Magnachip Semiconductor Corporation

Thank you for standing by, and welcome to the Q4 2021 Magnet Ship Semiconductor Corporation Earning Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question at that time, please press star then 1 on your touch-tone telephone. As a reminder, today's conference call is being recorded. I would now like to turn the conference over to your host, Ms. Sue John. Ma'am, you may begin.

Thank you. Hello, everyone. Thank you for joining us to discuss MagnaChip's financial results for the fourth quarter ended December 31st, 2021. 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 today's call will be available shortly after 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 Chief Executive Officer, and Shin Young Park, our Chief Financial Officer. Y.J. will discuss the company's recent and annual operating performance and business overview, and Shin Young will review financial results for the quarter and the year and provide guidance for the first quarter of 2022. 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 Magna Chips 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. 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 MedinaCHIP'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 Investors section at www.magnachip.com. I now will turn the call over to Y.J. Kim. Y.J.?

Hello, everyone. Thank you for joining our call today. For the first quarter... The demand and signals from our customers remain strong across the board. However, severe supply constraints continue to significantly limit our OLD revenue potential, which was partially upset by our stronger power business. We reported $110.3 million in revenue and $0.31 in non-GAAP diluted EPS. Our revenue decreased 13.1% sequentially and 22.8% year-over-year as a result of the supply constraints. The shortage was felt more severely for 28-nanometer 12-inch wafers, where we have been producing most of our new OLED products, winning numerous designs and rapidly expanding market share in the past few years. Case in point, the revenue from 28 nanometer products grew 80% to $174 million in 2021 from $97 million in 2020, representing 90% of the total OLED revenue in 2021 as compared to only 34% in 2020. The successes of our 28-nanometer product line has been and we expect will continue to be one of the critical growth enablers for us. Unfortunately, a severe shortage of 28-nanometer OLED wafers adversely affected our OLED business as a major limiting factor, adding tremendous pressure to an already difficult supply environment. Fortunately, we enhanced our supply chain for an additional 20 nanometer capacity last year, which we expect will start to come online in the later part of this year. Looking at the full year, while our revenue for 2021 declined 6.5% year-over-year due to the wafer supply shortage, partially offset by outstanding growth in our power business, I am pleased that we delivered solid profitability for the full 2021 year. Gross profit margin reached 32.4%, representing an increase of 710 basis points from 2020. Adjusted operating income margin increased to reach 11.8% of total revenue from 8.2% in 2020. Adjusted net income was 10.8% of total revenue versus 5.6% from the year before, and adjusted EBITDA also grew to $70.7 million from $52.9 million in 2020. 2021 has certainly presented its share of unique challenges for us. However, our team steadfastly pressed forward with our plan to achieve not only healthy profitability, but also critical milestones to fuel future growth, upon which I will elaborate shortly. I deeply appreciate every magnet trip team member for their unwavering commitment and dedication. I'm most grateful that we could achieve solid results while protecting and safeguarding our employee health and safety amidst the global COVID-19 pandemic. Now, let's move to a detailed review of our product business, starting with the OLED business. OLED revenue in Q4 was $37.7 million, down 31.8% sequentially. and down 53.1% from our historical record revenue level in Q4 2020. Against CVS supply constraints, we have been protecting our profitability by strategically focusing on high-value, high-margin design activities, including the newly launched flagship smartphone model of a major smartphone OEM. Also, revenue from 5G smartphones and high frame rates rate products continue to represent over 93% of our 2021 OLED revenue. Turning to the full year review, OLED revenue was $192.8 million, down 32.3% year-over-year as we unfortunately had to forego some demand. Our demand was more than 50% higher than what we shipped in 2021. However, I am pleased to report some critical milestones that we achieved. One, we have successfully broadened our customer base to include a top-tier panel maker outside Korea. Initial revenue is expected to start in the later part of this year. We are well aligned with top-tier panel makers in the world and positioned to benefit from increasing OLED adaption in multiple countries. Two, we enhanced our supply chain for additional 20 nanometer manufacturing capacity, which is expected to come online in the later part of this year. In addition, we are in discussions with our foundry partners regarding a multi-year supply agreement in order to secure long-term capacity. We have also been working on MOUs and supply agreements with key customers, some of which have been already signed. Three, we're expanding into new areas. We have successfully commenced initial mass production of OLED TV DDIC during the fourth quarter, and we continue to expand our large display OLED TV business by addressing next-gen premium TVs with microLED technology. We used to have over 30% market share in TV application with LCD DDIC, with a particular vendor during peak times before we strategically defocused from the business a few years ago. In addition, we are also expanding our OLED DDIC product lineup for automotive display applications. In summary, our OLED business is winning new customers and expanding into new applications. The demand from our customers Current customers is strong. In fact, we are getting numerous RFQs from Korean panel makers, although supply constraints continue to be the gating factor. With additional supply capacity expected beginning in the later part of this year, we are very optimistic about the rejuvenated growth in our oil business in the coming years. Now, let's turn to the power business. Power revenue in Q4 came in at $58.2 million, which was slightly lower than our record revenue in Q3 2021 and a solid quarterly revenue growth of 24.2% year-over-year. The overall demand for our IGBT medium voltage MOSFET and battery-fed products in the industrial and wireless application remains strong, especially our IGBT products for solar inverter demonstrated solid traction in Q4, bolstered by growing interest in alternative energy. For full year 2021, our power business delivered a record high revenue of $227.8 million, an increase of 36.8% year-over-year, driven by solid demand across Most of our product families are coupled with increased internal capacity, resulting from our timely investment in F3. Clearly, we are approaching our target ahead of our plan, and we are working to further improve F3 capacity. Xun Yang will provide more details shortly. One notable highlight for 2021 is the exciting momentum we are seeing in premium power products. Our premium product group grew remarkably in 2021 to $117.1 million from $82.5 million a year ago. Super Junction MOSFET not only maintained its solid position in Korean TV markets, but also expanded into PC power, lighting, and other industrial applications. PowerIC revenue grew over time. 60% year-over-year since the first penetration into solid-state disk-related application in 2020. IGBT revenue grew significantly driven by strong demand for renewable energy. Our go-to-market strategy, efficient R&D, and timely investment in Fab 3 led us to achieve record quarterly revenues three quarters in a row during 2021, and also accelerated development and introduction of new products. In summary, we will continue to execute the growth plan of our power business by strengthening FAT3 productivity and introducing new products with superior performance and improved costs, which we expect will further drive healthy growth for many years. Before I turn the floor over to Xinyang, I will take a few minutes to comment on our capital allocation plan. Given our current business condition, our near-term cash use is focused on three areas. First, we target to maintain $100 million-plus cash on the balance sheet. This is mainly for working capital, but it also reflects our customers' desire to see a solid cash balance. As we have already demonstrated, we are committed to share the return. In December 2021, our board authorized a $75 million stock repurchase program. Three, the remainder of the cash on our balance sheet will be allocated for flexible optionality. At the present time, we believe that supply is the fundamental limiter of our potential growth. Therefore, enhancing our supply chain is currently deemed one of the imminent capital allocation options. Possible options include, but not limited to, securing additional 20 nanometer manufacturing capacity and locking in multi-year long-term supply agreements, which typically requires strong commitments from us and our customers, including prepayments. We are also expanding additional manufacturing capacity at Fab Street, for our power business to address continuously increasing demand. In conclusion, we're expanding our customer base, penetrating new applications. Our ability to supply is anticipated to improve in the later part of this year. While our near-term outlook is still being challenged by persisting supply constraints, we expect OLED revenue to be flat to slightly up in 2022 compared to 2021, with significant growth coming during the later part of the year. As a whole company, we expect modest revenue increase in 2022 driven by the OLED recovery as well as decent growth in our power business. Recent developments and critical milestones we have achieved reinforce our confidence and optimism about our long-term growth. Now, I will turn the call over to Sinyoung and come back for the Q&A session. Sinyoung?