Magnachip Semiconductor Corporation

Standing by and welcome to the Magnet Chip 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 1-1 on your telephone. If your question has been answered and you'd like to remove yourself from the queue, please press star 1-1 again. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Stephen Paleo, Managing Director of the Blue Shirt Group. Please go ahead. Great. Thank you, Jonathan.

Hello, everyone. Thank you for joining us to discuss MagnaChip's financial results for the fourth quarter and full year ended December 31st, 2023. The fourth quarter earnings relief 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 Y.J. Kim, MagnaCHIP's Chief Executive Officer, and Shin-Young Park, our Chief Financial Officer. Y.J. 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 MagnaCHIP'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 on upon information available to the company as of the date you're of 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 MagnetShift'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 Y.J. Kim. Y.J.?

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 FAB capacity in our KOMI FAB 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 go-to-market strategy, strengthens the potential for increased shareholder value and also improve 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 relationships 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 fast 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 these 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 products 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 PowerDiscrete 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 quarter 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%, close near the low end of our guidance range. During the quarter, our OLED business was impacted by slower design and 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 20.5% 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 30.8% year-over-year and 18.3% sequentially. We received our first pilot production purchase order in China for our first chip 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 chip 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 is 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 OLED DDI-C products. Our third OLED DDI-C trips successfully completed designing evaluation at a leading Chinese smartphone OEM and being assigned a high-value 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 chip, which we prioritize and will sample next quarter. Additionally, our second chip 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 OLED DDI chip targeted for fast-growing portable smartphone market. Third-party research from China security estimates global portable handsets are projected to grow over 50% year-over-year 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. We are applying our smartphone DDIC technology know-how and development expertise. The delivery of the first sample is expected in mid-2024. This initiative demonstrates our strategy to expand into new high-growth markets with new product offerings that showcase our ability to innovate across segments. With regard to our OLED automotive business, we began production treatment through 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 2023 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 22.3% year-over-year, and 20.5% sequentially. Sequentially, our power business was impacted by an ongoing inventory correction in industrial and markets, particularly e-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 were 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 reduce 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, lightning 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 ins and wins. These new products will provide the foundation to fill our Gumi fab, 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 650V IGBT in the first half of 2024, followed by 6th generation super junction MOSFETs and 6th generation IGBTs in Q3 of this year and 8th generation medium voltage MOSFETs and 8th 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 1 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 Xinyang gives you more details of our financial performance in the fourth quarter and provide Q1 and full year 2024 guidance. Xinyang?