Magnachip Semiconductor Corporation

Standing by and welcome to the Magnet Chips Summit Conductor Corporation's fourth quarter 2023 earnings 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 during this session, you'll need to press star one one on your telephone. If your question has been answered and you'd like to remove yourself from the queue, please press star one one again. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Steven Pelleo, managing director of the Blue Shirt Group. Please go ahead.

Great, thank you, Jonathan. Hello, everyone. Thank you for joining us to discuss Magnet Chips financial results for the fourth quarter and full year ended December 31st, 2023. The fourth quarter earnings release that was issued today after the 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 YJ Kim, Magnet Chips chief executive officer, and Shen Yong Park, our chief financial officer. YJ will discuss the company's recent operating performance, business overview, and directional guidance for 2024. And Shen Yong will review the financial results for the quarter and provide guidance for the first quarter and full year 2024. YJ will then briefly recap the company's business strategy. 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 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 filing. Such statements are based upon information available to the company as of the date hereof and are subject to change for future development. Except as required by law, the company does not undertake any obligation to update these statements. 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 as supplemental measures of Magnet Chips operating performance that may be useful to investors. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in our fourth earnings release in the investor relations section of our website. With that, I'll now turn the call over to YJ Kim. YJ?

Hello everyone. Thank you for joining us today and welcome to Magnet Chips Q4 earnings call. First, I believe it's important for investors to understand how our financial results fit into the big picture as we undergo a substantial transformation in our business over the next couple of years. First, we are dramatically shifting priorities in our display business to be laser focused primarily on China. This strategy builds upon 20 years of OLED driver success, primarily in Korea, and follows the industry's dramatic shift to China production.

Second,

we will be working this year and next to fill ideal FAP capacity in our Kumi FAP as we transition away from supplying non-core transitional foundry services to higher margin power products. Third, starting early this year, we began operating under a new structure that streamlines our -to-market strategy, strengthens the potential for increased shareholder value and also improved transparency for investors. Let me provide more detail on each of these transitions. The first major transition involved China, which is becoming the new center of the OLED display universe. We are executing on a strategy to penetrate this vibrant market with feature-rich OLED standard products, and I'm pleased to say we've made tremendous progress so far. We've laid the groundwork for success by establishing a China-dedicated entity and by building strong working relationship with Chinese panel makers and leading smartphone OEMs. Over the past few quarters, we've doubled our resources and staff in China, amassing a team of more than 20 professionals dedicated specifically to our OLED display business. In addition, we hired senior advisors from a top 5G semiconductor company, the financial services sector, and the China supply chain to help accelerate our progress. And I now personally travel to China on nearly a weekly basis to meet our strategic customers, partners, and strategic OEMs. Our work in China is beginning to pay off. We've already secured two smartphone design wins with leading OEMs and expect more on the way. It's part of our strategy to serve the full spectrum of models from mainstream to portables. I'm confident that the results of our strategy will become apparent beginning later this year with more significant revenue growth expected in 2025. The second major transition involves the ideal capacity we expected in our Gumi fab created by the wind down of our transitional foundry services business. We plan to fill the ideal capacity with our existing power product portfolio, as well as a new slate of next generation power products that we will introduce over the next several quarters. We believe these products will be on a par with some of the best global suppliers of power products. As we've said previously, this fab transition will depress gross margins until we can adequately replace the legacy transitional foundry services business with higher margin power products. And we intend to share updates on our perspective on this transition on a quarterly basis. To help achieve our goal during the transitions, we've now streamlined the structure of the company by creating two main business entities to better align our product strategies and also to provide more transparency to investors through our new MMS, mixed signal solutions, which includes display and power IC product and PAS, power analog solutions, our traditional power discrete businesses. To help investors better track our business progress, we will break out MMS and PAS revenue, as well as gross margin beginning on the Q1 earnings call. The reasons for deciding to separate the standard product business structurally and operate independently, mainly because display and power IC are fabulous and power discrete is an IDM business. In addition, the separation allows the following benefits. One, increase shareholder value by maximizing the valuation of each business. The separation allows a foundation for more efficient and transparent business structure that can fuel sustainable growth through strategic financing and investment. Two, strengthen business performance management by establishing independent and responsible management systems. Three, enhance flexibility in business portfolio and increase strategic responsiveness to environment changes. We are confident that the strategies I've outlined will put us on a path to achieve a sustained recovery over the next two years. While we typically provide guidance for one quota only, I feel it's important in the current environment to provide directional guidance for 2024. We currently expect double digit revenue growth in both the newly organized MSS and PAS businesses. Overall, we expect total company revenue to be flat to up slightly in 2024 over 2023, primarily due to the phase out of the transitional foundry services. Gross margin for the consolidated company is expected to be in the range of 17% to 20% for the year, severely impacted by the ideal capacity when the transitional foundry service revenue winds down. While the near term outcome is disappointing, rest assured that my team and I are committed to working every day on behalf of our shareholders to improve the results. Now that I've provided a big picture context, let's review our Q4 results. Revenue was 50.8 million and gross margin was 22.7%, both near the low end of our guidance range. During the quarter, our OLED business was impacted by slower design-making progress than expected due to longer OEM evaluation cycles. During Q4, we also embarked on another key OLED project aimed at diversifying our customer base to enter the smartwatch display market. Our power business results were down .5% sequentially, primarily due to the ongoing inventory correction in industrial and markets, particularly in China's e-bike market and the solar sector. Now, let me provide updates to each of our business under the 2023 financial reporting convention. Beginning with our display business, Q4 revenue was in line with our expectation at 5.2 million, down .8% year over year, and .3% sequentially. We received our first pilot production purchase order in China for our first trip from an after service market player during the December quarter, and we are making progress on many additional fronts. Specifically, Q4 marked the beginning of initial shipments in China of our first OLED DDI trip that we taped out in 2022. In Q4 2023, we were awarded our first design win and related PO for the after service market. While its immediate financial contribution expected to be modest, it marks our first pilot production PO in China and is a significant step towards the acceptance our product capabilities as well as our team's efforts. Moving on to our current generation of OLED DDI-C products. Our third OLED DDI-C trips successfully completed design and evaluation at a leading Chinese smartphone, OEM, and been assigned a high volume model for launch in Q2 2024. This resulted in a design win with obtaining pilot production PO as a second source supplier. For this leading Chinese smartphone OEM, we've been qualified and added to their approved vendor list. Moreover, we've been chosen to also work with them on their fall model with our next generation trip, which we prioritize and will sample next quarter. Additionally, our second trip is still going through a design and evaluation phase at a global smartphone OEM. We will provide an update on this once we receive the status from the OEM evaluation. Mid this last year, we announced that we began developing another OLED DDI trip targeted for fast growing portable smartphone market. Third party research from China Security, estimates global portable handsets projected to grow over 50% a year over the next few years, and reach over 100 million units by 2027 from just approximately 15 million units today. Finally, we're excited to announce that we partner with a watch solution maker in China during Q4 to develop a new product targeting the OLED smartwatch display market. This is an adjacent market where we are applying our smartphone DDI technology know-how and development expertise. The delivery of first sample is expected in mid 2024. This initiative demonstrates our strategy to expand into new high gross markets with new product offerings that showcase our ability to innovate across segments. With regard to our OLED automotive business, we began production shipment to our large Korean panel maker for three different car models from two top tier European car manufacturers between May and July 2023. Modest revenue from those devices began in May 23, and is expected to continue for a few years, given longer automotive cycles. All these efforts underscore our commitment to innovation and market expansion. Moving on to our power business. Q4 revenue was 36 million, down .3% a year year over year, and .5% sequentially. Sequentially, our power business was impacted by an ongoing inventory correction in industrial and markets, particularly the bike and solar. We also saw weakness in consumer TV and PC power. On a positive note, we secured two new smartphone design wins for our low voltage MOSFET family, which grew more than 20% sequentially in the fourth quarter for that product family. While the overall power business results in the fourth quarter was disappointing, we currently expect a gradual recovery in our power business in the first half of the year, with increased momentum in the second half. Our major markets such as consumer computing and communication already underwent a major inventory correction over the last year. We continue to focus on execution in Q4. We developed and launched new power products, and saw strong momentum in our design win activities. In Q4, we secured a new design win and began mass production for a major U.S. automotive brand that would contribute to revenue growth in 2024. I am extremely proud of the progress we've made in our automotive business, as revenue for the full year 2023 is up over three times compared to 2022. I look forward to building on this momentum in coming years. We also continue to innovate. In October, we announced two new 650-volt super junction MOSFETs that reduced the overall footprint by nearly 60% as compared to other products from competitors. These new MOSFETs offer excellent design flexibility, efficient heat dissipation, and low resistance characteristics. As a result, they are well suited for various applications that require compact size and high efficiency, such as OLED TVs, servers, lining products, and laptop chargers and adapters. In summary, our power business, our product portfolio is getting stronger as we continue to focus on rolling up our next generation power products to maintain our momentum of design wins and wins. These new products will provide the foundation to fill our gummy fat, achieve better margin, and help us get back to profitability. Entire families of our next generation products will be forthcoming in 2024. We will be releasing the next generation 650-volt IGBTs in the first half 2024, followed by sixth generation super junction MOSFETs and sixth generation IGBTs in Q3 of this year. And eighth generation medium voltage MOSFETs and eighth generation low voltage MOSFETs in Q4 of this year. We expect these next generation product families to match or surpass the performance of our tier one competitors. This will position us well to compete for high-end industrial and auto world markets, as well as serve our existing markets, such as consumer computing and communications better. Additionally, we will be introducing a new line of commodity products by end of the fourth quarter to improve FAP utilization. I'll come back to wrap up the call after Shin-young gives you more details of our financial performance in the fourth quarter and provide Q1 and full year 2024 guidance. Shin-young.

Thank you, I.J. And welcome to everyone on the call. Let's start with key financial metrics for Q4. Total revenue in Q4 was $50.8 million, down 17% sequentially and down .7% year over year. Revenue from the standard products business was $41.2 million and revenue from transition of under services was $9.6 million. Within standard products, display business revenue was $5.2 million and power business revenue was $36 million. Whereas margin in Q4 was 22.7%, down from .6% in Q3, mainly driven by lower FAP utilization. Compared to the same period last year, cosmogen decreased 370 basis points from 26.4%, primarily as a result of unfavorable product mix, lower FAP utilization and higher FAP cost. Going forward, please keep in mind that there likely will be more volatility in our cosmogen due to the relative sizes of the newly organized businesses on a standalone basis. In addition, among other things, product mix, FAP utilization and input manufacturing costs will impact our quarterly gross margin by business. As a reminder, our transition of boundary services contract with SKT Boundary expired at the end of August, 2023. And we are planning to wind down these boundary services starting in Q1, 2024 and the revenue is expected to be approximately $2 to $3 million per quarter in the first half of 2024. Transitional boundary services accounts for approximately 30% of our GUME capacity when fully utilized with boundary products. This anticipated decline is significantly impacting our factory utilization rate in GUME, which is negatively impacting our product gross margin for the power business. Turning now to operating expenses, Q4 combined R&D and SG&A was $27.5 million. This compares to R&D and SG&A of $23.7 million in Q3, 2023 and $26.2 million in Q4 last

year.

R&D and Q4 was $15.4 million as compared to $11.6 million in Q3 and $13.7 million in Q4 last year due to higher mask set costs. Stock compensation charges including operating expenses were $1.7 million in Q4 compared to $2.1 million in Q3 and $1.5 million in Q4 last year. Q4 operating loss was $15.9 million. This compared to an operating loss of $9.2 million in Q3 and operating loss of $10.1 million in Q4, 2022. On a non-GAM basis, Q4 adjusted operating loss was $14.1 million compared to adjusted operating loss of $7.1 million in Q3 and $8.6 million in Q4 last year. Net loss in Q4 was $6 million as compared with a net loss of $5.2 million in Q3 and a net income of $3 million in Q4 last year. Q4 adjusted EBITDA was negative $10 million. This compares to a negative $2.7 million in Q3 and negative $4.8 million in Q4 last year. Our GAAP diluted loss per share in Q4 was 16 cents as compared with diluted loss per share of 13 cents in Q3 and diluted earnings per share of 7 cents in Q4 last year. Our non-GAAP diluted loss per share in Q4 was 21 cents. This compares with diluted loss per share of 4 cents in Q3 and 36 cents in Q4 last year. Our weighted average diluted shares outstanding for the quarter were 38.8 million shares. In Q4, under our new stock buyback program authorization of $50 million, we repurchased approximately 1.1 million shares or $8.2 million. We had about $36.4 million remaining out of the new 15 million program at the end of December 31, 2023. Moving to the balance sheet, we ended a quarter with no debt and cash of $158.1 million down from $166.6 million at the end of Q3 2023. The primary cash outflow during the quarter was approximately $8.2 million of stock buybacks. Net accounts receivable at the end of the quarter $32.6 million, which represents a decrease of .6% from Q3 2023. Our daily phase outstanding for Q4 was 59 days and compares to 62 days in Q3. Our average days in inventory for Q4 was 77 days and compares to 61 days in Q3. The absolute dollar value of our inventory was up slightly quarter over quarter, while lower cost of sales primarily drove the calculations for days of inventory higher. Specifically inventory's net at the end of the quarter totalled $32.7 million. This compares to $30.8 million in Q3 2023. Lastly, Q4 capex was $4.7 million and for the full year 2023, we spent $7 million in line with our previous estimates that we affirmed last quarter. Now moving to our first quarter and full year 2022-2024 guidance. Beginning Q1, we'll begin reporting results under the newly organized businesses, MSS and PAS. While actual results may vary, for Q1 2024, Magnet Shift currently expects consolidated revenue to be in the range of $46 to $51 million, including approximately $3 million with transitional boundary services. MSS revenue to be in the range of $80 to $10 million. This compares with MSS equivalent revenue of $8.6 million in Q4 2023. PAS revenue to be in the range of $35 to $38 million. This compares with PAS equivalent revenue of $32.6 million in Q4 2023. Consolidated gross profit margin to be in the range of 17 to 20%. MSS gross profit margin to be in the range of 40 to 43%, which includes the positive impact of expected one-time non-recurring engineering revenue. This compares with MSS equivalent gross profit margin of .3% in Q4 2023, which also included one-time non-recurring engineering revenue. PAS gross profit margin to be in the range of 15 to 18%, due primarily to the expected decline in transitional boundary services revenue. This compares with PAS equivalent gross profit margin of 18% in Q4 2023. For the full year 2024, we currently expect MSS revenue to grow double digits year over year, as compared with MSS equivalent revenue of $44.4 million in 2023. PAS revenue to grow double digits year over year, as compared with PAS equivalent revenue of $151.3 million in 2023. Consolidated revenue flat up slightly year over year as recovery in MSS PAS is offset by the phase out of transitional boundary services. Consolidated gross profit margin between 17 to 20% due to idle capacity expected from the phase out of transitional boundary services. This compares with the consolidated gross profit margin of .4% in 2023. Thank you. And now I'll turn the call back over to YJ for his final remarks. YJ.

I want to emphasize points I made earlier because they are important for investors to understand where we are and where we are headed. One, our display business is building upon our past success in Korea to focus more squarely on China. As a sign of the importance of the China market, we have formed a dedicated China operating entity enabling us to forge strategic partnerships with key players in the smartphone, TV, automotive and ecosystems. This move strengthens our market presence and fosters valuable relationship within the industry. As we benefit from these strategic initiatives in our China operations, we are optimistic about the trajectory ahead for our display business. Two, we are dealing ahead on with an expected drop in fab capacity in our Gumi fab as a result of the expected drop off in transitional boundary services and will provide regular updates on our plan. Three, we've separated the structure of the company into two entities to increase shareholder value by maximizing the valuation of each segment, strengthening business performance management and enhancing flexibility to respond to changes in the business environment. The move also will dramatically increase our transparency to the investor community. Thank you to our shareholders for your patience. We appreciate your support as we work to achieve our goals. Now I will turn the call back to Stephen. Stephen?

Great, thank you. That concludes the prepared remarks section of our call today. Operator or Jonathan, would you now open up the call for questions?

Certainly, one moment for our first question. And our first question comes from the line of Sujith D'Silva from Brough Capital Markets. Your question, please.

Hi, YJ, hi, Shen Yang. So YJ, in the display market in China, you say you have two smartphone OEM wins. Are those wins secured directly by you or by the display partner you have? Just trying to understand how those OEM wins are gonna be secured going forward.

Yes, in China, we sell to the panel customer and the smartphone OEMs, they also dictate on which DDIC they like to use as well. So as I said, we doubled our resources in the last few quarters, we have more than 20 professionals. And also, we have added three more direct OEM sales to smartphone and to the OEM. And I've also hired three advisors to help out from the top 5G semiconductor companies and supply chain so forth. So we are using both sell to the panel as well as the small OEMs. And that's how we're gonna accelerate and win more sockets.

Okay, also in the display market, can you tell me how many products you have now targeting the China market in total? And what is the after service market? Is that a special market that needs special products?

Yeah, so let me talk about the after service market. So after service market is like either refurbished phone or when your screen goes off, then you have to replace. According to market research, that market now is anywhere between 10 to 20% of smartphone market. And as you saw, there's an increase in new smartphones. So I think that's what we are seeing. That's the first question answer. And then the app, what was the- How many products do you have? The number of products. We now have in China, we have three. And I said, we're gonna have another chip coming out next quarter. And then we are working on the affordable and the mainstream product. That that be all out this year.

Okay, great. And then last question, as you convert the Foundry Services Agumi to power, how should we size the revenue opportunity once that's fully converted incrementally for your power business? The opportunity at least, capacity-wise.

Yeah, so I think there are two vectors there. One is how are we gonna fill the fab? How are we gonna fill the fab is during the transition. First of all, we're gonna have a bunch of new products. As I said today, we have a slew of new generation coming out all this year. So we have a 650 volt IGBT in first half, followed by six generation super junction and IGBT in V3, and eight generation in the low voltage in fourth quarter. And then another commodity product line to fill the factory in fourth quarter. So that is a product strategy to fill. And then in the second half, we will be converting the fab to our product and fill it up. So the once all that is achieved, it's we expect revenue to go beyond what we did in the past. But it will take a little time.

Understood.

Maybe one last

question for Xin-Yong and I'll go. I'll come back in the queue. Xin-Yong, for the gross margin for MSS, how much of that was NRE benefited? You could roughly size that, that'll be helpful.

It's probably the normal life basis. It's probably 30% plus.

30% of the margin? No,

no, no. So 41% is just because of that the one time thing. So without that NRE, kind of normalize this way at this stage is 30 plus. 30%, like a couple of percentage more than that.

That's better. Okay, thanks guys.

Thank you. One moment for our next question. And our next question comes from the line of Quinn Bolton from Needham. Your question, please.

Hey guys, Nick Doyle for Quinn. Just a quick one. Will you provide a historical breakout of MSS and BAS?

We will, we will, yes.

Okay, great. Q1.

Technically, like when we report the Q1 quarterly, you're gonna see the competitive, the historical period recross on the same basis.

Right, so we'd at least see the first quarter, but hopefully we could get some second and third quarter numbers. Great, so for gross margins, you mentioned, we should expect volatility. You're winding down the transitional founder services. I think by the end of the second quarter, so how long will that fee, FAB, be at least 30% underutilized? I guess I'd expect margins to maybe bottom in 2Q and remain low, maybe flat 30Q into 4Q, perhaps. I mean, after last quarter, I think we are expecting margins to bottom in the 3Q, 4Q time frame. So are you kind of pulling that in with maybe an accelerated sound rewind down? I guess what's the best way

to think about the margin pattern?

I mean, we are gonna still have some boundary services revenue,

like two to $3 million per quarter in Q1 and Q2. So technically we can't really do anything about the 30% capacity in our Gumi FAB, and we are gonna wind down after the Q2. So I mean, we're gonna see some of the idle capacity in the second half as well, until we fully convert that FAB capacity to power the PAS, the product. So you're gonna see that the margin kind of depression throughout the year.

But I think the second half, the difference is that we are rolling out by the time all the new generation, which has a higher margin and lower costs. So that will be the lever that will try to maximize the margins.

Okay, I think I understand. I mean, when you kind of finish the idling process, maybe margins bottom in the third quarter, and then stay flat until you fill up the FAB. That's what it sounds like. So in the power business, you talked about an auto wind that will contribute in 2024. So a couple of questions there, just how do we think about sizing that wind? Maybe when will it begin to ramp? What was the main technical driver of that design wind? And then how does that ramp play out with your Gumi fab utilization? Sounds like that would kind of help in the three, two, four key timeframe.

So the automotive, as you know, we did not have any automotive business about two calendar years ago. And the 22 was first year, maybe it was 1% or less than 1% revenue. Last year, we had about 5% of revenue. So, and then this year will still grow high double digits. So that's the about size of the automotive business. But we now have more than two dozen of design, engine, wind, and automotive,

and

we are still having

the momentum.

Thank you. Thank you. One moment for our next question.

And our next question comes from the line of Martin Yang from Oppenheimer. Your question,

please.

Hi, thank you for taking my question. My first question is about your customer engagement activities in China. Can you talk about how many customers are you actively engaged with, and are the new wearables and aftermarket winds with the same customer?

Yes, a very good question. So we are discussing with direct panel customer, like the panel guys. So we have a two panel guys, we're doing business now. And we are actively engaged with top five out of six smartphone OEMs directly. And so that's what we are doing.

Got it, thank you. A question on the margins for power discrete products. And how does the current margin compares to historical levels, especially historical peaks, and what needs to happen before we see that discrete product, power product margin recover back to where it was?

I mean, as YJ mentioned, once we convert that to 30% of the capacity for the power discrete, but we are gonna rolling out with the new generation power product series of them, which we're gonna have a higher margin. So once we kind of replace the boundary product, you've seen the negative margin. The thing is AST was fixed for those products, but the cost was high. So the power now have to absorb those fixed costs from those boundary. But if we feel that capacity with a higher margin product based on the new generation product series, and we have a potential to go back to our historical kind of high level.

Got it. So what else needs to happen fundamentally for you to fully fill that capacity?

Yeah, so I think that's very, we've been saying that today, that is our top priority. And it's about having the right product portfolio. And so we already had 650 volt super junction in the October release. That's like 60% better than before. We are introducing the new 650 volt IGBT in first half, followed by six generation super junction, and six generation IGBT in the third quarter, and eight generation medium volt and low voltage MOSFET in fourth quarter. And additionally, we'll have a new line of commodity product on the fourth quarter. So those will drive to fill the fab with a better margin and better performance.

Thank you, Wajid. That's it for me.

Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Stephen Palao for any further remarks.

Okay, great. Thank you. This concludes our Q4 earnings conference call. Please look for details of our future events on Magnetship's investor relations website. Thank you and take care.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

All right.

Good day. Good day. Good day. Good day. Good day. Good day. Good day. Good day. Good day. Good day. Good day. Good day. Good day. Good day. Good

day. Good day. Good day. Good day. Thank you for standing by and welcome to the Magnetship Semiconductor Corporation's fourth quarter 2023 earnings 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 during this session, you'll need to press star one one on your telephone. If your question has been answered and you'd like to remove yourself from the queue, please press star one one again. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Stephen Pelleo, managing director of the Blue Shirt Group. Please go ahead.

Great, thank you, Jonathan. Hello everyone. Thank you for joining us to discuss Magnetship's financial results for the fourth quarter and full year ended December 31st, 2023. The fourth quarter earnings release that was issued today after the 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 YJ Kim, Magnetship's chief executive officer, and Shin Young Park, our chief financial officer. YJ will discuss the company's recent operating performance, business overview, and directional guidance for 2024. And Shin Young will review the financial results for the quarter and provide guidance for the first quarter and full year 2024. YJ will then briefly recap the company's business strategy. 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 Magnetship'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 filing. Such statements are based upon information available to the company as of the date hereof and are subject to change for future development. Except as required by law, the company does not undertake any obligation to update these statements. 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 as supplemental measures of Magnetship's operating performance that may be useful to investors. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in our fourth earnings release in the investor relations section of our website. With that, I'll now turn the call over to YJ Kim. YJ?

Hello everyone. Thank you for joining us today and welcome to Magnetship's Q4 earnings call. First, I believe it's important for investors to understand how our financial results fit into the big picture as we undergo a substantial transformation in our business over the next couple of years. First, we are dramatically shifting priorities in our display business to be laser focused primarily on China. This strategy builds upon 20 years of OLEV driver success primarily in Korea and follows the industry's dramatic shift to China production.

Second,

we will be working this year and next to fill ideal FAP capacity in our Komi FAP as we transition away from supplying non-core transitional foundry services to higher margin power products. Third, starting early this year, we began operating under a new structure that streamlines our -to-market strategy, strengthens the potential for increased shareholder value and also improved transparency for investors. Let me provide more detail on each of these transitions. The first major transition involved China which is becoming the new center of the OLED display universe. We are executing on a strategy to penetrate this vibrant market with feature-rich OLED standard products and I'm pleased to say we've made tremendous progress so far. We've laid the groundwork for success by establishing a China dedicated entity and by building strong working relationship with Chinese panel makers and leading smartphone OEMs. Over the past few quarters, we've doubled our resources and staff in China, amassing a team of more than 20 professionals dedicated specifically to our OLED display business. In addition, we hired senior advisors from a top 5G semiconductor company, the financial services sector and the China supply chain to help accelerate our progress and I now personally travel to China on nearly a weekly basis to meet our strategic customers, partners and strategic OEMs. Our work in China is beginning to pay off. We've already secured two smartphone design wins with leading OEMs and expect more on the way. It's part of our strategy to serve the full spectrum of models from mainstream to portables. I'm confident that the results of our strategy will become apparent beginning later this year with more significant revenue growth expected in 2025. The second major transition involves the ideal capacity we expected in our Gumi fab created by the wind down of our transitional foundry services business. We plan to fill the ideal capacity with our existing power product portfolio as well as a new slate of next generation power products that we will introduce over the next several quarters. We believe these products will be on a par with some of the best global suppliers of power products. As we've said previously, this fab transition will depress gross margins until we can adequately replace the legacy transitional foundry services business with higher margin power products. And we intend to share updates on our perspective on this transition on a quarterly basis. To help achieve our goals during the transitions, we've now streamlined the structure of the company by creating two main business entities to better align our product strategies and also to provide more transparency to investors through our new MMS, mixed signal solutions, which includes display and power IC product and PAS power analog solutions, our traditional power discrete businesses. To help investors better track our business progress, we will break out MSS and PAS revenue as well as gross margin beginning on the Q1 earnings call. The reasons for deciding to separate the standard product business structurally and operate independently are mainly because display and power IC are fabulous and power discrete is an IDM business. In addition, the separation allows the following benefits. One, increase shareholder value by maximizing the valuation of each business. The separation allows a foundation for more efficient and transparent business structure that can fuel sustainable growth through strategic financing and investment. Two, strengthen business performance management by establishing independent and responsible management systems. Three, enhance flexibility in business portfolio and increase strategic responsiveness to environment changes. We are confident that the strategies I've outlined will put us on a path to achieve a sustained recovery over the next two years. While we typically provide guidance for one quota only, I feel it's important in the current environment to provide directional guidance for 2024. We currently expect double digit revenue growth in both the newly organized MSS and PAS businesses. Overall, we expect total company revenue to be flat to up slightly in 2024 over 2023, primarily due to the phase out of the transitional foundry services. Gross margin for the consolidated company is expected to be in the range of 17% to 20% for the year, severely impacted by the ideal capacity when the transitional foundry service revenue winds down. While the near term outcome is disappointing, we're so sure that my team and I are committed to working every day on behalf of our shareholders to improve the results. Now that I've provided a big picture context, let's review our Q4 results. Revenue was 50.8 million and gross margin was 22.7%, close near the low end of our guidance range. During the quarter, our OED business was impacted by slower design and progress than expected due to longer OEM evaluation cycles. During Q4, we also embarked on another key OED project aimed at diversifying our customer base to enter the smartwatch display market. Our power business results were down .5% sequentially, primarily due to the ongoing inventory correction in industrial and markets, particularly in China's e-bike market and the solar sector. Now, let me provide updates to each of our business under the 2023 financial reporting convention. Beginning with our display business, Q4 revenue was in line with our expectation at 5.2 million, down .8% year over year, and .3% sequentially. We received our first pilot production purchase order in China for our first trip from an after service market player during the December quarter, and we are making progress on many additional fronts. Specifically, Q4 marked the beginning of initial shipments in China of our first OED DDI trip that we taped out in 2022. In Q4, 2023, we were awarded our first design win and related PO for the after service market. While its immediate financial contribution expected to be modest, it marks our first pilot production PO in China and is a significant step towards the acceptance of our product capabilities, as well as our team's efforts. Moving on to our current generation of OED DDIC products. Our third OED DDIC trips successfully completed design and evaluation at a leading Chinese smartphone, OEM, and been assigned a high volume model for launch in Q2 2024. This resulted in a design win with obtaining pilot production PO as a second source supplier. For this leading Chinese smartphone OEM, we've been qualified and added to their approved vendor list. Moreover, we've been chosen to also work with them on their fall model with our next generation trip, which we prioritize and will sample next quarter. Additionally, our second trip is still going through a design in evaluation phase at a global smartphone OEM. We will provide an update on this once we receive the status from the OEM evaluation. Mid this last year, we announced that we began developing another OED DDIC trip targeted for fast growing portable smartphone market. Third party research from China security estimates global portable handsets are projected to grow over 50% a year over the next few years, and reach over 100 million units by 2027 from just approximately 15 million units today. Finally, we're excited to announce that we partner with a watch solution maker in China during Q4 to develop a new product targeting the OLED smartwatch display market. This is an adjacent market where we are applying our smartphone DDIC technology know-how and development expertise. The delivery of first sample is expected in mid 2024. This initiative demonstrates our strategy to expand into new high gross markets with new product offerings that showcase our ability to innovate across segments. With regard to our OLED automotive business, we began production shipment to our large Korean panel maker for three different car models from two top tier European car manufacturers between May and July, 2023. Modest revenue flow from those devices began in May, 23 and is expected to continue for a few years, given longer automotive cycles. All these efforts underscore our commitment to innovation and market expansion. Moving on to our power business. Q4 revenue was 36 million, down .3% of your year over year and .5% sequentially. Sequentially, our power business was impacted by an ongoing inventory correction in industrial and markets, particularly the bike and solar. We also saw weakness in consumer TV and peace power. On a positive note, we secured two new smartphone design wins for our low voltage MOSFET family, which grew more than 20% sequentially in the fourth quarter for that product family. While the overall power business results in the fourth quarter was disappointing, we currently expect a gradual recovery in our power business in the first half of the year, with increased momentum in the second half. Our major markets such as consumer, computing and communication already underwent a major inventory correction over the last year. We continue to focus on execution in Q4. We developed and launched new power products and saw strong momentum in our design win activities. In Q4, we secured a new design win and began mass production for major U.S. automotive brand that would contribute to revenue growth in 2024. I am extremely proud of the progress we've made in our automotive business, as revenue for the full year 2023 is up over three times compared to 2022. I look forward to building on this momentum in coming years. We also continue to innovate. In October, we announced two new 650 volts super junction MOSFET that reduced the overall footprint by nearly 60% as compared to other products from competitors. These new MOSFETs offer excellent design flexibility, efficient heat dissipation and low resistance characteristics. As a result, they are well suited for various applications that require compact size and high efficiency such as OLED TVs, servers, lining products and laptop chargers and adapters. In summary, our power business, our product portfolio is getting stronger as we continue to focus on rolling up our next generation power products to maintain our momentum of design ends and wins. These new products will provide a foundation to fill our gummy fat, achieve better margin and help us get back to profitability. Entire families of our next generation products will be forthcoming in 2024. We will be releasing the next generation 650 volt IGBTs in the first half of 2024, followed by sixth generation super junction MOSFETs and sixth generation IGBTs in Q3 of this year and eighth generation medium voltage MOSFETs and eighth generation low voltage MOSFETs in Q4 of this year. We expect these next generation product families to match or surpass the performance of our tier one competitors. This will position us well to compete for high-end industrial and auto one markets as well as serve our existing markets such as consumer computing and communications better. Additionally, we will be introducing a new line of commodity products by end of the first quarter to improve fab utilization. I'll come back to wrap up the call after Shin Young gives you more details of our financial performance in the fourth quarter and provide Q1 and full year 2024 guidance. Shin Young.

Thank you, YJ and welcome to everyone on the call. Let's start with key financial metrics for Q4. Total revenue in Q4 was $50.8 million, down 17% sequentially and down .7% year over year. Revenue from the standard products business was $41.2 million and revenue from transitional foundry services was $9.6 million. Within standard products display business revenue was $5.2 million and power business revenue was $36 million. Course margin in Q4 was 22.7%, down from .6% in Q3, mainly driven by lower fab utilization. Compared to the same period last year, course margin decreased 370 basis points from 26.4%, primarily as a result of unfavorable product mix, lower fab utilization and higher fab cost. Going forward, please keep in mind that there likely will be more volatility in our course margin due to the relative sizes of the newly organized businesses on a standalone basis. In addition, among other things, product mix, fab utilization and input manufacturing costs will impact our quarterly course margin by business. As a reminder, our transitional foundry services contract with SK key foundry expired at the end of August, 2023. And we are planning to wind down these foundry services starting in Q1, 2024 and the revenue is expected to be approximately two to $3 million per quarter in the first half of 2024. Transitional foundry services accounts for approximately 30% of our Kumi capacity when fully utilized with foundry products. This anticipated decline is significantly impacting our factory utilization rate in Kumi, which is negatively impacting our product course margin for the power business. Turning now to operating expenses, Q4 combined R&D and SG&A was $27.5 million. This compares to R&D and SG&A of $23.7 million in Q3, 2023 and $26.2 million in Q4 last

year.

R&D in Q4 was $15.4 million as compared to $11.6 million in Q3 and $13.7 million in Q4 last year due to higher mask set cost. Stock compensation charges including operating expenses were $1.7 million in Q4 compared to $2.1 million in Q3 and $1.5 million in Q4 last year. Q4 operating loss was $15.9 million. This compared to an operating loss of $9.2 million in Q3 and operating loss of $10.1 million in Q4, 2022. On a non-GET basis, Q4 adjusted operating loss was $14.1 million compared to adjusted operating loss of $7.1 million in Q3 and $8.6 million in Q4 last year. Net loss in Q4 was $6 million as compared with a net loss of $5.2 million in Q3 and a net income of $3 million in Q4 last year. Q4 adjusted EBITDA was negative $10 million. This compares to a negative $2.7 million in Q3 and negative $4.8 million in Q4 last year. Our GEP diluted loss per share in Q4 was 16 cents as compared with diluted loss per share of 13 cents in Q3 and diluted earnings per share of 7 cents in Q4 last year. Our non-GEP diluted loss per share in Q4 was 21 cents. This compares with diluted loss per share of 4 cents in Q3 and 36 cents in Q4 last year. Our weighted average diluted shares outstanding for the quarter were 38.8 million shares. In Q4 under our new stock by the program authorization of $50 million, we repurchased approximately 1.1 million shares or $8.2 million. We had about $36.4 million remaining out of the new 50 million program at the end of December 31, 2023. Moving to the balance sheet. We ended a quarter with no debt and cash of $158.1 million down from $166.6 million at the end of Q3, 2023. The primary cash outflow during the quarter was approximately $8.2 million of stock buybacks. Net accounts receivable at the end of the quarter totalled $32.6 million, which represents a decrease of .6% from Q3, 2023. Our daily days outstanding for Q4 was 59 days and compares to 62 days in Q3. Our average days in inventory for Q4 was 77 days and compares to 61 days in Q3. The absolute dollar value of our inventory was up slightly quarter over quarter, while lower cost of sales primarily drove the calculation for days of inventory higher. Specifically inventory's net at the end of the quarter was $32.7 million. This compares to $30.8 million in Q3, 2023. Lastly, Q4 capex was $4.7 million and for the full year 2023, we spent $7 million in line with our previous estimates that we affirmed last quarter. Now moving to our first quarter and full year 2022-2024 guidance. Beginning Q1, we'll begin reporting results under the newly organized businesses, MSS and PAS. While actual results may vary, for Q1 2024, Magnet Shift currently expects consolidated revenue to be in the range of $46 to $51 million, including approximately $3 million with transitional boundary services. MSS revenue to be in the range of $8 to $10 million. This compares with MSS equivalent revenue of $8.6 million in Q4, 2023. PAS revenue to be in the range of $35 to $38 million. This compares with PAS equivalent revenue of $32.6 million in Q4, 2023. Consolidated gross profit margin to be in the range of 17 to 20%. MSS gross profit margin to be in the range of 40 to 43%, which includes the positive impact of expected one-time non-recurring engineering revenue. This compares with MSS equivalent gross profit margin of .3% in Q4, 2023, which also included one-time non-recurring engineering revenue. PAS gross profit margin to be in the range of 15 to 18%, due primarily to the expected decline in transitional boundary services revenue. This compares with PAS equivalent gross profit margin of 18% in Q4, 2023. For the full year 2024, we currently expect MSS revenue to grow double digits year over year, as compared with MSS equivalent revenue of $44.4 million in 2023. PAS revenue to grow double digits year over year, as compared with PAS equivalent revenue of $151.3 million in 2023. Consolidated revenue flexed up slightly year over year as recovery in MSS PAS is offset by the base out of transitional boundary services. Consolidated gross profit margin between 17 to 20% due to idle capacity expected from the base out of transitional boundary services. This compares with the consolidated gross profit margin of .4% in 2023. Thank you, and I'll turn the call back over to YJ for his final remarks. YJ.

I want to emphasize points I made earlier because they are important for investors to understand where we are and where we are headed. One, our display business is building upon our past success in Korea to focus more squarely on China. As a sign of the importance of the China market, we have formed a dedicated China operating entity enabling us to forge strategic partnerships with key players in the smartphone, TV, automotive, and ecosystems. This move strengthens our market presence and fosters valuable relationship within the industry. As we benefit from these strategic initiatives in our China operations, we are optimistic about the trajectory ahead for our display business. Two, we are dealing ahead on with unexpected drop in fab capacity in our Gumi fab as a result of the expected drop off in transitional boundary services and will provide regular updates on our plan. Three, we've separated the structure of the company into two entities to increase shareholder value by maximizing the valuation of each segment, strengthening business performance management, and enhancing flexibility to respond to changes in the business environment. The move also will dramatically increase our transparency to the investor community. Thank you to our shareholders for your patience. We appreciate your support as we work to achieve our goals. Now I will turn the call back to Stephen. Stephen?

Great, thank you. That concludes the prepared remarks section of our call today. Operator or Jonathan, would you now open up the call for questions?

Certainly one moment for our first question. And our first question comes from the line of Sujit D'Silva from Roth Capital Markets. Your question please. Hi, YJ,

hi, Shen, here. So YJ, in the display market in China, you say you have two smartphone OEM wins. Are those wins secured directly by you or by the display partner you have? Just trying to understand how those OEM wins are gonna be secured going forward.

Yes, in China, we sell to the panel customer and the smartphone OEMs, they also dictate on which DDIC they like to use as well. So as I said, we doubled our resources in the last few quarters, we have more than 20 professionals. And also we have added three more direct OEM sales to smartphone and to the OEM. And I've also hired three advisors to help out from the top 5G semiconductor companies and supply chain so forth. So we are using both sell to the panel as well as the small OEMs. And that's how we're gonna accelerate and win more sockets.

Okay, also in the display market, can you tell me how many products you have now targeting the China market in total? And what is the after service market? Is that a special market that needs special products?

Yeah, so let me talk about the after service market. So after service market is like either refurbished phone or when your screen goes off, then you have to replace. According to market research, that market now is anywhere between 10 to 20% of smartphone market. And as you saw, there's an increase in new smartphones. So I think that's what we are seeing. And that's the first question answer. And then the app, what was the- How many products do you have? The number of products. The number of products we now have in China, we have three. And I said, we're gonna have another chip coming out next quarter. And then we are working on the affordable and the mainstream product. That that be all out this year.

Okay, great. And then last question, as you convert the Foundry Services at Gumi to power, how should we size the revenue opportunity once that's fully converted incrementally for your power business, the opportunity at least capacity wise?

Yeah, so I think there are two vectors there. One is how are we gonna fill the fab. How are we gonna fill the fab is during the transition. First of all, we're gonna have a bunch of new products. As I said today, we have a slew of new generation coming out all this year. So we have a 650 volt IGBT in first half, followed by six generation super junction and IGBT in V3, and eighth generation and the low voltage in fourth quarter. And then another commodity product line to fill the factory in fourth quarter. So that is a product strategy to fill. And then in the second half, we will be converting the fab to our products and fill it up. So the once all that is achieved, it's we expect revenue to go beyond what we did in the past. But it will take a little time.

Understood.

Maybe

one last question for Xin-Yong and I'll go back in the queue. Xin-Yong, for the gross margin for MSS, how much of that was NRE benefited? You could roughly size that, that will be helpful.

It's probably the normal life basis. It's probably 30% plus.

30% of the margin? No,

no, no. So 41% is just because of that the one time thing. So without that NRE, kind of normalize this way at this stage is 30 plus. So 30%, like a couple of percent is more than that.

That's

better. Okay, thanks guys.

Thank you. One moment for our next question. And our next question comes from the line of Quinn Bolton from Needham. Your question, please.

Hey guys, Nick Doyle for Quinn. Just a quick one. Will you provide a historical breakout of MSS and BAS?

We will, we will, yes.

Okay, great.

And technically like when we report the Q1 quarterly, you're gonna see the competitive, the historical period recast on the same basis.

Right, so we'd at least see the first quarter, but hopefully we could get some second and third quarter numbers. Great, so for gross margins, you mentioned, we should expect volatility. You're winding down the transitional founder services. I think by the end of the second quarter, so how long will that fee, FAB be, at least 30% underutilized? I guess I'd expect margins to maybe bottom in 2Q and remain low, maybe flat 30Q into 4Q perhaps. I mean, after last quarter, I think we are expecting margins to bottom in the 3Q, 4Q time frame. So are you kind of pulling that in with maybe an accelerated sound rewind down? I guess what's the

best way to think about the margin pattern?

I mean, we are gonna still have some boundary services revenue, like two to

$3 million per quarter in Q1 and Q2. So technically we can't really do anything about the 30% capacity in our Gumi FAB, and we are gonna wind down after the Q2. So, I mean, we're gonna see some the IDA capacities in the second half as well, until we fully convert that FAB capacity to power the PAS, the product. So you're gonna see that the margin kind of depression throughout the year.

But I think the second half, the difference is that we are rolling out by the time all the new generation, which has a higher margin and lower costs. So that will be the lever that will try to maximize the margins.

Okay, I think I understand. I mean, when you kind of finish the idling process, maybe margins bottom in the third quarter, and then stay flat until, you know, fill up the FAB. That's what it sounds like. So in the power business, you talked about an auto wind that will contribute in 2024. So a couple of questions there, just how do we think about sizing that wind? Maybe when will it begin to ramp? What was the main, you know, technical driver of that design wind? And then how does that ramp play out with your, you know, Gumi Fab utilization? Sounds like that would kind of help in the three Q four Q timeframe.

So the automotive, as you know, we didn't have any automotive business about two calendar years ago. And the 22 was first year, maybe it was 1% or less than 1% revenue. Last year, we had about 5% of revenue. So, and then this year will still grow high double digits. So that's the about size of the automotive business. But we now have more than two dozen of design, engine, wind, and automotive, and we are still having the momentum.

Thank you. Thank you. One moment

for our next question. And our next question comes from the line of Martin Yang from Oppenheimer. Your

question, please.

Hi, thank you for taking my question. My first question is about your customer engagement activities in China. Can you talk about, you know, how many customers are you actively engaged with and are the new wearables and aftermarket winds with the same customer?

Yes, a very good question. So we are discussing with direct panel customer, like the panel guys. So we have a two panel guys, we're doing business now. And we are actively engaged with the top five out of six smartphone OEM directly. And so that's what we are doing.

Got it, thank you. A question on the margins for power discrete products. And, you know, how does the current margin compares to historical levels, especially historical peaks, and what needs to happen before we see that discrete product, power product margin recover back to where it was?

I mean, as YJ mentioned, like once we convert that the 30% of the either capacity for the power discrete, but we are gonna rolling out with a new generation power product series of them, which we're gonna have a higher margin. So once we kind of replace the boundary product, I guess you've seen the negative margin. The thing is AST was fixed for those products, but the cost was high. So the power now have to absorb those fixed costs from those boundary. But if we feel that capacity with a higher margin product based on the new generation product series, and we have a potential to go back to the, our historical kind of high level.

Got it. And do you, so what else needs to happen fundamentally for you to fully fill that capacity?

Yeah, so I think that's a very, we've been saying that today, that is our top priority. And it's about having the right product portfolio. And so we already had 650 volt super junction in the October release. That's like 60% better than before. We are introducing the new 650 volt IGBT in first half, followed by six generation super junction, and six generation IGBT in the third quarter, and eight generation medium volt and low voltage MOSFET in fourth quarter. And additionally, we'll have a new line of commodity product on the fourth quarter. So those will drive to fill the fab with a better margin and better performance.

Thank you, Wajay. That's it for me.

Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Stephen Pelleo for any further remarks.

Okay, great. Thank you. This concludes our Q4 earnings conference call. Please look for details of our future events on Magnetship's investor relations website. Thank you and take care.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.