Q1 2020 Earnings Call
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Ladies and gentlemen, thank you for some design and while it sounds to me 1000, trendy magnitude Jamie can separate corporately anything Swanson football.
At this time, all participants are leaving only mode.
After the speakers for sensation it will be a question and answer session I.
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I'll now like to have the conference we can't speak of TV [laughter] with Eaton head of Investor Relations. Thank you. Please go ahead Sir.
Okay. Thank you for joining us to discuss Magnachips financial results for the first quarter ended March 31st 2020, the first quarter earnings release before out today after the stock market close and other releases can be found on the company's Investor Relations website.
Telephone replay of today's call will be available shortly after the completion of the cool and then what scares 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 shouldn't Young Park, our Chief Accounting Officer, why Jerry will discuss the company's recent operating performance in market outlook for all product categories and shouldn't your who will provide in over.
View of the accounting treatment of continuing and discontinued operations there will be acuity session. Following today's prepared remarks. During the course of this conference call. We may make forward looking statements about magnachips business outlook and expectations are forward looking statement and all other state.
It means 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 discussion found in RCC filing [laughter] during the call.
We will also discuss non-GAAP financial measures and non-GAAP measures or not prepared in accordance with generally a county.
Counting principles, but are intended to illustrate an alternative measure of Magnachips operating performance that may be useful a reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in our first quarter earnings release available on our website under the.
Instead, www dot Magnachip dot com I'll now turn the call over to White Jae Kim wagering.
Thanks, Bruce and it will come to everyone on the Q1 2020 conference call first of all our Hearts go out to all those people whose lives have been impacted by the global pandemic CAD Magnachip. We are fortunate that Korea seems to have handled it could be 19.
Break out in a manner that minimize it spread.
Magnachip, starting 2020 on a high note, we executed well and delivered solid results in Q1, despite typical seasonal softness and market disruptions caused by the cold feet 19 Global pandemic. If you recall on our Q4 earnings call on February nine.
Teens suite guided Q1 revenue between hundred 80, 295 million and gross profit margin between 23% to 25% we update our guidance on March 10th and raised a lot when other revenue guidance 287 million and be huh.
In 297 million due to stronger than expected revenue you know really de in foundry businesses and despite weakness you know power business. We kept the gross profit margin range at the same.
The financial statements, we released today look different than in previous quarters, because beginning in Q1, we now account for the foundry business Oh Gee discontinued operation on the accounting rules. The contributing business includes the display business power business.
And fab three operations. The change you know reporting came about when we signed a definitive agreement on March studios to sell the foundry business and fab four Shinyo Chief Accounting Officer will soon provide a more detailed overview of the accounting rules that go.
And how we now present <unk> financial statements mean time, we are pleased that the combined Q1 revenue from standard product and foundry services 897 million on a non-GAAP basis that was our highest revenue level.
For first quarter in 12 years and met the high end of our updated guidance. We currently do not detect excess inventories are now sales channels and our own inventories levels to meet near term demand. The non-GAAP combined gross profit margin from continuing that.
This country any operations was 25.3%, which exceeded the high end of the guidance range revenue from standard products was 110.7 million up 10.4% year over year and gross profit margin was 26.3% right.
And you from the foundry business was 86 million and gross profit margin was 23%.
No I like to give you an update on the definitive agreement to sell the foundry business and Pfaffle. If you recall the transaction value was 435 million, which includes 344.7 million in cash and approximately 90 million in accrued.
Severance liabilities that will be transferred along with approximately 1500 employees to the buyer. The transaction remains on track to close on schedule in the September October timeframe, it's worth noting that there's no closing condition tied to any irregular.
Ruble also worth noting that is that that definitely agreement contains an explicit condition that colby 19 cannot be a cause to delay or cancel the transaction.
Common.
<unk> about the strategic rationale for selling the foundry business and fab four when we discuss Q1 foundry result in a few minutes.
No.
Let's take a closer look at the contributing businesses, starting with oily D, which accounted for about 90% about total display business in Q1.
Oily D.D. I see revenue was 69.7 million up 43.6% year over year and 3.5% sequentially on our Q4 earnings call. In February we said, we expected nine new oily de smartphones without display drivers.
Would be launched in the first half 2020, now we had doubling our estimate to 18, new smartphones in first half of these 18 mottos eight was launched in Q1 and a nine just went into pilot production. This helps explain the sweet.
5% increase in oily de revenue from Q4 19 to Q4 2020 in a period Daddy's typically seasonally so [noise].
We achieved 14, new Orly de de IC design wins for smartphones in Q1 or more than two extra totaled from the same period, a year ago design wins on or is a direct indicator of future revenue, but definitely a good indicator of the market appeal about low power.
Driver portfolio, we now have 16 oily de display drivers with cheese nearly twice the size of portfolio in Q1 of 2019 lastly, serving the needs of smartphone makers in multiple geography was a benefit to watch in Q1, we so age.
Drop off from smartphone brands in China in Q1, due to though koby 19 outbreak, but the decline was offset by a Korean smartphone maker that launch to multiple new models without oily D. I sees this diversification effort would benefit was it again in Q2 I wasn't trying to us.
Smartphone market is beginning to show signs of recovery. Many new models, you without really de display drivers will launch in Q2.
We see the following trends in 2024 hour Liddy business five G. Oh, Oh 14 design wins in Q1, 10 war for Fiveg phones, and we expect this design activity to heat up throughout 2000, 2028 nanometer drives you will gain momentum.
Our 628 nanometer, it's really the drivers represent nearly 40% out what display driver portfolio and accounted for over 40% of design wins in Q1.
Our 28 nanometer devices are the lowest is powered devices on market, which is why we see design momentum continuing to be strong for this growing product family.
Gaming smartphones are gaining popularity and we are well positioned to capitalize on this trend we see more design win activity. This year 420 hurts smartphones targeting full game users we have for display drivers with hundred 20, Herge refresh rate and we also have kept that bill.
Due to reach hundred 44 inch higher refresh rates import into gamers because of faster display response times, which make Doug gameplay appear smoothed there on the screen. We recently taped out another 20 nanometer product with 144 Hearts rate.
Aimed at high end smartphones, Oh really de solutions orsa behind some of these smart phones with words best cameras on increasing importance smartphone feature.
[noise] flexibility design wins or on the way up we are seeing more design wins without flexible d. I see.
The dosage cheap on plastic packaging is becoming more prevalent. This is good for us because packaged coffee is lower dust a profit margin can be higher design wins in Q1, using CLP packaging nearly tripled from the number of design wins in all over 2019.
All of the for auto we have now kicked up development oily de for automotive product, which we expect to go into production in first half 2021, we believe the auto market represent a promising long term oily the opportunity.
Mike really D., we have released an enhanced version of a Mark go LCD TV D. I see for targeted production in first half 2021 might go fairly de <unk> represents and ONTAP market opportunity for growth.
Now, let's turn to power the Colby 19 outbreak in China impact it out power business Powell revenue of 33.1 million declined 12.3% sequentially.
[noise] and 21.2% year over year, primarily due to market softness in China has offices in factories or was shut down for an extended period in Q1.
Super Junction MOSFET, and Paul like Chief performed well in Q1, but we so a sharp decline in other products due to softness in wireless communications and E bikes.
Oh product mixes improves despite the decline in Q1 power revenue premium products represented more than 55% about products in Q1, let's compare to the mid 40% level in Q4 2019.
The good news sees that China appeared to be on the road to recovery from Koby 19, and we now expect power revenue to grow by a double digit percentage is sequentially in Q2.
The news bright spot for power in Q2 is that demand is ramping for our battery fats in d. rapidly growing wireless earphone markets, especially for Korean Oems.
E V in hybrid outdoor segment opportunity to new projects for hybrid electric vehicles kicked off in Q1, adding to a growing portfolio design win.
For the East segment as you May recall, we are involved in several 10000, our qualification testing stages with the auto suppliers. We expect the E auto segment would represent a meaningful growth opportunity for our power business in the years ahead.
Now turning to the foundry services group.
Andre Services group revenue was 51.1% year over year.
And flattish from Q1, 19, why certain markets like wireless communication and consumer was soft due to seasonally macroeconomic trends the declines were offset by in part by demand for medical devices, including respirators and these.
Thermometers demand also came from the computing and tablets segments are working from home has increased due to the pandemic.
[noise] foundry turned in a good quarter, but our decision to sell that business and Pfaffle was strategic and aimed at maximizing shareholder value over the long term. The foundry business is capital intensive highly cyclical requires a separate sales force continuous R&D and scale it.
Ability hands, we believe this business could grow with a dedicated focus which it now we'll have with new owners, given our size and financial resources, Oh Management Board. Both believed in made more sense to focus on either foundry well standard products, but not both.
From an operational point of view the sale of the foundry business and Pfaffle allow us to transform into a streamline pure play products company focused exclusively on the gross opportunities in the display and power businesses.
The sale or so allow us to set near term and longer term financial goes to improve overall profitability and maximize shareholder value putting aside the near term impact of Colby 19 here, a key priorities and financial metrics.
We are focused on over the next few years.
It all starts with achieving profitable revenue growth. Our number one goal is to achieve robust sustainable and profitable revenue growth through focused R&D and continued product innovation.
I will aim for higher gross margin and focus on increasing gross margin dollars to contribute to cash flow generating net operating cash flow as we've done for the past four quarters is a key goal.
Run lean and mean, a streamlined standard product company will right size, opex and exercising financial discipline.
Operating income targeted to doubled from current levels all along with Tom goal is for adjusted operating income, which excludes stock based comp to double to about 10% in the next few years.
We will de lever and strengthen the balance sheet by this time next year, we should be largely freed of approximately 21 million.
In my interest expenses, which will improve net income by $21 million, excluding the impact from noncash foreign currency gains or losses.
EBITDA margin percentage to increase this goal will be made more achievable.
Without the foundry business and fat for.
[noise], we plan to provide more detailed information on our pro forma financial <unk> models as we go forward and hold on analyst day. After we closed the sale of the foundry business and fat for.
Now, let me make a few comments about koby 19, and how we are dealing with it at Magnachip.
Many investors have asked Sgas, how we are managing our workforce in view of the pandemic. We've began in February to take series steps to help protect our employees. The vast majority of whom working Korea. Each day, we disinfect all areas in now fabs well workers tend to get.
Peter and we require that office and fab employees you separate entrances to avoid cross contamination. Weve also is dog plexiglass partitions in D. cat employee cafeteria to create protected spaces for employees.
For higher temperatures taken and hand sanitizer each time on employee enters any of our offices or fabs and employees, where a face masks and practice source euro distancing.
In our sole office.
Weve upgrade to the Sammy Hap.
Filter system capable filtering out or true fine particles have and weve implemented alternating work at home days for those in critical function to avoid sidelining whole teams or management.
Provided paid leave for five employees that war in a severely affected area and send them to co pack is to their home I think all low employees for their ongoing dedication to serve our customers. During this extra ordinary period.
Turning now to our supply chain, Oh Assembly and test subcontract in China now a fully operational we use to Xotwo foundries, I would say Korea and China in separate location to manufacture our new generation oily the display drivers both.
Foundries have been operating at normal levels. Likewise, Oh this play subcontractors in Korea.
Oh operating at normal levels and now also hold an extra two months of inventory to prepare for unexpected events to date, Oh fab three and Pfaffle manufacturing facilities in Korea had been operating at normal levels. The supply chain is only a strong or was it.
Its weakest link so we will continue to monitor it closely to mitigate potential murder vulnerabilities.
Turning now to our business outlook. Please refer to the press release, we issued today for Q2 financial guidance.
Maybe 19 has reduced visibility and created significant business challenges, but we are better prepared now than ever before to confront them to sum up I like to emphasize that the business transformation, we are undertaking will better position us to deliver.
Sustainable and profitable growth I share with you earlier, our priority priorities over the next few years and look forward to report our progress as we continue to execute our business plan.
Now I'll turn the call over to Shinyo and come back for cure name Shinyo. Thank you I, Jay Let's review the accounting treatment for the continuing and discontinued operation.
As you can see in our first quarter earnings release, the financial statements the very different from what Weve reported in the past.
Until we closed the sale of foundry business and therefore, the prudent way to Karkhi late our non-GAAP bps is that you need to look at it on a combined non-GAAP basis.
The foundry services group is accounted for as a discontinued operation beginning this quarter and the assets and liabilities relating to the foundry business and therefore are showing separately I stood held for sale on our balance sheet.
What is essentially does is that we are carving out the foundry services grew from our operation or reserve and the assets and liabilities that belong to the foundry business and that's more.
To do this carve out we've applied to certain assumptions, mainly for the allocation of I'll pick between the foundry business and to send our products business.
For instance, we use the least of approximately 1500 employees as a basis for the allocation of Pedro cost.
If there's any change to the least of employees to be transferred through to the closing will make an adjustment as applicable.
Following the consummation of the sale of foundry business, and therefore and for a certain period of time thereafter, we'll provide a transitional foundry services to the buyer for foundry products manufactured in that three which is our fabrication facility located in Chromite Korea.
Burned up here yet prior to closing revenue, we do right by providing transition or find your service from three to the foundry services group I recorded that book at cost in both though still continuing and discontinued businesses, resulting in no margin as such series and Costa eliminated when reserves from the two business.
Our combined together.
Because of this accounting treatment you will see new lines understatement operations called net sales transitional Statthree foundry services and cost of sales transitional Centsthree foundry services.
Keep in mind that economy will dictate the general corporate overhead shared between continuing and discontinued operations get lumped hundred percent into the continuing operations bucket.
This is why it would not be accurate to extrapolate this level of a shared services expenses as part of continuing operations into the future.
I'd like to note expenses the qualify for inclusion in discontinued operations, our direct operating expenses incurred by the foundry services group that are reasonably segregated from cost over the ongoing reporting entity.
Indirect expenses, such as sooner corporate overhead are not including discontinued operations under the accounting rules.
Generally cost and expenses that are expected to continue into ongoing reporting entity. After the disclosure date should not be allocated to discontinued operations and instead she would be included in the reserve ongoing entity.
For instance, professional fees for audit concert can legally services for the overall company cannot be allocated to the foundry services group.
These types of expenses will be rice site.
Interest expense is cannot be allocated to the foundry services group as we do not transfer our third party that obligations.
No one of our intercompany loan commitments are transferred either continuing operations absorbs the related foreign currency gain or loss in our piano.
As a reminder, a substantial portion of our net foreign currency gain or loss is associated with the intercompany long term, though is to our Korean subsidiary by our Dutch subsidiary, which are denominated in us dollars and is affected by changes in exchange rate between Korean won and the U.S. dollar.
Therefore, the net loss for Q1 number 2020 on a GAAP basis from continuing operations, otherwise known as to send our products business class that three appear to have dipping compared to be the year ago asked the Korean won depreciated relative to U.S. dollar.
But this finance your yardstick is not necessarily a relevant measure of our business performance because the aforementioned that net foreign currency gain or loss is a noncash item.
With that I'll turn the call back to Bruce Bruce.
Thank you Roger you mentioned young so Chris. So this concludes our prepared remarks that we'd like to open the call for questions.
Ladies and gentlemen, if he wants to ask cool.
Well I wonder how that's all we go question.
Again, it's nice to ask question. Please go ahead sorry.
Please standby Roseland pilot games last thing again like assets.
[noise]. My first question comes from the line of so good luck on with capital. Your line is open actually I question, Hello, Ligation young congratulations on the the execution here in a challenging environment.
Thank you, though yeah, there's little static on here's the top let me know if you can hear me well so on the China smartphone market, maybe why Jay what are you seeing in terms of demand you know the late March April early may since the quarter to close a week to week trends anything or any color there would be helpful.
I'm glad you heard today I mean, we are expecting nine a product launch in the first half we doubled to 18.
Part of reason is that they uptick.
Pvds and a new design wins, so Oh, we're very pleased to report our design win Q1, we continue to win more design win and we are excited about that some of the new phone that be launched in Q2. So we will have a nine new product to be expected launch in Q2. So are we think there.
At a the market is recovering and.
One way to recover the are you know the revenues orsa through product innovation and I think that's what we're seeing in the market.
Okay.
And with what the impact of cobot, perhaps the overall market smartphone market, maybe being weaker are you seeing any increasing the OLED mix or people are the.
Smartphone Oems and Theres writers emphasizing fiveg OLED upgrades in this environment are you seeing any of that benefit.
I mean, even today if you look what are we just said out of 14 design win in the Q1 10 war targeting for five day smartphone. So we definitely see a uptick a pick gun to fiveg momentum.
And because.
<unk> product portfolio has increased from nine to 16, a if in fact, if you include the legacy is 18. So we have it does double the number of the portfolio. So I think that the momentum is there going to do really D.
Okay and then the power segment you saw it say seeing recovery here would the premium mix continue to stay high and increased further here is that is gonna be how the a the power segment plays out the rest of there and what would enter got inorganic growth here makes sense to grow the portfolio and improve the premium product effort even more.
Yes, so a laser focus is proof in improving the portfolio there and the product margins.
But as the market also recovers there'd be more demand on the non premium as well. So we expect boasts a segment to grow in terms of revenue.
That makes them maybe last question, perhaps within young the Opex I'm trying understand going forward what portion I will be allocated standard products up versus the overall sort of non-GAAP. The you've given in terms of Opex, we understand the go forward run rate.
We operate Libyan.
Their stated we don't actually forecast like Opex for the whole year, but I can repeat the comment that we gave last quarter earnings call. The first first half of the Opex for the first half of 2020 would be flattish with your second half of last years. So that would that should stay true and also I would not really.
Object, if youre going to use the Q1 net 2020 after a proxy to kind of see the split between discontinued and.
Center Parcs business, so that run rate makes sense, Jim is that right.
Yes, I mean, yeah, no oh protect if you use that ratio, yes understood. Appreciate it thanks for the color and again congratulation on the progress. Thanks.
Thank you.
And ladies and gentlemen, if he wants to ask questions. Please press star one.
Your next question from sub pumps funds to line up gradually Yong Sun met him how your line is up.
Yeah, Thanks, and you might have touched on this but there is lot of issues on on this call and getting on the call under logistics.
So you talked about why Jessica.
I missed part of it the adjusted operating income will double 10%. The next few years can you talk about what the.
Can you just repeat the operating income the gross margin.
Interest expense reduction the timeframe when summer.
With that.
Sure sorry, I have some hearing issue. So on the operating income so operating income we target to doubled from current levels.
Long term goal is for adjusted operating income, which excludes the stock based comp to double to about 10% in the next few years. So that's what we said exactly.
What does it now and the doubled from current year I mean, it's apples and oranges, what's the operating income now.
The the foundry I don't know.
It's about.
5% on an apples to Apple base.
Okay, and what about their gross margin on a go forward they gonna be kind of 28% gross margin for.
For a well yet when you guided to 27% gross margin.
The combined they will combine yeah.
28% for display in power.
Is that the gross margin.
For OLED and ER and power what does it move Martin Rolling power on a go forward basis.
We haven't provided those details today on the pro forma.
Okay, and then the so the topic when.
22.6 million.
For Q1.
And the revenue was 120.5 million.
Excluding the foundry that the in terms of the revenue of 99.8 million for the Bathree transitional certain how long is that going to be and how do I model that go going forward and what.
It should we be modeling 120 million.
The standalone business or the segments in whatever our group on top of that.
Yes. So a you know as you know, we don't give more than a quota, but because you know a special situation I think for the this year you could.
Have a similar model, but going on going more than couple of years, we will give more debt on the analysts day I'm on the model, but the we expect the trends is there and a service to be there next few years, but how are the or the curb plays out we'll we'll give you more forecast for.
The next few years, Indiana to stay on that portion.
And when Indiana, they're going to be I'd be set a date.
Yeah, We said that we will have it a after close of the fab four transaction.
And the fact for transaction, we Ah said, it's going to be September October timeframe.
And then you mentioned also.
I'm sorry go ahead.
And the other thing a important thing we gave you is that the.
We will de lever and strengthen the balance sheet. So by this time next year, we should be largely freed up approximately 21 million in interest expenses, which will improve net income by 21 million, excluding the impact from the noncash foreign currency gains.
Losses, and as you know this interest expense is on top of the operating income that we are going to generate.
Right, so when you're doing the operating income of or you're projecting about.
I guess, 10% over over the next two years.
I thought that comp is that.
Essentially the transfer of all you know the majority of the 1500 employees.
Suburban company does it also include any additional thing.
That's factored into this one a number.
This this is after the the company or the transaction is completed and additional saving an improvement that we are going and execute you know in the next.
A few years. So so that's all baked in.
[laughter].
Because a as I've said before that even today on the adjusted based the Apple to Apple we about 5%. So there there's going to be a lot of other improvement. We we are going in part from to maximize shareholder value.
[noise] again, ladies and gentlemen.
Your line.
By one.
I'm showing no questions.
Like.
Got.
Okay.
Okay. So thank you Chris. So this concludes our first quarter 2020 earnings Conference call. Please look for details of feature events on Magnachips Investor Relations website before we and I would like to welcome News story on June 20, your IR veteran in Silicon Valley.
Alley.
Replaces me as head of Investor Relations She's in IR approach in Silicon Valley and she looks forward to meeting all of you. That's for me. Thanks to everyone. After a great right over the past five years I've enjoyed my time had the owner of working side by side with why jury his team and the board.
I'll be spending less time on airplanes and more time at home and cheering on Magnachip from the sidelines. Thank you for joining us today.
Operator, thank you.
Ladies and gentlemen.
Today's conference call. Thank you.
Leading human health.
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