Magnachip Semiconductor - Q3 2024

Transcript

Operator (participant)

Thank you for standing by. Welcome to the third quarter 2024 Magnachip Semiconductor Corporation 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 participate, you will need to press star 11 on your telephone. You will then hear a message advising your hand is raised. To withdraw your question, simply press star 11 again. Please be advised that today's conference is being recorded. Now, it's my pleasure to turn the call to Stephen Paleo, Head of Investor Relations.

Stephen Paleo (Head of Investor Relations)

Great. Thank you, Carmen. Hello, everyone. Thank you for joining us to discuss Magnachip's financial results for the third quarter ended September 30, 2024. The third 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 Yujia Zhai, Magnachip's Chief Executive Officer, and Shin Young Park, our Chief Financial Officer. Yujia 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 fourth 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 development. 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 third quarter earnings release in the Investor Relations section of our website.

With that, I'll now turn the call over to Yujia Zhai. Yujia?

Yujia Zhai (CEO)

Hello, everyone, and thank you for joining us today, and welcome to Magnachip's Q3 earnings call. Q3 revenue was $66.5 million, up 8.5% year-over-year, and up 25% sequentially. Revenue was at the high end of our guidance range of $61.5-$66.5 million. Consolidated Q3 gross profit margin of 23.3% was down 0.3 percentage points year-over-year but up 1.5 percentage points sequentially. The overall gross margin results were in line with the midpoint of our guidance range of 22.5%-24.5%. Shin Young Park will provide more details in her section. As we wind down and exit the transitional foundry service business, Magnachip will be a pure-play standard products company based on industry-leading mixed-signal expertise. Our standard products comprise of offerings in the MSS and PAS businesses, which include power ICs, advanced OLED DDICs, and discrete power products for industrial, automotive, consumer communications, and computing applications.

Revenue in Q3 for our standard product business was $64.0 million, up 24.0% year-over-year and up 25.9% sequentially. Standard product business gross margin was 24.4%, up 1.3 percentage points sequentially. We are on track with our guidance given at the beginning of the year for double-digit growth in MSS and PAS for 2024. We will provide 2025 guidance on our Q4 and year-end call as we've done in the past. Now, let me provide more detailed comments for each of our standard products business lines. In terms of revenue contribution, PAS represented 74.3% of standard product revenue in Q3. Reported PAS revenue was $47.6 million, up 16.1% year-over-year and 21.2% quarter-over-quarter. The sequential increase was broad-based, so I'll share some details about application. The industrial segment continued to see a strong rebound in solar.

The issues of exiting distributor and customer inventory in China now are behind us in this business segment. In addition to solar inverters, demand for solar pumps is expanding the range of applications we address. The industrial segment also saw growth from additional design wins in the China lighting market with our sixth-generation superjunction devices. Finally, the shift to high-speed E-motors for scooters and motorcycles is leading to an increase in bill of material content and carries the potential for stronger growth. While a relatively smaller contributor to PAS, the automotive segment continues to show strength. We are building upon our past success in Korea with additional design wins and production ramps for automotive customers in Japan and China. The end applications continue to vary widely across many subsystems in our vehicles. More recently, we obtained design wins for additional applications such as power outlets and idle stop/go functionality.

The communication segment shows slight sequential improvements with my continued demand for Low-Voltage MOSFETs for high-end foldables and leading-edge AI smartphones in Korea. We also have seen incremental design opportunities for tablets, wearables, and China smartphones. In consumer, we saw growth from TV driven by strong seasonal demand from Korea. Further, we continue to see steady demand for our Super Junction MOSFET and IGBT products in home appliances such as refrigerators and induction cooktops. Additionally, we expect a recent design in for air purifiers to transition into a design win in Q4. While a relatively small contributor, the computing segment saw strong growth driven by seasonal demand from China for PC and laptop power adapters. In Q3, we hired a Chief Technology Officer and Assistant GM in PAS. He is a proven expert in the field of power semiconductors with more than 20 years of experience.

Prior to joining Magnachip, he worked at Hyundai Motor Company, where he led the development of IGBT and SiC products for automotive applications. Prior to Hyundai Motor Company, he made a significant contribution to the company by entering the planar MOSFET market for the first time and achieving the largest market share of super junction MOSFETs in Korea. His rich experience and knowledge of power semiconductors, his insight into automotive markets, and his ability to develop power semiconductor products will greatly contribute to our company's technology and product roadmaps and overall competitiveness. In summary, the strong sequential growth in Q3 for PAS was ahead of typical seasonal patterns and was driven by linear distribution channels and design wins for existing and new products. We are continuing to execute in delivering a new strong product pipeline for power in 2024.

We believe many of these new products will have similar performance to tier one suppliers, which will give us an opportunity to penetrate new markets and help fill idle Gumi fab capacity in 2025 created by the phase-out of the traditional foundry services businesses. Turning to MSS, Q3 revenue was $16.4 million, up 54.5% year-over-year and up 41.8% sequentially. The results represented 25.7% of standard product revenue and was near the high end of our guidance range of $14.5-$16.5 million. The quarter-over-quarter revenue growth was due to increased demand from OLED DICs for China smartphone OEMs, as well as for automotive and power IC for OLED IT. During Q3, we continued to make inroads with OLED panel makers and smartphone OEMs focusing on the China market. At a high level, we have several DICs at different stages of development, customer evaluation, and in production.

These designs cover the broad smartphone market spectrum from mass market to premium segments and extend to other display markets like automotive and wearable tech, including smartwatches. In line with our original expectations, we have now moved into production on two smartphone models. More specifically, following the purchase order received in Q2, we started initial production and shipment in Q3 for a QHD+ DIC for a premium smartphone model from a leading China OEM. We are the primary DIC supplier for this model, and we expect increased shipment growth to this customer throughout Q4. During Q3, we also received a purchase order as a second source supplier from another leading China smartphone OEM and commence shipments in October. We believe this initial win gives us an opportunity to deepen our relationship and positions us well for future smartphone models.

As mentioned in our Q2 call, we began sampling our next-generation DIC in October. This OLED driver is targeted for mid- to high-end smartphone models in China and incorporates advanced IP, including subpixel rendering, SPR, refined color enhancement, and brightness uniformity control. Notably, this chip reduces power consumption by more than 20% compared to the previous generation. We expect a China panel maker to begin evaluation in Q4 and move into production in 2025. We plan to introduce this chip to multiple China OLED panel makers to further diversify our customer base next year. Evaluations are underway for a new DIC targeted at the smartwatch market. We look forward to leveraging this relationship with a China module maker to expand into new high-growth adjacent markets. With regard to our automotive DIC business, revenue increased for the third quarter in a row.

The business was driven primarily by increased demand from a panel maker that supplied to multiple automakers in Europe. We also saw DIC growth for automotive LCD. Our power IC business, which is including MSS, saw sequential and year-over-year growth driven primarily by increased demand for OLED IT tablets and notebooks. We continue to develop new power IC products for both LCD TV and OLED IT applications for potential new customers. In summary, within MSS, we are executing our strategy and making inroads with top-tier panel makers and major smartphone OEMs. Our decision to act locally was the right strategy for our OLED business in China. At the same time, we are also working to drive revenue from adjacent markets in wearable, automotive, TV, and IT. For Q4, we currently see flattish revenue sequentially, which is better than typical seasonality in this market.

In conclusion, we believe that with the growing trend of AI-enabled smartphones and PCs, power consumption is on the rise. It is crucial to reduce the overall power usage of these systems. The display is a major power consumer and one of the few areas where power can be significantly reduced by switching from LCD to OLED panels. As smartphones incorporate high-performance AI capabilities and adopt larger foldable and flexible displays, the need for power-efficient OLED DDIC has become increasingly important. Our newest and most advanced OLED DDIC offers a power reduction of over 20% compared to the previous generation using the same process technology. Additionally, smartphone OEMs are looking to offset the rising power demands of AI features by utilizing advanced battery FET technologies like those in our PAS segment, alongside the growing use of the OLED screens.

I will now turn the call over to Shin Young to give you more details of our financial performance in the third quarter and provide Q4 guidance. Shin Young.

Shin Young Park (CFO)

Thank you, Yujia, and welcome everyone on the call. Let's start with key financial metrics for Q3. Total revenue in Q3 was $66.5 million, which came in at the high end of our guidance range of $61.5-$66.5 million. This was up 8.5% year-over-year and up 25% sequentially. Revenue from MSS business was $16.4 million, near the high end of our guidance range of $14.5-$16.5 million. This was up 54.5% year-over-year and up 41.8% sequentially. PAS business revenue was $47.6 million, above the midpoint of our guidance range of $45.5-$48.5 million. This was up 16.1% year-over-year and up 21.2% sequentially.

Revenue from transitional foundry services was flattish sequentially at $2.4 million and down from $9.6 million in Q3 2023 as we continue to wind down this service, as we've explained previously. Consolidated gross profit margin in Q3 was 23.3%, slightly below the midpoint of our guidance range of 22.5%-24.5%, down from 23.6% year-over-year, but up from 21.8% sequentially. MSS gross profit margin in Q3 was 38.7%, above the midpoint of the guidance range of 36.5%-39.5%, up from 28.8% in Q3 2023 and up from 34.6% in Q2 2024. The year-over-year and sequential improvement was primarily attributable to a favorable product mix. PAS gross profit margin in Q3 was 19.4%, slightly below the midpoint of the guidance range of 18.5%-20.5%, down from 28.6% in Q3 2023 and slightly lower than the 19.7% in Q2 2024.

The year-over-year decline was mainly due to a lower Gumi fab utilization rate from the wind down of transitional foundry services. Turning now to operating expenses. Q3 SG&A was $12.1 million as compared to $11.7 million in Q2 2024 and $12.1 million in Q3 2023, primarily driven by the increase in stock compensation charges that coincide with the timing of the stock grant. Q3 R&D was $14.4 million as compared to $12.7 million in Q2 2024 and $11.6 million in Q3 last year. As a reminder, R&D expense fluctuates quarter over quarter due to the timing and number of products in development. Stock compensation charges, including operating expenses, were $1.8 million in Q3 compared to $1.1 million in Q2 and $2.1 million in Q3 last year. These charges fluctuate every quarter depending on the timing and size of stock grant. Q3 operating loss was $11 million.

This compares to an operating loss of $12.8 million in Q2 and operating loss of $9.2 million in Q3 2023. On a non-GAAP basis, Q3 adjusted operating loss was $9 million compared to adjusted operating loss of $11.6 million in Q2 and adjusted operating loss of $7.1 million in Q3 last year. Net loss in Q3 was $9.6 million as compared with a net loss of $13 million in Q2 and a net loss of $5.2 million in Q3 last year. Q3 adjusted EBITDA was negative $4.9 million. This compares to a negative $7.6 million in Q2 and negative $2.7 million in Q3 last year. Our GAAP-diluted loss per share in Q3 was $0.26 as compared with diluted loss per share of $0.34 in Q2 and diluted loss per share of $0.13 in Q3 last year. Our non-GAAP-diluted loss per share in Q3 was $0.34.

This compares with diluted loss per share of $0.21 in Q2 and diluted loss per share of $0.04 in Q3 last year. Our weighted average diluted shares outstanding for the quarter were 37.5 million shares. Under our $50 million stock buyback program authorized in July 2023, we repurchased in Q3 2024 approximately 500,000 shares for aggregate purchase price of $2.5 million, leaving about $27.5 million remaining authorization as of September 30, 2024. Moving to the balance sheet, we ended Q3 with cash of $121.1 million, and same as last quarter, we had an additional non-redeemable short-term financial investment of $30 million, which will mature on November 5, 2024. This amount is classified on our balance sheet as short-term financial instruments, but we'll transition back to cash upon maturity.

Net accounts receivable at the end of the quarter totaled $28.7 million, which represents a decrease of 8% from Q2 2024. Our days sales outstanding for Q3 was 40 days and compares to 53 days in Q2. Our average days in inventory for Q3 was 65 days and compares to 76 days in Q2. Net inventory at the end of the quarter totaled $36.1 million and $34.8 million in Q2 2024. Lastly, Q3 CapEx was $2.6 million. Our prior CapEx forecast for the full year 2024 was to spend $10-$12 million, primarily for our PAS business and Gumi fab, and now we expect the amount to be closer to the high end of the range. This expectation includes approximately $3.5 million of one-time CapEx for a newly established operating entity in China. Now, moving to our fourth quarter and full year 2024 guidance.

While actual results may vary, for Q4 2024, Magnachip Semiconductor expects consolidated revenue to be in the range of $59-$64 million, including approximately $2 million of transitional foundry services. MSS revenue to be in the range of $15-$17 million, down 2.7% sequentially, but up 87% year-over-year at the midpoint. This compares with MSS revenue of $16.4 million in Q3 2024 and MSS equivalent revenue of $8.6 million in Q4 2023. PAS revenue to be in the range of $42-$45 million, down 8.6% sequentially, but up 33.3% year-over-year at the midpoint. This compares with PAS revenue of $47.6 million in Q3 2024 and PAS equivalent revenue of $32.6 million in Q4 2023. Consolidated gross profit margin to be in the range of 21.5%-23.5%. MSS gross profit margin to be in the range of 37.5%-40.5%.

This compares with MSS gross profit margin of 38.7% in Q3 2024 and MSS equivalent gross profit margin of 41.3% in Q4 2023. PAS gross profit margin to be in the range of 17%-19%. This compares with PAS gross profit margin of 19.4% in Q3 2024 and PAS equivalent gross profit margin of 18.1% in Q4 2023. For the full year 2024, we currently expect MSS revenue to grow double digits year-over-year as compared with MSS equivalent revenue of $44.4 million in 2023, consistent with what we communicated throughout the year. PAS revenue to grow double digits year-over-year as compared with PAS equivalent revenue of $151.3 million in 2023, consistent with what we communicated throughout the year. Transitional foundry services will be wound down by the end of 2024 as expected. We expect any remaining amount to be material beyond Q4 2024.

Consolidated revenue flattish as compared to our prior expectation of flattish to slightly down. Consolidated gross profit margin between 21%-22% as compared to our prior expectation of 19%-22%. This compares with the consolidated gross profit margin of 22.4% in 2023. Thank you. Now I'll turn the call back over to Yujia for his final remarks. Yujia.

Yujia Zhai (CEO)

In conclusion, Magnachip's strategic focus on its core standard products business drove a better-than-seasonal Q3 and now look for Q4. We are on track with our expectations set at the beginning of the year for double-digit growth in both MSS and PAS. As we continue transitioning into a pure-play standard products company, we are focused on leveraging our industry-leading mixed signal expertise applied to power ICs, advanced OLED DICs, and power discretes. These ongoing efforts position us well for the future.

We will provide our outlook for 2025 on the next call, but I am confident that our business strategies are leading us in the right direction. We remain dedicated to enhancing shareholder value in every way possible. Now, I will turn the call back to Stephen. Stephen. Stephen, please check your mute button. Sorry about that. Thank you. This concludes the prepared remarks section of our call today. Operator, you may now open up the call for questions.

Operator (participant)

Thank you so much, and as a reminder to our audience, if you do have a question, simply press Star 11 to get in the queue and wait for your name to be announced. To remove yourself, simply press Star 11 again. One moment for our first question, and it comes from the line of Suji De Silva with Roth Capital. Please proceed.

Suji Desilva (Managing Director)

Hi, Yujia. Hi, Shin Young.

Congrats on the progress here. Start off maybe with the gross margin. Can you talk about what drives the recovery to target here? Is it MSS utilization? Is it utilization for PAS? And kind of what's the time frame, I guess, for new products getting rolled into the foundry capacity that's the foundry uses that's being taken off?

Shin Young Park (CFO)

So you're talking about probably the PAS gross margin because you talked about the utilization rate. Correct. For the other capacities. Yes. So the power margin, I mean, because if you look at our transitional foundry revenue kind of size, that used to be kind of $10 million per quarter, came down to $5 million. This quarter, we had $2.4 million of foundry. We're going to have $2 million next quarter as well.

It's going to be almost kind of wound down by the end of this year, 2024. Going into 2025, we'll have to convert that portion for the power product. So I said, depending on the product mix, we used to use approximately a third of our Gumi capacity for the foundry product. We can probably do a little better for the efficiency and kind of use some of the equipment for the power product. So maybe 20% can be idle after 2024. So we are doing the conversion gradually. So, I mean, that conversion will not going to happen overnight. So kind of switching that for the power product and fill that with the new product, the PAS product, it will going to take, I mean, take some time. So it will not going to happen in Q1, but it will take some quarters.

It's going to happen throughout 2025.

Suji Desilva (Managing Director)

Okay. And then switching over to the MSS business, the ramp-up in 2025, Yujia, would that be one Q would be a seasonal impact, or are you having program ramps with your two China customers and perhaps more that would kind of offset that? Would it be steady growth from here, or is it lumpy with programs? Any color on MSS outlook would be helpful. Yeah.

Yujia Zhai (CEO)

So we said we're going to guide 2025 next earnings call, but to repeat what we said, we have two products they're going to production this fourth quarter. That's going to increase throughout this quarter. And we also said that we have a new product that's 20% less power than previous generation. With the sample, we expect to go into production 2025. We expect to use a chip to multiple panel markets and makers.

So beyond that, we don't have crystal ball in 2025 to give outlook at the moment, but we can say we are very pushing well and moving in the right direction. Our product pipeline is improving in both PAS as well as MSS, and that's going to also help fill the Gumi fab. And we are currently cautious, optimistic, but not guiding 2025.

Suji Desilva (Managing Director)

Okay. Very good. And then one last quick question. When you talk about your two customers, I think you talked about one of them, you're the primary DDIC vendor, and the other one, you're a second source, if I heard that right. I'm just curious what kind of share difference that can apply as those models ramp up. Thanks.

Yujia Zhai (CEO)

The primary, and that's really good. It's a major. And then the secondary means you are second, so you have much less share.

So that's typically how it's done.

Suji Desilva (Managing Director)

Okay. Thanks, Yujia. Thanks, Shin Young.

Operator (participant)

Thank you so much. And as a reminder, to ask a question, simply press Star 11 on your telephone keypad. Our next question is from Nick Doyle with Needham & Company. Please proceed.

Nick Doyle (Equity Research Analyst)

Hey, guys. I'll echo the congrats on specifically the first year-over-year revenue growth in a long time. I guess on gross margins also, we're getting a bit of a surprise $2 million in the foundry revenue next quarter. So does that kind of push out this gross margin bottom to Q2 2025?

Yujia Zhai (CEO)

I mean, I understand you're not guiding into 2025, but we are kind of thinking the transition would really accelerate in fourth quarter and hopefully finish around first quarter, maybe into second quarter, but that kind of shaped a first quarter bottom for gross margin.

So, maybe anything else you could tell us about that?

Shin Young Park (CFO)

So, the foundry, I mean, we've given them the end-of-life, I mean, the notice, and they've given that to their customers as well. Some of our clients' customers, I mean, they are kind of using our product for their automotive applications. So, they were kind of giving our customers their end-of-life orders, their last-time purchase orders, rather slowly or more cautiously. So, we thought initially we were going to have probably almost zero revenue in Q4, but we were going to see some kind of $2 million-ish revenue in Q4. But beyond that, it's not going to be material. So, we're going to manage that via our utilization rate, I mean, along with our power product demand. And also, we're going to manufacture the foundry product in Q4.

Yujia Zhai (CEO)

But in terms of the gross margin impact, I mean, depending on when we are going to load those wafers into our fab, we may have a slightly kind of carryover effect in Q1 2025. But 2025 Q1 is usually a seasonally soft quarter anyway for us. So we'll have to see the other kind of factors that's impacting gross margin, but we'll see.

Nick Doyle (Equity Research Analyst)

Thanks. And just as a follow-up, I guess, what drove the uptick in R&D spending in the third quarter, and kind of do we expect that level going forward? I'm just trying to figure out what drove the larger-than-expected EPS miss or lower EPS. And I think that might be one of the big parts.

Shin Young Park (CFO)

Yep. So for the R&D, I would say just rather a quarterly fluctuation.

So that fluctuates quarter over quarter depending on the timing and the number of products in development for both business lines, MSS and PAS. So it looks bigger, but when I kind of gave out the guidance for the full year 2024, the OPEX, SG&A R&D together without staff-based comp charges, we said initially $100 million, but we lowered that to $95 million-ish when we had a call last time. And I think we still can finish 2024 with $94-$95 million range. So the Q3 was kind of rather a kind of quarterly distribution depending on the timing of the development. But again, for the annual expectation, we still stand by our previous comment that it's going to be between $94-$95 million. And also. Thank you. Yeah.

For your question about the EPS, that's literally kind of mechanics of how we calculate quarterly the income tax provision versus benefit. So we have to apply the annual ETR rate to the quarterly pretax income or loss. So that means we took a little bigger income tax benefit in the first half, and then we had to take an income tax expense provision in Q3. But again, that really doesn't change our kind of expectation for the annual guidance. So the annual, we still think that we are going to see some kind of $2 million-ish of income tax benefit. So that income tax benefit expense whole kind of fluctuation, kind of that's impacting our EPS on a quarterly basis.

Nick Doyle (Equity Research Analyst)

Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Martin Yang with Oppenheimer. Please proceed. Good morning. Thank you for taking my question.

Martin Yang (Senior Analyst)

My first question is on all our customers. As we get into fourth quarter, are you seeing any macro factors affecting your customers that leads you to believe the market could trend differently comparing to a few quarters ago? Are you seeing any fundamental improvement, deterioration on all the markets in China?

Yujia Zhai (CEO)

So for the fourth quarter, we don't see any for our businesses, our products and customers, we don't see any much difference in Q3 and Q4. And I think we guided based on our quarter-to-quarter visibility, and we are guiding better than seasonality than our previous few years.

Martin Yang (Senior Analyst)

Got it. And then also on OLED market, can you maybe comment on how you think about some of the emerging display technologies like micro-OLED and micro-LED for AR/VR devices? Is that a market that looks attractive to you?

And do you already have programs targeting those markets? Thank you.

Yujia Zhai (CEO)

We've been disclosing that we are the leader in the micro-LED TV from the leading TV manufacturer. So that's the only announced product, and that's the production product that we're shipping. We haven't mentioned anything about the micro-LED for virtual reality at the moment.

Martin Yang (Senior Analyst)

Thank you, Yujia. My last question on gross margin for MSS. So is there anything additional you can share with us other than product mix that contributed to the improvement for our gross margin?

Shin Young Park (CFO)

So because Yujia mentioned that we already had more automotive OLED, the product, and also the power IC. Both of those kind of the segment out of the MSS business line, they tend to have a higher gross margin.

So depending on how much we have from the generated revenue from the OLED automotive and also the power IC and the mobile OLED, that's what I meant by the product mix. So because of increasing the automotive OLED and power IC, that kind of is boosting up our MSS gross margin.

Martin Yang (Senior Analyst)

Got it. Thank you, Shin Young. That's it for me.

Thank you so much. And with that, I will turn the call back to Stephen Paleo for his final comments.

Stephen Paleo (Head of Investor Relations)

Okay. Thank you. This concludes our Q3 earnings conference call. Please look for details of our future events on Magnachip's investor relations website.

Operator (participant)

Thank you and take care. Thank you all who participated in today's conference. You may now disconnect.