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spk01: And thank you for standing by. Welcome to the Q3 2022 Magnet Chip Semiconductor Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone. It is now my pleasure to introduce Investor Relations Representative Hi, everyone.
spk04: Thank you for joining us to discuss Magnet Chip's financial results for the third quarter ended September 30, 2022. The third 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. Joining me today are Y.J. Kim, Magnet Chip's Chief Executive Officer, and Shin-Yong Park, our key financial officer. YJ will discuss the company's recent operating performance and business overview. Shenyang will review financial results per quarter and provide guidance for the fourth 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 Magnet Chip'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 statement found in our sec violence during the call we will also discuss non-gap financial measures the non-gap measures are not prepared in accordance with generally accepted accounting principles but are intended to illustrate an alternative measure of magnet chips offering performance that may be useful the reconciliation of the 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 section at www.magnichip.com. I will now turn the call over to Y.J. Kim. Y.J.?
spk03: Hello, everyone. Thank you for joining us today, and welcome to MagnetChip's Q3 earnings call. First, Let me say that our hearts and prayers are with the families affected by the Halloween incident over the weekend in Seoul, and we wish you a quick recovery for all those who are injured. Moving on to our results, we closed Q3 revenue at $71.2 million. which was within the guidance range that we provided but represented a disappointing 43.9% decrease year-over-year and 29.8% decrease sequentially. This result is obviously not satisfactory. As we indicated last quarter, our second half is being severely impacted by several macro challenges that I will detail as I discuss each of our two main businesses. Beginning with our display business, Q3 revenue was $6.4 million, down 89.1% year-over-year and 77.6% sequentially. These results were primarily due to the supply shortages of 28-nanometer 12-inch OLED wafers in the second half of this year that impacted designing projects from our large panel customer in Korea, which are typically awarded in advance based on future wafer supply allocation. In addition, china covered lockdowns and the dramatic slowdown in consumer spending as a result of global inflationary pressures reduced demand for smartphones particularly in china and resulted in an oversupply of channel inventories this caused our large customer in korea to significantly reduce orders to normalize inventory levels unfortunately We believe these poor dynamics will continue in the near future, but we expect inventory levels will normalize by the middle of next year. But the global geopolitical situation and economy remains uncertain. We are focusing on executing the initiatives that are in our control and delivering a strong recovery of our display business in 2023. During Q3, we made follow-up in the following areas. First, regarding our new top-tier panel customer, last quarter we disclosed that the timing of our mass production ramp was delayed due to the customer requesting a feature change, so we had to make modifications to our product. In the beginning of October, we successfully released the new modified OLED DDIC to this customer and is now undergoing customer qualification. We anticipate this customer to complete qualification by the end of this year. However, due to the continued weak consumer service, demand and channel inventory oversupply in China, we expect the production to commence towards end of Q1 2023. While this is unfortunate, the good news is that we received a second design-in project with this large customer. We are extremely excited about this new award as it presents greater volume potential than the first project and also demonstrates our committed partnership. We expect to begin taping out this new part in November this year and begin mass production in late 2023. Over the next few years, OLED production in this region of the world is expected to more than double, so we are obviously excited about our growing relationship with this customer. Second, in September, we met several leading OLED manufacturers in this region and their interest our products are very high due to our product competitiveness and differentiated capabilities we are continuously discussing with them for our future product business opportunities third regarding our large panel customer in Korea last quarter we announced we kicked off the development of two new OLED drive IC projects with them We expect to take out one of the new projects this month and anticipate mass production by second half of next year. Finally, regarding OLD wafer capacity, with the global economic slowdown, we are seeing more wafer availability at most foundries. As a result, we are now in discussions with multiple foundries for 2023 wafer capacity, as well as locking in agreements for longer-term supply. We believe our 2023 wafer supply will be more than two times higher than 2022. In summary, our near-term OLED results are very disappointing. and we expect demand weakness to continue in the near future. However, looking forward to 2023, we remain focused on executing towards a strong recovery of our OLED business driven by a significant improvement in both wafer supply and organic demand from our top tier customers and new design wins. Now, let's turn to the power solutions business. Q3 revenue was 56.4 million, down 4.2% year-over-year and 10.4% sequentially. In line with the broader slowdown we are seeing in a global economy, particularly in consumer and markets. For example, our third quarter of revenue was affected by lower demand for TVs, e-bikes, smartphones and computing applications. Similar to our display business, we expect this self-demand environment to continue in the near term as the economy further slows due, inflationary pressures, and consumers work through the excess inventories that have built up in the channel. On a positive note, our higher margin premium tier products, remained resilient in Q3 and grew 5.8% year-over-year and 2.3% sequentially, driven by record demand for our IGBT product for industrial solar applications, which was up 80.4% year-over-year and 24.3% sequentially. We are extremely excited about this trend as the solar industry is benefiting from strong tailwinds such as rising energy prices and favorable regulatory conditions globally as the world accelerates its clean energy initiatives. In our superjunction market pipeline, we continue to see resilient demand as revenue only decreased 0.7% sequentially despite slowdown from TVs that was mostly offset from strengths in industrial applications like LED lighting due to higher energy efficiency requirements. During the quarter, we were also awarded several new design wins with our 600 and 650V super junction MOSFETs with a leading TV manufacturer and an adapter OEM. In Q3, we continued to develop new power products. In September, we introduced a new 200-volt medium voltage MOSFET that incorporates a third-generation trench technology that reduces capacitance by 50%. versus the prior generation and significantly improves energy efficiency as a result of faster switching and a higher power density. This product is able to operate in temperature between negative 55 C and 175 Celsius and is perfect for light ED motor controllers and industrial power supplies requiring high efficiency and stable power supply in various rugged conditions. To summarize, our power solution business is not immune to slowdowns in the broader economy, but we are confident our technology, diversified product portfolio, and product roadmap will help us remain resilient and recover with the market. With that said, we are cautious of the semi-cycle we are entering and are planning to reduce our 2023 capex spending by nearly 60% from 2020 levels. Shin Young will provide more details in her section. In closing, unfortunately, everyone is already too familiar with the inflationary environment that's pressuring consumer spending, not to mention the other challenges like Ukraine, trade tensions between U.S. and China, and the energy crisis in Europe. However, we have a strong balance sheet to weather this down cycle, and we continue to remain focused on executing our 2023 recovery plan. We are making progress by winning new designs with our panel customers and expanding customers, as well as revitalizing new products in both of our businesses. In addition, our OLD Wait for Capacity challenges will be resolved next year, and we are looking forward to a return to growth. Before I turn the call over to Shinya, I do want to address the U.S. Chips Act that was enacted in October. At this moment, We do not expect any direct impact on our business in connection with its policies as our product utilizes legacy technologies. Now, I'll turn the call over to Xunyong to go over Q3 results and give our Q4 guidance. Xunyong?
spk02: Thank you, IJ, and welcome to everyone on the call. Let's start with key financial metrics for Q3. Total revenue in Q3 was $71.2 million. down 29.8% sequentially, and down 43.9% year-over-year. Revenue from the Standard Prox business was $62.8 million, down 31.2% from Q2, and down 46.5% year-over-year. As YJ already mentioned, both the sequenture and year-over-year decrease were mainly attributable to the supply constraints for waivers in our OLED business. and slow demand for Chinese and Korean smartphone models as a result of the global downturn in the smartphone market. Revenue from our power solutions business was $54 million, down 10.4% sequentially and down 4.2% year-over-year. The sequential decline was due to a slowdown in TV, e-bikes, and computing applications affected by COVID lockdowns in China, was partially offset by higher demand in solar and industrials. The profit margin in Q3 was 24.2%, below the low end of our guidance range, as we recorded a $3.3 million charge to scrap 12-inch vapors as a result of slowing demand caused by elevated smartphone inventories in China. Excluding this charge, our gross profit margin would have been 28.8%. slightly above the high end of our guidance range. In addition to the script cost, our lower gross profit margin year-over-year was driven by a lower utilization rate at our factory, higher third-party foundry costs, and unfavorable product mix. Turning now to operating expenses, Q3 SG&A was $11.4 million as compared to $12.7 million in Q2 2022, and $12.6 million in Q3 last year. Q3 R&D was $13.3 million as compared to $13.4 million in Q2 2022 and $12.3 million in Q3 last year. Stock compensation charges including operating expenses were $0.9 million in Q3 compared to $2 million in Q2 and $2 million in Q3 2021. In Q3, our operating loss was $10 million compared to operating income of $2 million in Q2 and $20 million in Q3 2021. Adjusted operating loss in Q3 was $6.6 million compared to adjusted operating income of $4.8 million in Q2 and $22.7 million in Q3 a year ago. Adjusted EBITDA in Q3 was negative $3 million compared to $8.5 million in Q2 and $26.4 million in Q3 a year ago. We recognize a tax benefit of $3.9 million in Q3 due primarily to pre-tax group loss of our operating entity in Korea, mainly driven by non-cash foreign currency translation losses in connection with its intercompany loans. For the full year 2022, we expect gas tax to fall in the range of a benefit of $2 million to an expense of $4 million, excluding the impact of any further FX volatility. This wide range is due to multiple tax items in multiple jurisdictions, such as realized foreign currency gains at our operating entity in Korea, expected U.S. taxes from the application of Section 174 of the U.S. Tax Code, and other group and cash tax timing differences. Net loss in Q3 was $17.2 million as compared with $3.3 million in Q2 and $10.8 million in Q3 a year ago. Our gap diluted loss per share in Q3 was $0.38 as compared with a loss per share of $0.07 in Q2 and earnings per share of $0.23 in Q3 last year. Our non-gap diluted earnings per share in Q3 was $0.02 down from 23 cents in Q2, and down from 42 cents in Q3 last year. Our diluted shares outstanding for the quarter were about 45.7 million shares, which reflects shares repurchased as part of our extended share repurchase program that we announced in mid-December. And we continue to exercise the buybacks that was authorized by the board. Moving to the balance sheet. Our cash balance at the end of Q3 was $250.8 million. This compares to $273.8 million at the end of Q2. Accounts receivable net totaled $36.8 million, decreased 38.5% from Q2. Our day saved outstanding for Q3 was 47 days and 54 days in Q2. The decrease in accounts receivable net in Q3 was attributable to the decrease in quarterly revenue along with the timing of related payments from certain customers. Inventories net ordered $37.3 million compared to $36.2 million in Q2. Our average days in inventory for Q3 was 64 days and 45 days in for Q2. Regarding our CapEx plan, Q3 CapEx was $10.3 million, and we now anticipate total 2022 capital expenditures to be approximately $23.5 million, which is lower than our prior plan of $28 million, including about 8 million special CapEx for Bed 3 capacity upgrade. This reduction is a result of negotiating better pricing terms, and delaying the deployment of certain capital equipment. For 2023, we now anticipate CapEx to be approximately $10 million, which is nearly 60% lower from the 2022 level. Before turning to our guidance, I want to provide some clarity on our year-to-date and Q3 cash flows that you see in our financial statements. As a result of this year's Korean Won volatility against the U.S. dollars, a reporting translation from functional currency Korean won to U.S. dollars may provide a confusing operating cash flow picture. On a pro forma basis, excluding the impact of SX translation, our operating cash flow for the quarter was about negative $450,000. From a commercial standpoint, the majority of our sales are contractually in U.S. dollars, but about half of our spending are denominated in Korean won. our cash balance is also predominantly in U.S. dollars. Therefore, our policy to hedge the risk of U.S. dollars being weaker than our expectation by entering into certain hedging instruments whose impact turns out to be negative to our revenue in the recent quarters due to the current Korean won volatility against the U.S. dollars. Now moving to our fourth quarter guidance. While actual results may vary, for Q4, MagnetShift currently expects revenue to be in the range of $57 million to $62 million, including about $7 million of transitional F3 boundary services. Our Q4 guidance includes an estimated $5 million revenue loss from foreign currency exchanging and hedging instruments. Gross profit margin to be in the range of 26% to 28%. Thank you, and now I'll turn the call back over to Yujia. Yujia?
spk04: Thanks, Shenyang. That concludes the prepared remarks section of this earnings call. Operator, please begin the Q&A session.
spk01: Certainly. As a reminder, ladies and gentlemen, to ask a question, you will need to press star 1-1 on your telephone. Once again, to ask a question, please press star one, one, one moment, please. Our first question comes from. With mine of Needham and company.
spk00: Yeah. Thanks for taking my questions. Um, uh, why did you just say just a few questions on the old lead business? Um, you talked about that. The smartphone inventory levels won't normalize until mid 2023. Just wondering if you could, from your vantage point, characterize the amount of channel inventory that exists in the Chinese handset market right now. The market's been coming down in terms of units all year, but it doesn't seem like we're still at the bottom yet. So just any clarity on how much channel inventory is still there? And your comment about mid-2023, if I think I heard you correctly, maybe provide some insight on that timeframe.
spk03: Yes, Raj, thanks for asking the question. So, you know, we can't really tell each customer by customer or the vendor, silicon vendor by silicon vendor, but that's the signs that we see for ourselves. So I think, you know, as you know, that we have a new product that we taped out and sampled and it being qualified, we expect to go to production in first half with that product. And we also wrote a lot of inventories between Q2 and Q3 this year. And we expect to consume that in the first half and middle of next year. And then, you know, we expect to tape out two new products this month, and that we expect to go to production by second half. So our comments are based on those knowledge with our customers and our programs, but I can't say for the industry and what they may be. So that's what we can say.
spk00: got it okay it makes sense and so you you mentioned that you are um you know you're seeing uh you know shortages on 28 nanometer 12 inch that impacted your design in panel at samsung display but then you also mentioned that um because of the reduction demand that there is more capacity that's that's being freed up um particularly in 2023 um so just kind of reconcile i guess what's happening on 28 nanometer 12 inch and kind of the commentary about 2023?
spk03: Yes. So, you know, we have qualified free 28 nanometer. And, you know, with the slowdown in the economy, we do see better availability. So we are working with all the foundries and working out the – arrangements and allocation for 23 and 24 and we do have either written or verbal commitment from our partners and we see more activity as a result as our customers also cross-check with the foundries and we see more RFQs that's coming in from our customers and also there have been more top-level meetings involving myself with our customers. So, you know, we are working to come out and recover next year and beyond.
spk00: Got it. And just last question, you know, you're sitting on, you know, $250 million of cash on the balance sheet. The market cap is currently sitting around $460 million. So almost half of the market cap is in cash. So what are the intentions for that cash on the balance sheet, given where your stock price is now? Thank you.
spk03: Yeah, so, you know, we do have a strategic review committee that's formed, and we are looking at every option to maximize shareholder value. One of them is a stock buyback, which we started to implement, and we're still doing that. And we're looking at all the various means to maximize shareholder value. And also during this downturn, also strong balance sheet also will help us come out of the downturn as well.
spk01: Thank you. Thank you. And our next question comes from the line of Martin Yang with Oppenheimer.
spk05: Hi, YJ. Thank you for taking my question. Can you first talk about some of the associated expenses that potentially will be invested in relating to the new customers you're engaging in China?
spk02: So that's Martin. I mean, currently we are incurring some R&D expenses. And that's why you are seeing that, I mean, our office in Q3 was a little lower. That's mainly due to some kind of churn down of our stock compensation expenses. But, I mean, our R&D is not really going down, and that's mainly due to kind of to support those design R&D activities to support that new panel customer.
spk05: Got it. And as you expand your business in China, do you see and how has the COVID-related restrictions affected impact your business development activities in China?
spk03: So, yeah, Martin, this is YJ. So, thank you. So, I mean, it's... We send our engineers and FAEs there. They have to go through quarantine, just like anyone else, but it doesn't, you know, deter us from working with our new customer. So, but we're hoping that the... China becomes more available and reduce quarantine and trades more freely with the western parts of the world.
spk05: Thank you. Last question from me. Are you seeing any capacity constraints for yourself either at 28 or 40 today?
spk03: So, you know, most of our product in OLED is 20 nanometer. So we are seeing more variability of those. And as I said before, we have three foundries that we have qualified 20 nanometer. And either either written or verbally, we have a better commitment for 23 and 24. So we expect to, you know, have a long term supply agreements. with many of them and also grow the business together. And we are excited to see that the capacity will not be a limiting factor, but more design wins. We started to see the design win activities picked up.
spk05: Got it. Thank you very much.
spk01: That's it for me. Thank you. And our next question comes from the line of Suji De Silva with Roth Capital.
spk06: Hi, Wajid. So for the China business, I'm curious what the foundries you're securing, do you have domestic China foundry supply available to support that? Just to reduce the de-risk kind of geopolitical potential issues?
spk03: Yeah, Suji, hi. Yeah, so, you know... We have all the 12-inch foundries, as you know, is located outside Korea. And, you know, other than the global foundry, we haven't really disclosed. But, you know, we are working out, you know, through the geopolitical situation as well as make sure that the customers, our panel customers are comfortable using the foundry that we choose for them. So that's how we work out the relationship. So that's what we're doing.
spk06: Okay. Helps understand that. Thanks. And then for the power business, you said that was impacted by consumer spending. How does the next few quarters kind of lay out for that? Is there inventory that has to be worked down in that segment, or is that maybe kind of reaching toward the back end of that inventory, Justin?
spk03: I think, as I said before today, the consumer segment seems to be a little soft, but we do see strong industrial and the other premium product lines. So as soon as I think the consumer sector becomes more normalized, I think we should be okay. So that's our current outlook, obviously, at this time.
spk06: Okay. My last question is on the gross margin. Beyond the guidance for 4Q, what's the intermediate term outlook here, maybe into 2023? What are some of the puts and takes on gross margin we should be thinking about as the year progresses?
spk02: I mean, we only guide one quarter at a time, so we haven't really guided for the full year 2023. But gross margin, there are like multiple factors. Like that's a factor of gross margin. So the product mix, obviously, but at the same time, utilization of our internal facts. and boundary cost, external boundary cost for 12-inch wafers, know that we're going to be impacting our 2023. So we are, I mean, we don't really disclose our kind of target for 2023, but we are trying to get back to a little, because we have a little, the past two quarters, we had kind of one time hit from the recognition of the inventory reserves and the scrap costs. So we are trying to kind of get back to some normalized levels next year.
spk06: Okay. Thanks, Shane. Thanks, Wajid.
spk01: Thank you. Thank you. No further questions. I'll now hand the call back over to Investor Relations Representative Eugia Zai for any closing remarks.
spk04: Thanks, Operator. So that concludes our Q3 earnings conference call. Please look for details of our future events on Magnet Chip's Investor Relations website. Thanks, everyone. Take care.
spk01: Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.
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