Q2 2023 Magnachip Semiconductor Corporation Earnings Call
Good day, and thank you for standing by walking through the Q2 2023 Magna chips Semiconductor Corporation earnings Conference call. At this time, all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the session will need to press star one on your telephone you will then hear an automated message advising your hand is.
Your question. Please press Star one again, please be advised today's conference is being recorded I would now like to hand, the call over to your speaker today UGG as I. Please go ahead.
Hello, everyone. Thank you for joining us to discuss <unk> financial results for the second quarter ended June 32023.
<unk> quarter earnings release that was issued today after market close can be found on the company's investor Relations website.
Webcast replay of today's call will be archived on our website shortly afterwards.
So that is why they can manage it chief Executive Officer, and Shin Young Park 90 chips Chief Financial Officer.
YJ will discuss the company's recent operating performance and business overview and Shin Young will review the financial results for the quarter and provide guidance for the third quarter of 2023.
The Q&A session. Following the prepared remarks during the course of this earnings conference call. We may make forward looking statements about management's 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 statement found in our SEC filings.
During the call we will also discuss non-GAAP financial measures.
non-GAAP measures are not prepared in accordance with generally accepted accounting principles.
Intended to illustrate an alternative measure of magnetics operating performance that may be useful.
The reconciliation of the non-GAAP financial measures to the most.
Those directly comparable GAAP measures can be found in our second quarter earnings release.
The relations section of our website.
With that I will now turn it.
Over to YJ Kim.
Right.
Hello, everyone. Thank you for joining us today and welcome to Magna chips Q2 earnings call starting with our financials Q2 revenue was 61 million down 39, 8% year over year and up 7% sequentially gross margin was 20.
Two 2% up 100 basis points from Q1, driven by higher utilization at our gumi fat.
Four year results continued to be impacted by macro challenges that I will detail in each of our business sections, but I am pleased to see sequential improvement.
Our business driven by industrial and automotive applications. These positives were offset by weaker OLED smartphone revenue during the quarter from our top Korea panel customer.
During the quarter. We also completed the $25 5 million of our remaining stock buyback program.
Today I am pleased that our board approved a new stock.
Buyback authorization of 50 million, which signifies our confidence in our long term business and unwavering commitment to enhance shareholder value.
Finally early in the second quarter, we announced that our board approved the recommendation of each strategic review committee to separate our display and power business into a separate legal entities broadly speaking this strategic separation represents a.
Second milestone for making the trip and highlights our commitment to unlock long term value for our shareholders. We are currently working through the process of separating the business. So they will have a distinct ERP enterprise is right our resource planning and accounting systems.
The process is expected to be completed at the end of 2023 and go live in January 2024 post separation the board and management team will continue to oversee both businesses. This internal separation is aimed at.
In answering transparency accountability business flexibility.
This business focus and strategic Optionality, and we look forward to providing further updates on our upcoming earnings calls.
Yeah.
Let me now provide updates into each of our business segments.
Beginning with our display business Q2 revenue came in at $9 7 million down 65, 9% year over year and down 10, 9% sequentially.
Year over year, our results reflect the ongoing smartphone inventory correction and continue the impact of the last two years supply shortages of 20 nanometer to a wrench OLED wafers that affected our second half 2022 design wins sequentially our OLED.
The revenue decline from Q1 due to decreased demand from our large Korean customer.
Customer. Despite these near term hurdles, we remain focused on expanding our customer base to include all major global panel customers to deliver highly competitive products to achieve sustainable long term growth as an industry leader in display.
And our new global tier one panel customer we delivered our second OLED EIC project sample in Q1, but do you do spec changes by the customer we revise and shipped a second chip at the end of June we aim to receive final qualification in a few months and in tissue.
Production at the end of the year. Additionally, we sample the third ship in Q2, which has been evaluated by the global panel customer and is now at the design in evaluation stage by a smartphone maker for the first half 2024 launch further.
We hired a new global panel customer we continue to collaborate on new projects in Q2, we began developing a force OLED DDI. She project for all global panel.
Maker that has the potential to contribute revenue around midyear 2024. Additionally, we started work on a mass market really the display driver chips chip aimed at expanding market share of the low to mid range OLED smartphone display market, which.
We expect to drive revenue growth in the second half of 2024 and beyond.
Given these developments, we feel confident about all odds of winning additional Asian smartphone designs and capturing significant market share over the longer term in Asia. It is estimated that in Q2, 'twenty three China panel makers, they already have captured almost 40% of the worldwide.
OLED smartphone panel production.
With regard to our large panel customer in Korea, we began production shipments of first OLED automotive chip in Q2 targeted for two different car models for a leading European automaker. Following the quarter end in July we also initiated production shipment.
Targeted to another top tier European car manufacturer, we anticipate these three model to provide revenue beginning in the second half of this year and beyond further we secured two new design wins with a third European automaker in Q2.
With mass production slated for second half 2025 with these wins, we now have five cumulative design wins targeting for a car models from leading European automakers.
For our smartphone DRC project at our large panel customer in Korea, we are awaiting our customers' alignment with Chinese smartphone Oems and look for such alignment by the end of the year.
Moving.
Onto our powered business Q2 revenue was 41.7 million down 33, 7% year over year and up two 6% sequentially due to strength in industrial and automotive markets.
As we stated in our last quarter call.
We believe we hit the bottom in Q1, 'twenty three and we saw progress in inventory on hand, the demand improvement in Q2 was broad based so it instead, we saw a revival in demand for Tvs solar and lighting markets.
Additionally, we continued our strong momentum with design activities in Q2 propelled by our robust product portfolio across automotive industrial and computing applications in particular, notably.
35% of the design ins and wins are attributed to new products and customers, while more than 17% emerge from new applications.
One key design win was at a leading home appliance maker in Korea with production slated to begin in Q3 23.
Power products ASP remained strong increasing 25, 3% year over year and down slightly by two 2% sequentially on lower.
Premium product mix.
We also contribute to innovate in early July we announced four new low voltage MOSFET using Super channel technology that significantly improves power loss of smartphone batteries, when charging or discharging in summary, you know power.
And as a product design in win rate is stronger than ever and we are rolling out next generation power products. Throughout this year looking ahead, we are seeing more improvements.
From a base and we expect further sequential growth in Q3.
In our display business, we are very optimistic about the long term growth of our OLED business. We continue to collaborate closely with our new global partner panel customer and we're excited about the additional new products that we're rolling out in the next six months these new products.
Offer compelling competitive advantages.
Teasingly aimed at tapping into the rapidly expanding OLED market in the Asia region.
Thank you to our shareholders for your patience and we appreciate your support as we work towards our goals I will now turn the call over to <unk> to go over the financial in details.
Thank you Jay and welcome to everyone on the call, let's start with key financial metrics for Q2.
Total revenue in Q2 was $61 million up 7% sequentially and down 39, 8% year over year revenue from the <unk> business was 51 $4 million and revenue from transitional foundry services rose $9.6 million.
We then send our product display business revenue was $9 $7 million and power revenue was $41 $7 million.
YJ mentioned, while our research are still muted, we see sequential improvement in Q3.
Gross margin in Q2 was 22, 2% up from 21, 2% in Q1.
We expect our Q3 2023 gross margin will gradually improve as utilization continues to improve with a higher demand in our power business.
As we have stated on prior calls we.
We are planning for a wind down in our transitional foundry services over the next several quarters. Following the end of our contractual agreement with key foundry at the end of August 2023.
Transitional foundry services accounts for approximately 25% of our could make capacity, we anticipate to begin the process of converting a portion of the idle capacity to power our products around the middle of 2024.
Turning now to operating expenses Q2, combined R&D and SG&A was $23 $4 million. This compares to R&D and SG&A of $25 $5 million in Q1, 2023, and $26 $1 million in Q2 last year.
A lower R&D and SG&A was primarily driven by our voluntary resignation program. The reactivated at the end of Q1.
Stock compensation charges, including operating expenses were $2 million in Q2 compared to $1 $1 million in Q1, and $1 $9 million in Q2 last year.
Q2 operating loss was $10 $7 million. This compares to an operating loss of $21 $8 million in Q1, and an operating income of $2 million in Q2 2022.
On a non-GAAP basis Q2, adjusted operating loss was $7 $8 million compared to adjusted operating loss of $12 $2 million in Q1, and our adjusted operating income of $4 $8 million in Q2 last year.
Q2, adjusted EBITDA was negative $3 $6 million. This compares to a negative $7 $9 million in Q1, and a positive $8 $5 million in Q2 last year.
Net loss in Q2 was $33 $9 million as compared with a net loss of 21 $5 million in Q1, and a net loss of $3 $3 million in Q2 last year.
Our GAAP diluted loss per share in Q2 was nine cents as compared.
With diluted loss per share of <unk> 49 in Q1, and seven cents in Q2 last year.
Our non-GAAP diluted loss per share in Q2 was six cents. This compares with non-GAAP diluted loss per share of <unk> 24 cents in Q1 and the earnings per share of 23 cents in Q2 last year.
Our weighted average diluted shares outstanding for the quarter were 41 7 million shares which reflects shares repurchased as part of our expanded share repurchase program.
Our stock buyback in Q2, 2023, amounting to approximately $2 5 million shares or $25 $5 million.
Cumulatively since September last year to the end of Q2. This year, we've repurchased four 9 million shares or $15 million.
Moving to the balance sheet, we ended the quarter with no debt and cash of $173 million down from $212 $1 million at the end of Q1 2023.
Cash outflows during the quarter were approximately $25 million of stock buybacks and payment of $11 $4 million related to the voluntary resignation program, including onetime package cost of $8 $4 million.
Net accounts receivable at the end of the quarter $235 million, which represents an increase of eight 9% from Q1 2023.
Our days sales outstanding for Q2 was 52 days and compares to 51 days in Q1 inventories net at the end of the quarter toward or $32 $3 million. This compares to $36 $4 million in Q1 2023.
Our average days inventory for Q2 was 62 days and compares to 73 days in Q1.
Lastly, Q2, Capex was $1 $4 million.
Currently expect our Capex in 2023 to be approximately $7 million, which is about 30% lower from our previous forecast of $10 million and nearly 70% lower from the 2022 level.
Now moving to our third quarter guidance, while <unk> catering for tier three magnitude currently expects revenue to be in the range of $59 million to $65 million, including about $8 million of transitional foundry services gross profit margin to be in the range of $22 five person.
<unk> to 24, 5%.
Thank you I'll now turn the call back over to US yeah Yeah.
Thanks Danielle.
Both the prepared remarks section of Hong Kong upward areas you May now open the call for questions.
Ladies and gentlemen, if you have a question or a comment at this time. Please press star one on your telephone. If your question has been answered or you wish to move yourself from the queue. Please press star one again, we will pause for a moment, while we compile our Q&A roster.
Our first question comes from <unk> de Silva with Roth Capital. Your line is open.
Hi, YJ and welcome back Shin young.
So on the the OLED business.
About the new tier one panel customer you seem to seem to have multiple products you may be able to ramp within the next four to eight quarters can you talk about how to size that opportunity versus <unk>.
Traditional business, you've had and in the and the Korea panel customers. It seems like the bigger opportunity.
I understand that opportunity.
Yeah, Susan Thank you.
So.
We now have three samples and so Oh, you mentioned today, one will go through the qualification and expect to go towards the end of the year end.
The other one.
Chip, it's already in the design and evaluation stage and expect to go.
Successful go to launch in the first half next year. So we are also getting a lot of encouraged because now we have three product.
So the ramp will be based on each.
Each models.
So it will be hard to say, but now we are back.
Back on the.
Our pipeline back to start starting the OLED ramp towards the end of the year.
Okay. That's helpful. There and then where are your China panel customers where are they in the process of securing.
Wins with their smartphone customer and where are they in that process at this point.
Well, it's the the fact that the we already have a design in evaluation stage and and.
We have a lot more encourage.
Promoting a lot and so we know we'll have about a you know a $5 six different type of a panel using the three chips.
That is being promoted and then I said before that we will have two another chips coming in in next six months, but that will also enable a.
2024 revenue enablement.
In addition to this three chip being already being sampled or started being evaluated by the year end customers.
Okay.
Okay switching over to the power business I'm curious how much will the what kind of incremental revenue opportunity or capacity opportunity would you expect to happen is the gumi service contract comes off line, how should we think about that opportunity incrementally.
So the historical transitional foundry services accounts for approximately 25% of our <unk> capacity.
I mean, assuming all other things being equal like if nothing is done until the gap our power products manufactured in <unk>.
We'll have to absorb approximately 25% of a fixed cost.
We'll increase our power product cost and Richard can lower gross margin, but again thats also the opportunity for us to fill that gap. So our job is to build a gap of transition of foundry wafers with our power wafers as soon as possible, but that will also require a converting transitional service equipment to handle power devices.
So again, our goal is to make that a minimum and similarly bring up more of our power business conversion in downtown.
Okay.
And then following up on that on the gross margin opportunity here. It seems like the prior peaks you were in the high Twenty's when power is about 30% higher than where it is now versus now in the low twenties is that the difference here in terms of recapture.
Recapturing power revenue to drive gross margin back up or can you go above that but this incremental capacity would be rapid.
I mean, it's going to be our long term goal to get to.
The high than the gross margin level, but as I explained briefly because of that the switch from the transitional services to the power of business to kind of move some of the equipment from the creamy fat to bringing like new equipment to support our power businesses that theres going to be some some gap there and because.
The power products during the process, we will have to absorb more costs there. So.
Long term basis, we are trying to get back to the maximum level that you just pointed out explained but in the meantime, walking on experienced some of that.
The dip in the gross margin there.
Okay got it maybe one last quick question the Opex from the current levels do you expect it to be steady going forward or will you be adding to the opex or are there additional cost efficiency opportunities that thanks.
I mean, the voluntary resignation program that we executed at the end of Q1, that's definitely helping our SG&A R&D to go down and Thats why you saw in Q2, but R&D for the full year 2023, we're going to similar to the last year's level due to the development is like many new chips. That's why Jay explained during the call.
So the you're going to see some increase in R&D expenses in the second half of 2023, but the SG&A. We are trying to keep that at a reduced level benefited from the voluntary resignation program.
Okay.
Got it very helpful. Thanks.
Again, ladies and gentlemen, if you have a question or a comment at this time. Please press star one on your telephone and one of them for our next question.
Our next question comes from Martin Young with Oppenheimer. Your line is open.
Okay.
Martin Your line is open you can ask your question.
Hi can you hear me, yes, we can hear you now.
Great.
So my first question is.
<unk>.
Maybe why can you clarify.
Your comment regarding.
Korean panel customer and its alignment with Chinese smartphone Oems.
Can you give.
Give us some more details on what you mean.
Alignments and what are the potential outcomes.
Out of the different scenarios or the alignment with our customers.
Yes.
Very good question.
So.
Our Korean panel customer are they tend to have three different type of customer to Chinese smartphone.
Bankers, our internal mobile division and then.
For the company.
So the our chip that we have provided to them last year in 2022 was targeted for.
They are a business for capturing.
Capturing some.
Some Chinese high end smartphone so.
That's what they're working on but as you know.
China's.
The OLED market is very competitive and there are five main panel makers and I think according to some market research data they capture the almost 40%.
The worldwide production or consumption or shipment in Q2 of this year. So.
I think that's why some delay there, but but at the same at the same time, we are doing so many chips are with the new panel global panel customer and I think our strategy is on track.
Got it.
My second question is on <unk>.
For the fourth or fifth ships and how that translates to maybe new customer relationships can you maybe tell us.
How many panel maker customers do you expect to have OLED panel maker customers you expect to have by the end of 'twenty four.
The buy end of 'twenty or.
Yourself.
Hello.
Yes.
Hello.
Yes, hi, thank you.
Sorry.
Yeah.
Yes.
We expect.
To.
Good.
Sure.
Panel customer by then shipping.
Our quality all of the charges.
Okay.
Okay.
Hello.
Hello.
Yes, we can hear you.
Yes, okay.
Okay.
Maybe you should ask your question again Martin.
Sure.
A follow up on the my second quick question.
Second dose additional panel customers.
Chinese.
Yes, so we are expecting.
Our future chairs.
To be put in.
To be used by.
Other than our current global customer.
Okay.
I have no more questions. Thank you.
Again, ladies and gentlemen, this do you have a question or comment at this time. Please press star one on your telephone.
Gotcha.
And I'm not showing any questions at this time I'd like to turn the call back over to you for any closing remarks.
Thank you that concludes our Q2 earnings conference call. Please look for details of our future events on Magnetek Sebastian.
Thank you everyone take care.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.
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