Magnachip Semiconductor - Earnings Call - Q4 2024

Executive Summary

• MX delivered Q4 revenue of $63.0M (+24.0% y/y, -5.1% q/q) and gross margin of 25.2%, both ahead of internal guidance midpoints; non-GAAP diluted EPS swung to +$0.07 from -$0.21 y/y, while GAAP diluted EPS was -$0.44 due to FX and impairment charges.
• Management announced a strategic pivot to become a pure-play Power company and is exploring all options for the Display business; Display will be classified as discontinued operations beginning Q1 2025, with a goal to complete the process by end of Q2 2025.
• 2025 framework: Adjusted EBITDA breakeven by Q4 2025 (continuing ops), positive adjusted operating income in 2026, and positive adjusted free cash flow in 2027—part of its “3-3-3” goal to reach a $300M annual run-rate and 30% gross margin in three years.
• Near-term outlook reflects seasonal Q1 softness and fab underutilization as foundry services wind down; Q1 2025 revenue guided to $42–$47M and GPM 18.5–20.5%, with FY25 revenue growth mid-to-high single digits for continuing ops and GPM 19.5–21.5%.

What Went Well and What Went Wrong

What Went Well

• Gross margin beat and expansion: Q4 consolidated GPM reached 25.2%, above the 21.5–23.5% guide and up 190 bps q/q and 250 bps y/y; Standard Products GPM rose to 26.6% (+220 bps q/q).
• Segment momentum: PAS revenue +33.2% y/y (to $43.5M) and MSS +102% y/y (to $17.3M); MSS GPM 41.8% exceeded guidance (37.5–40.5%).
• Strategic clarity and new product pipeline: Management committed to pure-play Power focus, with 40+ next-gen power products slated for 2025 (including Gen6 IGBTs/SJ MOSFETs), targeting higher-value auto/industrial/AI markets; CEO/CFO voluntary salary cuts signal commitment.
  • “By focusing on the Power business, our goal is… quarterly adjusted EBITDA breakeven by the end of Q4 2025… $300 million annual revenue run rate with a 30% gross margin target” — CEO YJ Kim.

What Went Wrong

• GAAP losses persisted: Q4 operating loss widened q/q to -$15.7M and net loss to -$16.3M on FX headwinds and a non-cash impairment in Display; GAAP diluted EPS -$0.44.
• Underutilization headwind: Wind-down of Transitional Foundry Services leaves ~20% of Gumi fab idle near-term, pressuring 2025 GPM (guided below 2024 on an equivalent basis) until new power ramps in 2H25.
• Seasonal/segment softness: Sequential revenue declined 5.1% q/q; PAS revenue fell 8.7% q/q on seasonality despite y/y strength.

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the Magnachip Semiconductor Corporation Fourth Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Steven Pelayo, Investor Relations. Please go ahead.

Steven Pelayo (Head of Investor Relations)

Great. Thank you. Hello, everyone. Thank you for joining us to discuss Magnachip's financial results for the fourth quarter and full year ended December 31, 2024. The fourth quarter earnings release that was issued today before the market open 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 Shinyoung Park, our Chief Financial Officer. YJ will discuss the company's recent operating performance and business overview, and Shinyoung will review financial results for the quarter and provide guidance for the first quarter and full year of 2025. 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 are therefore 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 will 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'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 fourth 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, Board of Director, and Member of the Risk Committee)

Hello, everyone, and thank you for joining us today, and welcome to Magnachip's Q4 earnings call. In addition to sharing Q4 earnings results, Magnachip Management and the Board of Directors today announced a new strategy to become a pure-play power company, focusing its investments on the Power discrete and Power IC businesses to drive profitability and maximize shareholder value. We will host a separate sell-side analyst briefing later this morning to provide additional color on our strategy. As part of that strategy, we also announced today that Magnachip is exploring all possible strategic options for the display business. This was an extremely difficult decision for me, the management team, and the Board of Directors when considering both our valued customers and employees.

While we have a rich and competitive portfolio of OLED display technology, after a careful review of our business outlook, we've determined that the greatest potential for profitable growth lies with our Power solutions business, including Power discrete and Power IC. Achieving profitability is our highest priority and in the best interest of our shareholders and other stakeholders. As a sign of my own personal commitment to the long-term success of Magnachip's new strategy, I'm voluntarily cutting my current base salary by 20%. Shinyoung Park, our CFO, has also agreed to a 10% voluntary decrease of her current base salary until such time as Magnachip achieves positive GAAP operating income for two consecutive quarters. Unlike the display business, which primarily is served by a few panel customers, Magnachip's Power business caters to a broad array of industries and customers that we believe have more stable long-term growth prospects.

We therefore have launched a strategic process for the display business. While our goal is to complete this process by end of Q2 2025, the display business will be classified as a discontinued operations beginning with our Q1 2025 financials. Shinyoung will explain this in greater detail later in the call. As mentioned previously, our utmost short-term goal is a return to profitability. By focusing on the Power business, our goal is that Magnachip's business from continuing operations will achieve quarterly adjusted EBITDA break-even by the end of Q4 2025, followed by positive adjusted operating income in 2026 and positive adjusted free cash flow in 2027. Each of these targets will act as milestones towards achieving a goal in three years to reach a $300 million annual revenue runway with a 30% gross margin target. We're calling this three-year objective our 3-3-3 Strategy.

Magnachip's Power business is now entering a new phase that we call phase III. During phase I was our initial market entry and foundation period between 2007 and 2012, and primarily focused on mobile phones. Phase II was our market expansion into consumer home appliances, computing, smartphone, e-bike, solar, and lighting. Most of these efforts were aimed at a small portion of the performance segment serving up to 10 kW. Many of our greatest successes were in sub-1 kW applications such as TVs, smartphones, and e-bikes. For phase III, we are expanding our addressable markets into larger and higher performance markets. These include additional industrial segments such as energy storage, automation, and robotics, as well as automotive and AI data center opportunities up to 100,000 kW and above.

Our phase III strategy is on the way now with today's launch of a series of next-generation power products, including Gen 5 and Gen 6 IGBT, Gen 6 Super Junction MOSFETs, and Gen 8 medium and low voltage MOSFETs. We expect to release over 40 new-generation phase III power products in 2025, with 27 new-generation products launching in Q4 2025, with fully qualified commercial samples available.

Steven Pelayo (Head of Investor Relations)

Launching in Q1.

Young-Joon Kim (CEO, Board of Director, and Member of the Risk Committee)

Q1 2025, sorry, launching right now in Q1 2025. With our current product pipeline, we expect to increase the number of phase III new-generation power products to approximately 55 that we expect to introduce in 2026 versus 2025. We expect new-generation power products to drive higher revenue per wafer at our Gumi fab. For example, our Gen 6 Super Junction power devices not only deliver superior performance compared to the previous generation, but will also offer 30% more die per wafer. Therefore, these new products, when fully ramped, will drive meaningfully higher gross margins compared to the previous generation. These innovative product families will open new high-value market opportunities for Magnachip, such as automotive, industrial, and AI applications. We are targeting automotive, industrial, and AI to represent more than 60% of Magnachip's future product mix, up from 30% in 2024. Notably--

Steven Pelayo (Head of Investor Relations)

Up from 37%. [audio distortion]

Young-Joon Kim (CEO, Board of Director, and Member of the Risk Committee)

Up from 37% in 2024. Notably, we already have ongoing engagement to penetrate automotive markets, which expect to reach over 10% of our revenue by 2027, from less than 5% of our revenue in 2024. To support this transition to higher performance new-generation products, we will invest $65 million-$70 million over the next three years to upgrade production equipment at our manufacturing facility in Gumi. When these new power products enter production, we anticipate top-line growth and meaningful bottom-line improvement. By the end of 2026, we expect almost half of our manufacturing capacity in the Gumi fab will come from these new generation of products. We will discuss all of this in greater detail at today's analyst briefing. Now, let's step back and review Q4 and 2024 results.

Q4 revenue was $63 million, up 24% year-over-year and down 5.1% sequentially. Consolidated Q4 revenue was above the midpoint of our guidance range of $59.0 million-$64.0 million. Consolidated Q4 gross profit margin of 25.2% was up 2.5 percentage points year-over-year and up 1.9 percentage points sequentially. The overall gross margin result exceeded our guidance range of 21.5%-23.5%. Shinyoung will provide more details in her section. Revenue in Q4 for our standard products business was $60.7 million, up 47.5% year-over-year and down 5.1% sequentially. Standard products business gross margin was 26.6%, up 2.2 percentage points sequentially.

On a full-year basis, consolidated revenue increased 0.7% in calendar 2024 versus 2023. Excluding transitional foundry services, our standard products business increased 13% year-over-year, with MSS up 22.5% and PAS up 10.2%. Both of these business line growth rates were in line with our guidance for double-digit growth provided at the beginning of 2024. Now, I provide more details by business line.

Reported PAS revenue was $43.5 million, up 33.2% year-over-year and down 8.7% quarter-over-quarter. The year-over-year increase was primarily driven by the expansion of high-end mobility and battery management systems in China, deeper penetration within Korean smartphones, as well as increased market share. The sequential decline was mostly due to seasonality in each of our market segments, except in communication, where we enjoyed meaningful quarter-on-quarter growth. Within standard products, PAS represented 71.5% of revenue in Q4. The industry market remained stable to slightly down in 2024 and represented 39% of PAS revenue. A shift towards high-speed e-motors and battery management systems with higher BOM content offset decline in e-bike demand.

Similarly, growth in solar pumps offset weaker solar inverter sales. LED lighting remained steady, while power tools, including welders, experienced strong growth. From a product perspective, we benefit from advantages for our Gen 5 and Gen 6 IGBT and Super Junction products in solar and motor drive applications. Despite modest year-over-year growth, our revenue in the industrial market outperformed competitors driven by our diversified end-market strategy. In consumer, we achieved high single-digit growth driven by strengths in home appliances for a broadening array of products, including refrigerators, cooktops, and a new advantage in Q4 for air purifiers. TVs were relatively flat year-over-year, with notable strengths in Korea offset by declines elsewhere.

Overall, the consumer market accounted for 35% of PAS revenue in 2024. The communication market represented 15% of PAS revenue in 2024 and increased more than 50% year-over-year, fueled by advantages for Battery FET in mainstream and flagship portable and AI-enabled smartphones in Korea, along with expanding adoption in wearables, tablets, and AR glasses. Additionally, we gained traction with multiple brands in China and Japan for further strengthening our presence in smartphone, tablet, and wearable markets. While a relatively smaller contributor at 8% of PAS revenue, the computing market saw more than 25% growth in calendar 2024, driven by demand from China for PC and laptop power adapters.

Finally, the automotive market was less than 5% of PAS revenue in 2024 and outperformed the broad automotive market last year, declining less than 5%. We strengthened our position in Korea with new design wins, driving greater market penetration while ramping up production for multiple automotive customers in Japan and China. Our applications span a wide range of vehicle subsystems, with a recent disadvantage for heater application with a China OEM. This adds to previous wins in power outlets and Idle Stop & Go functionality announced last quarter.

In summary, the sequential decline in Q4 for PAS was mostly in line with typical seasonal patterns, while the sequential strengths in communications were driven by preparation for new product launches. For Q4 2024, the double-digit growth was fairly broad-based, driven by communications, consumer, and computing markets, while very slight declines in industrial and automotive relatively outperformed their respective markets. As we have mentioned before, we continue to execute on delivering a strong new product pipeline for power. We believe many of these new products will have similar performance to Tier 1 suppliers, which will give us an opportunity to penetrate new markets and help fill idle Gumi fab capacity created by the phase-out of the transitional foundry service business. We will share more details on our Power business in the analyst briefing later this morning.

Turning to MSS, Q4 revenue was $17.3 million, up 102% year-over-year and up 5.1% sequentially. Including Power IC, MSS represented 28.5% of standard products revenue and slightly exceeded the high end of our guidance range of $15 million-$17 million. Power IC revenue was relatively flat sequentially at $5.4 million and increased 62.4% year-over-year. On a full-year basis, total MSS revenue increased 22.5% year-over-year.

Now, I will turn the call over to Shinyoung to give you more details of our financial performance in the first quarter and provide Q1 and full-year 2025 guidance. Shinyoung.

Shinyoung Park (CFO and Chief Accounting Officer)

Thank you, YJ, and welcome everyone on the call. Let's start with the key financial metrics for Q4. Total revenue in Q4 was $63 million, which came above the midpoint of our guidance range of $59 million-$64 million. This was up 24% year-over-year and down 5.1% sequentially. Revenue from MSS business was $17.3 million, slightly exceeding the high end of our guidance range of $15 million-$17 million. This was up 102% year-over-year and up 5.1% sequentially, primarily due to relative strength in automotive. PAS business revenue was $43.5 million and was in line with the midpoint of our guidance range of $42 million-$45 million. This was up 33.2% year-over-year and down 8.7% sequentially, primarily reflecting seasonality.

Revenue from transitional foundry services was down 5.9% sequentially at $2.3 million and down from $9.6 million in Q4 2023, as this business has been wound down, as we've explained previously. Consolidated gross profit margin in Q4 was 25.2%, exceeding the high end of our guidance range of 21.5%-23.5%, up from 22.7% year-over-year and up from 23.3% sequentially. MSS gross profit margin in Q4 was 41.8%, above the high end of the guidance range of 37.5%-40.5%, up from 41.3% in Q4 2023 and up from 38.7% in Q3 2024. The year-over-year improvement was primarily attributable to higher automotive and Power IC revenue, and despite lower-than-expected mobile display revenue.

PAS gross profit margin in Q4 was 20.5%, above the guidance range of 17%-19%, up from 18.1% in Q4 2023 and up from 19.4% in Q3 2024. The upside versus guidance, year-over-year and sequential improvement was mostly due to stronger-than-expected U.S. dollar against the Korean won.

Turning now to operating expenses, Q4 SG&A was $12 million, as compared to $12.1 million in Q3 2024 and $12.1 million in Q4 2023. Q4 R&D was $13 million, as compared to $14.4 million in Q3 2024 and $15.4 million in Q4 last year. As a reminder, R&D expense fluctuates quarter-over-quarter due to the timing and number of products in development. Staff compensation charges, including operating expenses, were $2 million in Q4, compared to $1.8 million in Q3 and $1.7 million in Q4 last year. These charges fluctuate every quarter depending on the timing and the size of stock award agreements. Q4 operating loss was $15.7 million. This compares to an operating loss of $11 million in Q3 and an operating loss of $15.9 million in Q4 2023.

In Q4 2024, a $4.6 million loss was recorded as a one-time non-cash impairment charge associated with the display business in accordance with U.S. GAAP. In the same period, $2 million was also recorded as other charges, which represents a one-time cumulative financial impact in connection with certain Korea-mandated employee benefits. On a non-GAAP basis, Q4 adjusted operating loss was $7 million, compared to an adjusted operating loss of $9 million in Q3 and an adjusted operating loss of $14.1 million in Q4 last year. Net loss in Q4 was $16.3 million, as compared with a net loss of $9.6 million in Q3 and a net loss of $6 million in Q4 last year.

A substantial portion of our net foreign currency gain or loss is associated with intercompany long-term loans, which are denominated in U.S. dollars and affected by changes in the exchange rate between the Korean won and the U.S. dollar. Therefore, the net loss in Q4 2024 on a GAAP basis had deepened, compared with a year ago or a quarter ago, as the Korean won depreciated relative to the U.S. dollar in Q4 2024, whereas the Korean won appreciated during Q3 2024 and Q4 2023. However, this financial yardstick is not necessarily a relevant measure of our operating performance, as we cannot control the size of these effects, and the aforementioned net foreign currency gain or loss is a non-cash item. Q4 adjusted EBITDA was negative $2.6 million. This compares to a negative $4.9 million in Q3 and negative $10 million in Q4 last year.

Our GAAP diluted loss per share in Q4 was $0.44, as compared with diluted loss per share of $0.26 in Q3 and diluted loss per share of $0.16 in Q4 last year. Our non-GAAP diluted earnings per share in Q4 was $0.07. This compares with a non-GAAP diluted loss per share of $0.34 in Q3 and non-GAAP diluted loss per share of $0.21 in Q4 last year. Our weighted average non-GAAP diluted shares outstanding for the quarter were 37.7 million shares and 37.5 million shares in Q3 and 38.8 million shares in Q4 2023. Under our $50 million stock buyback program authorized in July 2023, we repurchased in Q4 2024 approximately 0.7 million shares for an aggregate purchase price of $2.9 million, leaving about $24.6 million remaining authorization as of December 31, 2024.

Moving to the balance sheet, we ended Q4 with cash of $138.6 million. At the end of Q3, we had cash of $121.1 million and $30 million of non-redeemable short-term financial investment, which was transitioned back to cash on November 5, 2024. The primary cash outflow during the quarter was approximately $7.4 million of CapEx and $2.9 million of stock buybacks. Net accounts receivable at the end of the quarter totaled $28.4 million and $28.7 million at the end of Q3 2024. Our days sales outstanding for Q4 was 41 days and compares to 40 days in Q3. Our average days in inventory for Q4 was 60 days and compares to 65 days in Q3. Inventory net at the end of the quarter totaled $30.5 million and $36.1 million at the end of Q3 2024.

Lastly, Q4 CapEx was $7.4 million. As noted previously, our CapEx forecast for the full year 2024 was to spend at the higher end of the $10 million-$12 million range, and we spent $11.6 million primarily for our PAS business and Gumi fab. Now, let me provide financial-related comments regarding our strategy to become a pure-play power company. One, effective January 1, 2025, we transfer the Power IC portion of MSS to Magnachip Semiconductor Limited, our existing Korean operating company, where the PAS business line already resides. Together, PAS, which is our Power discrete business, and Power IC comprise our Power solutions business line, which represents Magnachip's going forward continuing operations.

Two, with our strategy to become a pure-play power company, we expect the display business to be classified as discontinued operations beginning in our Q1 2025 financials, and reported separately from our continuing operations that will comprise PAS and Power IC business lines. As a reminder, we had wound down transitional foundry services by the end of 2024 and do not expect to report such revenue separately beginning with Q1 2025 financial results. Three, YJ mentioned earlier that we expect over time to achieve higher revenue per wafer and improve product mix at our Gumi fab. To achieve those goals, we currently expect to invest approximately $65 million-$70 million over three years to upgrade the Gumi fab.

In 2025, we expect total CapEx, including maintenance, to be in the range of $26 million-$28 million, which includes approximately $14 million-$15 million to upgrade the Gumi fab. Total CapEx in 2024 was $11.6 million. The depreciation cost from the new investment in the Gumi facility will not begin to be fully 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. It is important to note that from a cash management standpoint, the CapEx investment in Gumi will be partially funded through a previously announced $26.5 million equipment financial credit agreement. This is tied specifically to equipment purchases or upgrades in our Gumi fab.

This new investment in Gumi is expected to drive development of the new generation power product portfolio and upgrade new tools to optimize product mix and improve gross profit margin. Four, as a result of the strategy changes we are making, we are now targeting quarterly adjusted EBITDA from continuing operations to be break-even by the end of Q4 2025. To achieve this, we'll explore and execute all available cost reduction initiatives to align our spending level with a strategy to become a pure-play power company, while enabling us to continue to make progress towards our 3-3-3 Strategy.

Now, moving to our first quarter and full year 2025 guidance. While actual results may vary, for Q1 2025, Magnachip currently expects consolidated revenue from continuing operations, which includes Power discrete and Power IC businesses and excludes our formal display business, to be in the range of $42 million-$47 million, down 8.9% sequentially due primarily to seasonality, but up 11.5% year-over-year at the midpoint. This compares with the equivalent revenue of $48.9 million in Q4 2024 and $39.9 million in Q1 2024. Consolidated gross profit margin from continuing operations to be in the range of 18.5%-20.5%, due to the seasonal sequential decline in revenue and the wind down of transitional foundry services impacting fab utilization. This compares with the equivalent gross profit margin of 23.2% in Q4 2024 and 17.6% in Q1 2024.

For the full year 2025, which was at the stage to become a pure-play power company, we currently expect consolidated revenue from continuing operations to grow mid to high single digit year-over-year, as compared with equivalent revenue of $185.8 million in 2024. Consolidated gross profit margin from continuing operations between 19.5%-21.5%, reflecting the fact that we have completed the wind down of transitional foundry services, and new generation power products will just begin production in the second half of 2025. The equivalent gross profit margin was 21.5% in 2024.

Thank you, and now I turn the call back over to YJ for his final remarks. YJ?

Young-Joon Kim (CEO, Board of Director, and Member of the Risk Committee)

The pure-play power strategy we announced today focuses on shareholder value and prioritizes a return to profitability, supported by clearly articulated and transparent short and medium-term financial targets.

We see a great market opportunity in power semiconductors, which is greater than 10x larger than the OLED DDIC market. We have a proven track record in power with design, manufacturing, and shipping more than 23 billion units during the past 18 years. The primary goal of our 3-3-3 Strategy is to reach a $300 million annual revenue run rate with 30% gross margin in the next three years. We are excited about the large rollout of our new generation products happening now through 2026. These products address higher valued markets with better performance and low cost. We are upgrading our Gumi fab to manufacture more of these new generation products. Our plan is to convert the fab to serve 70% of the capacity with new products. These will help optimize our Gumi fab for better profitability.

As I've said in the past, we are focused on maximizing shareholder value, and we believe prioritizing a return to profitability by focusing on the Power business offers our shareholders the greatest potential. In addition to our medium-term or three-year goals, we have set very specific short-term milestones after the display business has been discontinued. These milestones include achieving continuing operations: one, quarterly adjusted EBITDA break-even by the end of Q4 2025, followed by two, positive adjusted operating income in 2026, and three, positive adjusted free cash flow in 2027.

Now, I will turn the call back to Steven. Steven?

Steven Pelayo (Head of Investor Relations)

Thanks. That concludes our prepared remarks. Now, let's open the call for any questions that you may have. Operator, please go ahead.

Operator (participant)

Thank you. As a reminder to ask a question, please press star 11 on your telephone and wait for your name to be announced to withdraw your question, please press star 11 again. Our first question comes from the line of Suji Desilva with Roth Capital. Your line is now open.

Suji Desilva (Senior Research Analyst)

Good morning, YJ. Best of luck on the strategic transition here. Maybe you could talk first, YJ, about the Power segment, the end markets you think will drive the mid—that will most drive the mid-high single digit year-over-year growth in 2025 as a starting point. Which end markets do you think would be the most best contributors there?

Young-Joon Kim (CEO, Board of Director, and Member of the Risk Committee)

Yes. In 2025, I think it's evenly distributed to the industrial, automotive, and consumer communication computing, but with the new generation that we just launched, 27 new products, we think that will help us grow more into the AI computing area as well as industrial and automotive.

Suji Desilva (Senior Research Analyst)

Okay. That's helpful. The profitability targets, the gross margin—Shinyoung, maybe what are the drivers of gross margin improvement near term? Just to understand from the Power business, what are the key elements there of trending gross margin up towards the 30% long-term target?

Shinyoung Park (CFO and Chief Accounting Officer)

Yes. For the near term, at least for 2025, we gave the annual outlook. That is going to be 100 basis points lower than 2024, and that is mainly because of the fact that we have wound down the transitional foundry services, the fabs we have either in Gumi, so that is impacting our utilization. Also, our new power generation product we are going to just begin production in the second half of 2025. That is the near-term outlook. To achieve the 3-3-3 Strategy, we are going to have the new power product coming out starting in the second half and more in 2026.

YJ said about half of our 2026 revenue is going to be coming from the new generation power product. We are going to increase the portion of the new by the end of next year. We are going to increase the portion of that, and with that, the more new generation product contribution and also utilizing our Gumi fab, with that high-end market targeted product, we can expand our gross margin in the longer term.

Suji Desilva (Senior Research Analyst)

Okay. That's helpful, Shin. Maybe one last question, YJ, on the cash balance on the balance sheet and the use of the proceeds. I know you are going to be using the cash and then potential proceeds from the restructuring. I know you are going to have CapEx needs the next few years, but are there any thoughts on the use of the cash, perhaps buybacks or other inorganic activity? Any color there would be helpful.

Young-Joon Kim (CEO, Board of Director, and Member of the Risk Committee)

Yes. Suji, very good. Today, we announced we're going to spend $65 million-$70 million upgrading our facility in Gumi, and that's where we're going to richly support a quick transition to make the new products. That's one of the key areas of our spending, to improve the profitability and product mix.

Shinyoung Park (CFO and Chief Accounting Officer)

Yes. Suji, that $65 million-$70 million spending we're going to be spending, I mean, invested in over three years, not like everything in 2025. Also, as I mentioned, we actually have a $26.5 million credit line that we opened with a bank in Korea, which is actually the interest rate is less than 4% and 10-year maturity, with a three-year interest only and the amortizing payment afterwards.

We can actually partially fund our intended investment in Gumi fab, and that is what is going to—we are going to manage our cash balance on the balance sheet.

Suji Desilva (Senior Research Analyst)

Okay. All right. Thanks.

Young-Joon Kim (CEO, Board of Director, and Member of the Risk Committee)

Thank you.

Operator (participant)

As a reminder, to ask a question at this time, please press star 11 on your touchstone telephone. Our next question comes from the line of Nicholas Doyle with Needham. Your line is now open.

Nicholas Doyle (Analyst)

Hey, guys. Thanks for letting me ask a question. Struggling a bit with the calendar 2025 gross margin guide. Is the Gumi fab headwind a bit stronger in 2Q or maybe even further into 2025, or is that a greater impact from the underutilization, or is that the Power IC business just operates at a lower margin versus display? I mean, I know you talked about these new products ramping and that impact as well, but any more color would be helpful. Thanks.

Shinyoung Park (CFO and Chief Accounting Officer)

Probably, if you look at 2024, we still have $10.6 million of the foundry services revenue, which we produce in our Gumi fab. Although that foundry service revenue, I mean, the portion has negative margin, that was actually helping to share the fixed cost in our Gumi fab. Now we've wound down the business completely by the end of Q4 last year. That means about 20% of our Gumi fab, I mean, the facility is actually idle. That portion has to be converted. As we explained previously, I mean, during the call, we are going to do that not only to just increase the capacity, we are going to upgrade the Gumi facility to support the more, to support the higher of the new generation power product going forward.

That mid-transition will take time, and that's why we're going to invest in Gumi fab over three years. That underutilization from the phase-out of transitional foundry services and also the new power product just beginning the production in the second half of 2025, we're going to impact the 2025 gross margin for the whole company. The first half, we are getting both impacts, first half, obviously, because we're going to get the benefit from the new generation power product starting in the second half. You're going to see a little improvement in the second half, but the first half, you're going to see both impacts impacting the utilization rate adversely. You're seeing that impact for the overall.

Nicholas Doyle (Analyst)

Okay. That makes sense. What kind of OpEx level do you assume to get to that positive adjusted EBITDA by 2Q 2025? Thanks.

Shinyoung Park (CFO and Chief Accounting Officer)

For the OpEx, you know that we actually, the share of service and the overhead function supported both display and power together. There has got to be some efficiency in there too. Roughly speaking, I think probably 35%-40% of our OpEx was tied to the display business.

Young-Joon Kim (CEO, Board of Director, and Member of the Risk Committee)

The other thing, Nick, you asked about Power IC. Power IC is not made in Gumi fab. It is pure fabless, and Power IC typically has around 40% gross margin, which is a much better gross margin product line.

Nicholas Doyle (Analyst)

Very helpful. Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Martin Yang with OpCo. Your line is now open.

Martin Yang (Analyst)

Thank you for taking the question. My first question on Power, especially when you look at your approach to high-value markets like industrial and AI, can you maybe talk about does it require you to take a new go-to-market strategy? How do you go about attacking those higher-value customer base or segments?

Young-Joon Kim (CEO, Board of Director, and Member of the Risk Committee)

Yes. As I explained, initially, when we came out, this Power business 18 years ago, we addressed less than 100 W application. With the new generation, second generation, we went up to 10 kW or mostly 1,000 W, where we became number one in our target accounts. Now, with the new generation Super Junction and Gen 8 MV MOSFETs, the product is about 30%-40% better performance than the previous generation, yet the cost is we can produce 30% more die per wafer. That drives higher die per wafer or low cost and higher performance.

With that, we will be able to penetrate into more high-valued applications in the AI server to high-end industrial market like energy storage system to automotive inverter, where you can get much better ASP and margin. That is our strategy, and we just introduced 27 new products today, and full commercial qualified samples are available now. Our goal is to hit the production by the end of this year with those products.

Martin Yang (Analyst)

Thanks, YJ. My next question is on your display business. When you look at the different strategic alternatives, because this is different from a potential buyout of the company, does it open you to different sets of potential buyers or partners when you explore the display business alternative solutions?

Young-Joon Kim (CEO, Board of Director, and Member of the Risk Committee)

We are looking at every option possible. As you said, the sale of the business or certain assets to joint venture to partnership to even wind down. We are looking at all options, and we are going to do it, make sure that our customers are happy and they have smooth transition, as well as we abide with any regulation of Korean or U.S. regulations.

Martin Yang (Analyst)

Got it. Last question from me is, can you maybe talk a little bit more about the timing of decision? Any context you could give us why now?

Young-Joon Kim (CEO, Board of Director, and Member of the Risk Committee)

Of the timing? As we said, it was a very extreme decision for me personally and also to the board and the management. It is best that we hit the profitability. That is our number one goal, and that is the highest priority at the best interest of shareholders and stakeholders.

The Power business has brought a range of industry and customers and more stable. We already have more than 200 customers in Asia, whereas the display, as you know, it's really few panel makers are the customers. Depending on their situation, it's very hard to control the fate of your revenue ramp. With that, we made a prudent decision to go with the pure-play company, where we're going to restore the profitability path as soon as possible, as well as broad perspective to grow.

Also, you saw we announced $65 million-$70 million investment. I think we cannot afford to invest that kind in two businesses. We're going to do that, and progress we see and where we're going to turn around more to quicker profitability is Power business and more opportunities.

Martin Yang (Analyst)

Yep. Makes sense. Thank you.

Young-Joon Kim (CEO, Board of Director, and Member of the Risk Committee)

Thank you.

Operator (participant)

Thank you. I'm currently showing no further questions at this time. I'd like to hand the call back over to Steven Pelayo for closing remarks.

Steven Pelayo (Head of Investor Relations)

Great. Thank you. This concludes our Q4 earnings conference call. Following today's earnings call, we are hosting an analyst briefing where YJ, Shinyoung, and other members of management will share more details on today's announcement. On March 17th and 18th, we will be attending the 37th Annual Roth Conference in Dana Point, California, for one-on-one investor meetings. Attendance at the conference is by invitation only. For interested investors, please contact your respective sales representative to register and schedule one-on-one meetings with the management team. That concludes our prepared remarks for our call today.

Operator, you may now pardon me. That concludes our remarks. That's it. We look forward to meeting with you for future events, and you can find details on those on Magnachip's Investor Relations website. Thank you and take care.

Operator (participant)

This concludes today's conference call. Thank you for your participation. You may now disconnect.