Magnachip Semiconductor - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 revenue from continuing operations rose 8.1% year over year to $47.6M and was above the midpoint of guidance; gross margin was 20.4%, within guidance. GAAP diluted EPS from continuing ops was $0.23, while non-GAAP diluted EPS was -$0.08, reflecting the exclusion of a $10.8M FX gain and a $4.1M tax benefit.
• Versus Wall Street consensus, revenue modestly beat and non-GAAP EPS was better than expected; management lowered FY 2025 outlook to “flattish” revenue and 19–20% gross margin, citing tariff uncertainty and pricing pressure in China; Q3 revenue/gross margin guidance implies sequential and year-over-year declines at the midpoint.
• Segment trends were mixed: PAS grew on communications (+46.7% YoY) and computing (+45.1% YoY), while PIC rose 11.1% YoY; industrial and automotive were weak due to e-bike softness and EV demand pressures.
• Strategic and capital actions: share buybacks continued; upgraded CapEx timing increased 2025 spend to $32–34M to accelerate new-gen products, and post-quarter, the Board appointed an Interim CEO and announced multi-year CapEx cuts by >50% (to $30–35M through 2027) while exploring strategic alternatives—potential stock catalysts.

What Went Well and What Went Wrong

What Went Well

• Fifth consecutive YoY revenue growth quarter from continuing operations; PAS strength in communications and computing plus PIC momentum in TV-LED and OLED power ICs.
• Management accelerated the new-generation roadmap (Gen6 SJ, Gen8 MOSFET, IGBT), launching 28 PAS products in H1 and achieving 71 design wins in Q2 (+61% YoY), with early revenue expected by year-end and material impact in H2’26.
• Management quote: “We are accelerating the development of a full array of new generation…feature-rich power products which we expect will command higher prices and margins to drive future growth and profitability”.

What Went Wrong

• Guidance cut: FY 2025 revenue now “flattish” vs prior mid-to-high single-digit growth; FY gross margin lowered to 19–20% (from 19.5–21.5%) due to tariffs and pricing pressure on older-generation products in China.
• Margin compression and higher operating loss: consolidated gross margin fell to 20.4% vs 21.1% a year ago; PIC gross margin declined sequentially to 37.4% (from 46.5%); operating loss widened to -$7.4M.
• Analyst concerns on pricing/utilization: CFO cited severe pricing competition in China and lower utilization impacting second-half margins and outlook; tariff-related customer pull-ins shifted revenue from H2 to Q2, adding near-term pressure.

Transcript

Speaker 4

Hello, and welcome to Magnachip Semiconductor Corporation's second quarter 2025 earnings conference call. At this time, all participants are on 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 will need to press *11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press *11 again. I would now like to turn the conference over to Steven Pelayo. Sir, you may begin.

Speaker 2

Great, thank you. Hello, everyone. Thank you for joining us to discuss Magnachip Semiconductor Corporation's financial results for the second quarter ended June 30, 2025. 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 Semiconductor Corporation'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 Semiconductor Corporation'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 filing. 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'll also 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 Semiconductor Corporation'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?

Speaker 1

Hello, everyone, and thank you for joining us today on Magnachip's Q2 earnings call. We continued in Q2 to execute on our strategic pivot to become a pure-play power semiconductor company, and we delivered solid results despite ongoing macro challenges. For Q2 2025, consolidated revenue for our continuing operation was $47.6 million, up 8.1% year-over-year and above the midpoint of our guidance range. This was our sixth consecutive quarter of year-over-year growth on an apples-to-apples basis. Gross profit margin from continuing operation was 20.4%, which was within our guidance range of 19.5% to 21.5%, still down 2.1 percentage points from a year ago and down slightly from Q1 due primarily to pricing pressure in China affecting older-generation power. We expect our new generation power products will be more competitive and command better pricing as we roll out these offerings over the course of the next several quarters.

As we said before, the catalyst for achieving our financial goals is the successful rollout of our new generation products, including Gen 6 superjunction and IGBT, and Gen 8 medium and low-voltage MOSFET, as well as a full array of follow-on power products. We remain committed to our 3-3-3 strategy of achieving $300 million in revenue and 30% gross margin in three years. Although the exact timing will depend in large part upon macro factors beyond our control, Shin Young Park will provide more color in our section. We've already launched 28 new generation products in the first half of 2025 and are on track to meet our previously stated goal in 2025 for 40 new generation Power Analog Solutions products. We will start to see initial new generation product revenue by the end of 2025 and meaningful impact in the second half of 2026.

We are exploring all options to accelerate our new generation product roadmap and now targeting more than 50 new generation products by end of 2025. We expect these new generation power products to drive higher revenue and give us a smaller die size, yield 20% to 30% more die per wafer in our cookie size. When new generations are fully ramped, within a couple of years, these new products are expected to drive higher gross margins compared to the previous generations. Breaking down the business line, Power Analog Solutions revenue was $42.3 million, up 10.7% year-over-year and 6% quarter-over-quarter. Power Analog Solutions represented nearly 90% of total revenue. Power IP revenue was $5.4 million, up 11.1% year-over-year and up 10.2% sequentially. We continued in strong design win activity in Q2, reflecting customer acceptance of new power products.

We achieved 71 total design wins in the quarter, up 61% from the 44 design wins in Q2 of last year. Twenty-three of the design wins represented 30% of all wins for new products. These new innovative power families open new high-value market opportunities for Magnachip in automotive, industrial, and AI applications. We currently expect these three market opportunities to represent more than 60% of Magnachip's future product mix in 2028, up from 51% in 2024. We already have ongoing engagement to penetrate the automotive market, which we expect to reach over 10% of revenue by 2028, from less than 5% in 2024. Some notable design win activity included in the communication segment. We had six new design wins, up from one in Q2 a year ago.

We continue to win power sockets for both mainstream and flagship AI smartphone models, including multiple newly launched smartphones and also in upcoming portable AI smartphones. We also had power design wins for tablets and smartwatch applications. In the computing segment, we achieved 10 new design wins in Q2 compared to zero in the year-ago quarter. Most of these wins are related to PC power applications using our new superjunction Gen 6 products. Superjunction Gen 6 products are also being adapted into new TV models for 2026 in the consumer segment, where we had five new design wins in Q2 2025, which was equal to the amount from previous year-ago quarter. In industrial, we secured 47 additional design wins, up from 36 in Q2 2024. We saw particular strength in China for LED lighting, again leveraging superjunction Gen 6.

We also expanded into 5G battery management systems with our new medium voltage Gen 8 products. Within automotive, we had one new design win in China for PTC heater applications and now begun mass production for other key vehicle systems, such as idle step stoves, AC inverters, electric oil pumps, and car chargers destined for vehicles in Japan, the U.S., and Europe. In Power IP, we had two design wins, which is the same as the number of wins in the year-ago quarter. We are targeting additional design wins for LED drivers for 2026 TV models from multiple TV makers in Korea. Now, I'll provide more details by business segment within Power Analog Solutions. Industrial accounting for approximately 35% of PAS revenue declined 1.9% year-over-year, partly due to continued weakness in e-bikes and solar inverter sales driven by macroeconomic uncertainties and price competition in the e-mobility segment.

However, we saw strong sequential and year-over-year growth in higher performance e-motor applications, LED lighting, and 5G battery management systems supported by adoption of our new superjunction Gen 6 and NV Gen 8 products. Despite the solid growth in e-motors, it was not enough to fully offset the softness in e-bike demand. Consumer, which represented 34% of PAS revenue, declined 0.4% year-over-year due to continued weakness in home appliances, also being offset by year-over-year growth in TV applications. As mentioned before, we are targeting our new generation superjunction Gen 6 products being adapted for multiple 2026 TV models. Communication, which accounted for 20% of PAS revenue, grew nearly 47% year-over-year, reflecting increased share in both flagship and mass-market smartphone models.

In particular, our low-voltage MOSFET revenue for smart home battery packs increased 32% year-over-year, and we currently expect to hold the majority position with Korea's leading smartphone manufacturer in 2026, including in their flagship portable models. Computing, which represented 8% of PAS revenue, was up 45% year-over-year, driven primarily by higher PC power revenue in Taiwan and China. Automotive, which represented 2% of PAS revenue, declined 25% year-over-year, mainly due to slower demand from Korea-based EV makers and some inventory controls from customers in China. On our Power IP business, which represented 11% of consolidated Q2 revenue from continuing operations, grew 11.1% year-over-year and 10.2% sequentially. The growth was driven by both TV LED and OLED power IPs, supported by the introduction of 20 new mid-to-low-end TV models by our customers for 2025. Finally, the shutdown of our display business is now virtually complete.

We are benefiting from end-of-life income streams and continue to explore monetization opportunities for the display IP assets. China is a huge market, especially for power semiconductors. We started China for China strategy in early 2024 to address the local market opportunities. However, tariff uncertainty, along with competitive pricing pressure on our older generation products in China, combine to create a challenging environment that will impact our near-term outlook in the second half of this year. In view of this, we are being proactive and decisive by taking structural actions internally to reduce costs and optimize operational efficiency with the goal to get close to a quarterly adjusted EBITDA breakeven from continuing operation by the end of this year. We are also accelerating our R&D and product pipeline to differentiate our power product portfolio to be comparable to tier-one levels to command higher prices and margins.

We also are accelerating product development for power devices targeted specifically for China for better cost structure. All of these efforts have to support our long-term financial goals to maximize shareholder value. Now, I'll turn the call over to Shin Young to give you more details about financial performance in the second quarter and provide Q3 and full year 2025 guidance.

Speaker 0

Thank you, YJ, and welcome everyone on the call. Let's start with key financial metrics for Q2. Total Q2 consolidated revenue from continuing operations, which includes Power Analog Solutions (PAS) and Power IP, was $47.6 million, which is above the midpoint of a guidance range of $45 to $49 million. This was up 8.1% year-over-year and up 6.5% sequentially on an apples-to-apples basis. This compared with equivalent revenue of $44.1 million in Q2 2024 and $44.7 million in Q1 2025. Revenue from Power Analog Solutions was $42.3 million. This was up 7.7% year-over-year and up 6% sequentially. Revenue from Power IP was $5.4 million. This was up 11.1% year-over-year and up 10.2% sequentially. In Q2, consolidated gross profit margin from continuing operations was 20.4%, within our guidance range of 19.5% to 21.5%, down from 22.5% year-over-year and down from 20.9% sequentially on an apples-to-apples basis.

The year-over-year decline was primarily attributable to an unfavorable product mix, driven mainly by ASP erosion, particularly in China. The sequential decline was mainly attributable to the timing of certain inventory reserves associated with a Power IP product, coupled with a higher than expected revenue in Q2 from pull-ins by a customer due to the uncertainty around tariffs. The company's display business has been classified as discontinued operations from Q1 2025. All of the following figures reflect results from continuing operations. Q2 SG&A was $9.3 million as compared to equivalent SG&A of $9.7 million in Q2 2024 and $9.7 million in Q1 2025. Q2 R&D was $7 million as compared to equivalent R&D of $5.8 million in Q2 2024 and $5.9 million in Q1 2025.

R&D in Q2 increased due to the acceleration of R&D efforts while developing a family of new generation IGBT and superjunction products to target more high-value opportunities. Stock compensation charges, including operating expenses from continuing operations, were $0.9 million in Q2 as compared to $1 million in Q1 2024 and $0.8 million in Q1 2025. These charges fluctuate every quarter depending on the timing and size of stock overruns. Q2 operating loss was $7.4 million. This compares to an equivalent operating loss of $5.7 million in Q2 2024 and an operating loss of $6.3 million in Q1 2025. On a non-GAAP basis, the Q2 adjusted operating loss was $5.6 million compared to an equivalent adjusted operating loss of $4.7 million in Q2 2024 and an adjusted operating loss of $5.4 million in Q1 2025.

Income from continuing operations in Q2 was $8.5 million as compared with an equivalent loss of $2.2 million in Q2 2024 and a loss of $5.1 million in Q1 2025. In Q2, we recognized net foreign currency gain of $10.8 million, the majority of which was attributable to the non-cash translation gain on certain intercompany borrowings as a result of FX volatility during the quarter. We also booked in Q2 the income tax benefit of $4.1 million, which was primarily due to the tax law recognized in South Korea in connection with the shutdown of the display business. Q2 adjusted EBITDA was negative $2.1 million. This compares to an equivalent adjusted EBITDA of negative $1 million in Q2 2024 and negative $2.1 million in Q1 2025.

Q2 GAAP diluted earnings per share was $0.23 as compared with equivalent diluted loss per share of $0.06 in Q2 2024 and diluted loss per share of $0.14 in Q1 2025. Q2 non-GAAP diluted loss per share was $0.08. This compares with equivalent non-GAAP diluted earnings per share of $0.07 in Q2 2024 and non-GAAP diluted loss per share of $0.10 in Q1 2025. The difference between our GAAP and non-GAAP EPS in Q2 2025 was primarily due to the elimination of the non-cash foreign currency gain of $10.8 million that I explained earlier. Our weighted average non-GAAP diluted shares outstanding for the quarter were 36.1 million shares and 38.5 million shares in Q2 2024 and 36.9 million shares in Q1 2025.

As part of our stock buyback program authorized in July 2023, we repurchased in Q2 2025 approximately 0.7 million shares for an aggregated purchase price of $2.3 million, leaving about $21.2 million remaining authorization as of June 30, 2025. Moving to the balance sheet, we ended Q2 with cash of $113.3 million as compared to $132.7 million at the end of Q1 2025. The two main cash outflow items were $11.9 million of CapEx, which will be explained separately later, and $6.5 million of one-time liquidation costs related to the discontinued display business. With respect to the discontinued display business, we previously estimated total one-time cash cost of approximately $12 million to $15 million. Of this estimated total cash cost in Q2, we actually paid statutory severance and other employee-related costs of $6.5 million.

We originally expected to pay certain contract termination charges in full, along with the statutory severance and other employee-related costs. However, we negotiated with the respective vendors that the total of $6.5 million of contract termination charges would instead be paid over the remaining existing contract terms of one and a half years from Q2 2025, and that amount was recognized as part of other charges in the discontinued operations financials in Q2 2025. The company has begun to provide limited support for remaining customer obligations, including the sale of end-of-life (EOL) display products, which is being conducted by Magnachip Semiconductor Limited, the company's wholly owned subsidiary that operates the power business.

The sale of EOL display products and the potential monetization of the intellectual property assets of the discontinued display business is expected to generate cash inflow of approximately $20 million over a period of approximately two years from the second half of 2025. The total amount will depend upon the demand from customers and the outcome of the monetization efforts of the display intellectual property assets. Any future revenue derived from the display business will be accounted for separately as part of discontinued operations. Net accounts receivable at the end of the quarter totaled $28.8 million and $28.3 million at the end of Q1 2025. Our days outstanding for Q2 was 47 days and compares to 47 days in Q1 2025. Our average days in inventory for Q2 was 81 days and compares to 70 days in Q1 2025.

Inventories net at the end of the quarter totaled $37.6 million and $32.6 million at the end of Q1 2025. Q2 CapEx, as noted earlier, was $11.9 million, of which $9.4 million was used to upgrade the cookie set. For the full year 2025, we now expect our total CapEx to be in the range of $32 to $34 million, which includes approximately $20 to $22 million CapEx to upgrade the cookie set. The annual forecast for the upgraded CapEx from 2025 increased from the previously estimated range of $14 to $16 million to $20 to $22 million, primarily due to the timing shift of certain equipment purchases. In Q2, of the $9.4 million of upgraded CapEx, $7 million was funded by the previously announced $26.5 million equipment loan, resulting in our net cash impact from this upgraded CapEx in Q2 being $2.4 million.

For the full year 2025, we expect approximately 80% to 85% of the $20 million to $20 million upgraded capital expenditures to be funded by the same $26.5 million equipment loan, to which an interest rate of less than 3% per annum will apply, and the remainder will be funded by the company's cash. The loan was part of a previously disclosed strategy for Magnachip Semiconductor Corporation to make a $65 million to $70 million investment over three years to upgrade the cookie set. The depreciation costs related to the cookie set's upgraded capital expenditures won't begin to be reflected in our financial statements until 2027. At that time, we anticipate that a more robust portfolio of new generation power products will at least partially offset the impact.

This new investment in cookie sets is expected to drive the development of the new generation power product portfolio and upgrade the new tools to optimize product mix and improve gross profit margins. Before we move to the guidance section, let me provide some comments regarding the actions that are being undertaken by the company post shutdown of the display business. As we've disclosed previously, we are prepared to execute all available cost reduction initiatives to align our spending level with a strategy to become a pure-play power company and to achieve certain financial goals. We currently retain a cost structure, which includes some shared functions that historically have supported both display and power businesses.

One of the initiatives being undertaken is headcount reduction, primarily through some shared functions made redundant through the closing of display via a voluntary resignation program that we expect to commence and complete by the end of the third quarter. Due to the voluntary nature of the program, we are unable to provide an exact amount of the related financial impact at this time. However, with the execution of this headcount reduction, we target to achieve annual operating expense savings of $2 million to $3 million with a payback period of 1.5 years. Now, moving to our third quarter and full year 2025 guidance.

While actual results may vary for Q3 2025, Magnachip Semiconductor Corporation currently expects consolidated revenue from continuing operations, which includes Power Analog Solutions and power IC businesses, to be in the range of $44 million to $48 million, down 3.5% sequentially and down 13.2% year-over-year at midpoint on an equivalent basis due to pull-ins by customers in Q2 from the second half of the year, as well as competitive pricing pressure on our older generation products. This compares with equivalent revenue of $47.6 million in Q2 2025 and $53 million in Q3 2024. Consolidated gross profit margin from continuing operations to be in the range of 18.5% to 20.5%. This compares with equivalent gross profit margin of 20.4% in Q2 2025 and 22% in Q3 2024.

For the full year 2025, consolidated revenue from continuing operations is now expected to be flattish as compared to our previous forecast of mid to high single-digit growth year-over-year due to a challenging environment related to tariff uncertainty and pricing pressure on older generation products in China. This compares with equivalent revenue of $185.8 million in Q2 2024. Consolidated gross profit margin from continuing operations is between 19% to 20% as compared to our previous forecast of 19.5% to 21.5%. The equivalent gross profit margin was 21.5% in 2024. Thank you, and now I'll turn the call back over to YJ for his final remarks. YJ?

Speaker 1

In the first half of the year, we made good progress on our goal to become a pure-play power semiconductor company. We expanded our new generation power product pipeline and focused on increasing customer adoptions across key growth markets, including automotive, industrial, and communication. In Q2, in particular, our growth was driven primarily by strong performances in our communication and computing businesses, with each showing revenue growth of over 40% year-over-year. We also benefited modestly by some poolings by customers due to the uncertainty around tariffs. Looking to the back half of the year, we faced an uncertain environment due to tariffs and pricing pressure in China. As a result, we currently anticipate a softer second half of the year relative to our prior expectations.

While headwinds are impacting our near-term outlook, we have been proactive and decisive, taking structural actions to optimize operational efficiency while continuing to invest in R&D and CapEx to support our long-term 3-3-3 financial strategy. As we shared today, we are accelerating the development of a full array of new generation products to drive future growth and we expect to see initial revenue contributions by year-end, gaining momentum and having a material impact in the second half of 2026. This escalation will allow us to roll out more feature-rich, differentiated, and higher margin products more quickly. We remain committed to maximizing shareholder value and prioritizing a return to profitability. Now, I'll turn the call back to Steven. Steven.

Speaker 2

Okay, that concludes our prepared remarks. Now let's open up the call for questions that you may have. Please go ahead.

Speaker 4

Thank you. Ladies and gentlemen, as a reminder to ask a question, please press *11 on your telephone, then wait for your name to be announced. To withdraw your question, please press *11 again. Please stand by while we compile the Q&A roster. Our first question comes from a line of Suji Desilva with ROTH Capital. Your line is open.

Speaker 2

Hi, YJ. Hi, Shin Young. The poolings you saw in the first half from customers and the tariff impact, I'm wondering if that's flowing through in the second half, all the way, you know, to the next few quarters and whether you've largely seen the impact of that, you know, near term, when you talk about one large customer. Curious how much that affected lingering versus pricing threats for another element of the revenue.

Speaker 1

Yes, I think we mentioned the magnitude of estimates that fall in the prior time. We thought maybe about $2 million, and I think some of that came into the first half. We saw a little more in the later part of Q2, especially in the TV and TV-related area. We think that's already taken care of, in terms of pooling.

Speaker 2

Okay, great. On the gross margin, the wrap-down that you're seeing Q2, Q3, Q2, is that primarily pricing now at this point, or are you adjusting utilization for the current environment and trying to manage inventory too?

Speaker 4

The pricing pressure for sure, Suji, that's kind of revenue all over vision from the mid-price single digit to flattish. That's impacting our gross margin, obviously. We baked in previously, and the pricing competition and pressure became more severe. That's kind of dragging down our gross margin. At the same time, because the older generation product that we are kind of feeling the pressure there, the utilization rate is actually, I mean, that's definitely getting impacted as compared to our previous forecast. Lower utilization than our previous expectation, along with this kind of pricing pressure, the SE erosion is impacting our second half, and that's how you're kind of seeing our soft kind of outlook in the second half of 2025.

Speaker 2

Gotcha. All right, thanks, Shin Young. Thanks, YJ.

Speaker 4

Thank you. Thank you. As a reminder, ladies and gentlemen, that's *11 to ask a question. Our next question comes from a line of Nicholas Doyle with Needham & Company. Nick, your line is open.

I know. Thanks for taking my question. Just wondering if you can talk about where you're seeing strength in the communications, like which applications are driving strength in the communications gen market. Thank you.

Speaker 1

Yes, Nick. If you look at our remarks today, we had more design wins in the communication. From one to five models we had, we are seeing the trends from the new models that launched in 2025. That's from mid-range to flagship AI smartphones, and the newly launched AI portable phones, and that's where we saw growth. Also, in the computing area, we had more design wins, and that also contributed to the more design wins. We are also seeing a good pipeline for the AI server as well.

Okay, and then if I could just ask about the OPEX and the EBITDA breakeven, I mean, you're saying you're targeting hopeful breakeven by the end of the year. Does that mean you can really take down OPEX, you know, $1 million to $2 million by the end of the year? Kind of, you know, to be determined based on the voluntary resignation program dynamic. Thanks.

Speaker 4

Thanks, Nick. That's why we still target to get close to adjusted EBITDA breakeven in Q4 2025. We are executing this voluntary resignation program. We are going to do that launch and execute it by the end of Q3. You're going to see the impact in Q4 for sure, but our currently estimated range is like $2 million to $3 million OPEX reduction, that's kind of an annual basis. If you kind of divide it by four, just roughly, that's kind of a $0.5 million to $0.75 million reduction in OPEX, and mainly should be coming from the SG&A.

Thank you.

Thank you. Ladies and gentlemen, I'm showing no further questions in the queue. I will now like to turn the call back over to Steven for closing remarks.

Speaker 2

Okay, thank you. Before we conclude, I just want to give everyone a quick reminder on our upcoming investor conference. On August 20th, we will present at the sixth annual Needham Virtual Semiconductor and Semi-Cap one-on-one conference. Attendance at the conference is by invitation only. For interested institutional investors, please contact your respective sales representative to register and schedule one-on-one meetings with the management team. Please look for details of our future events on Magnachip Semiconductor Corporation's Investor Relations website. With that, this concludes our Q2 earnings conference call. Thank you and take care.

Speaker 4

Ladies and gentlemen, you may now disconnect. Thank you for your participation.