Magnachip Semiconductor Corporation

Ladies and gentlemen, thank you for standing by and welcome to the Q2 2020 Magna CHIP Semiconductor Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you'll need to press star one on your telephone. Please be advised that the conference is being recorded.

Thank you. Hello, everyone, and thank you for joining us to discuss MagnetChip's financial results for the second quarter ended June 30, 2020. The second quarter earnings release that was filed today after the stock market closed can be found on the company's investor relations website. A telephone replay of today's call will be available shortly after the completion of the call, and the webcast will be archived on our website for one year. Access information is provided in the earnings press release. Joining me today are Y.J. Kim, Magna CHIP's Chief Executive Officer, and Young Woo, our Chief Financial Officer. Y.J. will discuss the company's recent operating performance and business overview, and Young will review financial results for the quarter and provide guidance for the third quarter. There will be a Q&A session following the prepared remarks. During the course of this conference call, we may make forward-looking statements about MagnaCHIP's business outlook and expectations. Our forward-looking statements and all other statements that are historical facts reflect our beliefs and predictions as of today. and therefore are subject to risks and uncertainties as described in the Safe Harbor discussion found on our SEC filings. 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 to illustrate an alternative measure of Neganachip's operating performance that may be useful. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in our second quarter earnings release available on our website under the investor relations at www.magnachip.com. Now, I'll turn the call over to YJ Kim. YJ?

Thank you. Hello, everyone. Thank you for joining our call today. First of all, I'd like to welcome both So-Yeon Jung, our head of IR, and Dr. Young-Woo, our CFO, to their first earnings call at Magnetrip. Both will play important roles as Magnetrip opens a new chapter as a pure-play standard products company. I also want to acknowledge changes in our board of directors. Semiconductor veteran Mr. Camilo Martino was named chairman in June, and Ms. Liz Chung of Microsoft Korea joined our newly expanded board in July. During the second quarter, our team executed well and delivered excellent results. In keeping with our commitment to safety of our employees and continuity of services to our customers, we demonstrated our ability to be resilient to the impact of the COVID-19. We continue to take further steps to mitigate potential risks related to the health and safety of our employees and to the supply chain management. Key non-GAAP financial metrics exceeded our expectations. Revenue for the combined business came in above the high end of the guidance range due to strong demand in our power and foundry businesses. Gross margin surpassed expectations driven by improved product mix and higher FAB utilization. Non-GAAP diluted earnings per share from continuing operation was $0.13 as compared to $0.03 in Q1. On a sequentially flattish revenue, our bottom line improved due to higher gross margin. For the fifth consecutive quarter, we generated operating cash flow. In Q2, the cash flow from operations was $36 million. At the end of second quarter, our cash balance increased to $192.8 million, marking the highest level since the IPO in March 2011. In addition to delivering outstanding financial results, our team has made substantial progress with the pending sale of the foundry business and FAF4. I am comfortable with our progress to date, and we are working diligently to complete the remaining tasks to close this transaction. These tasks mostly relate to separating the shared R&D infrastructure and building. We are separating the IT systems, re-establishing a new IT infrastructure, and a new quality and reliability assurance lab for the continuing business. relocating our OLED test and development center and transferring power process R&D capability from Fab Four to Fab Three. I am proud of and thankful for what our team has accomplished during the quarter. Based on the progress we've made so far, we are now slightly ahead of our internal schedule and anticipate that the transaction will likely close in the third quarter instead of our previous estimate of the September-October timeframe. Now, let's take a close look at the continuing business starting with the display. During the second quarter, we completely exceeded all non-auto LCD TDDIC business as part of our strategic efforts to improve profitability and sharpen focus. As a reference point, we have reported approximately 6 million of non-auto LCD revenue as recently as Q1. If we use an Apple to Apple comparison, our Q2 display business revenue would have been 2.7% down from Q1 had we adjusted for this change. COVID-19 negatively impacted the global smartphone market during Q1 and extended into Q2, but we performed relatively well compared to the market during the first half of 2020. According to the market data, global smartphone market declined about 20% year-over-year during the first half of 2020, but our OLED DDI business was up 12.4% in the first half. The above-market performance was due in part to the accelerated launch scheduled from some of our customers. Our Q2 OLED DDIC revenue was $67 million, down 3.9% sequentially and down 8.3% year-over-year. Let me highlight four key takeaways for our display business. Firstly, regarding our new product launches, on our Q1 earnings call in May, we said we expected smartphone makers using our OLED drivers to launch 18 models in the first half, 10 models being scheduled to launch in Q2. Actually, 12 models were launched, bringing the total launch of 20 new smartphone models in the first half. Secondly, regarding customer design wins, we won eight new OLED DDIC design wins in Q2, including five based on the 28 nanometer manufacturing process. Our 28 nanometer products feature notable reduction in chip size and power consumption and continue to demonstrate strong design momentum in this growing product family. Thirdly, regarding advanced features in 5G phones, We are expanding our high frame rate HFR OLED DDIC product line. We launched five HFR OLED DDIC products to date and all of these now support 144 Hz for Full HD Plus displays and 120 Hz for the QHD Plus displays. Faster display response time is vital to full-featured 5G smartphones and we are well positioned to capitalize on the booming 5G smartphone industry. Our revenue from 5G smartphone accounted for about 20% of the total OLED revenue in first half 2020. Finally, regarding diversification, we continue to diversify the OLED business into automotive applications. During the second quarter, we taped out our first OLED automotive product. Leveraging our strategic alignment with major OLED panel makers, we plan to expand our design wings for automotive displays. Looking ahead, while quarterly revenue may fluctuate, we remain excited about the long-term outlook for the OLED market trend and our unique position. Recently, we experienced an upswing in demand for our OLED products. This recent increase in demand is outstripping our supply capability in Q3 because of insufficient lead time. The standard lead time for our OLED products is 2.5 to 3 months. Now, let's turn to the power business. The total annual power semiconductor market is approximately $45 billion, which presents us a tremendous opportunity for longer-term growth. It is important to note that today our manufacturing process, R&D, was centralized in our main Fab Four facility to support both our Fab Four and Fab Three. With the closing of the pending foundry transaction, FAB3 will become a dedicated FAB for our power business. Currently, critical product development and sizeable production for power are conducted at FAB4. Therefore, we will now be transferring all of our power process R&D to FAB3 and plan to equip the FAB to continue supporting our customers seamlessly. We also strengthened our power business leadership recently by hiring a 35 plus year veteran of Power Semiconductor as the General Manager. Our power business remains an essential part of a long-term growth and diversification strategy. Now let's talk about our power business in Q2. Power revenue experienced a strong rebound from Q2. China showed some signs of recovery from the global pandemic. The revenue came in at $39.8 million, up 20% sequentially and down 16.7% year-over-year. We saw pent-up demand for our medium-voltage MOSFET products driven by the increased popularity of personal transportation such as e-bike and e-motorcycles in China. We are seeing gross momentum with our PowerIC product line. Our PowerIC for one of the applications in the solid state drive is gaining traction at a global memory company and we are expanding our PowerIC lineup to serve with notebook PC and smartphone application in addition to TV applications. During Q2, We saw design-in and design-win activities across MB MOSFET, Battery Fest, Super Junction MOSFET, and PowerIC product lines addressing a wide range of applications. We are encouraged by a growing design pipeline in our power business.