Magnachip Semiconductor Corporation

Hello, and thank you for standing by. Welcome to MagnetChip Semiconductor Corporation third quarter 2025 earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the questions on the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. I would now like to hand the conference over to Mike Bishop. You may begin.

Thank you. Hello, everyone, and thank you for joining us to discuss MagnetChip's financial results for the third quarter ending September 30, 2025. The third quarter earnings release was issued today after the close of market and can be found on the company's investor relations website. The webcast and replay of today's call will be archived on our website shortly afterwards. Joining me on today's call are Camilla Martino, MagnetChip's Chief Executive Officer, and Shin-Young Park, our Chief Financial Officer. Camilla 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 fourth quarter. There will be a Q&A session following the prepared remarks. During the course of the conference call, we may make forward-looking statements about MagnetChip'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 developments. Except as otherwise 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. These 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 third quarter earnings release in the investor relations section of our website. With that, I'll now turn the call over to Camilla Martino. Camilla?

Thank you, Mike, and good afternoon, everyone. It has been approximately two and a half months since I was appointed interim CEO. Magaship is a company with a rich history of innovation, a reputation for high reliability and quality, and strong customer relationships. With that said, for the past couple of years, I believe we have failed to execute on our promises. I know our shareholders are frustrated and naturally upset. We are moving quickly to improve financial fundamentals and deliver long-term shareholder value. There are five very critical objectives for both Xinyang and myself. Number one, to reposition our product portfolio to be significantly more competitive. Number two, to right-size our OpEx structure for a pure play power business. Number three, conserve cash. Number four, increase our transparency with our shareholders. And number five, explore strategic alternatives. Consistent with our communications back in August, our board continues to review all strategic alternatives. At the same time, I see tremendous potential here. especially with a lineup of a new generation of products either recently launched or to be launched soon and with a very strong product roadmap ahead. I believe we can execute our product strategy to deliver on that potential. After joining the management team, we undertook a complete bottoms-up analysis of the company to highlight ways to correct course and put us on a path to recovery. We identified some significant changes in the near term and medium term that will require precise product planning and execution. I would like to present on this call our findings so far and outline the initial steps in our plan to address our issues and also our opportunities for the short term. My goal today and going forward is to be transparent about where we stand and where we are headed. the challenges we will likely face along the way, and our plans to address them. Let me first share our high-level results of Q3. Q3 revenue came in at $49.9 million, at about the midpoint of our guidance range. And gross profit margin was 18.6%, which was at the low end of the guidance range. These results reflect three realities. One, the pricing pressure on our legacy products is especially intense in China. Some business we actually have to walk away from. Number two, lower fab utilization as a result of this pricing pressure, and also due to the higher level of months of inventory at the end of Q3, especially in China. On the positive side, we did see significant strength in the communications segment with revenue increasing 34% sequentially, quarter-and-quarter, and 95% year-over-year. Regarding fab utilization, while we anticipate fab utilization rates will decline again in Q4, we believe that the Q4 fab utilization rate is likely to hit the low point of around the mid-50s to manage the mid-50 percentile to manage higher levels of inventory in the channel, and we expect to execute a $2.5 million incentive program to try and address it. In the meantime, we cannot afford idle capacity, and so we are pursuing every opportunity to aggressively load the fab with existing products to sustain operating leverage and stabilize, and then improve gross profit margin until our new generation products contribute more meaningfully. After Q4, we expect utilization to begin to recover, and we believe the new generation products will improve this metric in the future. These financial and operating results and the results of our analysis led us to create five objectives that I stated earlier, and I would like to elaborate on each one of these now. Our first objective is to reposition our product portfolio to be significantly more competitive. Magnchip's results clearly show the headwinds we are facing. Our competitive product position in China's industrial markets and the global consumer TV sector has significantly worsened over the past year. Intense price competition coupled with an aging product portfolio have taken their toll. Despite that, the engineering foundation here at MegaChip is solid, and we are taking decisive actions to stabilize our competitive position that we can then build upon. Namely, we are fast-tracking new generation product development to improve our competitiveness and achieve revenue growth, margin expansion, and a return to improve rates of fab utilization. Areas of focus for these new generation products are our low and medium voltage MXT MOSFET products, our super junction MOSFET products, and also our IGBT products. We are well underway with this initiative. During the first nine months of 2025, we have released 30 new generation products. compared with only two new generation products in the same time period for 2024. In Q4 2025, we currently expect to launch at least another 20 new generation products, giving us a total of at least 50 new generation products in 2025 as compared to only four new generation products in all of 2024. Generally speaking, we consider a new generation product is one in which we achieve a greater than 30% improvement in performance per unit area. The challenge is the revenue ramp time for these new generation products to impact our financial results. New generation products will take multiple quarters or more to meaningfully contribute to the income statement depending on the market segment. However, we are already seeing the initial results in Q3 as 2% of the total revenue came from new generation products. We expect that number to be approximately 10% in Q4 and 2026. We are also very excited about our IGBT announcement today. We have signed a strategic licensing agreement with Hyundai Motors regarding the use of IGBT technology, which stands for Insulated Gate Bipolar Transistor Technology. We have been developing this together for many years now. We believe this agreement will enable us to expand our IGBT footprint beyond automotive markets into industrial, AI and renewable markets. Industry analysts forecast the IGBT market, which will reach nearly $17 billion by 2029, up from $11 billion in 2024. Hyundai Mobus is a global auto parts provider focused on delivering differentiated mobility solutions that combine software and hardware together. And it is also associated with Hyundai Motor Company, the world's third largest automotive manufacturing company. This partnership is still in its early stages, but we expect to see qualification results in 2026. and currently expect initial revenue to start in 2027. Moving to the second objective, to right-size our OPEX structure for a pure play power business. We have initiated multiple OPEX cost reduction programs, including workforce streamlining that will generate approximately $2.5 billion of annualized OPEX savings. We will see the early impact of these actions in Q4 2025. With the current shutdown of the display business and the execution of this workforce reduction program, our overall headcount is expected to be reduced by more than 20% when comparing the end of 2025 versus the end of 2024. And for non-factory employees, we expect the headcount reduction to be nearly 40% when comparing at the end of 2025 versus the end of 2024. These initiatives that I just referenced are foundational to our third objective. The third objective is conserving cash. We have reduced our CapEx investments to both conserve cash and lay the groundwork for our recovery. As we have already announced, among the first actions being taken in our plan is cutting capital expenditures for our GumiFab upgrade by more than 50% over the next two years as we prioritize capital allocation. Our deliberate investment in CapEx for our GumiFab was made to support the growth of our new generation power products that are critical to our financial recovery. I can say now that with these actions we have implemented, I believe we are moving in the right direction. Now, let me comment briefly on our fourth and fifth objectives involving being transparent, and being and exploring strategic options. Let me assure you that I am personally committed to being transparent with our investors. Finally, the board and management team are fully aligned as we explore all strategic options available to us. Moving to my final thoughts here. During my years in the semiconductor industry, I've held executive roles in several chip companies, including as CEO of a publicly held semiconductor company. I have also lived and worked in Asia for many years as a senior executive for a global chip company, and so I'm very familiar with what it takes to compete here. With that said, I will be blunt. Turning MagnetShip around will take time and require an all hands on deck approach with intense focus from our management team. The next few quarters will remain challenging as our legacy products decline and our new generation products begin to ramp. But we also have several reasons for optimism. For example, I really believe we have a strong engineering team led by an intelligent CTO who's driving our entire product roadmap. a growing customer base, and in addition, a clear product roadmap that targets higher margin power segments. We are planning to have more definitive details on our go-forward operating strategy during our Q4 call early next year. With that said, I will hand the call over to Xinyuang for more detail on the financial results and guidance. and then come back for final remarks. Jinyoung?

Thank you, Camilo, and welcome everyone on the call. Let's start with key financial metrics for Q3. Total Q3 consolidated revenue from continuing operations, which includes power analog solutions and power IC, was $45.9 million, which was about the midpoint of our guidance range of $44 to $48 million. This was down 13.3% year-over-year and down 3.5% sequentially on an apples-to-apples basis. This compares with equivalent revenue of $53 million in Q3 2024 and $47.6 million in Q2 2025. Revenue from Power Analog Solutions was $41.5 million. This was down 12.7% year-over-year and down 1.7% sequentially, primarily due to the competitive pricing pressure on our older generation products, which was especially intense in China. Revenue from PowerIC was $4.4 million. This was down 18.9% year-over-year and down 18% sequentially. The sequential decline was due mainly to pull-ins by customers in Q2 from the second half of the year. In Q3, consolidated post-traumatic margin from continuing operations was 18.6%, which was at the low end of the guidance range of 18.5% to 20.5%, down from 22% year-over-year, and down from 20.4% sequentially on an APOSA at both bases. E-over-year decline was primarily attributable to an unfavorable product mix, driven mainly by ASP version, particularly in China, and filling our FAB with lower margin products and a lower utilization rate. The sequential decline was mainly attributable to a lower utilization rate. The company's display business has been classified as discontinued operations from Q1 2025, and from Q3 2025, we've additionally classified certain expenses incurred outside of Korea as discontinued operations. All of the following figures reflect results from continuing operations, and the prior periods were recast to be on an apples-to-apples basis. Q3 SG&A was $8.3 million as compared to equivalent SG&A of $9.5 million in Q3 2024 and $9 million in Q2 2025. Stock compensation charges including SG&A were negative $28,000 in Q3 as compared to $1.4 million in Q3 2024 and $0.8 million in Q2 2025. In Q3, $0.7 million was reversed as a result of the prior CEO separation and the related staff or featuring. Q3 R&D was $7.8 million as compared to equivalent R&D of $6.5 million in Q3 2024 and $6.5 million in Q2 2025. R&D in Q3 increased due to the acceleration of new product development. We expect at least 20 new generation product introductions in Q4. In Q3, we recorded one-time charges of $4 million, of which $2.6 million represented the package cost for the employees we let go under the voluntary resignation program that we completed at the end of Q3, and the remainder primarily related to the separation payment and certain cash benefits disclosed in our prior CEO separation agreements. Before I go into the details of our non-GAAP reserves, please note that our GAAP financial reserves are available in our Chrome AKA filing with our third quarter earnings relief. Our non-GAAP reserves are as follows. Q3 adjusted operating loss was $7.4 million, compared to an equivalent adjusted operating loss of $2.9 million in Q3 2024, and an adjusted operating loss of $4.8 million in Q2 2025. Q3 adjusted EBITDA was negative $4 million. This compares to an equivalent adjusted EBITDA of $0.8 million in Q3 2024 and negative $1.5 million in Q2 2025. Adjusted operating loss and adjusted EBITDA deteriorated year-over-year and sequentially, mostly due to the lower gross profit amount and higher R&D expense as explained above. Our non-gap dilute loss per share was 1 cent. This compared with equivalent non-GAAP diluted loss per share of 20 cents in Q3 2024 and non-GAAP diluted loss per share of 5 cents in Q2 2025. This is due in part to the recognition of income tax benefit of $4.2 million in Q3 and $4.1 million in Q2 2025, whereas the recognition of income tax expense of $6.1 million in Q3 last year. Our weighted average non-GAAP diluted shares outstanding for the quarter were 35.9 million shares and 37.5 million shares in Q3 2024 and 36.1 million shares in Q2 2025. Before we talk about some valuation items, let me provide some comments regarding the company's discontinued display business. The sale of the end-of-life display product, which are getting cash inflow of a little over $3 million in Q3, and we booked the one-time charges of $5.2 million, due mainly to certain additional expenses incurred outside of Korea, of which about 40% was a non-cash item, and we are in the process of reviewing and negotiating the remainder to reduce the cash outlay. Moving to the balance sheet. We ended Q3 with cash of $108 million as compared to $113.3 million at the end of Q2 2025. The main cash outflow in Q3 was $4 million of net cash capex after subtracting $3.6 million, which was the Q3 funded portion by the previously announced equipment loan. At the end of Q3, our long-term borrowings amounted to $38.9 million, which included the $10.4 million of the equipment loan. As noted in August, when Camilla joined the management team to conserve cash, we've reduced upgraded capex for our Gumi set to be in the range of $30 to $35 million by over 50% from the previously forecast range of $65 to $70 million through 2027. Of the $30 to $35 million range, we invested approximately $14 million in the first three quarters of 2025 and expect to spend approximately $6 million in Q4 2025. We view this investment as a requirement to support the development of the new generation of power products. For the full year 2025, we expect approximately 85 to 90% of the $20 million upgraded CapEx to be funded by the Equipment Loan, to which an interest rate of less than 3% per annum will apply. Because the available amount of Equipment Loan ties to the total CapEx amount, with which we reduce it by over 50%, the previously disclosed $26.5 million is now expected to be around $20 million. Including the maintenance capex for the full year 2025, we expect the total capex to be in the range of $29 to $30 million, and the related net cash impact to be in the range of $11.5 to $12.5 million, which netted the funded portion by the equipment loan. Additionally, in connection with the volunteer resignation program that we completed by the end of Q3, We paid in October the one-time package cost of $2.5 million that I mentioned earlier and $1.5 million of statutory severance, which was net of the deposits they made outside of the company's account per the Korean labor law. With the execution of this headcount reduction, we reduced an additional 5% of our total headcount after the shutdown of the display business. With this additional 5% reduction, we target to achieve annual OPEC savings of approximately $2.5 million, beginning in Q4 2025 with a payback period of about one and a half years. With the cash outflows in Q4, mainly from CAPEX and the payment timing of voluntary registration program related amounts as described above, we currently expect our cash balance at the end of 2025 to be in the level of mid $90 million. Now moving to our fourth quarter and full year 2025 guidance. While actual results may vary, for Q4 2025, Magnet should currently expect consolidated revenue from continuing operations, which includes power analog solutions and power IC businesses, to be in the range of $38.5 to $42.5 million, down 11.9% sequentially and down 17.1% year-over-year at the midpoint, On a equivalent basis, we impart one-time $2.5 million incentive program we expect to execute in Q4 to reduce higher levels of inventory in the channel. This compares with equivalent revenue of $45.9 million in Q3 2025 and $48.9 million in Q4 2024. Consolidated gross profit margins on continuing operations to be in the range of 8% to 10%, due to the above described one-time incentive as well as a lower FAP utilization rate. We expect this incentive program to be a 600 basis point negative impact. This is compared with the equivalent gross profit margin of 18.6% in Q3 2025 and 23.2% in Q4 2024. For the fall year 2025, consolidated revenue from continuing operations is expected to be down by 3.8% year-over-year at the midpoint of Q4 revenue guidance on equivalent basis. The equivalent revenue in 2024 was $185.8 million. Consolidated gross profit margin from continuing operations is expected to be between 17% to 18%, and the above described one-time incentive programming Q4 is expected to have an about 100 basis point negative impact in the full year consolidated gross profit margin. The equivalent gross profit margin was 21.5% in 2024. As I approach my fourth year as CFO, I must acknowledge this year's financial results have been disappointing. As Camilla noted earlier, we must regain investors' confidence, and therefore, my focus as CFO will continue to be on heightened financial discipline and cash preservation. While there is clearly more work to do, I feel good about a number of actions we and the Board recently executed, which are expected to result in a reduction of annual OPEX by about 35% year-over-year. and a reduction in headcount by more than 20% when comparing end of 2025 versus end of 2024. With these actions, we'll be better positioned to enter 2026. Thank you, and now I'll turn the call over to Camilo for his final remarks. Camilo?

Thank you, Xinyu. This quarter really reflects the realities of our transition into a pure play power products company. Our Q4 guidance is much lower than what we would have liked to see because of the one-time incentive program. As a result, I felt it was necessary to provide you a little bit of color on Q1 as well, which is very abnormal and not something we would typically do. But I would say that we expect in Q1, 2026, the top line revenue to sequentially grow by double digits. We acknowledge our failure to deliver on prime promises, and we certainly share the disappointment and frustration of our shareholders. Our priorities are very clear, including to explore strategic alternatives. The actions we have taken to reduce CapEx and OpEx and to revitalize our power product portfolio are repositioning MagnetShift for long-term recovery and success. I want to thank our employees for their continued hard work and dedication, and our investors and partners for their patience and support as we move through this important phase. I will now turn the call over to the operator to open the call for questions. Operator?

Thank you. Ladies and gentlemen, as a reminder to ask the question, please first start 11 on your telephone, then wait for your name to be announced. To withdraw your question, please first start 11 again. please stand by while we compile the Q&A roster. Our first question comes from the line of Suji DeSilva with Loft Capital. Your line is open.

Hi, Camilla. Hi, Shen Young. So appreciate all the updates here. So the incentives that you're doing, the impact, should we understand that that will be an impact that happens through the December quarter and is cleared. I appreciate the 1Q guidance about double digits. So do we think of that as being a one-quarter event, Camillo, in terms of the effort there?

Well, we expect, as we mentioned, to have the impact this quarter, that financial $2.5 million impact this quarter. and we hope that our strategy, at least, is that the inventory that we talked about in the channel will come down over time, but this is really a program to really encourage the sales channel to move the existing inventory. That is what it is intended for. Maybe, Xinyong, you have any additional financial comments?

we are trying to give our kind of channel guys to be price competitive. So we are booking this one time thing as a expense, one time expense, meaning the reduction in revenue. That's why it has an impact on the gross margin. But as Camilo explained, I mean, just make them as price competitive. We are hoping they're going to move their old kind of inventory.

Okay. I appreciate the color there. And then just thinking about the gross margin impact there, um, If we take the 4Q guidance of 9 and we add back the 600 BIPs, should we think of that as a trough level looking into 26 for gross margin? Or maybe you could give us some sense of the puts and takes, maybe utilization along with that to think about the trends there.

Right. So Camillo kind of did during his prepared remarks that Q4 is likely to be the lowest point of our gross margin utilization rate being mid 50 percentage points. So, you know, there's a time lag between when you produce a product and when you recognize revenue, and that's going to impact your gross margin. I mean, it's probably a little early to give out the entire 2026 guidance, but kind of this lower growth model utilization rate is kind of impacting the current quarter and also the next quarter in Q1 a little bit. I mean, setting aside the one time incentive program. So we'll have to see until the new generation product can meaningfully contribute. But we said about 10% of our revenue, like when we in Q4 2026. What that means is actually we still have quite a bit in the largest chunk of the old generation product, which we are going to continue to feel some pricing pressure. So we'll think we're going to see as the new generation product composition is going to increase, and our module is going to be improving gradually with that pace. But until then, I think we are continuing to see the pricing pressure on our older generation products.

And it's fair to say, just to add to that, it's fair to say that, look, 2026 is obviously going to be a challenging gross margin period of time for us because this pricing pressure doesn't go away at the end of the calendar year. It is there right now. And now new products that we're planning, you know, is what we use to compete against that. But that will take time. So clearly 2026 will be a challenging gross margin story for us as well.

Okay. Appreciate all that color. Maybe you can talk, Camilo, about the Hyundai-Mobis agreement and just, you know, the genesis of it, kind of how it came about, and if we should think about there being more agreements like that to target more product and markets beyond industrial IGBTs.

Yeah, you know, I've got to be a little bit careful as to what I say, just from a confidentiality point of view. But Hyundai-Mobis, as I mentioned, is part of Hyundai Corporation. that we have been working on this development for a number of years already and this specific licensing agreement or this specific agreement is really giving us the use to license this technology for our own purposes and obviously Hyundai has their own strategy with this part as well and I'm not going to comment on what their plans are to announce it or in what capacity, but it's a very close relationship between us, and we expect to focus our strategy on this licensing technology to the industrial markets in particular. is what we said. And so we look forward to revenues starting to contribute from this licensing deal sometime in 2027. As we get closer to that timeframe, we'll give more details and more color to our shareholders. But we're very encouraged. I mean, we're very excited. I think that was the only time I used the word excited in the entire script. I am very excited about this relationship.

It's always a balance. And then puts and takes. And then lastly, just I'll pass it on to that. The communication strength you saw there, I presume some of that's consumer smartphone. I'm wondering the sustainability of the wins and the strengths you're seeing there.

Thanks. You know, that is a very good relationship we have with our key customers here in Korea. We've been working with them for a long time. The technology is very, very competitive, as we mentioned, and that's why we see an increase. There was a couple of years ago, we lost our competitive way, and now we've regained it with new products. So that actually is a perfect example of what happens when you have a competitive product. Right. You have a competitive product. You can go out there and play the game to win. And we did that well. And so now we need to do that with our entire other product portfolio that we talked about. And so the 50 new generation products that we've launched or planning to launch this year is very, very critical for our future financial recovery. But that's not the end. As you can imagine, we plan to launch a whole bunch more next year, and then now Q4 call early next year will provide more details on what is our new generation product plan for 2026. Okay.

I appreciate the call. Camilla, Junyoung, thank you.

Thank you. Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back over to Mike for closing remarks.

Thank you. I would like to thank everyone for participating on our call today. We appreciate your continued support of magnet chip. This concludes our third quarter 2025 conference call.

Thank you for your participation. We may now disconnect.