Q3 2023 Magnachip Semiconductor Corp Earnings Call
A reminder, today's program is being recorded and now I'd like to introduce your host for today's program GSI managing director at the Blue shirt Group. Please go ahead Sir.
Thank you operator, Hello, everyone. Thank you for joining us to discuss magnitude its financial results for the third quarter ended September 32023.
Our earnings release issued today after the 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.
Joining me today are YJ can 90 chips, Chief Executive Officer, and Shin Young Park.
Our Chief Financial Officer.
YJ will discuss the company's recent operating performance into December.
Young will review financial results for the quarter and provide guidance for the fourth quarter and 2023.
There will be a Q&A session following the prepared remarks.
Of course of this conference call. We may make forward looking statements about magnitude it is not looking 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 statements found in our SEC filings.
On the call we will also discuss non-GAAP financial measures.
non-GAAP measures are not prepared in accordance with generally accepted accounting principles are intended to illustrate an alternative measure of magnitude operating performance that maybe useful.
Conciliation of the non-GAAP financial measures to the most direct.
Comparable GAAP measure can be found in our third quarter earnings release in the Investor Relations section of our website.
With that I will now turn the call over to YJ Kim again.
Hello, everyone. Thank you for joining us today and welcome to magnet chips Q3 earnings call starting with our financials.
Q3 results were in line with our expectations Q3 revenue was $61 2 million down 14% year over year and up slightly sequentially gross margin was 23, 6% down 60 basis points year over year, primarily due to unfavorable.
Product mix and higher fab cost, but recovered 140 basis points sequentially on higher fab utilization.
Overall market conditions are challenging, but we remain focused on driving towards smartphone design wins in our display business and launching competitive products in our power business.
Let me provide.
Today's to each of our business segments.
Beginning with our display business Q3 revenue was in line with our expectations at $6 4 million up slightly year over year and down 33, 7% sequentially OLED revenue remained muted due largely to a slower than planned design wins in <unk>.
China from our large Korean panel customer during the quarter, we work to expand our footprint with new global panel makers and smartphone Oems. We are disappointed that our OLED ramp lagged our original expectations, but our confidence in the longer term display business remain intact.
We are now engaged in projects that span the entire smartphone market spectrum from mass tier two premium tier segments.
Our goal as always is to deliver differentiated and competitive products to drive long term growth as an industry leader in display.
Our new global tier one panel customer our third OLED EIC chip successfully passed qualification at the end of the quarter and is now in the design in phase with a leading Chinese smartphone OEM for its flagship model that is scheduled to be launched at the end of.
The year as previously announced in the second quarter, we successfully qualified a second chip without global tier one panel customer and entered into the design stage with a global smartphone maker for smartphone.
<unk> two launch in mid 2024, we now have two design ins at leading smartphone Oems outside of Korea, and we are optimistic that they will lead to design wins and production shipments that will contribute to revenue in 2024.
In the second quarter, we also announced that we began developing a fourth OLED DDI project without global tier one panel maker. This nextgen Ddi's provides an end features and specs geared towards the growing foldable smartphone market. This quarter, we saw increased Inc.
Interest for the strip by multiple smartphone Oems and we are expecting to provide IC samples to our panel customer by early next year.
Additionally, our first OLED <unk> chip is now in the final stage of qualification with aftermarket Oems in China.
Finally during the quarter, we started a new development on our mass market OLED DDI chip with another H M panel maker. This first product is aimed at expanding market share into the low to mid range OLED smartphone display market. We currently expect this OLED.
Device to drive revenue growth in the second half of 2024 and beyond.
With regards to our OLED automotive business, we began production shipments to our large Korean panel maker for three different car models from two top tier European car manufacturers between May and July revenue from those devices study beginning in May.
And we currently expect those devices will continue to contribute to revenue for the remainder of the year.
Moving onto our power business Q3 revenue was $45 2 million down 19, 9% year over year and up eight 4% sequentially sequentially, our pas business benefit from a higher mix of premium tier products and strong demand in.
Humor computing and communication markets, such as Tvs notebooks, and smartphones, however, industrial markets, which had been an area of our strengths for us over the past several quarters slowed by double digit percentages in Q3, as our customers reduced orders to better manage their.
Operationally, we continued our strong momentum our design activities particular in automotive power products in Q3, we secured two new design wins and three design ins with two of the top five automakers in the word and we expect revenue.
Your vision over the coming quarters. We also continued to innovate in September we announced two new Igt's for the EV market that provides best in class efficiency and heat Spansion featuring advanced <unk> technology in October we unveiled our eighth generation.
<unk> hundred 50 volt medium voltage MOSFET finally power product Asps continue to remain stable, increasing 11, 3% year over year, but down slightly by 5% sequentially in.
In summary in our power business, our product portfolio is getting stronger as we continue to focus on rolling out next generation power products to maintain our momentum of design ins and wins looking ahead Ami.
Heightened global geopolitical and macro economy uncertainty, we expect demand to remain weak driven by normal Q4 seasonality and inventory correction.
Industrial end markets 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 panel customer and we are excited about the new product and new Asia based panel customer partnerships.
These new products offer compelling competitive advantages and are strategically aimed at tapping into the rapidly expanding OLED market in the Asia region.
Finally, a few comments on our previously announced plan to separate our display and power businesses into separate legal entities as we announced previously our internal separation of display and power business will be saturated by establishing a separate.
Operating company under magnet chips semiconductor limited.
S K.
Company's primary operating subsidiary.
In September we established a limited liability company Register in South Korea named Magna Chip mixed signal limited.
S. The separation will include the contribution of assets and liabilities of the display business and the power IC business.
Mmm S transfer or directly associated resources, such as sales marketing and R&D as well as the allocation of share the expenses of certain corporate functions, including HR finance legal and it.
This internal separation is expected to be completed and go effect on January one 2024.
Thank you to our shareholders for your patients.
We appreciate your support as we work towards our goals I will now turn the call over to Shane Young to review the financials in detail.
Thank you Jay and welcome to everyone on the call, let's start with key financial metrics.
Total revenue in Q3 was $61 $2 million up 4% sequentially and down 14% year over year revenue from the send aircraft business was $51 $6 million in revenue from transitional foundry services was $9 6 million within standard product.
Display business revenue was $6 $4 million and power business revenue was $45 2 million.
Margin in Q3 was 23, 6% up from 22, 2% in Q2, mainly driven by higher fab utilization.
Compared to the same period last year gross margin decreased 60 basis points from 24, 2%, primarily as a result, the unfavorable product mix and higher debt cost.
As a reminder, our transitional foundry services contract with key foundry expired at the end of August and we're planning to wind down this foundry services over the next several quarters.
Transitional foundry services accounts for approximately 30% of our gloomy capacity.
We anticipate to begin the process of converting portions of the idle capacity to power send our product around the middle of 2024.
Until such wind down is completed we will continue to provide these foundry services to achieve foundry based on mutually agreed pricing terms.
Turning now to operating expenses Q3, combined R&D and SG&A was $23 7 million. This compares to R&D and SG&A of 23 or $23 $4 million in Q2, 2023, and $24 $7 million in Q3 last year.
Stock compensation charges, including operating expenses were $2 1 million in Q3 compared to $2 million in Q2, and <unk> $8 million in Q3 last year.
Q3 operating loss was $9 2 million. This compares to an operating loss of $10 $7 million in Q2, and operating loss of $10 million in Q3 2022.
On a non-GAAP basis Q3, adjusted operating loss was $7 1 million.
Compared to adjusted operating loss of $8 million in Q2, and $6 $6 million in Q3 last year.
Q3, adjusted EBITDA was negative $2 7 million. This compares to a negative $3 $6 million in Q2 and negative $3 million in Q3 last year net.
Net loss in Q3 was $5 $2 million as compared with a net loss of $3 9 million in Q2, and a net loss of $17 $2 million in Q3 last year.
Our GAAP diluted loss per share in Q3 was <unk> 10.
As compared to a diluted loss per share of 9% in Q2 and 38 in Q3 last year.
Our non-GAAP diluted loss per share in Q3 <unk>. This compares to a diluted loss per share of 6% in Q2 and earnings per share of <unk> <unk> in Q3 last year.
Our weighted average diluted shares outstanding for the quarter were 41 million shares in.
In Q3 under our new stock buyback program with $50 million.
We repurchased approximately two 7 million shares or $5 $4 million.
Moving to the balance sheet, we ended the quarter with no debt and cash of $166 $6 million down from $173 million at the end of Q2 2023.
Primary cash outflows during the quarter were approximately $5 4 million.
Half buyback and $49 million in capital expenditures.
Net accounts receivable at the end of the quarter to quarter at $41 1 million, which represents an increase of 17, 5% from Q2 2023.
Our days sales outstanding purchase realized 62 day and compares to 52 days in Q2.
The increase in accounts receivable and days sales outstanding was attributable to the timing of payments from certain customers.
And spell on holiday in Korea, and the vast majority of the related payments were collected in early October.
Inventories net at the end of the quarter $238 million. This compares to $32.3 million in Q2 2023.
Our average days in inventory for Q3 was 61 days and compares to 62 days in Q2.
Lastly, Q3, Capex was $8 million.
We continue to expand our capex in 2023 to be approximately $7 million as we previously referred test on our Q2 earnings call.
This is nearly 70% lower from the 2022 level.
Now moving to our fourth quarter guidance amid heightened global geopolitical and macroeconomic uncertainty, we expect our demand to soften in Q4, driven by normal repurchase versus malady and inventory correction industry end market.
Actual results May vary for Q4, <unk> currently expect revenue to be in the range of $50 million.
$5 million, including approximately $8 million of transition of that boundary surfaces and gross profit margin to be in the range of 22, 5% to 24, 5%. Thank.
Thank you now I'll turn the call back over to UGI ETF.
That concludes our prepared remarks section of our call today, operator, you may now open the call questions.
Certainly ladies and gentlemen, if you have a question at this time. Please press star one on your telephone one moment for our first question.
Our first question comes from the line of <unk> de Silva from Roth Capital markets. Your question. Please.
Hi, YJ, Hi, Shin young so.
The.
The second and third chips for the lead Asia customer.
Display market.
Smartphone designs that are downstream from them are those secured already are still being competed for I know you talked about volume ramp timing, but curious whether that customer is already one smartphone designs.
To understand that where we are in that process.
Thank you for the question. So on those two smartphones first of all those two smartphones for the premium smartphones.
The.
The second chip.
For the.
Chinese.
<unk> phone.
And we are going through the final qualification, we added to two finalists for the phone and we will be the second source study the.
The volume will be determined after the qualification is done on the second chip it's for a global smartphone maker.
Typically sell around $10 million a year, but they do have several models.
And at this time, we are the considered vendor for one of the model.
We are for the low end model and carriage volume and that is expected to launch in the Q2.
Next year. The first ship is expected to launch end of the this year that the Chinese selection.
Okay, that's very helpful. Ajay.
Then the second China panel customer who is coming on after this first one are there should we think of that one is coming to market faster than the first one other I guess more broader learnings in the China market that you've been able to benefit from as you bring incremental panel customers open up over there.
No I think the their first three chip will come to revenue first the <unk> chip will come probably towards second half of next year.
Okay and.
On the gross margin side.
I know the revenue is kind of below trend here.
And thats been the gross margin, but we're.
What are the drivers and timing of gross margin recovery as it simply utilization or are there factors as the wind down of the <unk>.
The fab III service contract is that part of what gets margin back up any.
Color on the trajectory of gross margin from here would be helpful.
I mean, the gross margin itself as you explained I mean thats combination.
Factory manufacturing cost production cost utilization rate and product mix in the next year. So it will all going to impact our gross margin going forward.
But the annualized J can add to this one but I mean, the power we claim that we have a record levels of design ins and wins and although the revenue is not the level that the ASP trend has been strong and we have been increasing the mix of the premium product. So with all of those we're going to kind of hub.
Offset some of the impact that we will have from me and I will be winding down dip Andre transitional services.
Okay.
My next question is on the Fab three wind down in mid 'twenty four can you remind us the incremental revenue opportunity I guess it would be for power as you free up that capacity for.
Non service business.
I mean, it really depending on the mix right because when we got there.
Power products from key foundry that depending on like 25% and we also explained that about 30% of our Kermit capacity was further foundry services.
So I mean, it really depending on the demand and the mix, but we will have to kind of take out equipment or the foundry services and three banister and other equipment for the power. So I mean that 2024 going to be some transition period, because we are going to start that process in the middle of 2024.
I see.
And then lastly widely on the separation plan for the end of the year can you just remind us what the benefits you expect are for investors as we get closer to that so we can kind of prepare for that.
Separation and look for some.
What that triggers for you guys.
Yes.
Provides.
Many.
Advantages.
You get to focus too.
<unk> really focused on the P&L and three transparency as well as for there are more freedom for independent investment and the strategic opportunities.
Okay terrific. Thanks YJ.
Thank you.
Thank you one moment for our next question.
And as a reminder, if you do have a question at this time. Please press star one on your telephone.
And our next question.
It comes from the line of Couldnt Bolton from Needham <unk> Company. Your question. Please.
Hey, guys. This is Mike on for claim.
Some color on the power and foundry business for next quarter can you give color on display will it be flat.
Quarter over quarter and maybe.
Maybe discuss drivers near term of that business.
Yes, I think that that business on the display will be flattish, but generic explained.
There are some weakness in the industrial end market under power, so that Steve Mora, <unk> revenue down and driver and Thats. The similar trend we are seeing from our peers.
We know this ti or semi called out the weakness in industrial land and we already said today that we had.
Double digit percent decline in industrial the industrial was one of the key strengths that we saw this year so.
I guess this is happening right now on the industrial weakness in the market.
That makes sense, yeah, we've heard that from a number of other companies can.
Can you talk about the automotive contribution that you've seen in the quarter I think we are talking.
Maybe a million $2 million and $24 1 million square.
For 'twenty three calendar 'twenty three I'm just wondering if we're on track for that are coming in a little soft.
Yes.
The we did not have automotive until like last year, where we shipped there, but 6700 K and this year, we expect to finish.
Couple of million dollars. So we are on track. So we are accelerating design wins in the automotive as you saw we had a two design win and three design in this quarter. So.
We look forward to get more design wins and also the automotive section on the Evs we.
We see a big opportunity and also in China.
China has the EV that ranges from $25000 to.
50000, that's the sweet spot and then they introduced 100000, so I think the.
That's why they are doing.
3 million units of EV alone. So that those are the new things, we see and to be competitive in the low end EV market I think <unk> is a key and thats one of our strengths as well.
Thanks, sorry could we actually find another second down.
The China EV as I am maybe too early for you to get.
Really good pulse, but we've heard mixed data points as far as you know.
Man evaporating all of them, but then we just heard from our leg or this morning.
The demand is actually really strong.
Are you seeing anything specific as far as near term demand in China.
On the automotive Avs I believe China is strong I think the what we are hearing the evs in <unk>.
Non China market is slowing down so I think thats because of the EV pricing, China as much competitive rest of the world. The EV price had very high I think that's what it is and as I said the IGT as a key solution for more affordable Evs.
Yes that makes a lot of sense. Thanks for that and then last one for me the fab three wind down is there incremental capex required to transition those tools.
To your power products and how should we think about capex in 2024.
We haven't guided for 2020 operating higher Capex spend in terms of the the wind down process and conversion process. At this point, we do not really expect any material capex to be spent so probably couple of million dollars, but not a lot.
And I think we mentioned before that if we increase our capacity by 40%. The Capex is only 20% to $25 million. So it's not a big thing.
Okay.
Does that answer your questions.
Yes. Thank you.
Thank you.
This does conclude the question and answer session of today's program I'd like to hand, the program back to GSI.
Thanks, everyone. This concludes our Q3 earnings conference call. Please look for details of our future events on Magna chips investor various web site and thank you and take care.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
Okay.
Okay.
Okay.
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