Magnachip Semiconductor Corporation

Good day and thank you for standing by. Welcome to the first quarter 2024 Magnet Ship Semiconductor Corporation earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised today's conference is being reported. I would like to hand the conference over to your speaker today, Steven Palayo. Please go ahead.

Thank you. Hello everyone. Thank you for joining us to discuss Magnet Ship's financial results for the first quarter ended March 31, 2024. The first 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 Ship's Chief Executive Officer, and Shin Young Park, our Chief Financial Officer. YJ will discuss the company's recent operating performance and business overview, and Shin Young will review financial results for the quarter and provide guidance for the second quarter. 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 Ship'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 State 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 obligations 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 a generally accepted accounting principles, but are intended as supplemental measures of Magnet Ship's operating performance that may be useful to investors. The reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in our first quarter 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 and thank you for joining us today and welcome to Magnet Ship's Q1 Honest Call. Our overall Q1 results were in line without guidance. Q1 revenue was 49.1 million, down .9% year over year and down .5% sequentially. Consolidated gross profit margin was 18.3%, down 2.9 percentage points year over year and 4.4 percentage points sequentially, mostly due to the wind down of the transitional foundry services. Excluding transitional foundry services, revenue in our standard product business, which is comprised of MSS and PAS businesses, was up .6% sequentially, while gross margin was 21.2%, down 1.7 percentage points sequentially. The decline in gross margin was mostly due to lower GUMEFAP utilization, driven by the wind down of the transitional foundry services, which also impacts PAS margins because they share the FAP. Despite typical Chinese New Year seasonality, the solid sequential revenue growth of our standard product business in Q1 suggests overall market conditions are improving with the inventory correction possibly nearing an end for some verticals. In particular, we saw improvement in the inventory channel for our PAS business. We also saw better than expected demand from our design for the -to-service OLD display market, and we benefit from increased demand in our automotive display business. The PAS business strength was primarily from smartphones, e-motors, consumer appliances, and server power application. Now, let me provide more detailed comments for each of our standard product business lines. Beginning with MSS, Q1 revenue was in line with our guidance at 9.0 million, down .7% -over-year, and up .2% sequentially. As we mentioned before, the -over-quarter revenue growth was due to increased demand from automotive LCD and OLED products. Overall, we continue to collaborate with several OLED panel makers and smartphone OEMs targeting the China market. While third-party market researcher Omnia predicts only slight growth in the global smartphone market in 2024, the top five China brands are forecast to enjoy more than 18% growth in OLED smartphone treatments. As a reminder, we have DDIC designs and customer engagements on the way that span the entire smartphone market spectrum, from the mass market tier to the premium tier segments, as well as other display markets, such as automotive. We had an additional two new OLED designs this quarter that we'll discuss more in detail later. More specifically, during the quarter, our Display IC business had a new design in a high-end OLED smartphone for top-tier Chinese smartphone vendors. This design is based on our 2HD Plus OLED DDIC that we sampled in Q1 2024. This chip provides the latest eight-transistor LCD PO panel feature support and is produced in 28 nanometer. We expect this design to go into production by the end of the year. We also started the initial ramp in Q1 for our first generation OLED DDIC chip for China that we taped out in 2022 for the after-service market. We are now working to expand this segment with other China panel makers. As mentioned previously, we received a pilot production PO as a second-source supplier from a leading Chinese smartphone OEM. We expect revenue to begin in the second half of the year. Moreover, we also have been chosen to work with them on their fall 2024 model with our next-generation chip that we taped out and expect to sample in Q2 this quarter. Finally, we taped out in Q1 and expect sample in Q2, our first smartwatch OLED DDIC. We're excited about this partnership with a smartwatch solution provider in China as it showcases our strategies to expand into new high-growth adjacent markets. With regard to our automotive DDIC business, we felt a strength in the first quarter that we're likely to continue in Q2. Notably, we had a new OLED design win in EV that has come as production in Q2 targeted for a leading European automaker. Our power-chip business is now including MSS. We saw sequential strengths from LED TVs during Q1 and expect business to broaden to include multiple notebooks and tablet models in Q2. We continue to secure new design wins with a major Korean customer. Moving on to PAS. Q1 revenue was $36.5 million, down .6% -over-year, and up 12% -to-quarter. The sequential increase was due primarily to increased demand for medium voltage MOSFET for industrial e-motor markets in China, consumer appliances, and server power. The results are in line with our earlier expectation for gradual recovery in our POP business during the first half of 2024 and are further supported by initial signs of inventory reduction in the distribution channel for our PAS products. More specifically, we saw a strength in the high-speed e-motor market for scooters and motorcycles, where we benefit from the approximate doubling of the bill of material compared to a traditional e-bike. We believe our power solution for e-motors are now up-performing our competition. We are seeing steady demand in low-voltage MOSFETs due to contribution from new high-end smartphone models, as well as increased demand in mid-range smartphones. Further, the PAS design pipeline looks solid for the next generation of smartphones coming in late 2024 and into 2025. We saw a sequential uptick in demand for our super junction MOSFETs and obtained a 600-volt design win in the PC power and power supply market. We also had an IGBT design win at 650 volts from a major Korean appliance company. Lastly, with an automotive power, we had our first medium voltage MOSFET design win for an electric cooling fan with a China-based SUV supplier, as well as additional power steering related win in Korea. We have a strong product pipeline for power in 2024, and they are on track. These products expect to contribute revenue by end of the year. The new 650-volt IGBT finished the qualification and expect to begin commercial sample this month. Sixth generation IGBT and super junction samples will begin this quarter, Q2, and eighth generation LV MOSFET samples is ready, and eighth generation MB MOSFET samples are ready in this second quarter, 24. In summary, PAS saw strong sequential growth in Q1. With the addition of new products and streamlined channel inventory, we are optimistic for the growth trajectory in 2024. In MSS, we're executing our China-focused strategy and making steady inroads with the top tier panel makers and major smartphone OEMs. I will come back to wrap up the call after Shin-Yum gives you more details about financial performance in the first quarter and provide Q2 guidance. Shin-Yum.

Thank you, Ajay, and welcome everyone to the call. Let's start with key financial metrics for Q1. Quarter revenue in Q1 was $49.1 million, which came to about the midpoint of our guidance range of $46 to $51 million. This was down .9% -over-year and down .5% to Q1-shin. Revenue from MSS business was $9 million, at the midpoint of our guidance range of $8 to $10 million. This was down .7% -over-year, but up by 22% to Q1-shin. PAS business revenue was $36.5 million, and at the midpoint of our guidance range of $35 to $38 million. This was down .6% -over-year, but up 12% to Q1-shin. Revenue from Transitional Foundry Services declined to $3.5 million, as we continue to wind down this service over the next couple of quarters, as we explained previously. Consolidated Growth Project Margin in Q1 was 18.3%, within our guidance range of 17 to 20%, but down from .2% -over-year and down from .7% sequentially. MSS Growth Project Margin in Q1 was 44.6%, above the upper end of the guidance range of 40 to 43%, up from .2% in Q1-23, and up from .3% in Q4-23. The margin extension was primarily due to non-recurring engineering revenue and higher than expected revenue from our first generation VEICA for the after-service margin. The volatility of MSS Growth Project Margin is also due to the smaller relative size of each revenue. PAS Growth Project Margin in Q1 was 15.4%, below the midpoint of the guidance range of 15 to 18%, down from .7% in Q1-23, and down from .1% in Q4-23. This -over-year institution decline was mainly due to a lower grief and utilization rate from the wind down of traditional Foundry Services and unpaid level product mix. Turning now to operating expenses. Q1-HGNA was $11.3 million, as compared to $12.1 million in Q4-2023, and $12.2 million in Q1 last year. The sequential and the over-year decline in HGNA was primarily due to our cost reduction efforts with respect to certain one-time for-year rate of benefits. -R&D was $11.2 million, as compared to $16.4 million in Q4-23, and $13.3 million in Q1 last year. As a reminder, R&D expense in Q4 last year included higher mass set costs due to the timing of project development. Staff compensation charges included operating expenses were $0.9 million in Q1, compared to $1.7 million in Q4, and $1.1 million in Q1 last year. Q1 operating loss was $13.5 million, as compared to an operating loss of $15.9 million in Q4, and operating loss of $21.8 million in Q1-2020. On a non-GET basis, Q1 adjusted operating loss was $12.6 million, compared to adjusting operating loss of $14.1 million in Q4, and $12.2 million in Q1 last year. Net loss in Q1 was $15.4 million, as compared with a net loss of $6 million in Q4, and a net loss of $21.5 million in Q1 last year. Q1 adjusted EBZ was $8.4 million, as compared to a negative $10 million in Q4, and a negative $7.9 million in Q1 last year. On a GET diluted loss pressure in Q1 was $0.4 million, as compared with diluted loss pressure of $0.16 in Q4, and diluted loss pressure of $0.49 in Q1 last year. On a non-GET diluted loss pressure in Q1 was $0.28 million, as compared to the diluted loss pressure of $0.21 in Q4, and $0.24 in Q1 last year. Our weighted average value to share vaccine was a total of 38.5 million shares. Under our 50 million stock buy-down program, authorized in July 2023, we will purchase in Q1 2024 approximately 26 million shares, or $4.1 million, leaving about 32.3 million remaining authorization at the end of March 31, 2022. Moving to the balance sheet. We ended Q1 with cash of $171.6 million, which includes approximately $29.7 million in long-term borrowing, up from $158.1 million at the end of Q4 2020. We added a long-term borrowing in March this year, notice opportunistically taking advantage of variable role-financing terms, while exploring strategy options, including share buybacks and strategy investments to enhance shareholder value. This loan bears a variable interest rate, and the initial interest rate was .86% per annum, and matured on March 26, 2027. We classed our previous properties as collateral. Please refer to the form 8K, via the March 29, 2024, for further detail. Net accounts receivable at the end of the quarter toward $33.3 million, which represents a decrease of .2% from Q4 2023. Our day sales outstanding for Q1 was 66 days, and compares to these nine days in Q4. Our average day in inventory for Q1 was 71 days, and compares to 77 days in Q4. Inventory net at the end of the quarter was 31.5 million dollars, and 32.7 million dollars in Q4 2020. Lastly, Q1 capped at $4.7 million. For the full year 2024, we had to split the spend approximately 10 to 12 million dollars, primarily for our PAS business and QMES best. This includes approximately three to four million dollars of one-time capex for our newly established operating entity in China. Now moving to our second quarter and full year 2024 guidance. While actual results may vary, for Q2 2024, Magnets is currently expecting consolidated revenue to be in the range of 49 to 54 million dollars, including about $1.5 million of traditional bond use services. MSS revenue to be in the range of 9.5 to 11.5 million dollars. This compares with MSS's equivalent revenue of $9 million in Q1 2024, and $12.4 million in Q2 2020. PAS revenue to be in the range of 38 to $41 million. This compares with PAS equivalent revenue of $36.5 million in Q1 2024, and $39 million in Q2 2022. Consolidated gross profit margin to be in the range of 17 to 19%. MSS gross profit margin to be in the range of 32 to 33%. This compares with MSS equivalent gross profit margin of .6% in Q1 2024, which included non-recurring engineering revenue, and .4% in Q2 2020. PAS gross profit margin to be in the range of 15 to 17%, primarily as a result of the impact of high capacity from the expected decline in traditional bond use services revenue. This compares with PAS equivalent gross profit margin of .4% in Q1 2024, and .1% in Q2 2020. For the whole year 2024, we reiterate our prior guidance. MSS revenue to grow double-digit -over-year as compared with MSS equivalent revenue of $44.4 million in 2020. PAS revenue to grow double-digit -over-year as compared with PAS equivalent revenue of $151.3 million in 2020. Consolidate revenue flexed up wide-way -over-year as recovery MSS and PAS is offset by the base out of traditional bond use services. Consolidate gross profit margin between 17 to 20%, primarily as a result of the impact of high capacity expected from the base out of traditional bond use 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 Y.J. for his final remarks. Y.J.?

As we noted in our previous audience call, we are undergoing a substantial transformation in our business over the next couple of years. One, we have shifted the priorities in our display business to be laser focused primarily on China business expansion. We have now begun operations at our new Chinese entity, Magnetic technology company, MTC, with our China headquarters now up and running. And we expect to significantly expand our China operation in 2024. We are strengthening strategic relationship with panel customers, OEMs and suppliers. I am encouraged with the progress thus far. Two, Q1 is the first period in our financial results reflect the operating performance under the new MSS and PAs structure. The separation of those business streamlines our -to-market strategy, strengthen the potential for increase share of the value via strategic investment, and also improves transparency for investors. Three, we are working very hard to fill ideal FAP capacity in our GumiFAP caused by the wind down of the transitional boundary services. Our current power products are experiencing an increase in demand, and we are launching a new slate of higher margin products throughout the year. I look forward to sharing updates and our progress on future earnings calls. Now I will turn the call back to Stephen. Stephen?

Thank you. That concludes our remarks section of the call today. Operator, you may now open up the call for questions.

Thank you, ladies and gentlemen. If you have a question or a comment at this time, please press star one one on your telephone. If your question has been answered or you wish to move yourself from the queue, please press star one one again. We'll pause for a moment while we compile our Q&A roster. Our first question comes from Quinn Bolton with Needham. Your line is open.

Hey guys, can you hear me?

We can, but there's a little breaking up.

Okay, hopefully this comes through. I guess I wanted to ask, Y.J., the biggest, you've introduced a number of new products in the MSS segment over the last 12 to 24 months. And it sounds like a lot of those are slotted to start to go into production towards the end of this year and into early 2025. And I guess, as you look at the number of new products, could you kind of just rank order, which do you think are going to be the biggest contributors to growth in the second half in the MSS segment?

Okay, very good, Quinn, thank you. So the initial business ramp right now started with first generation product, we taped out in 2002. That's the EPSA service market. And then we announced the win with our second generation product with one of the key Chinese phone maker that expect to go to revenue in second half. And today we taped out and it's going to sample the third generation product. And that one will also go into production towards the fall or end of the year. And then we will have another product that will hit the market that tapes out and samples in the next quarter. So in terms of the volume product, it's going to be the second generation product that we talked about that we won that will go production in second half. And then the trip that we will sample this quarter in the second quarter, that will be aligned with the fall model. And those two will be the high volume model. And then additionally, we also said we sample QHD plus high-end model and that will also drive a decent revenue starting end of the year. So, and then there's a smartwatch that we taped that will sample. So those are the products that will drive the revenue. And I think the high-end and the second generation and the first third generation, have a good potential towards the end of the year.

Okay, so it sounds like to summarize that the second generation where you already have a win with the China smartphone maker going to production in the second half and then the third generation product, which you expect to start to ramp, perhaps a little bit later in the fall, but before you're on those are the two sort of highest volume runners as you see it today.

Yeah, and then I would say because the QHD is a high-end, even the volume may be a little lower, but the higher ASP so that we sample that will also hit towards the end of year that will have a probably decent revenue as well.

Got it, okay, perfect. And then just kind of looking at the PAS segment, you've commented that you're starting to see some signs of inventory clearance, kind of wondering how much longer do you think inventory is gonna be a headwind? Do you think it sort of continues into the second half of the calendar year? Do you think we'll be mostly through it by the end of the second quarter? Just any update on where you think we are on the inventory clearance? And I guess a related question, as you get better line of sight into inventory and the channel, do you have any sense, where do you think consumption is today of your product versus what you're shipping, which I imagine you're still shipping below and consumption, thank you.

Yeah, thank you, Quinn. So we sell about the, I would say about 80% in HN region and then 20% in the Europe and US. And for the industrial market and automotive tend to be very big portions for other power makers. They tend to be maybe 78%, but for us, industrial automotive is like 35, 40%. And so for us, the consumer communication and computing already went through the inventory correction C and a half. So in the first quarter, our industrial segment actually grew over fourth quarter. And even this quarter, we expect the industry to grow. On the consumer, we grew in Q1 and then we expect flattish and computing, we grew and expect flattish in Q2. Communication was slightly down in Q1, but we expect strong growth in Q2. So for us, the inventory correction in industrial segment for us seems to have gone away. So already adjusted. And usually second half, the Q3, Q4 is a strong quarter, a season for us, given that we have more consumer communication and computing segment, which tend to be cyclical. So we are guiding up in the Q2 and then we see strong Q3. So that's how we see based on today's indicators.

Got it, one last quick, just clarification. I think you said it was consumer and comms where you had sort of a flatter outlook in the second quarter. Is that just more what you would call seasonality or are there other factors slowing in demand that are leading to a flatter outlook for those two segments?

I think it's also really aligning with some of the consumer or computing communication models. So I think it's, I wouldn't say it's really tend to seasonality, but it's also model alignment so forth. So, you know, I think it goes up and down for us. So I don't think it's a pure seasonality. The Q2 is seasonality as overall is better for us. Yeah.

Got it,

okay, thank you. One moment for our next question. Our next question comes from Andrew Northcutt with Oppenheimer, line is open.

Hey guys, this is Andrew Roxxon Martin. Thanks for taking the question. You touched upon it a little bit, but can you talk a little bit about how much exposure the PAS segment has to the consumer home appliance market and how do you think China's recently announced home appliance trade in subsidy will impact the business? Thank you.

Could you repeat the subsidy on consumer appliance by whom? China? Yes,

by China.

Okay, so, you know, mostly the consumer, you know, is mostly in Korea at the moment. We do some in consumer in China. We do more of the industry like e-bikes and communications and cell phone in China, but I think that will also, if they are doing that, I think that will also help us out because China definitely is about 45%, 40 to 45% of revenue for us in PAS.

Perfect, thank you. One moment for our next question. Our next question comes from Suji De Silva with Roth HKM.

Hi, YJ, hi Shenyang. So YJ, the China smartphone wins, can you talk about whether those are a premium model or mainstream or across the platform trying to understand what the initial ramp can look like for those wins?

Yeah, the one that we announced the new win, it's a really high end, it's a QHD+. The QHD+, as you know, is higher than the WXGA, which is a resolution of iPhone. So it's a higher than that. So we see that segment growing starting this year. So we are preparing more solution around there. And this is the first one that we are going there with a new model and that's for the top three Chinese smartphone maker.

Okay, great.

Okay, and then you talked about in the power segment, you talked about server opportunity. Can you talk about whether that's early or that's starting to ramp and what the kind of opportunity is, whether it's AI type servers or just some color there as to what the opportunities that seems like it's newer to you and the competitive landscape there perhaps would be interesting to know as

well. Yeah, so we are starting the server powers. So we got qualified and start shipping. And we do hear that the AI portion of servers are the fastest growing within the server segment. So we look forward to see whether we get more subsequent design in the AI servers in the future. But the needs for the server power supply. Server power supply.

Okay, one last quick question. The formation of the MTC, the China organization there, just wondering what the implications of that are from MX perspective and sort of running the business and thoughts is what that maybe allows you to do and that you maybe couldn't in the past. Any thoughts? Can you help

me? Yes, the creation of MTC is to address the Chinese customer well with a local presence. I think given the sensitivity there politically, I think it's good to have a local company focused on Chinese suppliers. So, and then have an independent operation to service and support and grow opportunity with independent operation. So that's the idea and that's been very welcome by the Chinese customers.

Okay, all

right, thanks Wajay.

Thank you. And I'm not showing any further questions at this time. I'd like to turn the call back over to Steven for any closing remarks.

Great, thank you. This concludes our Q1 earnings conference call. Please look for details of our future events on the MagnaTips investor relation website. Thank you and take care.

Ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful day.