Q3 2020 MagnaChip Semiconductor Corp Earnings Call
Standing by at this time I would like to welcome everyone to the quarter three 2020, Magnachip Semiconductor Corporation earnings Conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session. You glad you asked it.
Question during that time simply press Star then the number one on your telephone keypad. If you would like to draw. Your question press. The pound key. Thank you. It is not my pleasure to turn the conference over to Mr., Paul you and John Ma'am. Please go ahead.
Thank you and thank everyone for joining us to discuss Magnachips financial results for the third quarter ended September 30, 2023rd quarter earnings release that was filed today. After the stock market closed can be found on the company's investor Relations website.
A telephone replay of today's call will be available shortly after the completion of the call and the webcast will be archived on our website for one year EPS.
Access information is provided in the earnings press release.
Joining me today are Vijay Kim <unk> chips, Chief Executive Officer, and young well, our Chief Financial Officer.
Why Jay will discuss the company's recent operating performance and business overview and young men with a few financial results for the quarter and provide guidance for the fourth quarter.
There will be a <unk> session following the prepared remarks.
During the course of this conference call. We may make forward looking statements about magnachips 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 discussion found in our SEC filings.
During the call. We also will discuss non-GAAP financial measures the.
The non-GAAP measures are not prepared in accordance with generally accepted accounting principles, but are intended to illustrate an alternative measures a minute chips operating performance that maybe useful.
A reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures can be found in our third quarter earnings release.
On our website under the Investor Relations at Www, <unk> made a chip that's coming.
I now will turn the call over to why take him lighting.
Hello, everyone. Thank you for joining our call today koby.
Koby 19, indeed change the way, we live work and think Oh.
Our team members at Magnachip had been actively adapting to the new normal by adhering to a multiple dose safety protocols and vision its country needy plan, we hope that you and your family Oh has fee and well.
We successfully completed the sale of the foundry business and fab four slightly ahead of our internal schedule.
For a purchase price of about 350.6 million, we used 227.4 million Oh, the perceived to fully redeem all of the 6.625% senior notes due 2021 on October.
Second over 2020.
During the future interest expense by approximately $16 million annually. This is our new chapter a fab light pure play standard product company generating substantial and sustainable cash flow.
In Q3, we achieved solid quarterly results with a 5% sequential revenue growth, which came in above the high end of the guidance range.
No. It's a healthy bottom line. This was achieved despite the backdrop of market disruptions caused by the global pandemic D. It's delayed it U.S. trying to trade tensions and a supply constrained environment gross profit margin was largely impacted by two one.
Time items, including the delayed the recovery from the power outage, Oh Fab Street, and the displays excess inventory charge related to the U.S. government export restrictions to wahler. These two one time items together negatively impacted our gross profit margin by.
Three percentage point adjusted for the impact of these one time factors, we delivered non-GAAP diluted earnings share openings per share of 14 cents.
Now, let's take a look.
Closer look at our product business, starting with the display business.
I remind you that we have completely exited the non OTO L.C.D. business in Q2 2020.
Reference point, our display revenue in Q3 of 2019 was 90.6 million, which included about 10.4 million of non automotive LCD business. Our display revenue was 69.6 million for the.
Third quarter.
Our customers strong Ram scheduling que four and beyond we remain confident and excited about the long term growth trajectory of the overall oily D. D. D. I C market, an hour leading market position as one of the pioneers.
Second boost our revenue in design activities were driven by a major Korean smart phone OEM and Chinese Oems one of the notable achievements that we are very excited about is that a major Korean smartphone OEM has launched a new key model with our display driver.
<unk> in early October this and customers model is being.
Well adapted in the market as it keeps their flagship features that consumers you want while hitting the price point that consumers knees and we expect the momentum to continue in the remaining 2020.
In addition design activities from major Chinese smartphone Oem's have been very strong and get three and we expect these design ways to support our revenue growth in queue for as well as in 2021, Manganate chips top market perdition as non captive supplier in the OLED dvi's.
Market reflects that our advanced technology and distinctive portfolio originate with our customers. We continue to focus on empowering our customers through relentless innovation and apparel support last but not least the five G momentum we.
We are enjoying the booming finds a smartphone industry, especially with our high frame rate H F. R. Oily the drive I see.
In Q3, we were awarded eight new design wins and seven of them wore five G. N. H F. R models using 20th nanometer process you may recall that our revenue from five G smartphones accounted for about 20% of the total OLED revenue.
New in first half 2020.
In Q3, five drew revenue represented about 40% of the oily the revenue according to the market data the global five G smartphone Shimon in 2020 will be about 200 million units and it will likely to be more than double in 2021 the.
Emerging global five to trend bodes well with the underlying strengths in a product portfolio.
Now, let's turn to the power business. The power revenue came in at 46.7 million up 17.3% sequentially and down 4.2% year over year.
Complete recovery from the power outage took longer than we anticipated, which limitative fat three output at full capacity, resulting in a lower utilization deer in Q3. Despite this handicap, we achieved a double digit sequential growth and manage the production the market momentum.
All product pipeline remain strong now let me highlight key takeaways firepower business.
First starting with demand as both China, and Korea War gradually recovering from the global pandemic All Powell revenue in the third quarter was mainly driven by personal transportation and T V applications, the rebounding Chinese and Korean television market drove strong demand for.
Super Junction MOSFET, and POW I see product in Q3, and the trend is concerning in queue for we expect our power business in queue for to grow 15% to 20% year or a year.
Driven by the combination of a capacity constrained and strong demand our channel inventory level became below a normal operating range. We are striving to address the continued demand and also also to replenish the channel inventory too.
A more balanced level in the future.
Let me also underline the progress we're making in the China market under our go to market strategy with a newly established leadership team too.
Too efficiently target the fast growing trying to market, we set up a regional support system with a dedicated sales and marketing function. The team focus out product to be more optimized for the China Chinese market demand Ah, we directly engage with numerous power customers that resulted in new.
[noise] wins from a wide range of applications, including T V Industrials and mobiles, we are encouraged by a D. Great momentum in China power business looking ahead I'm very excited about our power business potential by 2022, we will have in.
Produce a complete set of next generation power discreet product portfolios. These new generation premium product families will carry superior purple months with a much improved cause the upgrade will take place at all fast three and by that time Arafat three will be.
Up and running with about 40% additional capacity.
Now turning to our long term plan.
We are reproducing Meghan a trip to achieve sustainable and profitable growth.
As we close the Divesture ahead of our original schedule, we decided to actually our disclosure of pro forma financials, rather than wait till the future analyst day, let.
Let me provide our key goals, we are targeting to achieve by 2023.
While our quarterly reports are based on the total revenue, including the transitional fab three foundry services in accordance with GAAP, we are providing the following metrics based on the standard product business revenue.
Excluding the transitional fab three foundries service.
Ah such service is expect to the seas. After a certain period of time, we plan to one grow a topline at a double digit kanger.
To consistently achieve above 30% gross profit margin three reduce adjust opex to be below 18% of revenue for exceed 10% are just operating income margin. This will enhance our ability to generate free.
Cash flow.
Five tax rate to be approximately 14% to 16% in the next two to three years due to the net operating loss carry for us to be upset taxable income in park.
Estimated consolidated tax rate is based on our current organization and business structure and tax strategies six Capex four P. P. N E last quarter, we discuss about the special.
Investment, we're making and fast 342020, and 2021 from 2022 week Spector capital spending to return to the moderate level of 3% of revenue or below.
752000, twenty-three, we will generate free cash flow in excess of 8% of revenue.
These additional financial pro forma metrics will give you a better understanding of our longterm outlook and value creation, we also or like two photos share our capital allocation plan in the near future, Our board and management actively evaluating or.
All available options to maximize our shareholders value.
Now that we communicated these key pro forma financial metrics. It seems more prudent that we reschedule our annually say two Q1 2021 due to uncertainties around COVID-19 and related matters, we will Dan shower capital allocation plan.
<unk> and I'll grow strategic initiatives. We believe this rescheduling will allow for more comprehensive discussion with investors and analysts the date will be announced in the near future.
In closing choose three represented a people wrote chapter of Magna chip as we successfully closed the sale of found your business and fat for that are too mentally resulted in magnitude, becoming a pure placed products company with a very healthy balance sheet for the first time.
I'll Cross the company, we are making well planned moves to a real line I'll resources sharper now R&D focus on key priority areas and improve our operational efficiency.
More importantly, the upswing in demand, which began since July is continuing into the fourth quarter. We are encouraged by the robust gross opportunities ahead of us, which creates a stronger foundation full profitable growth.
We continue to push the envelope on enhancing out competitive position through continuous technology advancement Ah.
Restful market expansion and strategic customer engagements now I will turn the call over to a doctor who and come back for the Q&A.
Oh, Thank you wager and you're welcome to everyone on the call.
Unless it started with a key financial metrics for sure three.
Total revenue in trip, but he was 124.8 million dollar or 5% from two and down 16.3% from true true a year ago.
Ah revenue from those standard product pigeons was 100.
16.3 million dollar up 6.7% from true too and down 16.5% from the same Porter.
Our ago.
The the sequential increase was driven mainly by strong demand in our power product for pulse personal transportation and television applications.
Your ear decline was primarily due to the U S government expert restrictions on hallway that impacted the shipment of certain.
All led display driver ices to our customers.
Two year old ear decline was also a tribute to those structures exit of norm Oughta LCD business.
Which amounted for 10.4 million dollar into 320, 19 and Mil into 320.
This plane revenue in Tripoli was 69.6 million dollar I'll point.
0.6 points.
Per cent culture, all the culture and down 23.2% year over ear.
Ah Tingly numb at the outset of business it was down about 13% year over ear.
[noise] power revenue in truth that he was 46.7 million dollar.
17.3%.
Sort of a quota and down for 2% year of ear.
The sequential improvement in the power business was due to a solid you bone and the China market.
Gross profit margin into three was trying to 2.9%.
Around 4.1 percentage point from cute too.
And one SEC.
Seven person viewpoint, or 70 basis point from two or three a year ago.
There are two unusual items as mentioned by YJ earlier, the collective translated into a negative 3% growth smart profit margin here in the third quarter.
Pony now to operating expenses and three.
Operating expenses World 25.
Point 4 million or 20.3% of total revenue as compared to 23 point.
5 million dollar or 19.8% into two and 20.9 million dollar or 14% for the same quarter a year ago.
S journey trip, but he was 12.9 million dollar as compared to the 12.4 million dollar into too.
10.7 million dollar into 320 19.
Or in the truth be was 12.5 million dollar as compared to 11.1 million dollar into too.
And $10.2 million to three last year.
Stock compensation charges included in the operating expenses or 2 billion.
Judy.
One $4 million too.
Point 4 million dollar in two or three of last year.
Of just you they'll protium coming Judy was eight 8 million dollar down from 10.1 billion dollar into two and down from 14.8 million dollar into three or ear ago.
Adjusted EBITDA in truth, but he was 11.7 million dollar.
Down from 12.7 million dollar into too.
And down from seven 2.4 million into three a year ago.
[noise] net income in two three.
Including income from discontinued operations net of tax was 273 million dollar.
From 29.2 billion dollar into to and from.
Never came at $1.6 million in two three a year ago.
This sharp increase was primarily due to the recognition of game on sale over the phone to just business and the fab four of 287.1 million.
Truthfully that income from continuing operations was 8.5 million dollar down from 11.8 million dollar into two and off from negative 14.2 million dollar into 320 19.
Our audience per share include.
Including the results from this continued operations was 7.7 74 dollar into three off from 84 cents into to and from negative five cents.
Three a year ago.
Our own earnings per share from continuing operations was 24 cents into three.
Down from an awning Porsche of Saudi force since into to and from a loss for sure or 41 cents into 320 19.
Our non get diluted earnings per share from continuing operation was 14 cents.
Ah from 13 cents into two and it down from 21 sense into three last year.
The difference between hour gap and non-GAAP EPS was.
Similarly, morally due to the elimination of the long cash net for the color scheme or 8.9 million dollar pictures of which was offset and parked by the elimination of two one time expenses of 3.5 million dollar.
There or.
Sorry.
35.3 million basic weighted average number of shares outstanding and $46 6 million diluted weighted average number of shares outstanding and two three.
The difference between sure counts.
Similarly relate to the dilute covid effective including the companies exchangeable notes as if they were converted into chairs at the beginning of the period.
Now moving to the balance ship.
Cash was 542.1 million dollar at the end of two three.
This compares to 192.8 billion at the end of two two.
And two three weeks.
We completed the sale of the founded Epigenous and for for for a purchase price.
Approximate three $356 million in cash.
We plan to use some of our net operating loss carryforward too.
To offset capital gains tax on this sale transaction.
The capital gain tax, which is crunchy estimated to be in the range of 14.
14 to 16 million dollar.
Will be finalized and paid in two 120 21 as part of our annual 22 corporate income tax filing.
On October 2nd we fully redeem 2021 senior notes.
As part of this redemption, we paid though with only two packs of 25 million dollar as we move the cross frustrated from our Korean subsidiary to the Ultimate parent company in the U S who was the issue of those senior north.
[noise] account to the superbowl was 19% from cute too.
90 per cent Frank you to the increase in your country suburban two three was attributed to the timing of payment from certain customers as the Potter and fell on the holiday in Korea.
And the related payment will collected by the following week.
Our days sales outstanding for cute, but he was 40 43 days.
Inventories world down 26.1% from you to.
Due primarily to the limit to their ability to manufacture the product in February at full capacity hosed by the delay the recovery from the power outage.
Our abbadid everybody's days, an inventory for two three was 42 days.
Capex was seven 5 billion dollar into three as compared to 5.5 million dollar into too.
Before moving to the fourth quarter of guidance.
Would you like to note that we commenced voluntarily resignation program.
Which is available for all employees from the October 16th.
Due to the voluntary natural this program we are unable to provide an estimate your the amount of the religion severance and other combination benefit for those employees under the program at this time.
Once completed visual how it's our profitability.
Now I'm moving to chew for guidance.
The COVID-19 global pandemic is still evolving.
And continues to reduce our full visibility.
Why actually those may vary.
Megan Chip Crunchy anticipate 424 2020.
Revenue to be in the range of 120 821 under six.
6 million dollar.
Which represents approximately 3% 329% sequential growth.
Including 10 million to 11 million of the transitional subsidy foundry services.
Gross profit margin to be in the range of 25% to 27%.
Oh is that I will tell them to call Abel to swing. Thank you.
Thank you I T and yeah. The operator. This concludes our prepared remarks and will now open the call for questions.
At this time, if you would like to ask a question. Please press star one on your telephone keypad again, if you wish to ask a question simply press star one on your telephone keypad will path for just a moment to see if we have any question.
And your first question comes from the lineup Radgie heal from need Uhm. Your line is now okay.
Yeah. Thank you and congratulations everyone on really good results despite the uncertain environment.
Two questions one short term and in one long term on the short term.
The gross margin guidance is showing a bit of an uptick after the the issue that you faced in Q3 related to the power outage.
Uhm wanted to get your thoughts in terms of how we should be thinking about the the gross margins Q4, but also going into 2021.
I know you talked about a 30% gross margin target.
But are the power outages kind of complete and and and going forward. The gross margin improvement over the next several quarters should be driven by by mix or improvement on price. Just wondering what are your thoughts on the the gross margin to puts and takes for the near term.
Sure right. Thank you so.
Yes, the power outage is now under control it was got control in early October and.
In terms of the the guidance we provided fourthquarter 25 to 27 that includes all the foundry five three translation our service for a fast tree.
Which shows you know it has let alone no margin.
So the the product business unit margin, obviously, a couple of points higher and you know we will be sharing more of you know near term.
Modern forecast at the analyst de which now has it been reschedule.
But the what we provided is by 2023, where we see that the company will be fully Prada.
Product streamline company. So we are providing clear guideline in until then we still it will have some the transition or service rep. Three so we'll get more detailed breakout during the analyst day.
And in terms of the the growth in and power.
So there was a a rebound in China as you said in Korea, driven by personal transportation and in television and that was a nice reversal, how do we think about power.
Power in 2021, one of the major growth drivers and power are you seeing adoption or electric vehicles accelerating in China Korea that feeling a lot of the growth in 2021.
And what are the other markets empower that are that you're excited about.
Yeah. So today, we serve the four segments well, that's a communication consumers computing and industrial I I can say that industry and the consumer is the biggest more bigger segment for us we.
We are also exceeded excited about some of the SST penetration.
That's in the competing space and as you know we are also working on 10000 a quality in automotive.
And we have a Lou did it before that that should come in the second half next year, but it won't be a meaningful revenue so, but we expect the automotive three 5% to 10% in fears out. So so we excited about that and as I said before today that there by 2012 22, we will have a complete.
New set of the discrete power portfolio from Super junction to <unk> to medium voltages to power battery fat that will have much higher performance as well as much improved costs. So we are very excited about that in the near term as well as the midterm.
And on the OLED side, you mentioned that your benefit you're benefiting from the five G momentum.
And and so just curious in terms of the adoption of OLED would you say that goes hand in hand with the five G momentum going into into next year. So it's five you phones are gonna are gonna double more than double.
That we should expect I wouldn't have you touch rate doubling but we should expect that OLED adoption will continue to kind of accelerated 21 to support. These five phones do they kind of go hand in hand, when when these oem's launched by G phones with high frame rates.
Yes, I think there are two things first the the industry transition from L. C. D too early D and you know even for next year that maybe 40% or close to 50%, but as time goes by that's gonna actually more two OLED. So that you know of.
Favre second and tons of five G. Yes, there is a great momentum the first half this year, we had about 20% on the third quarter about 40% and in fact, the industry was slightly less than what our numbers by a couple of percentage points, but it's at the right direction, we've seen and then Ah.
According to market research they see the five G phone to grow at least about 2.5 X of this year. So we are very encouraged by all the sign both 75 G adoption as well as the industry moving from L. C. D too early so that should all help out.
Thank you.
Your next question comes from the line.
Tsuji Dasilva from Ross Capital. Your line is now open.
Hi, YJ high Dr well, congratulations on the progress here.
So on the on the smartphone market Y J D. O N demand can you talk about how the China market demand is shaping up for acute seems like the backlogs. Good and then early calendar 20 are you seeing evidence of a multi quarter recovery here or the visibility still challenging.
Well. So you know first of all we you know we all guide one call at a time, but what I can say is that the the industry is seeing a more demand than so the supplies very tight so I think it's F.
Reflection of the market being strong now in terms of the how the the market players are happening. It seems like there is a lot of competition, we're trying to win the Huawei sockets. So there is a improve business among the non Huawei is.
For us we have about doesn't end customer, but we don't they're not out there a customer. So we don't named him, but so the I think they're marketed trying to have the you know new dynamics as well as the industry or show, having a good silicon demand so.
Four that's what we see in the near future.
Okay, Great and then perhaps he could talk about the trend in and Foldable smartphones and how that's impacting your mixing products and all that and it's still early or is that an opportunity to counter 21 for ya.
Yes, we excited about the new application the oil it is bringing too.
I think the affordable he's one of them. The automotive is a second and then the T. V. You know I think the next year that there there'll be more reality T V from multiple.
Vendors, so I'm very excited about the new application developing and you have particular are affordable and you know a poor affordable will be more mainstream the there'll be vendors, who can produce stay in high volume, but absolutely for the you know mid term and long term that foldable is a new form factor.
For the the phone and they perhaps for some of the the portable applications.
Okay. Thanks, a lot.
Thank you.
Your next question comes from the line of John Lopez from.
Alrighty call Group your line is now open.
Hi, Thanks, so much can you hear me okay.
Yes.
Terrific.
I have a couple.
The first one is just on a clarification for the queue for guidance is there is there any latent impact from the outage going from Q3 to queue for in other words are you selling our product in queue for that has higher production costs that theoretically goes away in 2021.
So that's very good question so.
Some of the Paul products that there had a power outage in Q3 that wasn't the web we'll have that Ah higher costs due to the high 80 ligation that will ship in a fourth quarter, but the fourth quarter will have a very high utilization is the fat will be full so.
So you have to answer your question there will be some of that in in the fourth quarter on the power devices.
Gotcha, Okay, I'll I'll put in theory that should probably start to work itself out as we go into early next year.
Sorry is that right so that should largely resolve itself into early 2021.
Yes by the Q1 Shimon it should have.
If the parts made in the mid October and later that should be the the what he called I ideal conceptual thing perfect. Okay. Perfect. Thanks, My second question I'm wondering just.
Would you mind quantifying your exposure to Huawei, pink calendar Q3, or even perhaps year to date.
Sorry, as I said before we Don you know, we don't break down the customer and customer because we don't actually sell to them, we only sell to the panel, but we did say that the one time exposure on the right off for those inventory was $2.
3 million.
Okay Gotcha.
Two and a quick once the first one if I look at the display guidance for the counter fourthquarter I know, you're not getting specifically, but if we kind of back.
Very strong much stronger than it usually would be seasonally this is obviously an unusual here.
A whole bunch of different ways, but I suppose my question is.
Assuming that's correct would you have us think any differently about how seasonality my play in 2021, just given what seems like kind of a stronger and to this year.
So you know I think you are correct about seasonality season. The for US typically has been the Q3 is a high and Q4, we go down slightly low. So this is unusual pattern. So.
So 21.
We'll see what happens then but you are correct that we are doing much better than normal seasonality for the company.
Okay got Ya My very last one I'm wondering if you could talk just a minute about the dynamics in the power market and one thing in particular were picking up as you know a pretty reasonable amount of concern about the potential for sanctions on spec Uhm, who obviously has a pretty sizeable footprint.
So I guess I'm wondering are you seeing that development, specifically driving opportunities for you either to expand with existing customers are survives to pick up new customers could you just talk for a minute about the market and what kind of the opportunity set for you might look like to the extent that those those developments continue.
[laughter].
Well, so I I think that to the.
Separate things in there first of all the discrete devices. We mandated factor most of that you know fast free there are some stuff still debating the fab four but in terms of the you know the snake I don't think you know.
They if you want to have a snake make it I assume they would be more pemex, so but in any right. There I think the that would.
Tend to have a better business thing, but you know, we we count on our product portfolio on our discreet devices that we have I E P and we make internally as well as the how I see so you know we're gonna grow based on that and I'll competitiveness and I feel really.
Good about our next generation product. So that's how we gonna and when the business so but the the snake thing mention that that shouldn't hurt does in fact or help us.
Gotcha, Okay. Thanks for all the help I really appreciate it.
Thank you.
Again, if you have any questions simply press star one on your telephone keypad.
That is star one on your telephone keypad to ask that question.
And there are no further question at this time I would now like to turn back the call over to Mister <unk> Jong for some closing remarks.
Thank you. This concludes our third quota 2020 earnings conference call. Please look for details have our future events Unmanaged Investor Relations. That's great. Thank you for joining us today Goodbye.
Okay.
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