Magnachip Semiconductor Corporation

Ladies and gentlemen, thank you for standing by, and welcome to the fourth quarter 2020 Magnet Chip Semiconductor Earnings Conference Call. At this time, our participant lines are on a listen-only mode. After the speaker presentation, there will be a question-answer session. To ask a question during a session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would like to hand the conference to your speaker today, So-Yeon Jung. Please go ahead, ma'am.

Thank you. Hello, everyone. Thank you for joining us to discuss MagnaCHIP's financial results for the fourth quarter ended December 31, 2020. The fourth 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 the today's call will be available shortly after the completion of the call, and the website 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 and annual operating performance and business review, and Young will review financial results for the quarter and the year and provide guidance for the first quarter of 2021. There will be a Q&A session following the prepared remarks. During the course of the conference call, we may make forward-looking statements about MagnaCHIP 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 discussed 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 MagnaCHIP'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 fourth 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. MagnetChurch Q4 results exceeded our expectations, capping off one of the most challenging years for any of us. During Q4, demand for MagnetChurch products remained robust, driven by a strong ramp in 5G. More importantly, we were able to secure more supplies from foundry partners Theodore Kim, Shin Young Park, Theodore Kim J.D., There is no doubt that 2020 has presented its share of unique challenges, such as the COVID-19 pandemic, unstable global economy, and geopolitical uncertainties. Nevertheless, for Magnet Ship, 2020 was a remarkable year of structural transformation. Among the highlights are, one, Our adjusted operating income and adjusted EBITDA increased 36.7% and 29.3% from 2019, respectively. The revenue decreased 2.6% year-over-year due mainly to our exit from the non-auto LCD business. If we compare Apple to Apple's, our 2020 revenue grew 2.7%. GAAP gross profit margin of 25.3% represented a 290 basis point increase from 2019 as we improved the product mix. We successfully closed the sale of our founder business and FAFSA for the total cash proceeds of $350.6 million. and we used $227.4 million to fully redeem the 6.625% senior notes due 2021. This action significantly strengthened our balance sheet. Our stockholders' equity turned positive to reach $345.6 million at the end of 2020 versus a negative $15 million in 2019. We laid out 2020 through 2023 strategic initiatives and key metrics under MX3.0 and launched a new brand identity underscoring our fresh start as a pure play standard products company. It is with my profound gratitude for the dedication and tenacity of every Magnet Ship team member that I share the extraordinary accomplishments in 2020. Now, let's move to a detailed review of our product business starting with the OLED business. During Q4, our OLED DDIC revenue of $80.4 million set a new historic quarterly record. It surpassed the previous revenue high of $78.3 million recorded in Q3 of 2019 representing a 19% sequential increase and a 19.4% increase year-over-year. For 2020, despite the 8% decline in global smartphone shipments, our OLED revenue grew 6.5% year-over-year to reach a new high of $284.6 million making the third consecutive year of achieving record revenue. Let me address a couple of highlights for Q4 as well as fiscal 2020. First, the momentum in 5G smartphones, especially with high frame rate, HFR, OLED, DDIC grew stronger in Q4. We were awarded eight new design wins in Q4 and all of them were 5G and HFR models. This revenue from 5G smartphones accounted for about 20% of the total OLED revenue in first half 2020, 40% in Q3, and it reached approximately 70% in Q4, representing over 40% of our total 2020 OLED revenue. Second, the demand for our products in a key model launched by a Korean smartphone OEM continued to increase in Q4. This key model boasts the flagship features at a desirable price point and has been gaining solid ground. In addition, the strong design momentum with smartphone OEMs based in China during Q3 drove a healthy revenue growth in Q4. During the fourth quarter, 12 new smartphone models with our chips were launched. We are encouraged by the continued adoption of our distinctive solution by multiple end customers worldwide. In reviewing the OLED business in 2020, our outstanding performance is a testament to the laser-focused execution of the innovative product roadmaps. As a case point, Our OLED design activities hit new records in 2020. We secured 38 new OLED design wins in 2020 to reach 54 cumulative design wins compared to 21 new design wins and 34 cumulative design wins in 2019. In 2020, about 60% of these 54 cumulative design wins were derived from the 5G and HFR smartphone models. 2020 was also marked as a year of rebuilding a solid foundation and strengthening product lineups to accelerate OLED penetration into other applications. Although we can't comment on our customers' specific plans, I can tell you that our engineering team has been very busy throughout the year Engaging with the customer to develop new products in emerging technologies and applications such as OLED TV, Micro-OLED TV, and OLED Automotive. I'm happy to report you each product is moving well and as planned. I look forward to updating you in the key milestones of these projects in the future. Now, let's turn to the power business. Power Revenue Q4 2020 came in at $46.9 million, up 0.4% sequentially, and up 23.9% year-over-year. Q4 Power Revenue outperformed our expected growth of 15% to 20% year-over-year due to the strong demand of our premium products, including Power IC. For the whole year of 2020, our Power Revenue 2020 was outstanding. 166.5 million. It was down 5.6% year-over-year. Our power revenue was significantly impacted by COVID-19 during the first half of 2020, but it demonstrated an impressive resilience in the second half of 2020, despite the capacity handicap caused by the power outage at our fab street. In fact, our second half 2020 revenue Revenue was an all-time half-year high since we started our power business in 2007. Now, let me highlight key takeaways for our power business for Q4 as well as 2020. For Q4 2020, our PowerIC products continue to deliver healthy growth, driven by Series of design wins in a wide range of TV models and computing applications. PowerIC revenue crossed the 10 million annual revenue threshold in 2020, and it is expected to grow over 35% in 2021. PowerIC is one of the premium product families that carries a high gross profit margin, and we will continue to strive to expand this product group by targeting adjacent application and new customers. We have three key design wins, our PowerSC products, two from laptop and one from SSD-related applications. In reviewing the power business in 2020, we started to reestablish FAP3, our 8-inch FAP for power discrete semiconductors. While FAP3 capacity will gradually increase from 2021 as we install new tools, We plan to add about 40% incremental capacity for our standard power product by the end of 2020 compared to the 2020 level. Owning a dedicated power discrete fab also plays a critical role in supporting automotive customers. Underpinned by the sharpened R&D focus, and GoToMarket Strategy, our power business introduced a series of new product families that are gaining good initial traction. The total number of new products released in 2020 more than doubled the total number of 2019 and the business pipeline of these new products is expanding. Demand for our power products remains strong and our FAFSA-3 is running at full capacity. Before I conclude the business review, let me take a few minutes to comment on the demand and supply situation. According to Omdia market research, the overall OLED smartphone shipment in Q1 2021 will be down 17% from Q4 2020, as Q1 being seasonally low. Against this backdrop, The demand for our OLED products is still relatively strong. As it is well publicized, the overall semiconductor demand started to increase from the second half of last year, which caused supply constraints, especially with our 28 nanometer external foundry partners. While we are leaving some demand in Q1 unmet due to supply constraints, We are working closely with our strategic customer and our foundry partners to address supply constraints, and we expect the supply situation to improve later in the quarter. As we look at our current quarter, the demand at most of our end markets remains very healthy against the typically low season. As we improve our supply situation, We expect to continue executing our pure-play product strategy. In closing, we are proud of our solid performance in Q4 and the strategy that the board and management set out in early 2019 has positioned the company for long-term success. During the last year, we entered MX3.0, an exciting new chapter for growth, with a sharpened focus as a pure play standard products company. Renewed energy and a clear mission of empowering our customers. On the MX3.0, we set long-term financial targets that we would like to achieve by 2023. While we also recognize the path will not always be a straight line, the exciting opportunity ahead of us only reinforce our confidence in our gross outlook towards 2023. Lastly, we plan to host an analyst day on April 20, 2021. Our board is committed to maximizing shareholder value and is evaluating various options including a holistic review of our capital allocation strategy, our target liquidity position, and our ongoing distribution framework. We recognize that the company may currently have excess liquidity. We plan to address, among other things, a comprehensive plan for our near-term capital allocation, our liquidity leverage policy, and our ongoing shareholder distribution on or before the upcoming Analyst Day. Now, I will turn the call over to Dr. Wu and come back for the Q&A session.