Magnachip Semiconductor Corporation Q1 2023 Earnings Call

Speaker 1: Good day and thank you for standing by. Welcome to the first quarter 2023 Magdachyp semiconductor corporation earning conference calls. At this time participants are on a listen only mode. After the speakers presentation there will be a question and answer session.

Speaker 1: To ask a question during the session, you'll need to press star 1-1 on your telephone. You'll then hear an automated message advising your hand is raised.

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Speaker 1: I'd now like to hand the conference over to your host today, Gigi and Jai, Investor Relations Representative for Magnachip. Please go ahead.

Speaker 2: So, everyone, thank you for joining us to discuss negative financial results from the first quarter and did March 31st, 2000, 23rd. The first quarter earnings release that was issued today after the market close can be found on the company's investor relations website.

Speaker 2: The webcast's reply of today's call will be archival on our website, Shuron Affirmates. Joining me today is YJ Kin, Magnetrics Chief Executive Officer. So in your park, Magnetrics Chief Financial Officer is on maternity leave.

Speaker 2: During Xinjiang's absence, YJ is the principal financial officer of the company.

Speaker 2: YJ was discussed the company's recent operating performance and business overview and I will provide the financial results for the quarter and YJ will provide guidance for the second quarter of 2023. There will be a Q&A session following to prepare for the March. During the course of this conference call, you may make following the statements about the next application.

Speaker 2: Our four looking statements and all other statements that are not historical facts reflect our beliefs and predictions as of today. And therefore our subject of risks and uncertainties act described in the suit harbors statement found in our SEC violence.

Speaker 2: During the call, we will also discuss non-get financial measures.

Speaker 2: The non- GAAP financial measures are not prepared in accordance with generally accepted accounting principles, for our intended to illustrate an alternative measure of magnitude's operating performance that may be useful.

Speaker 2: The reconciliation of the non- GAAP financial measures to the most directly comparable GAAP measures can be found in our close quarter earnings release in the investment relations section of our work site.

Speaker 3: With that, I will now send a call over to YJ Kim. YJ? Hello everyone. Thank you for joining us today and welcome to Magnum Chips' Q1223 owning Schall. Before we proceed, I want to welcome Gilbert Nathan as an observer of the company's Board of Directors.

Speaker 3: We remain steadfast in our mission to turn around our displayed business and continue to execute our recovery plan during the quarter. I will summarize some of the key displayed business recovery initiatives for you. At our non-Korean tier one panel customer last quarter we completed qualification for the first OLED DDIC project. This quarter we began shipping initial volume and expect to accelerate shipments in the coming quarters. In Q1

Speaker 3: We also successfully deliver our second OLED DDIC project sample ahead of the schedule and mass production is expected in the second half of the year. Our second OLED DDIC offers significant performance and feature upgrades from our first DDIC for this customer.

Speaker 3: and we continue to have prospects with many of the leading smartphone OEMs.

Speaker 3: At our large panel customer in Korea, we successfully completed the tape out of a high-end smartphone DVHC project and are now in the issue. Targeting to release sample to our Korean customer in Q2, which mass production expected to begin near the end of the year. For our automotive oil-eating project at the customer, the mass production shipment timing we announced last quarter is now expected in mid-May. We are optimistic about securing additional designments in the upcoming quarters based on our automotive oil-eating DVHC.

Speaker 3: Moving on to our power business. Q1 revenue was 40.7 million, down 37.3% year-over-year, and down 12.1% sequentially. Similar to last quarter, our power business continued to be impacted by a weak demand across our end markets, particularly in computing and consumer. As a result,

Speaker 3: which significantly reduced production during the quarter at our internal fab to normalize inventories, which negatively impacted fab utilization, which was a primary driver of our lower gross margin during the quarter.

Speaker 3: Despite the challenging environment, the core fundamentals of our power business remain unchanged. Despite the market slowdown, the blended power speed for product increased 3.4% quarter over quarter and 26.3% year over year.

Speaker 3: in Q123-23 by improving the product portfolio and focusing on premium markets.

Speaker 3: Our premium products continue to maintain its strong product mix and ASPs. In Q1, premium products represented.

Speaker 3: 64.4% of total power revenue compared to 53.6% a year ago and premium ASP increase 6.4% a year over year. In addition, we continued our record page of design activities in Q1 2023.

Speaker 3: We were awarded over 100 design end and end driven by our strong portfolio process automotive industrial and computing applications. While total volumes remain weak during this industry wide inventory correction, we remained confident.

Speaker 3: that we would see a quick recovery on the other side of the cycle due to these strong fundamentals. We also continue to innovate this week. We announced nine new 600 volt super jumps and MOSFET products featuring a proprietary design technology that improves and

Speaker 3: on resistance and overall system efficiency. In the second half of this year, we will be introducing a full set of next generation products that will have better performance or cost by at least double digit percentages.

Speaker 3: Further, our power segments automotive business continue to make solid progress in various applications within the XEV automotive market. For example, we were awarded multiple design wins with our innovative power products for applications such as electric water pumps, positive temperature heaters, regenerated braking systems, idle stop and go systems, and electric vehicle charging stations with large EV automakers across Korea, Japan, China, and Taiwan.

Speaker 3: Now turning back to our oil lead business summary. We continue to focus on executing on the near term goals that we have set forth with our two major panel customers. We believe our oil lead business is bumping along the bottom and is poised to ramp in the second half.

Speaker 3: and expect to deliver revenue growth in 2023. With our cutting edge OLED products, we are well positioned to make significant strides in the industry once the current environment improves. Looking further ahead, we are highly optimistic about our OLED opportunities, particularly as we make headlines.

Speaker 3: headway internationally into the next major market beyond Korea where a variable foundry capacity is expected to increase few-fold over the next few years. Now our business, our product design in win rate is stronger than ever.

Speaker 3: We are rolling out next generation power products throughout this year. Looking ahead, the macro environment remains uncertain. However, we believe we hit the bottom in 2.1 and we expect gradually improving going forward as channel inventory is a constraint.

Speaker 3: We expect sequencer growth, especially in industrial automotive and computing segments. Finally, we recognize our recent market performance and results have been disappointing. However, we want to assure our investors that we remain unravering in our commitment to drive growth and next might share the value of demonstrating our decision to bring in fresh for the first try.

Speaker 3: shareholders for all of your patience and we appreciate your support as we work towards our goals. I will now turn the call over to Izzya to go over the financials in detail. Thank you, YJ. On behalf of the Magna Gepsy Association on Park, I will provide the financial aid for 2021.

Speaker 2: Total revenue in Q1 was $57 million, down 6.5% sequentially and down 45.2% year-over-year.

Speaker 2: revenue from the state or product business was 51.5 million down 4.3% sequentially and down 45.2% year of year.

Speaker 2: Revenue from our display business was $10.8 million, up 43.5% sequentially and down 62.9% year-over-year. Heavenly

Speaker 2: Our results continue to be impacted by the way first supply constraints in our OLED business that impacted our design wins in the second half of 2022 and slow demand for Chinese and Korean top tier smartphone models as a result of the global downturn in the smartphone market. The revenue from our power business was 40.79 million.

Speaker 2: margin in Q1 was 21.2%, down from 26.4% in Q4 2022, and down from 37.5% in Q1 last year.

Speaker 2: The sequential decline in gross margin was mainly due to a lower utilization rate of our internal fabrication facility in FUMI in response to the industry-wide slowdown in inventory correction and higher fab costs. The year-over-year decrease was primarily due to an unfavorable product mix and a significant drop in the utilization rate of our FUMI fab.

Speaker 2: 2021 and subsequently sold in Q1 2022.

Speaker 2: We expect our Q2 2023 course margin will continue to be impacted by lower utilization as well as higher manufacturing in forecast such as electricity and wages.

Speaker 2: Post-margin is expected to improve as we anticipate higher volume utilization rates in the second half.

Speaker 2: Turning now to operating expenses. Q1 SGA was $12.2 million as compared to $12.6 million in Q4 2022 and $14.2 million in Q1 last year. Q1 R&D was $13.3 million as compared to $13.7 million in Q4 2002.

Speaker 2: and 12.0 million than an NQ-1 last year. Stop compensation charges, including operating expenses, were 1.1 million NQ-1 compared to 1.5 million NQ-4, and 1.6 million NQ-1 last year.

Speaker 2: Also included in our OPEX this quarter was a one-time charge of $8.4 million related to the early termination subject to our Voluntary Resignation Program that we executed during the quarter. Based on the number of employees that opted for this program, we expect to have annual savings of approximately $3.4 million.

Speaker 2: Q1 operating loss was $21.8 million. This compares to an operating loss of $10.1 million in Q4 and an operating income of $12.9 million in Q1 2022.

Speaker 2: On a non-GAAP basis, Q1 adjusted operating loss was 12.2 million compared to an adjusted operating loss of 8.6 million Q4 and adjusted operating income of 14.5 million in Q1 last year.

Speaker 2: If you want to adjust it EBDA with negative 7.9 million, this compares to a negative 4.8 million Q4 and a positive 18.8 million Q1 last year.

Speaker 2: Net loss in Q1 was $21.5 million as compared with a net income of $3.0 million before and a net income of $95 million in Q1 last year.

Speaker 2: Our gap diluted loss per share in Q1 was 49 cents, as compared with an earnings per share of 7 cents in Q4 and an earnings per share of 20 cents in Q1 last year. Our non-gap diluted loss per share in Q1 was 24 cents. This compares with a non-gap diluted loss per share of 36 cents in Q4.

Speaker 2: and an earnings per share of 28 cents in Q1 last year. Our diluted shares outstanding for the quarter were 43.4 million shares, which reflects shares we purchased as part of our expanded share repurchase program.

Speaker 2: Our stock buyback in Q1 2023 amounted to $11.9 million. Cumulatively, since the start of the program in September last year to the end of Q1 this year, we've purchased 2.5 million shares or 24.4 million. And we continue to exercise the stock buyback that was authorized by the board.

Speaker 2: Moving to the boundary sheet, we ended the quarter with 212.19 of cash and no debt. Down from 225.5 million of cash at the end of 2024-2022.

Speaker 2: The primary cash outflow into one was the $11.9 million spent on stock buybacks.

Speaker 2: We expect to continue to draw down on our cash balance in the coming quarters, driven primarily by our buyback program. Payment of termination-related charges subject to the Voluntary Resignation Program in normal CapEx.

Speaker 2: Based on our forecast, we anticipate our task would range between $165 and $109 million between Q2 and Q3. Depending on whether we choose to enter into a long-term supply agreement with a 12-inch wafer boundary.

Speaker 2: We believe our balance sheet position is strong and positions us well during this period of macro uncertainty. NAIC accounts receivable at the end of the quarter total 32.1 million, which represents a decrease of 9.1% from Q4 2022.

Speaker 2: Our day sales outstanding for Q1 was 51 days, and compares to 53 days in Q4.

Speaker 2: In the choice, yes, at the end of the quarter total, 36.4 million. This compares to 39.9 million in Q4 2022.

Speaker 2: Our average days in inventory for Q1 went 73 days, as compared to 82 days in Q4.

Speaker 2: Lastly, Q1 CapEx was 0.1 million. As I mentioned earlier, for 2023, we continue to anticipate CapEx to be approximately 10 million.

Speaker 2: which is nearly 60% lower from the 2022 level. That concludes the CFO section of today's prepared remarks. Let me now turn the call over to YJ for guidance.

Thanks, Ecea. We expect our results to remain soft in the near term, but we believe both power and display are poised for recovery in the second half of this year, based on our current customer feedback. Based on our current projections and assuming a steady state global economy, we expect our results to remain soft in the second half of this year.

We are cautiously optimistic that our key financial metrics have the potential to show sequential improvement in the both the third and fourth quarters of 2023. Now moving to our second quarter guidance. While actual results may vary for Q2, magnitude currently expects revenue to be in the range of 58 million.

to 63 million including about 8 million of transitional foundry services in Al-Gumi Fath.

Gross profit margin to be in the range of 21% to 23%. Thank you. That concludes the prepared remarks section of our call today. Operator, you may now open up the call for questions.

If you'd like to ask a question at this time, please press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. Again, if you'd like to ask a question, please press star 1 1 on your telephone.

If you'd like to ask a question at this time, please press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. Again, if you'd like to ask a question, please press star 1 1 on your telephone. Please stand by where we compile the Q&A roster.

Again, that is star 11 to ask a question. Our first question comes from a line of Rodgie Gill with Needham.

Hi, this is Nick Doyle on Faradji Gale. Thanks for taking me on the question. First question, you just wanted to talk a little more about the design moment being around your new...

DDIC chips. And then also if you could speak about, you mentioned a little bit of premium market recovery.

If you could talk a little bit more there. Thanks. Sure. Thank you very much. So on the design front, we have one new chip that's supposed to deliver this quarter to the Korean customer.

With that customer, we saw in Q1 recovery of some premium phones for the current customer, as well as two new product launches that are happening in Q2. So we saw some of the improvement there.

We are also going to production with automotive this mid-May. So those are the key progress with that customer. And then in the non-Korean panel customer, we have qualified the first product last quarter. We shipped some and we expect to increment to ship.

during the next few quarters. Our second chip has delivered a schedule and that initial evaluation done. Now we are moving into the panel evaluation stage and we expect that product to do really well as reaching a lot of interest.

That product is a much better feature and performance and how consumption that first one. So we are looking optimistic about that. And then we said during today's call, we are also working on our next generation chip that we would pay for that would contribute to revenue next year as well.

Thanks. And as we could talk about utilization, it was lower this quarter. And did you say that you expected to go lower again next quarter and hoping you could give more direction on that further into the year? And is that completely tied to the power segment? And is the power segment, or is that...

as well. Thanks. Yeah, so we make the 100% of the display oily-dvic using external foundry, whether it's 18 to 12 inches.

So the utilization doesn't matter for that trip. On the power, we make around 80% internally, so the utilization does matter. And that's one of the reasons why Q1 margin was low on power. We expect the Q2 utilization to be better than Q1.

but without giving the details of the magnitude. As a reminder to ask a question that's star 1 1.

Our next question comes from the line of Sam Zadigatzandi.

with Oppenheimer.

Hi.

Um, on the line, um...

I'm calling for Martin Yang from Abenheimer. First question, what was driving the ASP growth in premium tier power solutions product and how confident are you at maintaining the premium tier? So you know there are premium. Hey good evening, there's a really exciting story.

that we will be introducing more of the other series of superjunction of the 600 votes.

So we will have a much better product portfolio that will be introduced. So our confidence in growing the premium products is very high. But you know, we're not going to give all the...

other stuff, but I can say the product portfolio roadmap looks really good. And you will see a lot of new product introduction, some in Q2 more, and then a lot more in the second half this year.

Okay, great. Sounds good. My next question is, can you talk about gross margin puts and takes? One needs to happen to drive gross margin towards high 20%.

So that's a really good question. So on the power, the utilization is a key factor. So once we're starting to fill the FAP, that will drive the gross margin, because we have a fixed cost. And so you feel more.

with a better utilization, the gross margin will come. On the side of DDI, that will be based on portfolio, as well as the shift towards higher and devices, like QHD and WHA type of devices.

and the brand new launches we expected towards the second half. So that's how we'll drive the gross margins of each product line. Got it, great. That's all from me.

Thank you. I'm showing no further questions in queue at this time.

This concludes today's conference call. Thank you for participating. You may now disconnect.