier 1 panel maker. This next gen DDIC provides enhanced features and specs geared towards the growing affordable smartphone market. This quarter, we saw increased interest for this trip by multiple smartphone OEMs, and we are expecting to provide IC samples to our panel customer by early next year.

Speaker 2

Additionally, our first OLED DDIC chip is now in the final stage of qualification with aftermarket OEMs in China. Finally, during the quarter, we started a new development on Our mass market OLED DDIC chip was another Asian panel maker. This 5th product is aimed at expanding market share into the lowtomidrange OLED smartphone display market. We currently expect this OLED device to drive revenue growth in the second half of twenty twenty four and beyond. With regards to our OLED Automotive business, We began production shipments to our large Korean panel maker for 3 different car models from 2 top tier European car manufacturers between May July.

Speaker 2

Revenue from those devices started beginning in May, and we currently expect those devices will continue to contribute to revenue for the remainder of the year. Moving on to our Power business. Q3 revenue was $45,200,000 down 19.9% year over year and up 8.4% sequentially. Sequentially, our power business benefit from a higher mix of premium key products and strong demand in consumer, computing and communication markets such as TVs, notebooks and smartphones. However, industrial markets, which had been an area of strength for us over the past several quarters, Slowed by double digit percentages in Q3 as our customers reduced orders to better manage their inventories.

Speaker 2

Operationally, we continued our strong momentum of design activities, particularly in Automotive Power Products. In Q3, we secured 2 new design wins and 3 design wins with 2 of the top 5 automakers in the world, and we expect revenue contribution over the coming quarters. We also continue to innovate. In September, We announced 2 new IGBTs for the EV market that provide best in class efficiency and heat Station featuring advanced field stop technology. In October, we unveiled our 8th generation 150 volt medium voltage MOSFETs.

Speaker 2

Finally, Power Product ASPs continued to remain stable, increasing 11.3% year over year, but down slightly by 5% sequentially. In summary, In our power business, our product portfolio is getting stronger as we continue to focus on rolling out next generation power products to maintain our momentum of design ends and wins. Looking ahead and with heightened global geopolitical and macroeconomic uncertainty, We expect demand to remain weak, driven by normal Q4 seasonality and inventory correction in the short end markets. In our display business, we are very optimistic about the long term growth of our OLED business. We continue to collaborate closely with our new global panel customer and we are excited about the new product and new Asia Space Panel Customer Partnerships.

Speaker 2

These new products offer compelling competitive advantages and are strategically aimed at tapping into the rapidly expanding OLED market in the Asia region. Finally, a few comments on our previously announced plan to separate our Display and Power businesses into separate legal entities. As we announced previously, our internal separation of display and power business will be effectuated by establishing a separate operating company under MagnaChip Semiconductor Limited, MSK, the company's primary operating subsidiary. In September, we established a limited liability company Registered in South Korea named Magnachip Mixed Signal Limited, MMS. The separation will include the contribution of assets and liabilities of the Display business and the PowIC business to MMS.

Speaker 2

Transfer of directly associated resources such as sales, marketing and R and D as well as allocation of shared expenses of certain corporate functions, including HR, finance, legal and IT. This internal separation is expected to be completed and go effect on January 1, 2024. Thank you to our shareholders for your patience, and we appreciate your support as we work towards our goals. I will now turn the call over to Shunyoung to review the financials in detail.

Speaker 3

Thank you, YJ, and welcome to everyone on the call. Let's start with key financial metrics for Q3. Total revenue in Q3 was $61,200,000 up 0.4% sequentially and down 14% year over year. Revenue from the Sandor Crocs business was $51,600,000 And revenue from transitional foundry services was $9,600,000 Within Sendar Products, display business revenue was $6,400,000 And Power Business revenue was $45,200,000 Gross margin in Q3 was 23.6 percent, up from 22.2% in Q2, mainly driven by higher fab utilization. Compared to the same period last year, gross margin decreased 60 basis points from 24.2%, primarily as a result of unfavorable product mix And higher fab costs.

Speaker 3

As a reminder, our transitional foundry services contract with KeyFoundry expired at the end of August, and we are planning to wind down these laundry services over the next several quarters. Transition of laundry services accounts for We anticipate to begin the process of converting portions of the idle capacity to power send our product around the middle of 2024. Until such wind down is completed, we will continue to provide these foundry services to key foundry based on mutually agreed pricing terms. Turning now to operating expenses. Q3 combined R and D and SG and A was $23,700,000 This compares to R and D and SG and A of $23,400,000 in Q2 2023 and $24,700,000 in Q3 last year.

Speaker 3

Stock compensation charges included in operating expenses were $2,100,000 in Q3 compared to $2,000,000 in Q2 and $800,000 in Q3 last year. Q3 operating loss was $9,200,000 This compares to an operating loss of $10,700,000 in Q2 and operating loss of $10,000,000 in Q3 2022. On a non GAAP basis, Q3 adjusted operating loss was $7,100,000 compared to adjusted operating loss of Adjusted EBITDA was negative $2,700,000 This compares to a negative $3,600,000 in Q2 and negative $3,000,000 in Q3 last year. Net loss in Q3 was $5,200,000 as compared with a net loss of $3,900,000 in Q2 and a net loss of $17,200,000 in Q3 last year. Our GAAP diluted loss per share in Q3 was $0.13 as compared with diluted loss per share of $0.09 in Q2 and $0.38 in Q3 last year.

Speaker 3

Our non GAAP diluted loss per share in Q3 was 0 point 4 dollars This compares with diluted loss per share of $0.06 in Q2 and earnings per share of $0.02 in Q3 last year. Our weighted average diluted shares outstanding for the quarter were 40,100,000 shares. In Q3, under our new We repurchased approximately 0.7000000 shares for $5,400,000 Moving to the balance sheet. We ended the quarter with no debt and cash of $166,600,000 down from $173,000,000 at the end of Q2 2023. The primary cash outflows during the quarter were Approximately $5,400,000 of stock buybacks and $800,000 in capital expenditures.

Speaker 3

Net accounts receivable at the end of the quarter totaled $41,100,000 which represents an increase of 17.5 percent from Q2 2023. Our days' days outstanding for Q3 was 62 days and compares to 52 days in Q2. The increase in accounts receivable and days days outstanding was attributable to the timing of Payments from certain customers as the quarter end fell on a holiday in Korea and the vast majority of related payments were collected in early October. Inventories net at the end of the quarter totaled $30,800,000 This compares to $32,300,000 in Q2 Our average days inventory for Q3 was 61 days and compares to 62 days in Q2. Lastly, Q3 CapEx was $800,000 We continue to expect our CapEx in 2023 to be approximately $7,000,000 As we previously discussed on our Q2 earnings call, this is nearly 70% lower from the 2022 level.

Speaker 3

Now moving to our Q4 guidance. Amid the heightened global geopolitical and macroeconomic uncertainty, we expect power demand to soften in Q4, That revenue to be in the range of $50,000,000 to $55,000,000 including approximately $8,000,000 of transition of factory boundary services and gross profit margin to be in the range of 22.5 percent to 24.5%. Thank you. Now I'll turn the call back over to Yujia. Vijaya?

Speaker 1

Thanks, Sinyang. That concludes the prepared remarks section of our call today. Operator, You may now open the call

Operator

One moment for our first question. Our first question comes from the line of Suji Desilva from ROTH Capital Markets. Your question please.

Speaker 4

Hi, YJ. Hi, Shenyang. So the 2nd and third chips for the lead Asia customer In the display market, are the smartphone designs that are downstream from them, are those secured already or still being competed for? I know you talked about volume ramp timing, but Curious whether that customer has already won smartphone designs to understand that where we are in that process.

Speaker 2

Suji, thank you for the question. So on those 2 smartphones, first of all, those 2 smartphones are for the Premium smartphones. On the second chip, it's for the Chinese flagship phone, and we are going through the final qualification. We are the Two finalists for the phone, and we will be the 2nd source. So the volume will be determined after the qualification is done.

Speaker 2

On the second chip, it's for a global smartphone maker. They typically sell around 10,000,000 a year, but they do have several models. And at this time, we are the considered vendor for 1 of the model and we are for the low end model And carriage volume, and that is expected to launch in the Q2 next year. The first ship is expected to The launch end of this year, the Chinese flagship.

Speaker 4

Okay. That's very helpful, YJ. And then the 2nd China panel customer who's coming on after this first one, are there should we think of that one as coming to market faster than the first one? Have there, I guess, Ben, any more broader learnings in the China market that you'd be able to benefit from as you bring incremental panel customers up over there?

Speaker 2

No, I think the first three trips will come to revenue first. The 4th trip Will come probably towards second half of next year.

Speaker 4

Okay. And on the gross margin side, I know the revenue is kind of below trend here And that's dampened the gross margin, but what are the drivers and timing of gross margin recovery? Is it simply utilization or are there factors? Is the wind down of The Fab 3 service contract, is that part of what gets margin back up? Any color on the trajectory of gross margin from here would be helpful.

Speaker 4

I

Speaker 3

mean, the gross margin itself, as you explained, I mean, that's a combination of factory manufacturing cost, production cost, utilization rate And product mix in the next year, so it will all going to impact our gross margin going forward. But the I mean, YJ can add to this one, but I mean the power We explained that we have a record leverage of the design wins and although the revenue was, I mean, not that level, but the ASP trend has been strong. And we have been increasing the mix of the premium products. So with all of those, we're going to kind of help To offset some of the impact that we will have from the kind of the winding down the boundary transitional services.

Speaker 4

Okay. My next question is on the Fab 3 wind down in mid-twenty 24. Can you remind us the incremental revenue opportunity, I guess, would be for power as you free up that capacity for non service business?

Speaker 3

I mean, really depending on the mix, right? Because when we got The power product from key foundry that depending on like 20%, 25%. And we also explained that about 30% of our Kumi capacity was for the foundry services. So I mean, it will be depending on the demand and the mix, but we will have to kind of take out equipment for the Because we are going to start the process in the middle of 2024.

Speaker 4

I see. And then lastly, YJ, on the separation plan for the end of the year, Can you just remind us what the benefits you expect are for investors as we get closer to that so we can kind of prepare for that separation and look for some What that triggers for you guys?

Speaker 2

Yes. So it provides many advantages. A, you get to focus 2, really focus on the P and L and 3, transparency as well as 4, there are more freedom for independent investments and the strategic opportunities.

Speaker 4

Okay, terrific. Thanks, YJ. Thanks.

Speaker 1

Thank you.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Quentin Bolton from Needham and Company. Your question please.

Speaker 5

Hey guys, this is Nick on for Quinn. You gave some color on the power and foundry business for next quarter. Can you give color on display? Will it be flat quarter over quarter and maybe discuss the drivers near term of that business?

Speaker 2

Yes. I think that the business on the display will be flattish. But as Shing Yang explained, There are some weakness in the industrial end market under power. So that's the most revenue down And that's the similar trend we are seeing from our peers. We know this TI or on semi Called out the weakness in industrial land and we already said today that we had double digit percent decline in industrial.

Speaker 2

The industrial was one of the key strengths that we saw this year. So I guess this is happening right now on the industrial weakness in the market.

Speaker 5

That makes sense. Yes, we've heard that from a number of other companies. Can you talk about the automotive That you've seen in the quarter, I think we are talking maybe $1,000,000 $2,000,000 in 'twenty four. Just wondering if we're For 2023 calendar 2023, just wondering if we're on track for that or coming in a little soft?

Speaker 2

Yes. So we did not have automotive until like last year where we shipped to about At the 600 ks, 700 ks, and this year, we expect to finish a couple of $1,000,000 So we are on track. So we are accelerating design wins on the automotive. As you saw, we had a 2 design win and 3 design in this quarter. So We look forward to get more design wins.

Speaker 2

And also the automotive section on the EVs, We see a big opportunity in also in China. China has an EV that ranges from $25,000 50,000, that's the sweet spot and then they're introducing 100,000. So I think the that's why they're doing 3,000,000 unit of EV alone. So those are the new things we see. And to be competitive in the low end EV market, I think IGBT is a key, and that's one of our strengths as well.

Speaker 5

Thanks, Zach. Could we actually send another second down on the China EVs? I may be too early for you to get a really good pulse, but We've heard mixed data points as far as demand evaporating, but then we just heard from Allego this morning that The demand is actually really strong. Are you seeing anything specific as far as near term demand in China?

Speaker 2

On the automotive and EV, I believe China is strong. I think the what we are hearing, the EVs in the Non China market is slowing down. So I think that's because of the EV price in China is much competitive. Rest of the world, the EV price is very high. I think that's what it is.

Speaker 2

And as I said, the IGBT is a key solution For more affordable EVs.

Speaker 5

Yes, that makes a lot of sense. Thanks for that. And then last one for me. The Fab 3 wind down, is there incremental CapEx required to transition those tools to your power products? And how should we think about CapEx

Speaker 3

So we haven't guided for the 2020 for the entire CapEx, but in terms of The wind down process and conversion process, at this point, we do not really expect any material CapEx to be spent. So probably a couple of millions, but not a lot.

Speaker 2

And I think we mentioned before that if we increase the capacity by 40%, The CapEx is only $20,000,000 to $25,000,000 So it's not a big thing.

Operator

Does that answer your questions?

Speaker 2

Yes. Thank you.

Operator

Thank you. This does conclude the question and answer session of today's I'd like to hand the program back to Yujia Zai.

Speaker 1

Thanks, everyone. This concludes our Q3 earnings conference call. Please look for details of our future events on MagnaChip's Investor Relations website. And thank you and take care.

Operator

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

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