Q3 2019 Earnings Call

Today's conference is being recorded.

Require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today, Bruce Entin head of Investor Relations. Please go ahead Sir.

Thank you for journey to discuss Magnachips financial results for the third quarter ended September Thirtyth 2019, the third quarter earnings release, we filed today after the stock market closed and other releases can be found during the Companys Investor Relations website, a telephone replay of today's call will be available shortly.

After the completion of the cool and the webcast will be archived on our website for one year access information is provided in the earnings press release.

Joining me today or why Jae Kim Magnachips, Chief Executive Officer, and Jonathan Kim Our Chief Financial Officer, why Jerry will discuss the company's recent operating performance and market outlook for our product categories and Jonathan will provide an overview of our Q3 financial results and provide financial.

For Q4 2019, there will be a question and answer session. Following today's prepared remarks. During the course of this call. We may make forward looking statements about magnachip some business outlook and expectations are forward looking statements and all other statements that are not historical facts reflect our belief.

<unk> predictions as of today, and therefore are subject to risks and uncertainties as described in the Safe Harbor discussion found in our SEC filings. During the call. We will also discuss non-GAAP financial measures. The non-GAAP measures are not prepared in accordance with generally accepted accounting principles.

But are intended to illustrate and alternative measure of Magnachips operating performance that may be useful a reconciliation of the nongaap financial measures to the most directly comparable GAAP measures can be found in our third quarter earnings release available on our website under the Investor Relations Tab W.

LBW that Magnachip dot com and now we'll turn the call over to why Jae Kim why Jay Thanks, Bruce what come to everyone on the Q3 conference call.

Q3 was Magnachips hi, its revenue quarter since our IPO in 2011.

Revenue for 229.7 million increased 11.5% year over year and 4% sequentially.

And was at the high end of our guidance range over 222 to 30 million.

Display and power both achieved record revenue in Q3 and foundry turned in its best revenue quota in five years.

Display power and foundry old showed year over year end quarter over quarter revenue growth.

While our oily the business had its highest revenue quarter ever.

Total gross profit margin was 26.5%, which exceeded our guidance range of 20% to 24% due primarily to increase revenue and higher fab you do ligation that benefited foundry as well as power and non or liddy stand up.

Product manufacturing in house.

Of course margin now has increased sequentially for two consecutive quarters and was about 12 percentage points higher in Q3 Dandy normally low level of recorded in Q1 of this year, Jonathan would provide commentary on gross margin shortly.

Let's begin our review of Q3 with Oh Eylea D.

Clearly the revenue was a record 78.3 million, which broke the previous record of a 73 million said less than 90 days ago. In Q2 will lead the revenue increase over 34% from a year ago and was up over 7% sequentially.

Oh really the business in Q3 benefited from the launch of a six oily de smartphones in Asia with our oily de display drivers.

In the first nine months of this year 20, or really de smartphones were launched worldwide with our oil indeed display drivers.

We were awarded a record 11, new oily D.D.D. I see design wins in Q3, including three midrange designs from a major smartphone maker in Korea.

The 11 design wins seven <unk> based on our 40 nanometer product family and four based on our new West and advanced 28 nanometer drivers that have the lowest power on the market.

About 21 cumulative oily de design wins through Q3 of this year, one third have been from our 228 nanometer Wally the display drivers 40 nanometer display drivers will account for the majority of oily design.

Okay and revenue in 2019 and in 2020, we expect that I was 28 nanometer display drivers will become mainstream products.

On the Q2 earnings call back in July I mentioned, we had three different versions of our 28 nanometer oil D. These play driver. However in Q3, we added a force to their product lineup.

Two of those 28 nanometer drivers in mass production and two others out being sampled by the end of the year, we anticipate well have a total of about a dozen different product versions of 40 and 28 nanometer display drivers in <unk>.

Barrier stage of development and production.

And we do not plan to stop here.

In summary, we believe we are building upon our position as the leading independent developer and supplier of oily de display drivers for smartphones today in the future. We plan to extend that puts you should have strengths to Tvs tablets computers and automotive as well.

Wow.

Let's now turn to our power standard products business.

Power revenue of 48.7 million set a record.

Revenue increased 9.5% from a year ago and gross profit margin reached its highest level ever.

Smartphones industrial lighting and E bikes were among the biggest driver is ever customer demand.

Revenue from premium product.

Premium power products, which include Super Junction MOSFET, IGBT, and how I see grew by double digits compared to a year ago and represented nearly 50% of the power revenue in Q3.

Our battery Fad per adult.

That protect smartphone batteries recorded its highest revenue since the product was introduced in 2008.

We have the number one market share in Korea, and we are currently in development about a dozen different battery projects to align with the customer product requirements in Asia.

Oh, how business is benefiting from changing industry trends.

Mobile devices like smartphones require or Trello power devices to support advanced application processors and extend battery life why products like power tools and he buys have motors they require mid and high voltage power devices, Oh power product lineup meets all of those.

<unk> requirements, we believe that the electric vehicle market would it be the next attractive long term business opportunity for Magnachip.

In summary, our power business has grown 14% and 13% in each of the past two years or what 12% over the first nine months compared to a year ago. Despite growing just 2% sequence in Chile in Q3.

We expect a slowdown in power in Q4, but we view that this business has the potential for long term growth.

Now turning to the foundry business.

Foundry revenue in Q3 was 90.3 million up 7.7% year over year and up 23.6% sequentially. The strong proponents of the founder business can be traced to east, especially strong demand from the computing and consumer segment.

In addition foundry products that had been in the early stages. Your production early in the year continue to ramp and we also saw a significant increase in demand for our PCB each quarter prom and high voltage technologies.

Now, let me provide an update on the street easy evaluation process.

On behalf of the Magnachips management and board of Directors I am pleased to report that we continue to make substantial progress on our previously announced Streeteasy evaluation process of the foundry business and fab four including discussions with.

Multiple was interested parties toward a possible sale of the business as well as consideration of accretive business conversions joint ventures and partnerships as stated previously our decisions regarding the outcome of the various options of this sheets.

Easy evaluation process will be guided by what's the management and the board considered to be the best Avaira pass to improve magnitude profitability and to maximize shareholder value.

Thank the board fleets is substantial efforts and asked any commitment to the company and our shareholders.

Now I'd like to share my perspective on the current business environment and my longer term outlook.

We got up to a start slow start this year because of a trade tensions that caused macro uncertainties and a industry wide inventory correction, but our business has rebounded nicely as we said on our last call and as we reiterate now we believe taught.

<unk> revenue this year, we're show modest growth. Despite the slow start to the year, we achieved about 200 million dollar wars of oil in the revenue in the first nine months of the year, which has more than we had for the entire 2018 when we had.

Hundred 88 million.

During the past, we anticipate a seasonal drop off of a oily the revenue in Q4, but we now anticipate it will be less severe in percentage terms than a year ago.

Taking the long view the future looks bright facility, we know the leading smartphone makers in Korea, and the U.S. have inverse embraced Wally the displays and now we have new market research data demonstrate that oily de adoption by China smartphone makers isn't the rise.

Based on proprietary data compiled by supply chain market research well the smartphones represented 13.6% of old smartphone models introduced by Chinese smartphone makers in 2017.

That number increased to 25% in 2018.

And is expect to increase again to 46.8% in 2019 by 2025 supply chain market research estimates that 75.2% of all smartphone introducing China by Chinese smartphone makers will have the oily de displays.

Based on trend life analysis.

[noise] power revenue through the three quarters was about 82% of what we achieve all of last year power business will decline in Q4, as we are seeing seasonal softness in consumer and communication segments, you know customer base.

However, we feel good about the longer term picture for this under the radar business that has grown faster than the industry over the past two years. The foundry business was soft in Q4 due to seasonality.

We have 100% of IP and manufacturing Korea, and this year up to now that you've generated more than 90% of each revenue in Asia. As a result, we feel fortunate to have a unique placing in the Asia supply chain that we feel positions as well.

Capitalize on different kinds of business opportunities in Korea, China, and Greater Asia, now I turn the call over to Jonathan and come back for the acuity Jonathan Thank you I'd and welcome to everyone on the call.

Let's start with revenue for the two business segments, and then moved to a review of profitability fab utilization operating expenses and balance sheet items.

Revenue in the standard products group, which includes display and power business lines was a record hundredd and 39.2 million up 14.1% year over year and up 5.5% sequentially from the previous record of 132 million in Q2.

Display revenue was a record 90.6 million up 16.7% year over year end up 7.5% from the previous record of 84.3 million in Q2 of this year.

The year over year increase was primarily attributable to an increase in revenue related to our mobile OLED display drivers due to the launch of new OLED smartphones by smartphone makers in Asia.

This increase was offset in part by these strategic reduction of our lower margin LCD business.

Although revenue in Q3 represented.

86.4% of our display business as compared to 75%.

In Q3 2018.

Power revenue as noted earlier was 48.7 million up 9.5% year over year and 2% quarter over quarter.

The year over year increase was due primarily to higher demand for premium power products, such as high in Mosfets, primarily for TV and industrial applications.

Foundry services group revenue was 90.3 million up 7.7% year over year and up 23.6% from Q2 of this year.

The increase was primarily attributable to an increase in demand from the computing and communications segments.

Standard products group represented 60.6% of total revenue up from 59.2% in Q3, a year ago and down.

64.3% in Q2 of this year.

Display was 39.4% of total revenue in Q3 up from 37.7% a year ago and down from 41.1% in Q2 2019.

Power was 21.2% of total revenue about flat with 21.6% in Q3, a year ago and down from 23.3% in Q2 2019.

The foundry services group represented 39.3% of total revenue down from 40.7% in Q3, a year ago and up from 35.6% in Q2 2019.

Let's now recap profitability metrics in Q3.

We believe gross profit is an important financial metric to monitor because of the potential flow through to operating income adjusted EBITDA and cash flows.

Total gross profit was 60.9 million up 9.2% year over year, and 38.8% quarter over quarter.

Operating income was 25.9 million up 41.9% year over year and up nearly threefold quarter over quarter.

Adjusted EBITDA was 35.5 billion up 27.2% year over year end up hundred an 8.6% quarter over quarter and operating cash flows up 12.9 million up nearly threefold year over year, but down 55.4% quarter over quarter due primarily to.

Our semiannual interest payment of debt as well as timing of certain payments.

Total gross profit margin of 26.5% was down from 27.1% a year ago and up from 21.4% in Q2 of 2019.

The improvement in total gross profit and gross profit margin in Q3 versus Q2 was due primarily to an increase in fab utilization and better than expected revenue in the foundry business.

Fab utilization in Q3 was into low 90% range as compared to the low 80% range in Q2 and compared to the high 80% range in Q3 of 2018.

We currently expect that fab utilization will decrease in Q4, primarily due to an anticipated seasonal softness in foundry and power.

Now, let's look at gross profit margin by segment.

Gross profit from our standard products group segment was 35.2 million or about flat compared to 35.2 million in Q3, 2018 and up 11.5% from 31.6 million in Q2 of this year.

Gross profit margin and standard products, <unk> was 25.3% down compared to 20.8% in Q3, a year ago and up from 23.9% in Q2 of this year.

Year over year decline in gross margin was primarily attributable to lower manufacturing yields of a newly introduced mobile display product during an initial stage of production from an external suppliers.

The company has already seen improvements in yields in Q4.

Gross profit from our foundry services Group segment was 25.5 million up 25% from 20.4 million in Q3, 2018 and up nearly 110% from gross profit of 12.2 million in Q2 of this year.

Gross profit margin in foundry was 28.3% versus 24.4% in Q3, a year ago and 16.7% in Q2 of this year.

Profit and gross profit margin improved sequentially due primarily to higher fabulous vision any favorable product mix.

Turning now to operating expenses in Q3.

As Jamie was 15.8 million or 7.3% of revenue as compared to 18.6 million or 9% of revenue in Q3, a year ago and was down slightly from 17 million or 8.3% of revenue in Q2 of this year.

The decrease was primarily attributable to the timing of equity based compensation that will cause SG need to increase in Q4 as genie into second half of 2019 will be about flattish with what we reported for the first half of this year.

R&D was 17.4 million or 7.6% of revenue compared to 18.9 million or 9.2% of revenue in Q3, a year ago and down 8.5% from 19 million or 9.3% of revenue in Q2 of this year.

Year over year decrease was primarily attributable to the timing of certain employee incentives and a decrease in outside service fees and various overhead expenses.

Operating expenses, excluding special charges in 2019 or expected to be slightly lower than 2018, as we continue to focus on cost control.

Turning now to the balance sheet.

Cash was hundred 31.3 million at the end of Q3 as compared to 123.8 million at the end of Q2 due primarily to an increase in gross profit dollars.

We generated net operating cash flow of 12.9 million in Q3.

Marking the second consecutive quarter of net positive operating cash flow.

We generated 17.2 million in net operating cash flow into first half of 2019.

Our current expectation is that we will have positive operating cash flow for the 2019 year, which will likely be the highest we generated in the last five years.

Accounts receivable totaled 106.3 million, an increase of 9.8% from 96.8 million in Q2 of this year.

The increase in accounts receivable in Q3 was attributable to the timing of payments from certain customers.

Virtually all of our accounts receivable or current.

Inventories totaled 72.7 million up 8.2% from 67.2 million in Q2 of this year, primarily due to higher revenue, particularly of OLED display drivers.

Capex was 1.7 million in Q3 as compared to 3.8 million in Q2, and 11.2 million in Q1 of 2019 Capex in 2019 is expected to be significantly lower than to normalized capex expenditures made in 2018, which was approximately 29 million.

With that please refer to our third quarter earnings release for our guidance for Q4, which is available on our website under the Investor Relations tab on now I'll turn the call back to Bruce Bruce. Thank you Jonathan So Josh. This concludes our prepared remarks, we would now like to open the call for quick.

Since.

As a reminder to ask a question you'll need to press star one on your telephone to withdraw your question press the pound cake.

Our first question comes from.

Yeah.

You May proceed with your question.

Thank you and the congrats on a really good results in light of this shared environment. What they wanted to see if you could maybe elaborate a little bit on on the foundry sale could you maybe discuss.

What has kind of changed incrementally.

From your discussions say at the beginning the year versus now.

In terms of potential interest.

And you also mentioned that you in the management in the board would evaluate variety of options and and would determine what is the best outcome can you elaborate on what metrics or kind of how you're going to frame that in terms of what you can decide which exit strategy you're going to have.

For the fab business.

Yes, so very good question so.

The management and the board clearly looking at the venue where to maximize shareholder value.

We laid it out are we looking and range of options.

From a potential sale to a joint venture to any accretive measure.

And partnership to maximize shareholder value. So we are very consistent and that Karen.

But beyond that Ah I cannot disclose any or things like timeline So force.

But are you still committed to the end of year. I think is would you had said at the beginning of the year that there would be some sort of strategic action on that fab.

Too if you go back to February announcement to Las and asked spend now we have not been any timeline on it. So you know we we are continuing this path.

And.

Yeah, well, we understand where you're coming from but we haven't set a timeline.

And in terms of the business improvement significant improvement in the gross margins.

Because of beat the high utilization rates can you talk a little bit about the recovery that you're seeing in foundry, you talked about computing and consumer.

I would imagine a lot of those end products are going to into China is there any thoughts about what's happening in China in terms of those end products and the recovery that's going on there.

Yes, So I think your question it wasn't the foundry right. So yeah, yeah, the foundry which is.

Yeah, well, which I believe.

A large percentage going into China.

So if you look it as a company about 95% of the business is outside the U.S. and today, we said about 90% of the business ease in Asia Ive few asks for exactly on the China about 50 per.

Our sense of the those 90% of business is in degrade greater China bus.

Going back to the the consumer and computing segment uptake we sell into foundry.

Some of the product we started production starting early this year, we show a a ramp up in Q2, and we continue to see the ramp up in Q3.

Some of the communications, we had a very good.

Product launches in demand in China, They created additional revenue upsides in Q3.

And those were the some of the next level details.

And on the on the old only D traction, which has been growing really well you talked about maybe a little bit less seasonal.

To have a change in Q4 than than initially that you had in last year.

What's the cost for the.

Oh wed be less seasonal in Q4 this year versus last year.

And the attach rates that you're seeing on only D. I am going into next year.

Can you talk a little bit about.

You know kind of what designs therefore, they for more your flexible high end designs are the across the board.

And you know how your competitively positioned there.

Yes. So thanks for all the question and there were multiple questions. So let me try to answer that so on the question of Ah why we see a better a slow on the fourth quarter than last year.

Is one of the key indicators you know is a number of design win last Q3 of 2018, we had six design wins. If you look at the design win we just announced for the Q3 is 11 so.

11, it's a much higher.

And that carries some momentum going through some of the revenue for the Q3, why we had a.

Record revenue into Q3 last year Q2, a slightly higher than Q3 and that carries into momentum into fourth quarter over this year. So I think that's one way or look at it.

For that.

In terms of the my market research done by supply chain management.

They are estimating about about roughly 46% of the new product introduction from Chinese smartphone makers enjoy early this year.

So obviously, a the the momentum in China or so on the oil these growing and so are we seeing similar a trend there.

As far as our products concern for the next year I think we mentioned that the.

This year 40 nanometer was more majority next year, we expect a 28 nano meter to become mainstream product what that means is that we expect or much of the design win activity.

Would it be based on the the new current and new 20 nanometer offering.

Going into 2020, and we will have a oh for three offering of the chip on glass chip on plastic a with cheese for the flexible already as well as a a one layer C O F which is for the rigid and then to lay a C O S for the high and flexible so we'll have a.

Very good.

Portfolio going into next year and we are so said this year by end of this year I expect a bad doesn't product portfolio, but this is a quite significant going if you look at last year end of the 2018 I had the six product line up.

Variety of different products going into 2019 so.

I think will position getting into 2020.

Great. Thank you.

Thank you. Our next question comes from Suji de Silva with Roth capital.

You May proceed with your question.

<unk>.

Here you had you talk about the metrics like revenue per wafer those improving what the customer mix here the utilization seems pretty similar to prior peaks I'm wondering if you're shifting mix toward higher valued customer in foundry.

Yeah, you're you're cutting out there can you repeat your question again.

Sure. It was about the foundry and whether the wafer mix has been improving because you had record revenues here with similar utilization to past peak.

Sure Yeah. So.

The the product mix did improve and you know as we mentioned on her prepared remarks, the the better than expected gross margin was primarily related to our better than expected revenues on the foundry side, which improved which increased the utilization.

As well as a better product mix. So those were the two factors that we're driving the better than expected gross margin.

Okay.

And then on the OLED side, the 20 nanometer products as those start to ramp into volume do you expect share gains here or there is there an S.P. uplift you have with those newer products versus the 40 nanometer product line.

So so that's very fair question so.

So at 20 nanometer offers the best power consumption in the industry today and Ah.

What our 20 nanometer brings the table is that you see to see a the affordable fall it started to a take off although it said in EMEA embryonic stage.

So some market research data showing that the analysts say Ics.

Expecting be raise the shipment in next year on the affordable phones, so things like dad, where really determined that the lowest power consumption is very important attributes I in terms of going into the ASP side.

You know the Ace Pete is going to be determined by not whether it's 40 or 28 nanometer, but the feature of the display driver is this the Q HD driver is this the 21 by nine is that does it up these U.P. or two legacy U.S. packaging. So.

That those are the more a attribute to determine dsps.

Okay.

And then my last question is on the manufacturing for the all that and the gross margin. When do you expect the way for yield from that new supplier to it production will take a several quarters or will it come in fairly quickly you think any thoughts there would be helpful. Yes. So that's very good question I'm. So.

As you know the 20 nanometer is a state of art, Oh really the process technology a variable we had the first one a day independent supplier a going into production in fact, we started producing in the serve corridor and ER and now.

In the first months into the fourth quarter. Our yield is very good now so we feel comfortable from this quarter that the the 20 nanometer is back in to the range. There were expecting in terms of yield. So so I like to thank my team who has gone to our foundry.

Ladies and developing these process over the last of 18 months and bring it to production, but I can tell you that a 20 nanometer oil in the process is not a variable a we'd done it with the foundry. We now are made it definitely production ready.

Okay. Congrats again on the progress thanks, guys.

Thank you as a reminder to ask a question you wanting to press star one on your telephone.

And I'm not showing any further questions at this time I would now like to turn the call back over to Bruce Entin for any further remarks.

Okay. Thank you Josh. So this concludes our third quarter 2019 earnings Conference call. Please look for details of our future events on Magnachips Investor Relations website, thanks for joining us today.

Thank you ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.