Q3 2022 MagnaChip Semiconductor Corp Earnings Call
Okay.
Hello, and thank you for standing by welcome.
Welcome to the Q3 2022 Magnum Chip Semiconductor Corporation earnings Conference call.
At this time all participants are in a listen only mode.
After the speaker presentation, there will be a question and answer session.
To ask a question. During this session you will need to press star one on your telephone.
It is now my pleasure to introduce Investor Relations Representative Eugenia XI.
Hi, everyone. Thank you for joining us to discuss magnitude its financial results for the third quarter ended September 32022.
Our third quarter earnings release that was issued today after the stock market closed.
Found on the company's Investor Relations website.
Cast replay of today's call will be archived on our website shortly afterwards.
Joining me today are why.
Jacob Magnet chips, Chief Executive Officer, and Shin Young Park, our Chief Financial Officer, YJ will discuss the company's recent operating performance and business outlook.
Shane Young will review financial results for the quarter and provide guidance for the fourth quarter of 2022.
There will be a Q&A session following the prepared remarks.
During the course of this conference call. We may make forward looking statements about magnitude business outlook and expectations are forward looking statements and all other segments that are not historical facts reflect our beliefs and predictions as of today and therefore are subject to risks and uncertainties as described in the Safe Harbor statement found in our SEC filings.
During the call we will also discuss non-GAAP financial measures.
Our non-GAAP measures are not prepared in accordance with generally accepted accounting principles.
Are intended to illustrate an alternative measure of magnitude its operating performance and may be useful.
The reconciliation of the non-GAAP 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 section.
Www dot magnitude dot com.
I will now turn the call over to YJ Kim YJ.
Okay.
Hello, everyone. Thank you for joining us today and welcome to making their chips Q3 earnings call.
Right.
Let me say that our hearts and prayers are with the families affected by Halloween Amsterdam over the weekend even so.
And we wish you a quick recovery for all those who are injured.
Moving on to our results. We closed Q3 revenue at $71 2 million, which was within the guidance range that we provided but represented a disappointing 43, 9% decrease year over year and 29, 8% decrease sequentially.
Ali.
This result is obviously not satisfactory.
We indicated last quarter, our second half is being severely impacted by several macro challenges there.
Detail.
Because each of our two main businesses.
Beginning with our display business Q3 revenue was $6 4 million down 89, 1% in the year over year and 77, 6% sequentially.
These results were primarily due to the supply shortage.
28 nanometer 12 inch OLED wafers in the second half of this year that impacted design in projects from our large panel customer in Korea, which typically awarded in advance based on feature wafer supply allocation. In addition, China coffee locked.
Islands, and the dramatic slowdown in consumer spending as a result of global the inflationary pressures reduced demand for smartphones, particularly in China and resulted in an oversupply of channel inventories. This caused our large customer in Korea to significantly reduce.
Orders can normalized inventory levels. Unfortunately, we believe these dynamics will continue in the near future. While we expect inventory levels will normalize by the middle of next year.
Global geopolitical situation and economy remains uncertain, we are focusing on executing the initiatives.
In our control and delivering a strong recovery of our display business in 2023.
During Q3, we made.
Progress in the following areas first.
Regarding our new top tier panel customer last quarter, we disclosed that the timing of our mass production ramp.
Due to the customer requesting a feature change so we have to make modification to our product in the beginning of October we successfully released the new modified OLED <unk> to this customer and he is now undergoing customer qualification.
Anticipate this customer to complete qualification by the end of this year. However, due to the continued weak consumer demand and channel inventory oversupply in China, We expect the production to commence towards end of Q1 2023, while this is unfortunate.
The good news is that we received a second design in projects with this large customer we are extremely excited about this new award.
Presents greater volume potential than the first project and also demonstrates how committed partnership.
Expected begin taping out this Newport in November this year and begin mass production in late 2023 over the next few years OLED production in this region of the World is expected to more than double. So we're obviously excited about our growing relationship with just pressler.
Second in September we met several leading OLED manufacturer in this region and their interest in our products very high due to our product competitiveness and differentiated capabilities, we are continuously discussing with them for our future.
<unk> business opportunity.
Regarding our large panel customer in Korea last quarter, we announced we kicked off the development of two new OLED driver IC projects towards that we expect to tape out one of the new project. This month and anticipate mass production by second half.
Next year.
Lee regarding OLED wafer capacity with the global economy slowdown, we have seen more wafer variability at Morris foundries.
<unk>, we are now in discussions with multiple foundries for 2023 wafer capacity as well as locking in men's for longer term supply. We believe our 2023 wafer supply will be more than two times higher than 2020 twos.
In summary, our near term OLED results are very disappointing and we expect demand weakness to continue in the near future. However, looking forward to 2023, we remain focused on executing towards a strong recovery of our OLED business.
Driven by a significant improvement in both wafer supply and organic demand from our top tier customers and new design wins.
Now, let's turn to the power solutions business Q3 revenue was $56 4 million down four 2% year over year and 10, 4% sequentially in line with the broader slowdown we are seeing in a global economy, particularly in consumer end markets for example.
Therefore, our third quarter revenue was affected by lower demand for Tvs E bikes smartphones and computing applications.
Similar to our display business, we expect the soft demand environment to continue in the near term as the economy, Florida to Lowe's do inflationary pressures and consumer as you work through the excess inventories that have built up in the channel.
On a positive note our higher margin premium tier products remain vigilant in Q3 and grew five 8% year over year, and two 3% sequentially driven by record demand for our <unk> products for industrial applications, which was.
Up 84% year over year, and 24, 3% sequentially. We're extremely excited about this trend.
The industry is benefiting from strong tailwind such as the rising energy prices and favorable regulatory conditions globally as the award actually its clean energy initiatives.
In our Super Junction MOSFET product line, we continue to see originally in demand revenue only decreased 7% sequentially. Despite slowdown from Tvs that was mostly offset from strength in industrial applications like led lighting due to higher energy efficiency.
<unk> requirements.
During the quarter. We were also awarded several new design wins with our 600 and 650 volt Super Junction MOSFET with a leading TV manufacturer and an adapter Oems in Q3, we continued to develop new power products in September we introduced.
A new 200 volt medium voltage MOSFET that incorporate a further generation trench technology that reduces capacity capex guidance by 50% versus the prior generation and significantly improves energy efficiency as a result of fat.
Switching and a higher power density this product is able to operate in temperature between negative 55 C and 175 Celsius and is perfect for light EV motor controllers, and industrial power supplies, requiring high efficiency and.
Stable power supply in various road conditions.
To summarize our power solutions business is not immune to slowdowns in the broader economy, but we are confident our technology diversified product portfolio and product road map will help us remain vigilant and recover with the market with that said we are cautious of the SME.
This cycle, we are entering and are planning to reduce our 2023 capex spending by nearly 60% from 2020 levels Shin young will provide more details in her section.
In closing unfortunately, everyone is already familiar with the inflationary environment, that's pressuring consumer spending not to mention the other challenges like Ukraine trade tensions between U S and China.
And the energy crisis in Europe . However.
One $2 million down 28, 29, 8% sequentially and down 43, 9% year over year.
Revenue from the Sundar Crocs fitness was $62 $8 million down 31, 2% from Q2 and down 46, 5% year over year.
That's why Jay already mentioned, both the sequential and year over year decrease were mainly attributable to the supply constraints for wafers in our OLED.
And slow demand for Chinese and Korean smartphone models as a result of the global downturn in the smartphone market.
Revenue from our power solutions business was $54 million.
Down 10, 4% sequentially and down 14, 2% year over year.
The sequential decline with you to a slowdown in T V E bikes and computing applications affected by Covid Lockdowns in China, partially.
Partially offset by higher demand in solar and industrial.
Gross profit margin in Q3 was $24, 2% below the low end of our guidance range as we recorded a $3 3 million charged to scrap 12 inch wafers.
George of slowing demand caused by elevated smartphone inventories in China.
Excluding this charge our gross profit margin would've been 28.
Slightly above the high end of our guidance range.
In addition to the script cost, although workers' profit margin year over year was driven by a lower utilization rate at our fab three higher third party foundry costs and unfavorable product mix.
Turning now to operating expenses Q3, SG&A was 11 $4 million as compared to $12 $7 million in Q2, 2022, and $12 $6 million in Q3 last year Q.
Q3, R&D was $13 $3 million as compared to $13 $4 million in Q2, 2022, and $12 $3 million in Q3 last year.
Stock compensation charges included in operating expenses were <unk> nine.
$9 million in Q3 compared to $2 million in Q2 and $2 million in Q3, 2021.
In Q3, our operating loss was $10 million compared to operating income of $2 million in Q2 and $20 million in Q3 2021.
Adjusted operating loss in Q3 was $6 6 million compared to adjusted operating income of $4 $8 million in Q2, and $22 $7 million in Q3, a year ago. Adjusted EBITDA in Q3 was negative $3 million compared to $8 five.
In Q2, and $26 $4 million in Q3, a year ago.
We recognized a tax benefit of $3 $9 million in Q3, due primarily to pre tax book loss of our operating entity in Korea, mainly driven by noncash foreign currency translation losses in connection with its intercompany loans.
For the full year 2022, we expect GAAP tax to fall in the range of a benefit of $2 million to an expense of $4 million, excluding the impact of any further FX volatility.
Its wide range is due to multiple tax items in multiple jurisdictions.
As realized foreign currency gains at our operating in and in Korea.
Back to the U S taxes from the application of section 174 of the U S tax code and other book and cash tax timing differences.
Net loss in Q3 was $17 2 million as compared with $3 $3 million in Q2.
The $10 $8 million in Q3, a year ago.
Our GAAP diluted loss per share in Q3 was 38 cents as compared with a loss per share of <unk> <unk> in Q2 and earnings per share of <unk> 23 in Q3 last year.
Our non-GAAP diluted earnings per share in Q3 was <unk> down from 23% in Q2 and down from 40% in Q3 last year.
Our diluted shares outstanding for the quarter were about $45 7 million shares which reflects shares repurchased as part of our expanded share repurchase program that we announced in mid September and we continue to exercise a buyback that was authorized by the board.
Moving to the balance sheet.
Our cash balance at the end of Q3 was $258 million. This compares to $273 $8 million at the end of Q2.
Accounts receivable net quarter to 36, $336 $8 million decreased 38, 5% from Q2.
Our days sales outstanding for Q3 was 47 days and 54 days in Q2. The decrease in accounts receivable net in Q3 was attributable to the decrease in quarterly revenue along with the timing of related payments from certain customers.
Inventories net quarter to $37 3 million.
Compared to $36 $2 million in Q2.
Our average days in inventory for Q3 was 64 days and 45 days in Q2.
Regarding our Capex plan Q3, Capex was $10 $3 million and we now anticipate towards 2022 capital expenditures to be approximately $23 $5 million, which is lower than our prior plan of $28 million in putting about 8 million.
Special Capex for factory capacity upgrade.
This reduction is a result of negotiating better pricing terms and delaying the deployment of certain capital equipment.
For 2023, we now anticipate capex to be approximately $10 million, which is nearly 60% lower from the 2022 level.
Before turning to our guidance I want to provide some clarity on our ear to date in Q3 cash flows that you see in our financial statements.
As a result of this year's Korean won volatility against the U S dollars, our reporting transformation from functional currency C. N. One to U S dollars may provide a confusing operating cash flow picture.
On a pro forma basis, excluding the impact of FX translation, our operating cash flow for the quarter was about negative $450000.
From a metric standpoint, the majority of our assays are contractually in U S dollars, but about half of our spending are denominated in Korean won.
Our cash balance is also predominantly in U S. Dollars. Therefore, our policy is to hedge the risk of U S dollars being weaker than our expectation by entering into certain hedging instruments, because the impact turned out to be negative to our revenue in the recent quarters due to the current Korean won volatility against the U S dollars.
Now moving to our fourth quarter guidance.
Actual results May vary for Q4 magnitude currently expect revenue to be in the range of $57 million to $662 million, including about $7 million of transitional fab three foundry services.
Our Q4 guidance includes an estimated 5 million of revenue loss from foreign currency exchanging hedging instruments.
Gross profit margin to be in the range of 26% to 28%.
Thank you and now I'll turn the call back over to Jeff <unk>.
Thanks Danielle.
That concludes the prepared remarks section of this earnings call.
Operator, please begin the Q&A session.
Certainly.
As a reminder, ladies and gentlemen to ask a question you will need to press star one one on your telephone once again to ask a question. Please press star one one.
One moment please.
Our first question comes from them.
With Arnold Needham <unk> company.
Yeah, Thanks for taking my questions.
Why.
A few questions on the OLED business, you talked about that.
The smartphone inventory levels will normalize until mid 2023.
Just wondering if you could from your vantage point characterize the amount of channel inventory that exist in the.
The Chinese handset market right now.
The market has been coming down in terms of units all year.
But it doesn't seem like we're still at the bottom yet any clarity on how much channel inventories is still there and you.
Your comment about mid 2023 years, I think I heard you correctly.
Maybe provide some insight.
On that timeframe.
Okay.
Yes.
Thanks for asking that question. So you know, we can't really tell each customer by customer or the vendor or silicon vendor by assured the lender, but that's the these signs that we see for ourselves. So I think Oh, you know as you know that the.
We have a new product.
We taped out and sample then they are being qualified we expected oil production in first half with their product and we also wrote a lot of inventory between Q2 and Q3 of this year.
Back to consume that you know first half in the middle of next year.
And then you know we expect to tape out two new product this month and that we expect gold production.
Production by second half, so the or comments.
<unk> done a dose knowledge with so.
Tumors in our programs, but I can say for the industry.
What's the maybe so that that's what we can say.
Got it okay. It makes sense and so you mentioned that you are.
Yeah.
Shortages on 20 nanometer 12 inch that impacted your design and panel at Samsung display.
But then you also mentioned that.
Because of the reduction in demand that there is more capacity.
Freed up particularly in 2023.
Kind of reconcile I guess, what's happening on 28 nanometer 12 inch and some of the commentary about 2023.
Yes. So you know we have qualified 328 nanometer and you know with the slowdown in the economy, we do see better variability. So we are working with all the.
Ah the foundries and <unk>.
Working out the.
Arrangement, an allocation for 'twenty, three and 'twenty four and we do have either written or verbal commitment from our partners.
And we.
We see.
The more activity as a result of the our customers or to cross check with the foundries and we see more skus.
That's coming in from our customers and also there have been more top level meeting involving myself with our customers. So you know we are working to.
To come out and recover next year and beyond.
Got it and then just last question.
You're sitting on $250 million of cash on the balance sheet. The market cap is currently sitting around $460 million.
So almost half the market cap is in cash so what are the intentions for that cash on the balance sheet, given where your stock price is now thank you.
Yes. So you know we do have a St. Petersburg Committee, that's formed and we are looking at every option to maximize shareholder value one of them.
Ah is a stock buyback, which we started to implement and we're still doing that.
And we are looking all the various means to.
Maximize shareholder value and also during this downturn. So a strong balance sheet also will help us come out of the.
The downturn as well.
Thanks.
Thank you.
And our next question comes from the line of Martin Yang with Oppenheimer.
Hi, Rodrigo. Thank you for taking my question can you first talk about.
Some of the associated expenses and potentially will be invested.
Invested in relating to your known raising to the new customers who are engaging in China.
So that's Martin I mean, the currently we are incurring some R&D expenses and Thats why you are seeing that I mean, our opex in Q3 was a little lower that's mainly due to some kind of trade down with our stock compensation expenses, but I mean, our R&D is not really going down.
And that's mainly due to kind of to support those design R&D activities to support that the new panel customer.
Got it.
As you expand your business in China do you see and how has the COVID-19 related restrictions impact your business development activities in China.
So Martin that's why is it so thank.
Thank you so I mean, it's.
We send our engineers and their fees there are they have to go through current team just like anyone else but.
It does and.
Deter us from working with a new customer.
So, but we were hoping that the Oh, China.
Becomes more available and reduce current PNM trades.
Trades more freely who was the western parts of the work.
Thank you our last question from me are you seeing any.
Capacity constraints for yourselves, either around 28 or 40 today.
So.
You know most of our product in OLED is 20 nanometer.
So we are seeing more variability of those and as I said before we have three foundries that we have qualified 20 nanometer and are either either return or verbally we have a better commitment for 23 and 24. So we expect to you know have a long term supply.
The agreements.
With.
Many of them and.
Also grow the business together and we are excited to see the that the capacity would not be a limiting factor, but more design wins and we started to see the design win activities picked up.
Got it. Thank you very much that's it for me.
Okay. Thank you.
And our next question comes from the line of <unk> Desilva with Roth capitals.
I want to mention yet.
And in the for the China business. The I'm curious with the foundries are securing but do you have domestic China foundry supply available to support that just to reduce the derisk kind of a joke political.
Uh-huh central issues.
Yes, Hi, yes. So you know we have the older 12 inch foundries as you know is located outside Korea.
And you know other than the global foundry, we haven't really disclosed so but you know we are working on.
Now to the geopolitical situation as well as make sure that the customers our panel customers.
Comfortable using the foundry that we choose for them. So that's how we work out the relationship so that that's what we are doing.
Okay.
And then for the power business you said there was impacted by consumer spending how does the next few quarters kind of lay out for that is there inventory that has to be worked down in that segment or is that maybe kind of reaching towards the back end of that inventory digestion.
I think the year as I said before today, the consumer segment seems to be a little soft, but we still see strong industrial and the other premium product lines. So sooner.
The consumer sector becomes more normalized I think we should be okay, and so that that's our current outlook obviously at this time.
Okay. My last question is on the gross margin you know beyond the guidance for <unk> whats the intermediate term outlook here maybe into 'twenty three what are some of the puts and takes on gross margin, we should be thinking about it.
Your progresses.
I mean, we.
We only guide one quarter at a time, so we haven't really guided for for the full year 2023 that gross margin. They were like a multiple factors that's affecting our gross margin. So the product mix, obviously, but at the same time utilization of our internal fab and foundry costs external foundry costs for 12 inch wafers now that we're going to be.
Impacting our 2023. So we are I mean, we don't really disclose that weren't kind of target for 2023, what we are trying to get back to a little because we have a little the past two quarters, we had kind of one time hit from the recognition of the inventory reserves. The best credit costs. So we are trying to kind of get back to you.
Some normal lies not only next year.
Okay. Thanks again, thanks Roger.
Thank you.
No further questions I'll now hand, the call back over to Investor Relations representative <unk> for any closing remarks.
Thanks, Operator that concludes our Q3 earnings conference call. Please look for details of our future events on magnitude its investor Relations website, thanks, everyone take care.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.
Okay.
The conference will begin shortly.
Raise your hand during Q&A, you can dial star one one.
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