Magnachip Semiconductor Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 2, 2024

Key Takeaways

  • MagnaChip reported Q1 revenue of $49.1 million, down 13.9% year-over-year, with a consolidated gross margin of 18.3% pressured by the wind-down of transitional foundry services; excluding those services, the standard product business achieved a 10.6% sequential revenue gain.
  • In MSS, Q1 revenue of $9 million rose 5.2% sequentially on stronger automotive LCD and OLED demand, driven by collaborations with Chinese panel makers and two new OLED DDIC design-wins slated for production by year-end.
  • PAS delivered $36.5 million in Q1 revenue (+12% sequentially) thanks to robust orders for medium-voltage MOSFETs in e-motors, consumer appliances and server power, along with recent IGBT and 600 V MOSFET design-wins in automotive and PC markets.
  • Management highlighted several upcoming MSS product ramps—including a high-end QHD+ OLED DDIC for a top-tier Chinese smartphone OEM and the first OLED DDIC for smartwatches—as key drivers for second-half growth.
  • As part of its strategic transformation, MagnaChip has launched a new Chinese entity (MTC) to deepen customer engagement, while separating the MSS and PAS divisions to streamline go-to-market efforts and enhance investor transparency.
AI Generated. May Contain Errors.
Earnings Conference Call
Magnachip Semiconductor Q1 2024
00:00 / 00:00

There are 6 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the 1st Quarter 2020 4 Magachip 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 Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Stephen Pelayo.

Operator

Please go ahead.

Speaker 1

Thank you. Hello, everyone. Thank you for joining us to discuss MagnaChip's financial results for the Q1 ended March 31, 2024. The Q1 earnings release that was issued today after the market closed 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, MagnaChip's Chief Executive Officer and Shin Young Park, our Chief Financial Officer. YJ will discuss the company's recent operating performance and business overview and Shin Young will review financial results for the quarter and provide guidance for the Q2. There will be a Q and A session following the prepared remarks. During the course of this 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.

Speaker 1

Such statements are based upon the information available to the company as of the date hereof and are subject to change for future development. Except as required by law, the company does not undertake any obligation to update these statements. During the call, we also will discuss non GAAP financial measures. The non GAAP measures are not prepared in accordance with generally accepted accounting principles, but are intended as supplemental measures of MagnaChip's operating performance that may be useful to investors. A reconciliation of the non GAAP financial measures to the most directly comparable GAAP measures can be found in our Q1 earnings release in the Investor Relations section of our website.

Speaker 1

With that, I'll now turn the call over to YJ Kim. YJ?

Speaker 2

Hello, everyone, and thank you for joining us today, and welcome to Magnachip's Q1 earnings call. Our overall Q1 results were in line with our guidance. Q1 revenue was $49,100,000 down 13.9% year over year and down 3.5% sequentially. Consolidated gross profit margin was 18.3%, down 2.9 percentage points year over year and 4.4 percentage points sequentially, mostly due to the wind down of the transitional foundry services. Excluding transitional foundry services, revenue in our standard product business, which is comprised of MSS and PAS businesses, was up 10.6% sequentially, while gross margin was 21.2%, down 1.7 percentage points sequentially.

Speaker 2

The decline in gross margin was mostly due to lower Gumi fab utilization, driven by the wind down of the transitional foundry services, which also impacts PAAS margins because they share the fab. Despite typical Chinese New Year seasonality, the solid sequential revenue growth of our standard product business in Q1 suggests overall market conditions are improving with the inventory correction possibly nearing on end for some verticals. In particular, we saw improvement in the inventory channel for our PAS business. We also saw better than expected demand from our design for the after service OLED display market, and we benefit from increased demand in our automotive display business. The PAS business strength was primarily from smartphones, e motors, consumer appliances and server power

Speaker 3

applications.

Speaker 2

Now let me provide more detailed comments for each of our standard product business lines. Beginning with MSS, Q1 revenue was in line with our guidance at 9,000,000 dollars down 29.7 percent year over year and up 5.2% sequentially. As we mentioned before, the quarter over quarter revenue growth was due to increased demand from automotive LCD and OLED products. Overall, we continue to collaborate with several OLED panel makers and smartphone OEMs targeting the China market. While 3rd party market researcher, Omdia, predicts only slight growth in the global smartphone market in 2024, the top 5 China brands are forecast to enjoy more than 18% growth in OLED smartphone shipments.

Speaker 2

As a reminder, we have DDIC designs and customer engagements underway that span the entire smartphone market spectrum from the mass market here to the premium tier segments as well as other display markets such as automotive. We had an additional 2 new OLED designs this quarter that we'll discuss more in detail later. More specifically, during the quarter, our Display IC business had a new design in of a high end OLED smartphone for top tier Chinese smartphone vendor. This design in is based on our QHD plus OLED DDIC that we sampled in Q1 2024. This chip provides the latest 8 transistor LTPO panel feature support and is produced in 28 nanometer.

Speaker 2

We expect this design to go into production by the end of the year. We also started the initial ramp in Q1 for our 1st generation OLED DDIC chip for China that we taped out in 2022 for the after service market. We are now working to expand this segment with other China panel makers. As mentioned previously, we received a pilot production PO as a second source supplier from a leading Chinese smartphone OEM. We expect revenue to begin in the second half of the year.

Speaker 2

Moreover, we also have been chosen to work with them on their fall 2024 model with our next generation chip that we taped out and expect to sample in Q2 this quarter. Finally, we taped out in Q1 and expect sample in Q2 our 1st smartwatch OLED DDIC. We're excited about this partnership with a smartwatch solution provider in China as it showcases our strategy to expand into new high growth adjacent markets. With regard to our automotive DDIC business, we saw strength in the Q1 that will likely to continue in Q2. Notably, we had a new OLED design win in EV that has commenced production in Q2 targeted for a leading European automaker.

Speaker 2

Our power IC business is now including MSS. We saw sequential strength from LED TVs during Q1 and expect business to broaden to include multiple notebooks and tablet models in Q2. We continue to secure new design wins with a major Korean customer. Moving on to PAS. Q1 revenue was $36,500,000 down 5.6% year over year and up 12% quarter to quarter.

Speaker 2

The sequential increase was due primarily to increased demand for medium voltage MOSFET for industrial e motor markets in China, consumer appliances and server power. The results are in line with our earlier expectation for gradual recovery in our power business during the first half of twenty twenty four and are further supported by initial signs of inventory reduction in the distribution channel for our PAS products. More specifically, we saw strength in the high speed e motor market for scooters and motorcycles where we benefit from the approximate doubling of the bill of material compared to a traditional e bike. We believe our power solution for e motors are now outperforming our competition. We are seeing steady demand in low voltage MOSFETs due to contribution from new high end smartphone models as well as increased demand in mid range smartphones.

Speaker 2

Further, the PAS design pipeline looks solid for the next generation of smartphones coming in late 2024 and into 2025. We saw a sequential uptick in demand for our super junction MOSFETs and obtained a 600 volt design win in the PC power and power supply market. We also had an IGBT design win at 6 50 volts from a major Korean appliance company. Lastly, within our automotive power, we had our 1st medium voltage MOSFET design win for an electric cooling fan with a China based SUV supplier as well as additional power steering related win in Korea. We have a strong product pipeline for power in 2024, and they are on track.

Speaker 2

These products expect to contribute revenue by end of the year. The new 6 50 volt IGBT finished the qualification and expect to begin commercial samples this month. 6th generation IGBT and super junction samples will begin this quarter Q2 and 8th generation LV MOSFET samples is ready and 8th generation MB MOSFET samples are ready in this Q2 'twenty four. In summary, PAS saw strong sequential growth in Q1. With the addition of new products and streamlined channel inventory, we are optimistic for the growth trajectory in 2024.

Speaker 2

In MSS, we are executing our China focused strategy and making steady inroads with the top tier panel makers and major smartphone OEMs. I will come back to wrap up the call after Xinyuan gives you more details of our financial performance in the Q1 and provide Q2 guidance. Xinyuan?

Speaker 4

Thank you, Ajay, and welcome everyone on the call. Let's start with key financial metrics for Q1. Quarter revenue in Q1 was $49,100,000 which came slightly above the midpoint of our guidance range of $46,000,000 to $51,000,000 This was down 13.9% year over year and down 3.5% sequentially. Revenue from MSS business was $9,000,000 at the midpoint of our guidance range of $8,000,000 to $10,000,000 This was down 29.7 percent year over year, but up 5.2% sequentially. TAS business revenue was $36,500,000 and at the midpoint of guidance range of $35,000,000 to $38,000,000 This was down 5.6% year over year, but up 12% sequentially.

Speaker 4

Revenue from transitional laundry services declined to $3,500,000 as we continue to wind down this service over the next couple of quarters as we explained previously. Consolidated gross margin in Q1 was 18.3%, within our guidance range of 70% to 20%, but down from 21.2% year over year and down from 22.7% sequentially. MSS gross profit margin in Q1 was 44.6%, above the upper end of the guidance range of 40% to 43%, up from 30.2% in Q1 'twenty three and up from 41.3% in Q4 'twenty three. The margin expansion was primarily due to non recurring engineering revenue and higher than expected revenue from our 1st generation DDIC for the after service market. The volatility of NSS gross profit margin is also due to the smaller relative size of its revenue.

Speaker 4

T and A's gross profit margin in Q1 was 15.4%, driven by the midpoint of the balance range of 15% to 18%, down from 26.7% in Q1 2023 and down from 18.1% in Q4 2023. 3. This year over year and sequential decline was mainly due to a lower consumer utilization rate from the wind down of transition of larger services and unfavorable product mix. Turning now to operating expenses. Q1 SG and A was $11,300,000 as compared to $12,100,000 in Q4 2023 and $12,200,000 in Q1 last year.

Speaker 4

The sequential and year over year decline in SG and A was primarily attributable to our cost reduction efforts with respect to certain one time correlated benefits. Q1 R and D was $11,200,000 as compared to $16,400,000 in Q4 2023 and $13,300,000 in Q1 last year. As a reminder, R and D expense in Q4 last year included higher net asset costs due to the timing of project development. Stock compensation charges included in operating expenses were $900,000 in Q1 compared to $1,700,000 in Q4 and $1,100,000 in Q1 non GAAP. Q1 operating loss was $13,500,000 This compares to an operating loss of $15,900,000 in Q4 and operating loss of $21,800,000 in Q1 2020.

Speaker 4

On a non GAAP basis, Q1 adjusted operating loss was $12,600,000 compared to adjusting operating loss of $14,100,000 in Q4 $12,200,000 in Q1 last year. Net loss in Q1 was $16,400,000 as compared with a net loss of $6,000,000 in Q4 and a net loss of $21,500,000 in Q1 loss. Q1 adjusted EBITDA was negative $8,400,000 This compares to a negative $10,000,000 in Q4 and negative $30,900,000 in Q1 last year. Our GAAP diluted loss per share in Q1 was $0.40 as compared with diluted loss per share of $0.16 in Q4 and diluted loss per share of $0.49 in Q1 last year. Our non GAAP diluted loss per share in Q1 was 0 point 28 dollars This compares with diluted loss per share of $0.21 in Q4 and $0.24 in Q1 last year.

Speaker 4

Our weighted average diluted shares outstanding for the quarter were 38,500,000 shares. Under our $50,000,000 stock buyback program authorized in July 2023, we repurchased in Q1 20 24 approximately $600,000 shares or $4,100,000 leaving about $32,300,000 remaining in authorization at the end of March 30, 2020. Moving to the balance sheet. We ended Q1 with cash of $171,600,000 which includes approximately $29,700,000 in long term borrowings, up from $158,100,000 at the end of Q4 twenty 20. We added the long term borrowing in March this year to focus opportunistically take advantage of favorable loan financing terms, while exploring strategic options, including share buybacks and strategy investments to enhance shareholder value.

Speaker 4

This loan bears the area of interest rate and the initial interest rate was 4.86% per annum and matures on March 26, 2027. We pledged our ruby properties as collateral. Please refer to the Form 8 ks filed at March 29, 2024 for further details. Net accounts receivable at the end of the quarter were $33,000,000 which represents a decrease of 7.2% from Q4 2023. Our days sales outstanding for Q1 was 66 days and compared to these 9 days in Q4.

Speaker 4

Our average days in inventory for Q1 was RMB 71 1,000,000 and compares to 77 days in Q4. Inventories net at the end of the quarter were $31,500,000 $32,700,000 in Q4 of 2020. Lastly, Q1 CapEx was $700,000 For the full year of 2024, we anticipate to spend approximately $10,000,000 to $12,000,000 primarily for our PAS business and Kumisbet. This includes approximately $3,000,000 to $4,000,000 of onetime CapEx for our newly established operating entity in China. Now moving to our 2nd quarter and full year While actual reserves may vary, for Q2 2024, Magna should currently expect consolidated revenues in the range of $49,000,000 to $54,000,000 including about approximately $1,500,000 of transitional bonded services.

Speaker 4

MSS revenues in the range of $9,500,000 to $7,500,000 This compares with MSS equivalent revenue of $9,000,000 in Q1 2024 and $12,400,000 in Q2 2020. 20. TAS revenue to be in the range of $38,000,000 to $41,000,000 This compares with TAS equivalent revenue of 36 $500,000 in Q1 2024 $39,000,000 in Q3 2020. 2. Consolidated gross profit margin to be in the range of 17% to 19%.

Speaker 4

MSS gross profit margin to be in the range of 30% to 33%. This compares with MSS equivalent gross profit margin of 44.6% in Q1 2024, which included non recurring engineering revenue and 36.4% in Q2 2020. PAS gross profit margin to be in the range of 15% to 17%, primarily as a result of the impact of higher capacity from the expected decline in transitional bond services revenue. This compares with TAS and coluncusafimarginib 16.4% in Q1 2024 and 23.1% in Q2 2020 2. For the full year 2024, we reiterate our prior guidance.

Speaker 4

MSS revenue to grow double digits year over year as compared with MSS equivalent revenue of $44,400,000 in 20.23. PAS revenue to grow double digit year over year as compared with PAS equivalent revenue of $171,300,000 in 20.23. Consolidated revenue was up slightly year over year as recovery in assets at KAS was offset by the base out of transitional volunteer services. Consolidated gross profit margin between 17% to 20%, primarily as a result of the impact of idle capacity expected from the base out of transitional bond and bond based services. This compares with the consolidated gross profit margin of 22.4% in 2020 3.

Speaker 4

Thank you. And now I'll turn the call back over to YJ for his opening remarks. YJ?

Speaker 2

As we noted in our previous earnings call, we are undergoing a substantial transformation in our business over the next couple of years. 1, we have shifted the priorities in our display business to be laser focused primarily on China business expansion. We have now begun operations at our new Chinese entity, magnetorchiptechnology company, MTC, with our China headquarters now up and running, and we expect to significantly expand our China operation in 2024. We are strengthening strategic relationship with panel customers, OEMs and suppliers. I am encouraged with the progress thus far.

Speaker 2

2, Q1 is the 1st period in our financial results reflect the operating performance under the new MSS and PAS structure. The separation of those business streamlines our go to market strategy, strengthens the potential for increased shareholder value via strategic investments and also improves transparency for investors. 3, we are working very hard to fill idle fab capacity in our Gumi fab caused by the wind down of the transitional foundry services. Our current power products are experiencing an increase in demand, and we are launching a new slate of higher margin products throughout the year. I look forward to sharing updates and our progress on future earnings calls.

Speaker 2

Now I will turn the call back to Stephen. Stephen?

Speaker 1

Thank you. That concludes our prepared remarks section of the call today. Operator, you may now open up the call for questions.

Operator

Our first question comes from Quinn Bolton with Needham. Your line is open.

Speaker 3

Hey, guys. Can you hear me?

Speaker 2

We can, but it is breaking up.

Speaker 3

Okay. Hopefully, this comes through. I guess I wanted to ask, YJ, the biggest you've introduced a number of new products in the MSS segment over the last 12 to 24 months. And it sounds like a lot of those are slotted to start to go into production towards the end of this year and into early 2025. And I guess as you look at the number of new products, could you kind of just rank order, which do you think are going to be the biggest contributors to growth in the second half in the MSS segment?

Speaker 2

Okay. Very good, Quinn. Thank you. So the initial business ramp right now study with 1st generation product we taped down 2,202. That's the EFSA service market.

Speaker 2

And then we announced the win with our 2nd generation product with one of the key Chinese phone maker that expect to go to revenue in second half. And today, we taped out and it's going to sample the 3rd generation product. And that one will also go into production towards the fall or end of the year. And then we will have another product that will hit the market that takes out and sample this in the next quarter. So in terms of the volume products, it's going to be the 2nd generation product that we talked about that we won that will go production in second half.

Speaker 2

And then the chip that we will sample this quarter in the Q2, that will be aligned with the fall model. And those 2 will be the high volume model. And then additionally, we also said the we sample QHD plus high end model, and that will also drive a decent revenue starting end of the year. So and then there's a smartwatch that we tape that with samples. So those are the products that will drive the revenue.

Speaker 2

And I think the high end and the second generation and the first, third generation have a good it. So

Speaker 3

Got it. So it sounds like to summarize that the 2nd generation where you already have a win with the China smartphone maker going to production in the second half and then the 3rd generation product, which you expect to start to ramp perhaps a little bit later in the fall. But before year end, those are the 2 sort of highest volume runners as you see it today?

Speaker 2

Yes. And then I would say because the QHD is high end, even the volume maybe a little lower, but the higher ASPs, so that we sample that will also hit towards the end of the year. That will have a probably decent revenue as well.

Speaker 3

Got it. Okay, perfect. And then just kind of looking at the on the PAS segment, you commented that you're starting to see some signs of inventory clearance, kind of wondering how much longer do you think inventory is going to be a headwind? Do you think it sort of continues into the second half of the calendar year? Do you think we'll be mostly through it by end of the second quarter?

Speaker 3

Just any update on kind of where you think we are on the inventory clearance? And I guess a related question, as you get better line of sight into inventory in the channel, do you have any sense where do you think consumption is today of your product versus what you're shipping, which I imagine you're still shipping below end consumption? Thank you.

Speaker 2

Yes. Thank you, Quinn. So we sell about the I would say about 80% in Asian region and then 20% in the Europe and U. S. And for the industrial market and automotive tend to be very big portions for other power makers.

Speaker 2

They tend to be maybe 78%. But for us, industrial automotive is like 35%, 40%. And so for us, the consumer communication and computing already went through the inventory correction a year and a half. So in the Q1, our industrial segment actually grew over Q4. And even this quarter, we expect the industry to grow.

Speaker 2

On the consumer, we grew in Q1 and then we expect flattish and computing, we grew and expect flattish in Q2. Communication was slightly down in Q1, but we expect strong growth in Q2. So for us, the inventory correction in industrial segment for us seems to have gone away, so already adjusted. And the usually second half, the Q3, Q4 is a strong quarter or season for us, given that we have more consumer communication and computing segment, which tend to be cyclical. So we are guiding up into Q2 and then we see strong Q3.

Speaker 2

So that's how we see based on today's indicators.

Speaker 3

Got it. One last quick just clarification. I think you said it was consumer and comms where you had sort of a flatter outlook in the Q2. Is that just more, what you would call seasonality or are there other factors slowing in demand that are leading to a flatter outlook for those two segments?

Speaker 2

I think it's also really aligning with some of the consumer or computing communication models. So I think it's I wouldn't say it's really come to seasonality, but it's also model alignment and so forth. So I think it goes up and down for us. So I don't think it's a pure seasonality. The Q2 is seasonality as overall is better for us.

Speaker 3

Got it. Okay. Thank you. Yes.

Operator

One moment for our next question. Our next question comes from Andrew Northcutt with Oppenheimer. Your line is open.

Speaker 5

Hey guys, this is Andrew Roth for Martin. Thanks for taking the question. You touched upon it a little bit, but can you talk a little bit about how much exposure the PAS segment has to the consumer home appliance market? And how do you think China's recently announced home appliance trade in subsidy will impact the business? Thank you.

Speaker 2

Could you repeat the subsidy on consumer appliance by whom, China? Yes, by China. Okay. So mostly the consumer is mostly in Korea at the moment. We do some in consumer in China.

Speaker 2

We do more of the industry like e bikes and communications and cell phone in China. But I think that will also if they are doing that, I think that will also help us out because China definitely is about 45% 40% to 45% of revenue for us in PAS.

Speaker 5

Perfect. Thank you.

Operator

One moment for our next question. Our next question comes from Suji Desilva with ROTH MKM.

Speaker 5

Hi, YJ. Hi, Shingyong. So, YJ, the China smartphone wins, can you talk about whether those are a premium model or mainstream or across the platform? I'm trying to understand what the initial ramp can look like for those wins.

Speaker 2

Yes. The one that we announced the new win, it's a really high end. It's a QHD plus The QHD plus as you know, is higher than the WXGA, which is a resolution of iPhone. So it's higher than that. So we see that segment growing starting this year.

Speaker 2

So we are preparing more solution around there. And this is the first one that we are going there with a new model, and that's for the top 3 Chinese smartphone maker.

Speaker 5

Okay. Great. Okay. And then you talked about in the Power segment, you talked about server opportunity. Can you talk about whether that's early or that's starting to ramp?

Speaker 5

And what the kind of opportunity is, whether it's AI type servers or just some color there as to what the opportunities that seems like it's newer to you and the competitive landscape there perhaps would be interesting to know as well?

Speaker 2

Yes. So we are starting the server powers. So we got qualified and started shipping. And we do hear that the AI portion of servers are the fastest growing within the server segment. So we look forward to see whether we get more subsequent design in the AI servers in the future, but it's for the server power supply.

Speaker 5

Server power supply. One last quick question. The formation of the MTC, the China organization, their entity, Just wondering what the implications of that are from an MX perspective and sort of running the business and thoughts as what that maybe allows you to do and that you maybe couldn't in the past? Any thoughts would be helpful.

Speaker 2

Yes. The creation of MPC is to address the Chinese customer well with a local presence. I think given the sensitivity there, politically, I think it's good to have a local company focused on Chinese suppliers. So and then have an independent operation to service and support and grow opportunity with independent operation. So that's the idea, and that's been very welcomed by the Chinese customers.

Speaker 5

Okay. All right. Thanks, Wai Jae.

Speaker 2

Thank you.

Operator

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

Speaker 1

Great. Thank you. This concludes our Q1 earnings conference call. Please look for details of our future events on MagnaChip's Investor Relations website. Thank you and take care.

Operator

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

Powered by Quartr