Magnachip Semiconductor - Q2 2024

Transcript

Operator (participant)

Thank you for standing by, and welcome to the MagnaChip Semiconductor Corporation Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star one one on your telephone. If your question has been answered and you'd like to remove yourself from the queue, simply press star one one again. As a reminder, today's program is being recorded. Now I'd like to introduce your host for today's program, Steven Pelayo of The Blueshirt Group. Please go ahead, sir.

Steven Pelayo (Managing Director)

Hello, everyone. Thank you for joining us to discuss MagnaChip's Financial Results for the Second Quarter ended June 30th, 2024. The second quarter earnings release that was issued today after the market closed can be found on the company's Investor Relations website. The webcast replay of today's call will be archived on our website shortly afterwards. Joining me today are YJ Kim, MagnaChip's Chief Executive Officer, and Shin Young Park, our Chief Financial Officer. YJ will discuss the company's recent operating performance and business overview, and Shin Young will review financial results for the quarter and provide guidance for the third quarter. 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 MagnaChip'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. Such statements are based upon information available to the company as of the date hereof and are subject to change for future developments. Except as required by law, the company does not undertake any obligation to update these statements. During the call, we also will discuss Non-GAAP financial measures. The Non-GAAP measures are not prepared in accordance with generally accepted accounting principles, but are intended as supplemental measures of MagnaChip's operating performance that may be useful to investors. A reconciliation of the Non-GAAP financial measures to the most directly comparable GAAP measures can be found in our Second Quarter Earnings Release in the Investor Relations section of our website.

With that, I'll now turn the call over to YJ Kim. YJ?

Young-Joon Kim (CEO)

Hello, everyone, and thank you for joining us today, and welcome to MagnaChip's Q2 Earnings Call. Q2 revenue was $53.2 million, down 12.8% YoY, but up 8.4% sequentially. This was above the midpoint of the previous guidance range of $49 million-$54 million. Consolidated Q2 gross profit margin of 21.8% was down 0.4 percentage points YoY, but up 3.5 percentage points sequentially. The overall gross margin result was above our previous guidance range of 17%-19%. Both MSS and PAS gross margins were higher than previous guidance. Shin Young will provide more details in her section. Revenue in our standard product business, which is comprised of MSS and PAS businesses, was $50.8 million, down 1.1% YoY, but up 11.6% sequentially.

Standard product business gross margin was 23.1%, up nearly two percentage points sequentially. Now, let me provide more detailed comments for each of our standard product business lines. Beginning with MSS, Q2 revenue was slightly above the high end of our guidance at $11.6 million, down 6.2% YoY, but up 28.7% sequentially. The QoQ revenue growth was due to increased demand from OLED DDICs for China smartphone OEMs, as well as automotive and Power IC for LCD, TV, and OLED IT panels. We continue to collaborate with several OLED panel makers and smartphone OEMs targeting the China market. As a reminder, we have multiple DDICs in various stages of development and customer evaluation.

These designs span the entire smartphone market spectrum, from the mass market tier to the premium tier segments, as well as other display markets, such as automotive and wearables, like smartwatches. During Q2, we held a formal opening ceremony to mark the launch of our new operations in China under our wholly owned subsidiary, MagnaChip Technology Company Limited or MTC. The goal of MTC is to expand the company's display driver IC and Power IC businesses in China. The event attracted a broad audience, including representatives from existing and prospective customers, strategic investment portfolio managers, various members of supply chain, and government officials. We recently hired Mr. Bing Lu as the new co-president of MTC. With over 25 years in the semiconductor industry, he brings a wealth of experience in scaling China businesses. Mr. Lu has a diverse background spanning mobile phones, automotive, home appliance, IoT, PC enterprises, and industrial sectors.

He has held key business management roles at Synaptics, InvenSense, TDK, Texas Instruments, and NXP Semiconductors. We look forward to leveraging Mr. Lu's expertise to drive sales and marketing growth in China. Today, we also announced William Lee, our General Manager of Mixed Signal Solutions, has decided to retire after more than a decade with the company. We are deeply grateful for William's years of exceptional service, and wish him the very best. In Q2, we secured a purchase commitment from the smartphone designer that we referenced in our Q1 Earnings Call. The commitment is for premium OLED smartphones, targeted at a leading Chinese smartphone manufacturer. Our plan is to initiate mass production of the chip, with potential revenue contributions currently expected to begin by the end of the year. The design win is built on 28nm technology and incorporates advanced 8-Transistor LTPO panel features.

In addition, we continue to make progress with another leading Chinese smartphone OEM, and are currently in the final design validation phase. As previously mentioned, we also have been selected to collaborate on this smartphone maker's upcoming winter 2024 model, featuring our next-generation chip. In Q2, we provided sample of this chip, which incorporates improved brightness control and power, lower power consumption to panel supplier, and upon completion, we will proceed with design validation at the smartphone OEM. In June, we taped out next-generation OLED driver, designed with key enhanced IP, including self-pixel rendering, SPR, refined color enhancement, color filter, brightness uniformity control, and more than 20% reduction in power consumption than previous generation. We believe more power-efficient DDIC will be increasingly important as the smartphones integrate high-performance AI functionality, as well as adopt a larger foldable and flexible screens.

This chip, which is targeted for feature-rich smartphones in China, is expected to be sampled to a broad array of OLED panel makers in Q4. Finally, after taping out in Q1, we sampled in Q2 our first OLED smartwatch DDIC. This opportunity showcases our strategy to expand into new, high-growth adjacent markets. With regard to our automotive DDIC business, revenue increased for the second quarter in a row. The strongest activity is coming from European end customers. Our Power IC business, which is included in MSS, saw strong sequential growth from LCD TVs and monitors during Q2. Further, due to earlier design wins with a major Korean customer, we saw a notable sequential increase for OLED IT panels as global notebook makers continued to launch new models with OLED display.

We continue to collaborate with this customer for upcoming models, and we are developing products for both LCD TV and OLED panels for potential new customers. In summary, within MSS, we're executing our strategy and making steady inroads with top-tier panel makers and major smartphone OEMs, while also working to drive revenue from adjacent markets in wearables, automotive, TV, and IT panels. For Q3, we forecast sequential revenue growth in MSS, driven by previously announced OLED smartphone design wins, as well as growth from automotive and the refurbished smartphone display markets. Moving on to PAS. Q2 revenue was $39.2 million, up slightly by 0.6% YoY, and up 7.4% QoQ. As I said before, the sequential increase was broad-based, so I will share some details by application.

The industrial segment saw a strong rebound in solar, as issues with excess distributor and customer inventory in China now appear largely resolved. Our new 75A 1200V IGBT has a design opportunity in solar applications and should begin mass production in the second half of the year. E-bikes also grew in Q2, and we are well positioned to benefit from the high-speed e-moto market for scooters and motorcycles, where we see an approximately doubling of the bill of materials content compared to a traditional e-bike. Lastly, lighting and other markets, such as power tools, saw sequential growth. While a relatively smaller contributor to PAS, the automotive segment rebounded sequentially as we build on our past success in Korea, and now see additional design wins and mass production ramps targeted for automotive customers in Japan and China.

The end application vary widely and include IGBTs for automotive heaters and powertrains, as well as medium-voltage MOSFETs for various automotive functions relating to steering, water pumps, compressors, cooling fans, seats, windows, and battery management systems. The communication segment increased sequentially, driven by continued demand for LV MOSFETs for high-end portables and leading-edge AI smartphones in Korea. We also are seeing incremental design win opportunities for tablets, wearables, and China smartphones. As we mentioned on our last earnings call, the PS- PAS design pipeline for low-voltage MOSFETs positions the company well for the next generation of a smartphone, coming in late 2024 and into 2025. We believe our latest smartphone LV products are well positioned to benefit from industry trend towards foldable screens and increasing AI on-chip integration, which requires much lower power consumption than before. Our latest LV power devices consume 20% less than previous generation.

In consumer, we saw growth from TV as China brands gear up to increase market share. Further, our Super Junction MOSFETs and IGBT products are seeing increased demand in home appliances such as refrigerators and induction cooktops. In summary, the overall Q2 PAS results were in line with our earlier expectation for gradual recovery in our power business during the first half of 2024, driven in part by inventory reductions in the channel. We believe the breadth of demand will continue in Q3, driven by leaner distribution channels and design wins for existing and new products, as well as seasonality. We are continuing to execute in delivering a strong new product pipeline for power in 2024.

We believe many of these new products will have similar to Q1 class performance, and will allow us to penetrate new markets in computing and premium OLED TVs. Additionally, the new products will begin to help fill idle Gumi fab capacity in 2025, created by the phase out of the transitional foundry service business. I will come back to wrap up the call after Shin Young gives you more details about financial performance in the second quarter and provides Q3 guidance. Shin Young?

Shin Young Park (CFO)

Thank you, YJ, and welcome everyone on the call. Let's start with the key financial metrics for Q2. Total revenue in Q2 was $53.2 million, which came above the midpoint of our guidance range of $49 million-$54 million. This was down 12.8% YoY, but up 8.4% sequentially. Revenue from MSS business was $11.6 million, slightly above the high end of our guidance range of $9.5 million-$11.5 million. This was down 6.2% YoY, but up 28.7% sequentially. PAS business revenue was $39.2 million, slightly below the midpoint of our guidance range of $38 million-$41 million. This was up 0.6% YoY and up 7.4% sequentially.

Revenue from traditional foundry services declined to $2.3 million as we continue to wind down this service, as we've explained previously. Consolidated gross profit margin in Q2 was 21.8%, above the high end of our guidance range of 17%-19%, down from 22.2% YoY, but up from 18.3% sequentially. MSS gross profit margin in Q2 was 34.6%, above the upper end of the guidance range of 30%-33%, down from 36.4% in Q2 2023, and down from 44.6% in Q1 2024. As a reminder, we recognized non-recurring engineering revenue in Q1 2024. The YoY decline was mostly due to unfavorable product mix.

PAS gross profit margin in Q2 was 19.7%, above the upper end of the guidance range of 15%-17%, down from 23.1% in Q2 2023, but up from 15.4% in Q1 2024. The upside versus guidance was mostly due to stronger than expected US dollar against Korean won, and the sale of reserved inventories, primarily for solar applications. The YoY decline was mainly due to a lower Gumi fab utilization rate from the wind down of transitional foundry services. Turning now to operating expenses. Q2 SG&A was $11.7 million, as compared to $11.3 million in Q1 2024, and $12.1 million in Q2 2023.

Q2 R&D was $12.7 million, as compared to $11.2 million in Q1 2024, and $11.3 million in Q2 last year. As a reminder, R&D expense fluctuates QoQ due to the timing of product development, and Q2 this year had higher mask set costs, which was in line with our expectation. Stock compensation charges, including operating expenses, were $1.1 million in Q2, compared to $0.9 million in Q1, and $2 million in Q2 last year. Q2 operating loss was $12.8 million. This compares to an operating loss of $13.5 million in Q1 and operating loss of $10.7 million in Q2 2023.

On a non-GAAP basis, Q2 adjusted operating loss was $11.6 million, compared to adjusted operating loss of $12.6 million in Q1, and adjusted operating loss of $7.8 million in Q2 last year. Net loss in Q2 was $13 million, as compared with a net loss of $15.4 million in Q1, and a net loss of $3.9 million in Q2 last year. Q2 adjusted EBITDA was -$7.6 million. This compares to a -$8.4 million in Q1 and -$3.6 million in Q2 last year. Our GAAP diluted loss per share in Q2 was $0.34, as compared with diluted loss per share of $0.40 in Q1, and diluted loss per share of $0.09 in Q2 last year.

Our Non-GAAP diluted loss per share in Q2 was $0.21. This compares with diluted loss per share of $0.28 in Q1, and diluted loss per share of $0.06 in Q2 last year. Our weighted average diluted shares outstanding for the quarter were 38.2 million shares. Under our $50 million stock buyback program, authorized in July 2023, we repurchased in Q2 2024, approximately 500,000 shares for aggregate purchase price of $2.3 million, leaving about $30 million remaining authorization as of June 30, 2024. Moving to the balance sheet. We ended Q2 with cash of $132.5 million, and we also have an additional non-redeemable short-term financial investment of $30 million, which has a maturity date in November 2024. This amount is classified on our balance sheet as short-term financial instruments.

Net accounts receivable at the end of the quarter totaled $31.2 million, which represents an increase of 2.9% from Q1 2024. Our days sales outstanding for Q2 was 53 days, and compares to 56 days in Q1. Our average days in inventory for Q2 was seventy-six days, and compares to 71 days in Q1. Inventories net at the end of the quarter totaled $34.8 million and $31.5 million in Q1 2024. Lastly, Q2 CapEx was $0.9 million. For the full year 2024, we reiterate our prior CapEx to spend $10 million-$12 million, primarily for our PAS business and Gumi fab. This includes approximately $3 million-$4 million of one-time CapEx for our newly established operating entity in China. Now moving to our third quarter and full year 2024 guidance.

While actual results may vary, for Q3 2024, MagnaChip currently expects consolidated revenue to be in the range of $61.5 million-$66.5 million, including approximately $1.5 million of transitional foundry services. MSS revenue to be in the range of $14.5 million-$16.5 million, up 33.7% sequentially and 46.2% YoY at the midpoint. This compares with MSS equivalent revenue of $11.6 million in Q2 2024, and $10.6 million in Q3 2023. PAS revenue to be in the range of $45.5 million-$48.5 million, up 19.8% sequentially and 14.6% YoY at the midpoint.

This compares with top PAS equivalent revenue of $39.2 million in Q2 2024, and $41 million in Q3 2023. Consolidated gross profit margin to be in the range of 22.5%-24.5%. MSS gross profit margin to be in the range of 36.5%-39.5%. This compares with MSS equivalent gross profit margin of 34.6% in Q2 2024, and 28.8% in Q3 2023. PAS gross profit margin to be in the range of 18.5%-20.5%. This compares with PAS equivalent gross profit margin of 19.7% in Q2 2024, and 28.6% in Q3 2023.

For the full year 2024, we currently expect MSS revenue to grow double digits YoY, as compared with MSS equivalent revenue of $44.4 million in 2023, consistent with what we communicated at the beginning of the year. PAS revenue to grow double digits YoY, as compared with PAS equivalent revenue of $151.3 million in 2023, consistent with what we communicated at the beginning of the year. Transitional foundry services revenue will decline in 2024 as expected. We expect this revenue to phase out by the end of the year. Consolidated revenue flattish to slightly down, compared to prior expectation of flat to up slightly YoY. Consolidated gross profit margin between 19%-22%, above our prior expectation of 17%-20%.

This compares with the consolidated gross profit margin of 22.4% in 2023. Thank you. Now I'll turn the call back over to YJ for his final remarks. YJ?

Young-Joon Kim (CEO)

As you know, we are undergoing a transformation of a business that will unfold over the course of two years. The first major transition involves the shifting our priorities to be laser-focused primarily in China expansion for our OLED display business. The second major transition involves filling idle capacity in our Gumi fab as a result of the previously disclosed wind down of the transitional foundry service business. We've already taken initial steps to realize our objective by streamlining the structure of the company, by creating separate MSS and PAS businesses to better align our product strategies. More recently, we formed a wholly-owned MTC subsidiary in China with the goal of accelerating our business there.... We currently are pursuing multiple OLED design opportunities with panel makers and smartphone OEMs in China.

As we've said previously, filling idle capacity in Gumi with power products is a high priority because of the impact on margins. A positive sign is that our power business is expected to show sequential growth again in Q3 as a result of new design wins and leaner channel inventories. Longer term, we have a pipeline of new power products that we expect to begin contribute to wafer starts in Gumi over the course of 2025 and beyond. Our power business is, in 2024, is currently forecast to grow by double digits over 2023. We have much work ahead to achieve our objectives, but I'm encouraged that our business strategy are pointing us in the right direction, and I'm committed to take any steps necessary to drive shareholder value. Now, I will turn the call back to Steven. Steven?

Steven Pelayo (Managing Director)

Thank you. That concludes the prepared remarks section of our call today. Operator, you may now open the call up for questions.

Operator (participant)

Certainly. As a reminder, if you do have a question, please press star one one on your telephone. Our first question comes from the line of Suji DeSilva from ROTH Capital. Your question, please.

Suji DeSilva (Managing Director and Senior Research Analyst)

Hi, YJ. Hi, Shin Young. Congratulations on the progress here. The OLED business is growing again nicely. Can you talk about, by today, how many products are supporting that and how many are still on the come? Similarly, maybe customers and models, just to give a sense of where we are in fulfilling your pipeline?

Young-Joon Kim (CEO)

Yes, Suji, very good question. So, obviously, you see, we have multiple design engagement as well as multiple products in development. So in terms of the design model opportunity, we are heavily designing to about four model that will go production in next few quarters, and that includes about three smartphones and one smartwatch. Obviously, but that we are also discussing more products as we speak, and there are more models in the after-service market that we also disclose. In terms of products, we have two new product that we sampled in Q2, one for the next generation OLED smartphone and one for smartwatch.

We just taped out the new product that has the next generation IP, such as the sub-pixel rendering, color enhancements, the color uniformity management, and less than 20% power reduction than previous generation, where that will be broadly expected to be broadly sampled to multiple panel makers. Those are the pipeline and stages that we have.

Suji DeSilva (Managing Director and Senior Research Analyst)

Okay. Very helpful. And then on the, the gross margin side, if I take your full year guide, it would seem like gross margin is declining in the fourth quarter. I just want to make sure my math is correct there. And then more importantly, what are the drivers for gross margin to improve, and the key ones for 2025, and remind us what the target gross margin is again?

Shin Young Park (CFO)

So, Suji, the gross margin for the full year, kind of YoY decline was mainly due to the phase out of the transitional foundry services, because we had those revenue in the first half and also $1.5 million in Q3. So that's coming down. So the transitional foundry services comprise approximately 20%-25% of our Gumi capacity. So that portion becomes idle, so that's kind of impacting our gross margins for the full year. So that's the main driver for the decline. But actually, we came a little higher in Q2, and we called out during the call that that was mainly due to some of the product mix improvement, reversal of some of the reserved inventories and favorable kind of FX impact on us. So we kind of have that.

And also Q3, we kind of guided flatter, flat, almost flat with the PAS, so at the midpoint. So full year, we raised our guidance range by 200 basis points at the bottom and at the top.

Suji DeSilva (Managing Director and Senior Research Analyst)

Mm-hmm.

Shin Young Park (CFO)

That's what we are seeing, the improvements for the full year 2024.

Young-Joon Kim (CEO)

And Suji, I forgot to also mention that the, I think in the today in the script, we said the, both the next generation OLED, I see 20% less power, and, our LV MOSFET is also 20% less power. This is very critical, as we see new smartphone with AI integrated features that will draw more power. So this kind of power reduction is really needed for next generation smartphones.

Suji DeSilva (Managing Director and Senior Research Analyst)

Okay. And then, Shin Young, YJ, the key drivers of gross margin improvement at 25%, is that refilling the Gumi fab capacity that freed up, or are there other elements to it?

Shin Young Park (CFO)

That, that is correct. That's the—we are going through the transformation, as we pointed out, and we are trying to fill the idle capacity in 2025. So new products, new generation products are rolling out, and so that will gonna help us to fill our idle capacity, like, beginning in 2025.

Suji DeSilva (Managing Director and Senior Research Analyst)

Okay, great. Thanks.

Operator (participant)

Thank you. Our next question comes from the line of Martin Yang from Oppenheimer. Your question, please.

Martin Yang (Executive Director)

Thank you. Thank you for taking my question. First, congratulations on recruiting Bing Lu. It's a very solid hire with strong background. Can you maybe talk about, you know, his priority and, you know, his responsibility in China?

Young-Joon Kim (CEO)

... Thank you. Yes, Bing Lu is a very seasoned executive, and as you said, he has very good proven record in China. So he's the Co-President of MTC, so he's responsible for the sales and marketing and business of the MTC, whereas the focus is OLED, driver IC, and the power IC.

Martin Yang (Executive Director)

Got it. And also, a clarifying question regarding your reference to OLED panels for IT. Is your current involvement with about your power IC products for those products? Or are you supplying a driver IC for OLED panels for IT applications?

Young-Joon Kim (CEO)

Right now, initially, power IC is the main driver.

Martin Yang (Executive Director)

Got it. And the next question is regarding your comment on power savings for your new DDIC products. You know, can you maybe give us more context around, you know, what does that 20% power savings mean for the overall panel consumption, or in the context of, you know, how does that translate to overall smartphone power savings?

Young-Joon Kim (CEO)

Yeah. So, you know, the high-end smartphone nowadays, either foldables or integrated AI, right? So that consume a lot more power. So, you need to offset the power consumption, many ways. Like today, we have the MOSFET we talked about and then driver IC. So you need to, you know, save as much power you can, and giving that kind of 20% saving in the next generation will really help out on the high-end smartphone. So again, the saving is also a function of the features. So I think the high end has a lot more of more functionality and the on-chip AI integrated, which consume more power.

But, you know, if you were not to add those things, I mean, you're talking quite significant saving in the actual applications.

Martin Yang (Executive Director)

Got it. Thank you. That's, that's it for me.

Operator (participant)

Thank you. And our next question comes from the line of Quinn Bolton from Needham. Your question, please.

Nick Doyle (Equity Research Analyst)

This is Nick Doyle in for Quinn Bolton. Thanks for taking my questions. You're lowering this fiscal year revenue target just slightly. You pointed out inventory levels are better, so could you expand on what accounts for that slight change?

Young-Joon Kim (CEO)

Yeah. So, you know, I think on the power, we are growing 7.4% in Q2, approximately 20% Q3. So, so that's a quite a very good growth and a leaner channel. But, so, at the same time, with that kind of growth, we do see some seasonality. So that's the only thing that we would describe that on the fourth quarter.

Nick Doyle (Equity Research Analyst)

Okay. So just a little more seasonality than typical in that December quarter. and-

Young-Joon Kim (CEO)

Yeah, the December quarter is a seasonally lower quarter, you know, for us, before the COVID. Yeah. When you go to normal cycle, yeah.

Nick Doyle (Equity Research Analyst)

Right. Do you have a view on whether these AI functions can drive a mobile replacement cycle? I think you just touched on it, but how are you exposed to the trend? Is that mainly in the MSS segment, or do you have also a PAS lever?

Young-Joon Kim (CEO)

Oh, yeah. In fact, we mentioned about the PAS, the low-voltage MOSFET that is going to all the leading the Korean smartphone that has a built-in AI. So our low-voltage MOSFET consumes 20% less than previous generation. So we do see whether it's the OLED DDI or the component in the smartphone in power is requiring that kind of competitiveness to be win to the next generation AI-based smartphone or foldable phone, which consumes more power.

Nick Doyle (Equity Research Analyst)

Okay. And then last one, if I could sneak in. Your gross margins are moving higher, so as they continue to improve, have you thought about a quarterly break-even level, and is that possible in 2025?

Shin Young Park (CFO)

I mean, we don't really guide for 2025, but it's really the function of the revenue and the gross margin. So the gross margin is improving as compared with our previous expectations, so for some, like, moving pieces. So we have more visibility for 2024, so we guided up our gross margin full year guidance by 200 basis points. Going into 2025, definitely new products that are rolling out into this year are going to help us. They'll fill our... the capacity, but the utilization rate and all of the manufacturing efficiency and cost, and everything were going to be impacting our 2025 gross margin. So the quarterly-wise revenue, we'll have to see, like, $50 million-$65 million per quarter-ish. That should be a break even for the PAS business, as we disclosed previously.

But again, it's all kind of the function of the revenue, like, and the gross margin.

Nick Doyle (Equity Research Analyst)

Thanks a lot.

Operator (participant)

Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Steven Pelayo for any further remarks.

Steven Pelayo (Managing Director)

Thank you. This concludes our Q2 Earnings Conference Call. Please look for details of our future events on MagnaChip's Investor Relations website. Thank you, and take care.

Operator (participant)

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.