Magnachip Semiconductor Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 7, 2023

Key Takeaways

  • Q2 2023 revenue was $61 million, down 39.8% year-over-year but up 7% sequentially.
  • Gross margin improved to 22.2%, up 100 basis points from Q1 driven by higher fab utilization.
  • Completed $25.5 million of share repurchases and the board approved a new $50 million buyback authorization.
  • Board approved separation of Display and Power businesses into distinct legal entities to unlock long-term value, with completion targeted by end of 2023.
  • Won five design wins for OLED automotive chips with leading European automakers, with production shipments starting in H2 2023.
AI Generated. May Contain Errors.
Earnings Conference Call
Magnachip Semiconductor Q2 2023
00:00 / 00:00

There are 6 speakers on the call.

Operator

Day and thank you for standing by. Welcome to the Q2 2023 MagnaChip Semiconductor Corporation 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. Please be advised today's conference is being recorded.

Operator

I would now like to hand the conference over to your speaker today, UGI Asai. Please go ahead.

Speaker 1

Hello, everyone. Thank you for joining us to discuss MagnaChip's financial results for the Q2 ended June 30, 2023. 2nd quarter earnings release that was issued today after the market close can be found on the company's Investor Relations website. Webcast replay of today's call will be archived on our Let's take shortly afterwards. Joining me today is YJ Kim, Magnitude's Chief Executive Officer and Shing Young Park, Magnitude's Chief Financial Officer.

Speaker 1

Yidian will discuss the company's recent operating performance and business overview, and Xinyan will review the financial results for the quarter and provide guidance for the Q3 of 2023. There will be a Q and A session following the prepared remarks. During the course of this earnings conference call, We may make forward looking statements about MagnaChip's business outlook and expectations. Our forward looking statements and all other statements that are not historical facts reflect our beliefs and predictions as of today, and therefore, are subject to risks and uncertainties as described in the Safe Harbor statement found in our SEC filings. During the call, we will also discuss non GAAP financial measures.

Speaker 1

The non GAAP measures are not prepared in accordance with generally accepted accounting principles or intended to illustrate an alternative measure of MagnaChip's operating performance that may be useful. A reconciliation of the non GAAP financial measures The most directly comparable GAAP measures can be found in our Q2 earnings release in the Investor Relations section of our website. With that, I will now turn the call over to YJ Kim. YJ?

Speaker 2

Hello, everyone. Thank you for joining us today, And welcome to MagnaChip's Q2 earnings call. Starting with our financials. Q2 revenue was $61,000,000 down 39.8% year over year and up 7% sequentially. Gross margin was 22.2%, up 100 basis points from Q1 driven by higher utilization at our Gumi fab.

Speaker 2

Our year over year results Continue to be impacted by macro challenges that I will detail in each of our business sections, but I am pleased to see sequential improvement in our power business driven by industrial and automotive applications. These positives were offset by weaker OLED smartphone revenue during the quarter from our top Korea panel customer. During the quarter, we also completed The 25,500,000 of our remaining stock buyback program and today, I'm pleased That our Board approved a new stock buyback authorization of RMB 50,000,000, which signifies our confidence in our long term business and unwavering commitment to enhance shareholder value. Finally, earlier in the Q2, we announced that our Board approved the recommendation of its strategic review committee To separate our Display and Power business into separate legal entities, broadly speaking, This strategic separation represents a significant milestone for MagnaChip and highlights our commitment to unlock long term value for our shareholders. We are currently working through the process of separating the business, so they will have a distinct ERP, Enterprise Resource Planning and Accounting Systems.

Speaker 2

The process is expected to be completed at the end of 2023 and go live in January 2024. Post separation, the Board and management Team will continue to oversee both businesses. This internal separation is aimed at Enhancing transparency, accountability, business flexibility as well as business focus and strategic optionality, and we look forward to providing further updates on our upcoming earnings calls. Let me now provide updates into each of our business segments. Beginning with our displays business.

Speaker 2

Q2 revenue came in at $9,700,000 down 65.9 percent year over year and down 10.9% sequentially. Year over year, our results Reflect the ongoing smartphone inventory correction and the continued impact of the last 2 years supply shortages Sequentially, our OLED revenue declined from Q1 due to decreased demand from our large Korean Noted customer. Despite these near term hurdles, we remain focused on expanding our customer base to include All major Global Panel customers to deliver highly competitive products to achieve sustainable long term growth As an industry leader in display, at our new global Tier 1 panel customer, we delivered Our second OLED DDIC project sample in Q1, but due to spec changes by the customer, We revised and shipped a second ship at the end of June. We aim to receive final qualification in a few months and atichepay production at the end of the year. Additionally, we sampled the 3rd chip in Q2, which has been evaluated by the Global Panel customer and is now at the design in evaluation stage by a smartphone maker for the first half twenty twenty four launch.

Speaker 2

Further, with our new global panel customer, we continue to collaborate on new projects. In Q2, we began developing a forced OLED DDIC project for our global panel Additionally, we started work on a mass market OLED display driver, Fripps Chip, aimed at Expanding market share of the low to mid range OLED smartphone display market, which expect to drive revenue growth in the second half of 2024 and beyond. Given these developments, we feel confident about our odds of winning additional Asian smartphone designs and capturing significant market share over the longer term in Asia. It is estimated that in Q2 2023, China panel makers already have captured almost 40% of the worldwide OLED smartphone panel production. With regard to our large panel customer in Korea, we began production shipment of 1st OLED automotive chip in Q2 targeted for 2 different car models for leading European Automaker.

Speaker 2

Following the quarter and In July, we also initiated production shipment targeted to another top tier European car manufacturer. We anticipate these three models to provide revenue beginning in the second half of this year and beyond. Further, we secured 2 new design wins with a 3rd European automaker in Q2 with mass production slated for second half twenty twenty five. With these wins, we now have 5 cumulative design wins targeted for a car model from leading European automakers. For our smartphone DDIC project at our large panel customer in Korea, we are awaiting Our customers' alignment with Chinese smartphone OEMs and look for such alignment by the end of the year.

Speaker 2

Moving on to our power business. Q2 revenue was $41,700,000 down 33.7% year over year and up 2.6% sequentially due to strength in industrial and automotive markets. As we stated in our last Quarter call, we believe we hit the bottom in Q1 2023, and we saw progress in inventory on hand. The demand improvement in Q2 was broad based. For instance, we saw a revival in demand for TVs, solar and lighting markets.

Speaker 2

Additionally, we continued our strong momentum with design activities in Q2, propelled by our robust product portfolio across Automotive, Industrial and Computing Applications, in particular, notably, 35% of the design ins and wins are attributed to new products and customers, while more than 17% emerged from new applications. One key design win was at a leading home appliance maker in Korea with production slated to begin in Q3 'twenty three. Power Products ASP remained strong, increasing 25.3 percent year over year and down slightly by 2.2% sequentially on lower premium product mix. We also contribute to innovate. In early July, we announced 4 new low voltage MOSFETs Using super short channel technology that significantly improves power, loss of smartphone batteries when charging or discharging.

Speaker 2

In summary, in our power business, our product design in win rate It's stronger than ever, and we are rolling out next generation power products throughout this year. Looking ahead, We are seeing more improvements in our customer base and we expect further sequential growth in Q3. 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 partner panel customer, and we're excited about the additional new products that we are rolling out in the next 6 months. These new products offer compelling competitive advantages, Strategically aimed at tapping into the rapidly expanding OLED market in the Asian region.

Speaker 2

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 Shunya to go over the financial and details.

Speaker 3

Thank you, I. J, and welcome to everyone on the call. Let's start with key financial metrics for Q2. Total revenue in Q2 was $61,000,000 up 7% sequentially and down 39.8% year over year. Revenue from the SendOut Products business was $51,400,000 and revenue from transitional foundry services was $9,600,000 Within SendOut products, display business revenue was $9,700,000 and power revenue was $41,700,000 As YJ mentioned, while our results are still muted, we see sequential improvement in Q3.

Speaker 3

Gross margin in Q2 was 22.2%, up from 21.2% in Q1. We expect our Q3 2023 gross margin will gradually improve as utilization continues to improve with a higher demand in our power business. As we have stated in our project notes, We are planning for a wind down in our transitional foundry services over the next several quarters, following the end of our contractor agreement with Keyfoundry at the end of August 2023. Transitional foundry services accounts for approximately 25% of our Gumi capacity. We anticipate to begin the process of converting portions of the idle capacity to power SINA products around the middle of 2024.

Speaker 3

Turning now to operating expenses. Q2 combined R and D and SG and A was $23,400,000 This compares to R and D and SG and A of $25,500,000 in Q1, 2023 $26,100,000 in Q2 last year. Our lower R and D and SG and A was primarily driven by our voluntary resignation program that we executed at the end of Q1. Stock compensation charges, including operating expenses were $2,000,000 in Q2 compared to $1,100,000 in Q1 and $1,900,000 in Q2 last year. Q2 operating loss was $10,700,000 This compares to an operating loss of $21,800,000 in Q1 and an operating income of $2,000,000 in Q2 2022.

Speaker 3

On a non GAAP basis, Q2 adjusted operating loss was $7,800,000 compared to adjusted operating loss of $12,200,000 in Q1 and adjusted operating income of $4,800,000 in Q2 last year. Q2 adjusted EBITDA was negative $3,600,000 This compares to a negative $7,900,000 in Q1 and a positive $8,500,000 in Q2 last year. Net loss in Q2 was $33,900,000 as compared with a net loss of $21,500,000 in Q1 and a net loss of $3,300,000 in Q2 last year. Our GAAP diluted loss per share in Q2 was 0 point 0 $9 as compared with diluted loss per share of $0.49 in Q1

Speaker 2

and $0.07 in Q2 last year.

Speaker 3

Our non GAAP diluted loss per share in Q2 was 0 point 0 $6 This compares with non GAAP diluted loss per share of $0.24 in Q1 and earnings per share of $0.23 in Q2 last year. Our weighted average diluted shares outstanding for the quarter were 41,700,000 shares, which reflects shares repurchased as part of our expanded share repurchase program. Our stock buyback in Q2 2023 amounted Approximately 2,500,000 shares or $25,500,000 Cumulatively, since September last To the end of Q2 this year, we've repurchased 4,900,000 shares or $50,000,000 Moving to the balance sheet. We ended the quarter with no debt and cash of $173,000,000 down from $212,100,000 at the end of Q1 2023. The primary cash outflows during the Order were approximately $25,000,000 of stock buybacks and payment of $11,400,000 related to the voluntary resignation program, including one time package cost of $8,400,000 Net accounts receivable at the end of the quarter totaled $35,000,000 which represents an increase of 8.9 percent from Q1 2023.

Speaker 3

Our daily sales outstanding for Q2 was 52 days and compares to 51 days in Q1. Inventories net at the end of the quarter totaled $32,300,000 This compares to $36,400,000 in Q1 2023. Our average days inventory for Q2 was 62 days and compares to 73 days in Q1. Lastly, Q2 CapEx was $1,400,000 We currently expect our CapEx in 2023 to be approximately $7,000,000 which is about 30% lower from our previous forecast of $10,000,000 and nearly 70% lower from the 2022 level. Now moving to our 3rd quarter guidance.

Speaker 3

While after a result of the delay, for Q3, MagnaChip currently expects revenue to be in the range of $59,000,000 to $65,000,000 including about $8,000,000 of transitional foundry services and gross profit margin to be in the range of 22.5% to 24.5%. Thank you. And now I'll turn the call back over to Yujia. Yujia?

Speaker 1

Thanks, Danielle. Thanks, so that concludes the prepared remarks section of our call today. Operator, you may now open the call for questions.

Operator

Thank you. Our first question comes from Suji Desilva with ROTH Capital. Your line is open.

Speaker 4

Hi, YJ, and welcome back, Xinyuan. So on the OLED business, talking about the new Tier 1 panel customer, You seem to have multiple products you may be able to ramp within the next 4 to 8 quarters. Can you talk about how to size that opportunity versus Your traditional business you've had in the Korea panel customers, it seems like the bigger opportunity, want to understand that opportunity?

Speaker 2

Yes. Susie, thank you. So we now have 3 samples. And so As mentioned today, one will go through the qualification and expect to go towards the end of the year and The other one, the 3rd chip is already in the design in evaluation stage and expect to go If successful go to launch in the first half next year. So we are also getting a lot of encouraged because now we have 3 products.

Speaker 2

So the ramp will be based on each models. So It will be hard to say, but now we are back on the Pipeline is back to starting the OLED ramp towards the end of the year.

Speaker 4

Okay. That's helpful there. And then where are your China panel customers? Where are they in the process of securing Wins with their smartphone customer, where are they in that process at this point?

Speaker 2

Well, so the fact that we already have a Designing evaluation stage and then we have a lot more encouraged. They are promoting a lot. And so We now will have about 5, 6 different type of panel using the 3 chips That is being promoted. And then I said before that we will have 2 other trips Coming in, in next 6 months, that will also enable 2024 revenue enablement on In addition to the switch being already being either sampled or started being evaluated by the end customers.

Speaker 4

Okay. Switching over to the Power business, I'm curious how much will the What kind of incremental revenue opportunity or capacity opportunity would you expect to happen as the Gumi service contract comes offline? How should we think about that opportunity incrementally?

Speaker 3

So the historical transition of funded services accounts for Nearly 25% of our Kumi capacity. So I mean, assuming all other things being equal, like if nothing is done, fill the gap, our power products We'll have to absorb approximately 25% of its fixed costs, which will increase our power product cost and result in lower gross margin. But Again, that's also the opportunity for us to build a gap. So our job is to build a gap of transitional boundary wafers with our power wafers as As soon as possible, but that will also require converting transitional service equipment to handle power devices. So like again, our goal is to make the dip minimum and smoothly bring up more of our power business conversion in that fab.

Speaker 4

Okay. And then following up on that Xinyuan, the gross margin opportunity here, it seems like the prior peaks you were in the high 20s when power is about 30% higher than where it is now versus now in the low 20s. Is that the difference here in terms of recapturing power revenue to drive gross margin back up? Or Can you go above that with this incremental capacity if you ramp it?

Speaker 3

I mean, it's going to be our long term goal to get to the high The gross margin level, but as I explained briefly, because of that switch from the transitional Services to the power business to kind of move some of the equipment from the Kumi fab to bring in like new equipment to support the power businesses. So there's going to be Some gap there and because the power product during the process, we'll have to absorb more cost there. So On long term basis, we are trying to get back to the maximum level that you just pointed out, explained. But in the meantime, we're going to Experience some of the dip in the gross margin there.

Speaker 4

Okay, got it. Maybe one last quick question. The OpEx from the current levels, do we

Speaker 3

I mean the volunteer recognition program that we executed at the end of Q1, that's definitely helping our SG and A R and D to go down and that's what you saw in Q2. But R and D for the full year 2023

Speaker 4

will kind

Speaker 3

of similar to the last year's level due to the development of like many new chips as YJ explained during the So you're going to see some increase in R and D expenses in the second half of twenty twenty three, but the SG and A, we are trying to keep that at the Reduced level benefited from the voluntary recognition program effect.

Speaker 4

Okay, got it. Very helpful, Shannon. Thanks, everybody.

Operator

Our next question comes from Martin Yang with Oppenheimer. Your line is open. Martin, your line is open. You can ask your question.

Speaker 5

Hi, can you hear me?

Operator

Yes, we can hear you now.

Speaker 5

Great. So my first question is Maybe, YJ, can you clarify your comment regarding your Korean panel customer and It's alignment with Chinese smartphone OEMs. Can you give us more details on what you mean by And what are the potential outcomes out of the different scenarios for the alignment with the customers?

Speaker 2

Yes. Martin, very good question. So Our Korean panel customer, they tend to have 3 different type of customers, the Chinese smartphone Makers, Internal Mobile Division and then the Food Company. So the our chip that we have provided to them last year in 2022 was targeted for their business for capturing some Chinese high end smartphone. So that's what they are working on.

Speaker 2

But as you know, the China's OLED market is very competitive and they have 5 main panel makers. And I think according Some market research data, they captured almost to 40% of the worldwide production or consumption in Q2 this year. So I think that's why some delay there, But that is same at the same time, we are doing so many trips with the new panel global panel customer, And I think our strategy is on track. Got it.

Speaker 5

My second question is On your 4th and 5th chips and how that translates to maybe new customer relationships, can you maybe tell us How many Animaker customers do you expect to have OLED Animaker customers do you expect to have by the end of 'twenty four?

Speaker 3

By end of 2024,

Speaker 2

you're selling. Hello? Hello? Yes.

Speaker 5

Yes, I can hear you.

Speaker 2

Yes, it's an echo here. We expect to get to 2 or 4 Panel customer by then shipping. Hello? Hello?

Operator

Yes, we can hear you. Hi. Yes, we can hear you.

Speaker 5

Yes. Okay.

Operator

Maybe you should ask your question again, Martin.

Speaker 5

Sure. Just a follow-up on the my second question is, are you expecting those additional PENO customers, Chinese?

Speaker 2

Yes. So we are expecting Our future chips to be open to be used by other than our current global customer.

Speaker 5

Got it. I have no more questions. Thank you.

Operator

And I'm not showing any questions at this time. I'd like to turn the call back over to UJIA for any closing

Speaker 1

Thank you. That concludes our Q2 earnings conference call. Please look for details of our future events on MagnaChip's Investor Relations website. Thank you, everyone. Take care.

Operator

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

Powered by Quartr