Magnachip Semiconductor Corporation

Good day, ladies and gentlemen, and thank you for standing by. At this time, I would like to welcome everyone to the Quarter 3 2020 MagnaCHIP Semiconductor Corporation Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star, then the number 1 on your telephone keypad. If you would like to draw your question, press the pound key. Thank you. It is now my pleasure to turn the conference over to Ms. Sol Yeon-Jong. Ma'am, please go ahead.

Thank you. And thank you, everyone, for joining us to discuss Meganechip's financial results for the third quarter ended September 30, 2020. The third 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, MagnaCHIP's Chief Executive Officer, and Young Woo, our Chief Financial Officer. Y.J. will discuss the company's recent operating performance and business overview, 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 discussion found in 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 measures of MagnaCHIP's operating performance A reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures can be found in our third quarter earnings release available on our website under the investor relations at www.magnachip.com. I now will turn the call over to YJ Kim. YJ?

Hello, everyone. Thank you for joining our call today. COVID-19 indeed changed the way we live, work, and think. And our team members at MagnetChip have been actively adapting to the new normal by adhering to our multiple safety protocols and business continuity plan. We hope that you and your family are all healthy and well. We successfully completed the sale of the foundry business and Fab Four Slightly ahead of our internal schedule for a purchase price of about $350.6 million. We used $227.4 million of the proceeds to fully redeem all of the 6.625% senior notes due 2021 on October 2nd of 2020, lowering the future interest expense Thank you for joining us. Semiconductor Corporation, Jk Minh, Hyuk Woo These two one-time items together negatively impacted our gross profit margin by 3 percentage points. Adjusted for the impact of these one-time factors, we delivered non-gap diluted earnings per share of $0.14. Now, let's take a closer look at our product business, starting with the display business. I remind you that we have completely exceeded the non-auto LCD business in Q2 2020. As a reference point, our display revenue in Q3 of 2019 was $90.6 million, which included about $10.4 million of non-automotive LCD business. Our display revenue was $69.6 million for the third quarter, up 0.6% sequentially and down about 14% year-over-year, adjusting the non-automotive LCD revenue in 2019. Q3 OLED drive IC revenue was $67.6 million, up 0.9% sequentially and down 13.7% year-over-year. In September, we recorded a $2.3 million excess inventory charge increase Our panel customers have de-risked the Huawei business and we don't expect further impact from the Huawei ban other than this unusual excess inventory charge. Please note that our Q4 guidance does not include any of Huawei business. Now, let me highlight three key takeaways for our display business. First, starting with demand. During our last earnings call, we mentioned an upswing in demand for our OLED product, which was outstripping our supply capability in Q3 due to the recent Theodore Kim, Shin Young Park, Theodore Kim, Shin Young Park, Both our revenue and design activities were driven by a major Korean smartphone OEM and Chinese OEMs. One of the notable achievements that we are very excited about is that a major Korean smartphone OEM has launched a new key model with our display driver in early October. This end customer's model is being well adapted in the market as it keeps the flagship features that consumers want Theodore Kim, Shin Young Park, Theodore Kim J.D., Seung-Hoon Lee, Jk Minh, Hyuk Woo MagnetChip's top market position as non-captive supplier in the OLED DDIC market reflects that our advanced technology and distinctive portfolio resonate with our customers. We continue to focus on empowering our customers through relentless innovation and imperial support. Last but not least, The 5G momentum. We are enjoying the booming 5G smartphone industry, especially with our high frame rate HFR OLED drive ICs. In Q3, we were awarded 8 new design wins, and 7 of them were 5G and HFR models using 28nm process. You may recall that our revenue from 5G smartphones accounted for about 20% of the total OLED revenue in first half 2020. In Q3, 5G revenue represented about 40% of the OLED revenue. According to the market data, the global 5G smartphone shipment in 2020 will be about 200 million units, and it will likely to be more than double in 2021. The emerging global 5G trend bodes well with the underlying strengths in our product portfolio. Now, let's turn to the power business. The power revenue came in at 46.7 million, up 17.3% sequentially and down 4.2% year-over-year. The complete recovery from the power outage took longer than we anticipated, which limited the FAT3 output at full capacity, resulting in a lower utilization during Q3. Despite this handicap, we achieved a double-digit sequential growth and managed the production. The market momentum and our product pipeline remain strong. Now, let me highlight key takeaways for our power business. First, starting with demand. As both China and Korea were gradually recovering from the global pandemic, our power revenue in the third quarter was mainly driven by personal transportation and TV applications. The rebound in Chinese and Korean TV markets drove strong demand for our Super Junction MOSFET and Power IC products in Q3, and the trend is continuing in Q4. We expect our power business in Q4 to grow 15% to 20% year-over-year. Driven by the combination of capacity constraint and strong demand, our channel inventory level became below our normal operating range. We are striving to address the continued demand and also to replenish the channel inventory to a more balanced level in the future. Let me also underline the progress we are making in the China market under our go-to-market strategy with a newly established leadership team. To efficiently target the fast-growing China market, we set up a regional support system with a dedicated sales and marketing function. The team focused our product to be more optimized for the Chinese market demand, and we directly engaged with numerous power customers that resulted in new wins from a wide range of applications, including TV, industrials, and mobiles. We are encouraged by the great momentum in China power business. Looking ahead, I am very excited about our power business potential. By 2022, we will have introduced a complete set of next-generation power discrete product portfolios. These new generation premium product families will carry superior performance with a much improved cost. The upgrade will take place at Our Fab 3, and by that time, our Fab 3 will be up and running with about 40% additional capacity. Now, turning to our long-term plan. We are repositioning magnet chip to achieve sustainable and profitable growth. As we close the divestiture ahead of our original schedule, We decided to accelerate our disclosure of pro forma financials rather than wait till the future analyst day. Let me provide our key goals we are targeting to achieve by 2023. While our quarterly reports are based on the total revenue including the transitional Fab 3 foundry services, in accordance with GAAP, We are providing the following metrics based on the standard product business revenue excluding the transitional FAP3 foundry service. Such service is expected to cease after a certain period of time. We plan to 1. Grow our top line at a double-digit CAGR 2. Consistently achieve above 30% gross profit margin 3. Reduce Adjusted UpX to be below 18% of revenue. 4. Exceed 10% Adjusted Operating Income Margin. This will enhance our ability to generate free cash flow. 5. Tax rate to be approximately 14% to 16% in the next 2 to 3 years due to the net operating loss carry forwards to be offset Semiconductor Corporation, Young-Joon Kim, Shin Young Park, Theodore Kim, Shin Young Park, Theodore Kim, Shin Young Park, Investment we are making in FAS3 for 2020 and 2021. From 2022, we expect the capital spending to return to the moderate level of 3% of revenue or below. 7. By 2023, we will generate free cash flow in excess of 8% of revenue. These additional financial pro forma metrics will give you a better understanding of our long-term outlook and value creation. We also would like to further share our capital allocation plan in the near future. Our board and management are actively evaluating all available options to maximize our shareholders' value. Now that we communicated these key pro forma financial metrics, it seems more prudent that we reschedule our analyst day to Q1 2021 due to uncertainties around COVID-19 and related matters. We will then share our capital allocation plan and our growth strategic initiatives. We believe this rescheduling will allow for more comprehensive discussions with investors and analysts. The date will be announced in the near future. In closing, Q3 represented a pivotal chapter of MagnetChip as we successfully closed the sale of Foundry Business and Fab Four that ultimately resulted in MagnetChip becoming a pure place products company with a very healthy balance sheet for the first time. Theodore Kim, Shin Young Park, Theodore Kim, Shin Young Park, We are encouraged by the robust growth opportunities ahead of us which creates a stronger foundation for profitable growth. We continue to push the envelope on enhancing our competitive position through continuous technology advancement, addressable market expansion, and strategic customer engagement. Now, I will turn the call over to Dr. Woo and come back for the Q&A.