Magnachip Semiconductor Corporation

Good day and thank you for standing by. Welcome to the Q2 2022 Magnet Chip Semiconductor Corporation Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. And to ask a question, you will need to press star 11 on your cell phone. You will then hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded. And I would now like to hand the conference over to your speaker today, Gigi Azai. Please go ahead.

Hello, everyone. Thank you for joining us to discuss Magnet Chip's financial results for the second quarter ended June 30, 2022. The second quarter earnings release that was issued today after the stock market closed 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. Access information is provided in the earnings press release. Joining me today are Y.J. Kim, Magnet Chip's Chief Executive Officer, and Shin Young Park, our Chief Financial Officer. Y.J. will discuss the company's recent operating performance and business overview. And Shin Young will review financial results for the quarter, and then Y.J. will come back to provide guidance for the third 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 MagnaCHIP's business outlook and expectations. Our forward-looking statements and 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 will also discuss Non-GAAP financial measures. The non-GAAP measures are not prepared in accordance with generally accepted accounting principles or intended to illustrate an alternative measure of magnet chips operating performance that may be useful. A reconciliation of the non-GAAP financial measures to the most comparable GAAP financial measures can be found in our second quarter earnings release available on our website under the investors section at www.magnetchip.com. I will now turn the call over to Y.J. Kim. Y.J.?

Hello, everyone. Thank you for joining us today and welcome to MagnetChip's Q2 earnings call. I'd like to start today by quickly touching on our Q2 consolidated financial results and then give an update on some of the near-term challenges we are facing in the second half of 2022. After that, I will give an update on our capital allocation plan before wrapping it up with a detailed review of our business segment. In Q2, revenue was $101.4 million and was within our guidance range. Similar to Q1, our OLED revenue continued to be impacted by severe supply constraints for 20 nanometer 12-inch wafers, and our power solution business continued its positive momentum of double-digit year-over-year growth. Looking forward into the remainder of the year, our second half faces a few challenges, particularly in our OLED business, that will continue to impact our near-term results before recovery in 2023. First, in the second half, we are facing further supply constraints of 28-nanometer 12-inch wafers. Lower wafer allocation from our foundries impacted our new designing assignments for second half of 2022 from our large panel customer in Korea. Typically, designing assignments are awarded 9 to 12 months in advance based on future wafer supply. Second, in June, we successfully sampled our fully functional next generation OLED drive IC to our new top tier panel customer. using our newly qualified foundry partner, and customer qualification is proceeding. However, in mid-June, there were additional feature changes to the OLED drive IC product just sampled to meet the current market changes. Therefore, we modified the product design and completed the new tape out in July. We anticipate the timing of our initial mass production to be around end of the year compared to our previous expectation of the end of Q3. With that said, our customer is going through full evaluation of the current version of the chip. This should significantly speed up the evaluation timeline of the new chip once it is sampled at the end of Q3. As such, we remain confident that our production ramp with this new customer remains on track as we enter 2023 and we expect them to contribute meaningfully to next year's growth. While these first two events are not related to customer demand, we are also seeing a slowdown in our key consumer and markets, such as smartphones and TVs, due to continued stress in the global economy, such as the Ukraine conflict, the China COVID lockdown of major cities, and global inflation. These macro factors are driving on end customer product inventory build in distributors and retail channels, which has caused temporary auto cuts at our large Korean customer. The consumer market slowdown is showing temporarily additional capacity becoming available in the near term. We are in active negotiations with our foundry partners and seeing signs of better allocations in 2023. Given these industry market dynamics, we believe it is mutually prudent to pursue shorter-term supply agreements for the next few years. With this decision, our board of directors has reaffirmed the remaining $37.5 million stock purchase program that was announced previously. We believe that this stock repurchase program and continue to drive our OLD business recovery plan Combined with the continued momentum of our power solution business, we are well positioned to drive significant accretion and value for shareholders over the coming years. Finally, in order to improve its internal processes, the company's board of directors has activated a strategic review committee to assist the board in reviewing, considering, exploring, and evaluating strategic alternatives that may be available to the company to maximize shareholder value. The committee's mandate is to review the company's capital allocation plan and actively explore potential strategic and transactional opportunities, including but not limited to joint ventures, strategic partnerships, and M&A possibilities that may arise in the future, and make recommendation to the board regarding those matters as appropriate. Now, I'd like to move to a detailed review of our Q2 results, starting with OLED. Our OLED revenue in Q2 was $24.6 million, down 44.3% year-over-year and 5.7% sequentially. The year-over-year decline was due to continued severe supply shortage for 28 nanometer 12-inch OLED wafers, which began at the end of 2020 and worsened last year and this year. Sequentially, OLED revenue decreased due to lower demand for China smartphones and the Korean flagship smartphone, but partially upset by higher demand for the latest generation Korean flagship model that launched in Q2. During Q2, we made progress in these following areas. First, as I already mentioned, in Q2, we successfully developed and released our first OLED DDA sample to our new top-tier panel maker outside of Korea. Over the next few years, OLED production in this region of the world is expected to more than double, and we are excited about our growing relationship with this customer. Second, during the quarter, we kicked off development of two new OLED drive IC projects with the top-tier panel maker in Korea. We are targeting to begin mass production in the second half of next year. Third, in our new business areas, we continue to ramp our other OLED products, such as OLED TV and automotive. To date, we have three automotive customers with European automakers, and initial mass production remains on track for the first half of 2023. Finally, our additional 28 nanometer manufacturing capacity in Asia remains on track to come online in the later part of this year. And we continue to engage in active discussions with multiple foundry partners for additional capacity for mobile and TV products. In summary, we continue to face challenges in our OLED business. However, we believe the strategic action that we are taking to secure additional wafer capacity, together with the recent new panel maker customer and project wins, will set us up for having a strong recovery in 2023. Now, let's turn to the power solutions business. It was another solid quarter for our power solution business, driven by strong demand for our premium power products, as well as battery-fed products. Our power solution business revenue in Q2 was $63 million. up 11.1% year-over-year and down 2.9% sequentially. The year-over-year growth was driven by continued strong demand across the board for almost all of our products, but particularly for our premium products such as our super junction MOSFET, Power IC, and IGBT in key end markets like communication, consumer industry, and computing, all driven by trend in electrification of everything. Sequentially, super junction MOSFET, battery fat, and power IC product revenue decreased slightly in line with the slowdown in smartphone, TV, and computing applications, but was partially upset by growth in medium voltage MOSFET and IGBT due to growing demands for e-bikes and solar inverters. In our super junction product line, we continue to see robust demand from TV, PC power, and lighting applications, due to increasing energy efficiency requirements. During the quarter, we are also awarded a new design for telecom power, and we are expanding the lineup for server and premium computing markets. For PowerIC, we were awarded five new design wins for premium display panels from a large Korean display customer. and continued ramping shipments of our boost ICs for solid state disk for servers and data centers. In our IGBT product line, revenue grew 36% year over year. This was driven by accelerating demand and new design from the renewable energy market, particularly solar inverter applications. Our medium voltage MOSFET product line achieved record revenue during the quarter due to strong demand and multiple design particularly in power tools, motors, and e-bikes. Our latest generation 200-volt medium voltage MOSFET with our advanced trench technology demonstrates much lower resistance and fast-reaching performance with higher cell density than prior generations. Further, our 40-volt medium voltage MOSFET for electric water pump in EVs started mass production during the quarter, and we are working on expanding the product portfolio to 60 volts for electric oil pumps, power doors, sits, and windshield wipers. During the quarter, we continue to develop and introduce new power products. The new 650-volt IGBT provides 30% better current density compared to the prior generation. We're excited about this new product as we continue to see growing demand for solar-based applications because of accelerating global adoption of solar power to reduce carbon emissions. In summary, we will continue to execute the growth plan of our power solution business by strengthening FAP3 productivity and introducing new products with superior performance and improved costs for new markets, such as renewable energy markets. For Q3, we expect our power solution business revenue to be down due to some softness in consumer, smartphone, and computing end markets, which will be upset in part by a strong IGBT demand for solar applications. Before I conclude my business summary, I want to say that we feel comfortable about our long-term growth prospects. Both of our businesses have leading technology and are at the intersection of two major trends. We are continuing to focus on executing our OLED recovery plan in 2023 and continuing our success in power solution business. Now, I'll turn the call over to Xinyu and come back for closing remarks and Q3 guidance. Xinyu?