Magnachip Semiconductor Corporation

Hello, and welcome to Magna Chips Semi-Conductor Second Quarter 2025 Earnings Conference Call.

At

this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. I will now like to turn the conference over to Stephen Pelleo. Sir, you may begin.

Great, thank you. Hello, everyone. Thank you for joining us to discuss Magna Chips financial results for the second quarter into June 30th, 2025. The second 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, Magna Chips Chief Executive Officer, and Chen-Yung Park, our Chief Financial Officer. YJ will discuss the company's recent operating performance and business overview, and Chen-Yung will review financial results for the quarter and provide guidance for the third 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 Magna 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 State Harbor Statement found in our SEC filing. Such statements are based upon information available to the company as of the date you're up and are subject to change for future developments. Except as required by law, the company does not undertake any obligation to update these statements. During the call, we'll also 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 Magna 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 second quarter earnings release in the rest of 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 on Magna Chips Q2 earnings call. We continue in Q2 to execute on our strategic T-vote to become a pure play power system in the company, and we deliver solid results despite ongoing macro challenges. For Q2-25, consolidated revenue from continuing operation was $47.6 million, up .1% -over-year, and above the midpoint of our guidance range. This was our fifth consecutive quarter of -over-year growth on -to-Apple basis. Growth profit margin from continuing operation was 20.4%, was within our guidance range of .5% to 21.5%, though down 2.1 percentage points from a year ago, and down slightly from Q1, due primarily to pricing pressure in China affecting older generation products. We expect our new generation power product will be more competitive and command better pricing as we roll out these offerings over the course of the next several quarters. As we said before, the catalyst for achieving our financial goals is the successful rollout of our new generation products, including Gen 6 Super Junction and RGBT, and Gen 8, medium and low voltage MOSFET, as well as a full array of Apollo 1 power products. We remain committed to our 333 strategy of achieving 300 million in revenue and 30% course margin in three years. Although the exact timing will depend in large part upon macro factors beyond our control, QINYON will provide more color in our section. We've already launched 28 new generation products in the first half of 2025 and are on track to meet our previously stated goals in 2025 for 40 new generation power analog solution products. We will start to see initial new generation product revenue by the end of 2025 and meaningful impact in the second half of 2026. We are exploring all options to accelerate our new generation product roadmap and now targeting more than 50 new generation products by the end of 2025. We expect these new generation power products to drive higher revenue and give us a smaller die-share, yield -30% more -for-wafers in our boomy span. When new generations are fully wrapped within a couple of years, these new products are expected to drive higher gross margins compared to the previous generations. Breaking down the business line, power analog solutions for PAS revenue was $42.3 million, up .7% -over-year and 6% -over-quarter. PAS represented nearly 90% of total revenue. Power IT revenue was $5.4 million, up .1% -over-year and up .2% sequentially. We continue to see strong design wins activity in Q2, reflecting customer acceptance of our new power products. We achieved 71 total design wins in the quarter, up 61% from the 44 design wins in Q2 of last year. 23 of the design wins representing 32% of all wins were for new products. These new innovative product families opened new high-value market opportunities for magnitude in automotive, industrial and AI applications. We currently expect these three market opportunities to represent more than 60% of magnitude future product mix in Q2, up from wealthy 1% in Q2. We already have ongoing engagement to penetrate automotive markets, which we expect to reach over 10% of revenue by 2020, from less than 5% in 2024. Some notable design win activity included, in the communication segment, we had six new design wins, up from one in Q2 a year ago. We continue to win power sockets for both main-trip and flagship AI smartphone models, including multiple newly launched smartphones, and also in upcoming portable AI smartphones. We also had power design wins for Tidalat and smartwatch applications. In the computing segment, we achieved 10 new design wins in Q2, compared to zero in the year-ago quarter. Most of these wins are related to PC power applications, using our new Super Junction Zen 6 products. Super Junction Zen 6 products are also being adapted into new TV models for 2026 in the consumer segment, where we had five new design wins in Q2 25, which was equal to the amount from previous year-ago quarter. In the industry, we secured 47 additional design wins, up from 36 in Q2 24. We saw particular strengths in China for LED lighting, again, leverage in Super Junction Zen 6. We also expanded into 5G battery management systems with our new medium voltage Gen 8 products. Within automotive, we had one new design win in China for PTC heater applications, and now we've got mass production for other key vehicle systems, such as Idoce.co, AT inverters, electric oil pumps, and car chargers, destined for vehicles in Japan, the US, and Europe. In POWER IT, we had two design wins, which is the same as the number of wins a year-ago quarter. We are targeting additional design wins for LED drivers for 2026 TV models from multiple TV makers in Korea. Now, I'll provide more details about business segments within our analog solutions. Industry is accounting for approximately 35% of PAS revenue and decline .9% -over-year, primarily due to continued weakness in e-bike and solar inverter sales, driven by macroeconomics and self-improvement and price competition in the e-mobility segment. However, we saw strong sequential and -over-year growth in higher performance e-motor applications, LED lighting and 5G battery management systems supported by Adaption IWU, Super Junction Zen 6, and NB Gen 8 products. Despite the solid growth in e-motors, it was not enough to fully offset the softness in e-bike demand. Consumers, which represented 34% of PAS revenue, decline .4% -over-year, due to continued weakness in home appliance, mostly offset by -over-year growth in TV applications. As mentioned before, we are targeting our new generation Super Junction Zen 6 products, being adapted for multiple 2026 TV models. Communications, which are accounting for 20% of PAS revenue, grew nearly 47% -over-year, reflecting increased share in both flagship and mass-market smartphone models. In particular, our low-voltage mass-fac revenue for smartphone battery-fac increased 32% -over-year, and we currently expect to hold the majority position with Korea's leading smartphone manufacturer in 2023, including in their flagship portable models. Computing, which represented 8% of PAS revenue, was up 45% -over-year, driven primarily by high FTC power revenue in Taiwan and China. Automotive, which represented 2% of PAS revenue, declined 25% -over-year, mainly due to slower demand from Korea-based makers and some investor controls from customers in China. On our Power IT business, which represented 11% of consolidated Q2 revenue from continuing operations, grew .1% -over-year and .2% sequentially. The growth was driven by both TV LED and OLED Power ICs, supported by the introduction of 20 new -low-end TV models by our customers for 2025. Finally, the shutdown of our display business is now virtually complete. We are benefiting from -of-life income strings and continue to explore monetization opportunities for the display IT asset. China is a huge market, especially for power semiconductors. We started China for China strategy in early 2024 to address the local market opportunities. However, terrorist uncertainty along with competitive rising pressure on our older generation products in China combined to create a challenging environment that will impact our near-term outlook in the second half of this year. In view of this, we have been proactive and decisive by taking structural actions internally to reduce costs and optimize operational efficiency with the goal to get close to a quarterly adjusted EBITDA break-even from continuing operations by the end of this year. We are also exploring our R&D and product pipeline to differentiate our power-product portfolio to be comparable to tier-one levels to command higher prices and margin. We also are accelerating product development for power devices targeted especially for China for better cost structure. All of these efforts are to support our long-term financial goals to maximize share of the value. Now, I turn the call over to Xinya to give you more details about financial performance in the second quarter and provide Q3 and full year to 2025 guidance. Xinya.

Thank you, YJ, and welcome everyone on the call. Let's start with key financial metrics for Q2. Total Q2 consolidated revenue from continuing operations, which includes Power Analog Solutions PAS and PowerIC was $47.6 million, which is above the pinpoint of a guidance range of $45 to $49 million. This was up .1% -over-year and up .5% sequentially on an Apple-Sapple basis. This compared with equivalent revenue of $44.1 million in Q2 2024 and $44.7 million in Q1 2025. Revenue from Power Analog Solutions was $42.3 million. This was up .7% -over-year and up .6% sequentially. Revenue from PowerIC was $5.4 million. This was up .1% -over-year and up .2% sequentially. In Q2, consolidated gross profit margin from continuing operations was 20.4%. Within our guidance range of .5% to 21.5%, down from .5% -over-year and down from .9% sequentially on an Apple-Sapple basis. The -over-year decline was primarily attributable to an unfavorable product mix driven mainly by ASP origin, particularly in China. The sequential decline was mainly attributable to the timing of certain inventory reserves associated with a PowerIC product coupled with a higher than expected revenue in Q2 from pull-ins by a customer due to the uncertainty around tariffs. The company's display business has been classified as discontinued operations from Q1 2025. All of the following figures reflect results from continuing operations. Q2 SG&A was $9.3 million as compared to equivalent SG&A of $9.7 million in Q2 2024 and $9.7 million in Q1 2025. Q2 R&D was $7 million as compared to equivalent R&D of $5.8 million in Q2 2024 and $5.9 million in Q1 2025. R&D in Q2 increased due to the acceleration of R&D efforts while developing a family of new generation IHBT and super junction products to target more high value opportunities. Stock compensation charges including operating expenses from continuing operations were $0.9 million in Q2 as compared to $1 million in Q1 2024 and $0.8 million in Q1 2025. Discharges fluctuate every quarter depending on the timing and size of stock overgrants. Q2 operating loss was $7.4 million. This compares to an equivalent operating loss of $5.7 million in Q2 2024 and an operating loss of $6.3 million in Q1 2025. On a non-GET basis, the Q2 adjusted operating loss was $5.6 million compared to an equivalent adjusted operating loss of $4.7 million in Q2 2024 and an adjusted operating loss of $5.4 million in Q1 2025. Income from continuing operations in Q2 was $8.5 million as compared with an equivalent loss of $2.2 million in Q2 2024 and a loss of $5.1 million in Q1 2025. In Q2, we recognized net foreign currency gain of $10.8 million, majority of which was attributable to the non-cash translation gain on certain Intel company borrowings as a result of FX volatility during the quarter. We also booked in Q2 the income tax benefit of $4.1 million, which was primarily due to the tax loss recognized in Korea in connection with the shutdown of the display business. Q2 adjusted EBITDA was $2.1 million. This compares to an equivalent adjusted EBITDA of $-1 million in Q2 2024 and -2.1 million in Q1 2025. Q2 get diluted earnings per share was 23 cents as compared with equivalent diluted loss per share of 6 cents in Q2 2024 and diluted loss per share of 14 cents in Q1 2025. Q2 non-gap diluted loss per share was 8 cents. This compares with equivalent non-gap diluted earnings per share of 7 cents in Q2 2024 and non-gap diluted loss per share of 10 cents in Q1 2025. The difference between our gap and non-gap EPS in Q2 2025 was primarily due to the elimination of the non-cash borrowing currency gain of $10.8 million that I explained earlier. Our rated EPS non-gap diluted shares outstanding for the quarter were 36.1 million shares and 38.5 million shares in Q2 2024 and 36.9 million shares in Q1 2025. As part of our stock buyback program authorized in July 2023, we repurchased in Q2 2025 approximately 0.7 million shares for an aggregate purchase price of $2.3 million, leaving about $21.2 million remaining authorization as of June 30, 2025. Moving to the balance sheet, we ended Q2 with cash of $113.3 million as compared to $132.7 million at the end of Q1 2025. The two main cash outflow items were $11.9 million of capex, which will be explained separately later, and $6.5 million of one-time liquidation costs relating to the discontinued display business. With respect to the discontinued display business, we've previously estimated total one-time cash cost of approximately $12 million to $15 million. Of this estimated total cash cost in Q2, we actually paid statutory severance and other employee-related costs of $6.5 million. We originally expected to pay certain contract termination charges in full, along with the statutory severance and other employee-related costs. However, we negotiated with the respective vendors that the total of $6.5 million of contract termination charges would instead be paid over the remaining existing contract terms of one and a half years from Q2 2025, and that amount was recognized as part of other charges in the discontinued operations financials in Q2 2025. The company has begun to provide limited support for remaining customer obligations, including the sale of -of-life EOL display products, which is being conducted by Magnetif Semiconductor Limited, the company's wholly-owned subsidiary that operates the power business. The sale of EOL display products and the potential monetization of the intellectual property assets of the discontinued display business is expected to generate cash inflow of approximately $20 million over a period of approximately two years from the second half of 2025. The total amount will depend upon the demand from customers and the monetization efforts of the display intellectual property assets, and the future revenue derived from the display business will be accounted for separately as part of discontinued operations. Net accounts receivable at the end of the quarter totalled $28.8 million and $28.3 million at the end of Q1 2025. Our date stated outstanding for Q2 was 47 days and compares to 47 days in Q1 2025. Our average days in inventory for Q2 was 81 days and compares to 70 days in Q1 2025. Inventory's net at the end of the quarter totalled $37.6 million and $32.6 million at the end of Q1 2025. Q2 capex, as noted earlier, was $11.9 million, of which $9.4 million was used to upgrade the GumiFast. For the full year 2025, we now expect our total capex to be in the range of $32 to $35 million, which includes approximately $20 to $22 million capex upgrade to GumiFast. The annual forecast for the upgraded capex in 2025 increased from the previously estimated range of $14 to $16 million to $20 to $22 million, primarily due to the timing shift of certain equipment purchases. In Q2, of the $9.4 million of upgraded capex, $7 million was funded by the previously announced $26.5 million equipment loan, resulting in our net cash impact from this upgraded capex in Q2 be $2.4 million. For the full year 2025, we expect approximately 80 to 85% of the $20 to $20 million upgraded capex to be funded by the same $26.5 million equipment loan, to which an interest rate of less than 3% per annum will apply, and the remainder will be funded by the company's cash. The loan was part of a previously disclosed strategy for MagnaChip to make a $65 to $70 million investment over three years to upgrade the GumiFast. The depreciation costs related to the upgraded capex won't begin to be reflected in our financial statements until 2027. At that time, we anticipate that a more robust portfolio of new generation power products will at least partially offset the impact. This new investment in Gumi is expected to drive development of the new generation power product portfolio and upgrade new tools to optimize product mix and improve stock margins. Before we move to the Biden section, let me provide some comments regarding the actions that are being undertaken by the company through shutdown of the display business. As we've disclosed previously, we are prepared to execute all available cost reduction initiatives to align our spending level with a strategy to become a pure play power company and to achieve certain financial goals. We currently retain a cost structure which includes some shared functions and historically have supported both display and power businesses. One of the initiatives being undertaken is headcount reduction, primarily through some shared functions made redundant through the closing of display via a voluntary resignation program that we expect to commence and complete by the end of the third quarter. Due to the voluntary nature of the program, we are unable to provide an exact amount of the related financial impact at this time. However, with the execution of this headcount reduction, we target to achieve annual uptake savings of two to three million dollars with a payback period of 1.5 years. Now moving to our third quarter and full year 2025 guidance. While actual research may vary, for Q3 2025, Magnetube currently expects consolidated revenue from continuing operations which includes power analog solutions and power IC businesses to be in the range of 44 to 48 million dollars, down 3.5 percent sequentially and down 13.2 percent year over year at midpoint on an equivalent basis due to pull-ins by customers in Q2 from the second half of the year as well as competitive pricing pressure on our older generation products. This compares with the equivalent revenue of 47.6 million dollars in Q2 2025 and 53 million dollars Q3 2024. Consolidated gross profit margin from continuing operations to be in the range of 18.5 to 20.5 percent. This compares with equivalent gross profit margin of 20.4 percent in Q2 2025 and 22 percent in Q3 2024. For the full year 2025, consolidated revenue from continuing operations is now expected to be flattish as compared to our previous forecast of mid to high single digit growth year over year due to a challenging environment related to tariff uncertainty and pricing pressure on older generation products in China. This compares with equivalent revenue of 185.8 million dollars in Q2 2024. Consolidated gross profit margin from continuing operations between 19 to 20 percent as compared to our previous forecast of 19.5 to 21.5 percent. The equivalent gross profit margin was 21.5 percent in 2024. Thank you and now I'll turn the call back over to YJ for his final remarks. YJ?

In the first half of the year we've made a good progress on our goal to become a pure place power semiconductor company. We expanded our new generation power product pipeline and focused on increasing customer adaptions across key growth markets including automotive, industrial and communication. In Q2 in particular our growth was driven primarily by strong performances in our communication and computing businesses with each showing revenue growth of over 40 percent year over year. We also benefited modestly by some pull-ins by customers due to the uncertainty around tariffs. Looking to the back half of the year we faced an uncertain environment due to tariffs and pricing pressure in China. As a result we currently anticipate a shorter second half of the year relative to our prior expectations. While headwinds are impacting our near-term outlook we are being proactive and decisive taking structural actions to optimize operation efficiency while continuing to invest in R&D and CapEx to support our long-term 333 financial strategy. As we share today we are accelerating the development of a full array of new generation products to drive future growth and we expect to see initial revenue contribution by R&D gaining momentum and having a material impact in the second half of 2026. This escalation will allow us to roll out more feature-rich differentiated and higher margin products more quickly. We remain committed to maximizing shareholder values and prioritizing a return to profitability. Now I turn the call back to Stephen. Stephen?

Okay that concludes our prepared remarks now let's open up the call for questions that you may have. Please go ahead.

Thank you. Ladies and gentlemen as a reminder to ask the question please press star 1-1 on your telephone then wait for your name to be announced. To withdraw your question please press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Suji De Silva with Walth Capital. Your line is open.

Hi YJ, hi Shen Youngs. It's the pull-ins you saw in the first half from customers with tariff impact. I'm wondering if that's flowing through in the second half all the way you know to the next few quarters and whether you largely see the impact of that you know near term when you talk about one large customer. So I'm curious how much that affected lingering versus pricing threats for other elements of the revenue.

Yes so I think we mentioned the magnitude of Esmit's pull-in in the prior time we saw maybe about two million and I think some of that came in into the first half and we saw some little more in the later part of the Q2 especially in the TV related area. So we think that's already to compare in terms of pull-ins.

Okay great and then on the gross margin the wrap down please being ,2,3 is that primarily pricing now that's like or are you adjusting utilization for the current environment and our imagine inventory here?

So the pricing pressure for sure Suji that's kind of revenue all over vision from the mid-high single digit to flattish and also that's impacting our gross margin obviously. So we baked in previously and the pricing condition and pressure became more severe so that's kind of dragging down our gross margin but at the same time because the older generation product that we are kind of feeling the pressure there so utilization rate is actually I mean that's definitely it's getting impacted as compared to our previous forecast. So lower utilization than our previous expectation along with this kind of pricing pressure the ASP origin is impacting our second half and that's how you're kind of seeing our soft outlook in the second half of 2025.

Okay all right thanks Shingon. Thanks Lekes.

Thank you as a reminder ladies and gentlemen that's star 11 to ask the question. Our next question comes from the line of Nick Doyle with Needham and Company. Nick your line is open.

Yes thanks for taking my questions. Just wondering if you can talk about where you're seeing strength in the communications like which applications driving strength in the communications end market. Thank you.

Yes so if you look at our remark today we had more design wins in the communication so from one to five models we had and so we are seeing the trends from the new models that launched in 2025 so that from mid-range to flagship AI smartphones and then the new launched the AI portable phones and that's where we we feel growth and also in the computing area we had more design wins and that also contributed to the more design win and then we are also seeing good pipeline for the AI server as well.

Okay and then if I could just ask about the OPEX and the EVO breakeven I mean you're saying you're targeting hopeful breakeven by the end of the year does that mean you can really take down OPEX you know one to two million by the end of the year kind of you know to be determined based on the voluntary employee dynamic.

Thanks. Thanks Nick so I mean that's why we still target to get close to adjust EVO breakeven in Q4 2025 so we are executing this voluntary resolution program we are going to do that launch and execute it by the end of Q3 so you're going to see the impact in Q4 for sure but our currently estimated range is like two to three million dollar OPEX reduction like that's kind of annual basis so if you kind of divide it by four just roughly that's kind of half million to like 0.75 the million kind of the reduction in OPEX and mainly should coming from the SG&A.

Thank you.

Thank you ladies and gentlemen I'm showing no further questions in the queue I will now like to turn the call back over to Stephen for closing remarks.

Okay thank you before we conclude I just want to give everyone a quick reminder on our upcoming investor conference on August 20th we will present at the sixth annual Needham virtual semiconductor and semi-cap -on-one conference attendance at the conference is by invitation only we're interested in institutional investors please contact your respective sales representative to register and schedule -on-one meetings with the management team. Please look for details of our future events on Magnet Ships investor relations website with that this concludes our Q2 earnings conference call thank you and take care.

Ladies and gentlemen you may now disconnect thank you for your participation.