Bruce Entin - Investor Relations YJ Kim - Chief Executive Officer Jonathan Kim - Executive Vice President, Chief Financial Officer and Chief Accounting Officer.

Suji De Silva - Topeka Capital Markets.

Good day, ladies and gentlemen, and welcome to the MagnaChip Semiconductor Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions following at that time. [Operator Instructions] And as a reminder this conference is being recorded.

Now I’ll turn the conference over to your host, Bruce Entin, Director of Investor Relations. Please begin..

Thank you and thank you for joining us to discuss MagnaChip's financial results for the third quarter ended September 30, 2016. The third quarter earnings release we filed today and other releases can be found on the Company's Investor Relations website.

A telephone replay of today's call will be available shortly after the completion of the call and the webcast will be archived on our website for one-year. Access information is provided in the earnings press release. Joining me today are YJ Kim, MagnaChip's Chief Executive Officer, and Jonathan Kim, Chief Financial Officer.

YJ will begin the call with a discussion of the Company's recent operating performance. Following YJ, Jonathan will provide an overview of our financial results. YJ will then briefly recap the Company's overall business strategy as well as provide financial guidance for the fourth quarter of 2016.

There will be a question-and-answer session following today's 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 discussion found in our SEC filings. During the call, we will also discuss some non-GAAP financial measures.

The non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles, but are intended to illustrate an alternative measure of MagnaChip's operating performance that may be useful.

A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in our third quarter earnings release available on our website under the Investor Relations tab at www.magnachip.com. I would now like to turn the call over to YJ Kim.

YJ?.

Thank you, Bruce, and good afternoon to everyone on our Q3 2016 conference call. MagnaChip achieved total revenue of $192.3 million in Q3, which exceeded the top end of our prior guidance by 4%. Q3 revenue was at the highest level in two years.

Revenue in the seasonally strong third quarter increased 15% from Q2 and nearly 25% from the third quarter of 2015. The improvement in our topline was driven by strong customer demand across the Board.

Our two operating segments; the Foundry Services and the Standard Products Group both showed a double-digit increase in revenue in Q3 as compared to Q2. Our foundry services unit was especially strong in Q3 with a sequential increase in revenue of nearly 19% as compared to Q2 and a gain of 3.3% as compared with the third quarter a year ago.

Revenue in our Standard Products Group which includes the display in power solutions increased 13.1% sequentially from Q2 and 43% year-over-year. Revenue in Standard Products increased for the fourth straight quarter. I will now provide more detail on our three business lines beginning with Foundry Services.

Our Foundry business achieved its highest level revenue since mid 2015 and continues to gain momentum. We laid our strategy more than a year ago to broaden the customer base to include global IC customers and we've successfully executed our plan.

Designs from global IC customers mainly in the power and communication markets have ramped into volume production. This was a trend that continued in Q3. Foundry revenue from new products increased 39% sequentially in Q3 and our foundry pipeline continued to fill with new database tape-outs.

Our specialized BCD process drew especially strong interest from global IC customers in the power market during Q3. Our BCD process is capable of integrating different technologies onto a single chip including non-volatile memories for PMICs.

Fab utilization in Q3 climb into the high 80% range the highest level since the second quarter of 2013 and the full four straight quarter of improvement.

Looking ahead we expect additional capacity will become a variable starting in 2017 as we continue to transition a greater portion of our AMOLED production to an external foundry using 12-inch wafers. In fact by spring 2017, we expect to begin sampling customers with leading-edge 40-nanometer AMOLED product supplied by an external foundry.

The strategy we laid out over a year ago was intended to turnaround the Company and we have executed so far according to plan by broadening our customer base with global IC customers and by expanding our product portfolio. As a result we have filled the fabs increase revenue offset fixed manufacturing cost reduced unit cost and maximized cash flow.

Now we are implementing the second phase of that original plan to improve margins over time by improving our product mix strengthening our product roadmap and extracting additional costs, wherever possible without putting any damper on growth. Now turning to the Standard Products Group which includes our Display and Power business lines.

Power Solutions turned in its best performance in more than a year, revenue was up 11% sequentially with demand coming mainly from the PC and TV end markets. Revenue in the Display Solutions business rose 14% sequentially driven mainly by smartphone demand in China and a two X increase in sequential revenue growth from the makers of a UHD TVs.

AMOLED revenue grew 9% in Q3 and represented 63% of the total Display Solutions business down from 65% in Q2. Our AMOLED revenue has increased for five consecutive quarters and has grown nearly fourfold since the second quarter of 2015. We have a long history in AMOLED with unique advantages that create barriers to entry.

We bring industry leading design process and application expertise to the table and have uniquely close ties to the top two OLED panel makers in the world and next turn our foundry to help us meet high volume requirements.

While we are bullish on the long-term business opportunity for mobile AMOLED display driver ICs, we now anticipate headwinds related to seasonality and product transition in the near to mid-term.

We currently expect AMOLED revenue will decline as expected in Q4 during large part to seasonality with lingering impact in Q1 which historically is a soft period for MagnaChip.

The product transition, we’re dealing with terms from a timing mismatch between MagnaChip’s introduction of a new generation mobile AMOLED IC product and a drop-up in revenue from existing AMOLED IC products.

However, we currently anticipate AMOLED growth to resume in the second half of 2017 as we expect customers will begin volume production of our new 40-nanometer AMOLED product that we intend to sample by spring 2017.

We believe the window of opportunity for AMOLED will open wide for MagnaChip in the back half of 2017 as more companies begin to adapt AMOLED for new and high volume products.

We also like our position as the second largest and fully independent supplier of mobile AMOLED display driver ICs to the top two OLED panel makers, while we will experience a near-term slowdown in our mobile AMOLED IC business due to seasonality and product transition, our auto product lines are on a upswing.

Our Foundry business is in revenue growth mode that non-AMOLED business - Display business is picking up and the Power business shows signs of growth. While we expect total revenue will decline sequentially in Q4 due largely to seasonal factors. So year-over-year Q4 revenue comparison appears highly favorable.

In addition, we also are forecasting sequential gross margin improvement in Q4 as compared to Q3 due to a more favorable product mix and higher fab utilization.

And while there is always an element of uncertainty in any dynamic high-tech business, the strengths we are forecasting in certain portions of our business lead us to believe that we can anticipate higher revenue, higher total revenue in 2017 as compared to 2016.

I will come back to wrap up the call and provide Q4 guidance after Jonathan gives you more details of our financial performance in the third quarter.

Jonathan?.

Thank you, YJ, and good afternoon to everyone on the call. YJ spoke in some detail about the change in our revenue profile from Q2 to Q3 of this year. So I will focus on year-over-year comparisons and provide commentary on the underlying trends.

MagnaChip reported, on a GAAP basis, revenue of $192.3 million for the three months ended September 30, 2016, an increase of $37.9 million or 24.6% compared to $154.4 million for the comparable period a year ago.

The increase in year-over-year revenue was primarily due to an increase in demand related to AMOLED display products primarily from Smartphone makers in China. Revenue in Q3 from our Foundry Services Group segment was $73.9 million, an increase of $2.4 million or 3.3% compared to $71.5 million for the comparable period a year ago.

That increase stand primarily from an increase in revenue for certain power management IC products from new global IC foundry customers and an increase due to higher levels of demand for our foundry services from customers serving the high-end Smartphone and consumer markets.

These increases were partially offset by a net decrease in revenue of approximately $60 million primarily attributable to the closure of our 6-inch fab in the first quarter of 2016.

Revenue from our Standard Products Group segment was $118.3 million for Q3, a $35.6 million or 43% increase compared to $82.7 million for the comparable period a year ago. This growth was primarily due to a significant increase in revenue related to our Display Solutions business line.

Revenue from our Display Solutions business line was $84.7 million in Q3, an increase of $36.4 million or 75.3% from $48.3 million for the comparable period last year. This significant increase in revenue was primarily due to higher revenue of mobile, AMOLED display driver ICs and large display driver ICs for UHD TVs.

Revenue from our Power Solutions business line was $33.6 million for Q3, a $0.8 million drop or 2.3% decrease from $34.4 million for Q3 2015. The decrease in revenue was primarily due to a reduction of low margin MOSFET products as part of our product portfolio optimization process.

As YJ mentioned Power Solutions revenue for Q3 of this year was $33.6 million, up 11.3% quarter-over-quarter. Turning now to gross margin. Our gross margin fell below our prior guidance range of 21% to 24%. Total gross profit was $39.1 million in Q3, an increase of $4.4 million or 12.8% from the same period a year ago.

Gross margin dollars in Q3 were the highest in two years and contributed to cash flow. Gross profit as a percentage of revenue for Q3 2016 declined to 20.4% compared to 22.5% for Q3 2015 and 22% of revenue in Q2 2016. The decrease in gross profit in both periods was primarily due to an unfavorable product mix.

As YJ mentioned our strategy to fill our fabs to reduce unit costs and maximize cash flows has been successfully executed. Now that the fabs have reached higher level of utilization. Our management team is fully committed to implementing the next phase of our original plan to show improvement in gross margin.

We expect to accomplish this by being more selective about incoming business opportunities and by continuing to reduce costs across the Board. We now are taking steps to implement a comprehensive plan and take actions to improve gross margin and while our results may not always be linear we are moving in the right direction.

Total SG&A and R&D expenses in Q3 totaled $38.5 million or 20% of revenue compared to $44.1 million or 26% of revenue in Q2 and $42.6 million or 28% of revenue in the third quarter a year ago.

SG&A in Q2 2016 included a one-time extraordinary charge of approximately $5 million which was mainly comprised of termination benefits payable under a voluntary resignation program for employees who left the company. When an underutilized 6-inch fab was closed at the end of February.

As a general comment the overall reduction in operating expenses reflects the Company's ongoing commitment to reduce spending wherever possible without impacting the Company's competitive position. SG&A expenses were $20.1 million in Q3.

Magnachip had a net foreign currency gain in Q3 of $33.2 million compared to net foreign currency loss of $44.1 million for the comparable period a year ago. A substantial portion of our net foreign currency gain or loss is non-cash translation gain or loss associated with intercompany long-term loans.

Net income on a GAAP basis for the third quarter of 2016 totaled $29.9 million or $0.86 per basic share and $0.85 per diluted share as compared to net loss of $17.8 million or $0.51 per basic share for the second quarter of 2016 and a net loss of $57.1 million or $1.65 per basic share for the third quarter of 2015.

Net income in the third quarter of 2016 was attributable, primarily to a non-cash foreign exchange gain on the Company's intercompany loans.

Adjusted net loss in non-GAAP financial measure for the third quarter for 2016 totaled $1.3 million or $0.4 per basic share, compared to adjusted net loss of $1.9 million for the second quarter of 2016 or $0.05 per basic share and compared to adjusted net loss of $10.4 million or $0.30 per basic share in the third quarter of 2015.

Turning to the balance sheet. Cash, and cash equivalents totaled $75.4 million at the end of the third quarter, compared to $83.9 million at the end of the second quarter and was up from $68.5 million at the end of the third quarter a year-ago.

Inventory at the end of the third quarter was $72 million, compared with $70 million in Q2 and $58 million at the end of the same period last year. We continue to focus on managing working capital while also producing sufficient levels of inventories needed to support the growth of our business.

Accounts receivable was $66 million at the end of Q3 compared with $55 million in Q2 and $58 million for Q3 2015. We anticipate capital expenditures in 2016 will be approximately $15 million. Capital expenditures in Q3 were approximately $6 million and totaled $11.3 million for the first nine months of the year.

In summary, we moved in the right direction in Q3. With regard to revenue growth, fab utilization and cash management, but have substantial work ahead of us to improve gross margin. We are fully committed to show progress in this area. Now let me turn the call back to YJ for his closing comments and fourth quarter financial guidance.

YJ?.

Thank you, Jonathan. Let me summarize Q3 and put our outlook in perspective. Our Foundry Services is in the midst of a sustained recovery and the business is gaining momentum as our pipeline strengthened. Our fab utilization hit the high 80% range in Q3 and is expect to increase again in Q4.

The Power business stabilized earlier this year and now it’s showing signs of growth. At the same time, we continue to work to improve margins based on continued portfolio optimization. Our non-AMOLED display business is growing and will continue to show gains in Q4.

First of all, mobile AMOLED Driver IC we are confident that customers will be drawn to our 40-nanometer offerings because we expect that products will have the industry's smallest die-size, the lowest power and highest quality in their geometry.

To sum up, our strategy over the past 12 to 18 months has been to gain traction with global IC customers and strengthen our product portfolio. Fill our fabs, reduced unit costs, better manage cash flows and increase revenue. The next phase of our strategy is to improve gross margin and focus on profitability.

And we are fully committed to achieve these goals. We have already taken action to improve our product roadmap and product portfolio and we have a many levers yet to pull as we explore our options to reduce costs and improve margins. Our Q3 earnings release included a statement about the strategic review committee process.

The statement said in part “The SRC continue to evaluate strategic alternatives, but is not currently engaged in on active process of considering alternatives for the sale of the entire company. The SRC will consider any strategic opportunities that arise in the future.” The full statement can be found in our Q3 earnings release.

With that, let's turn now to our forward-looking guidance. For the fourth quarter of 2016, MagnaChip anticipates revenue to be in the range of $174 million to $180 million, a sequential decline of 6% to 10% reflecting at typical seasonal decline, but representing double-digit year-over-year growth.

Gross profit to be in the range of 22% to 24% of revenue, representing a sequential and year-over-year improvement. Now, I will turn the call back to Bruce.

Bruce?.

Thank you YJ. So Tyrone, this concludes our prepared remarks. We would now like to open the call for questions..

[Operator Instructions] We have a question from Suji De Silva of ROTH Capital. Your line is open. .

Hi YJ, hi Jonathan, how are you doing? So first question on the strategic review committee is that something that would exist on an ongoing basis, so would there be a point in time where that committee would be expanded.

Just wanted to understand how that dynamic works?.

So we’ve put out the statements given the fact that the SRC is continue to evaluate strategic alternatives, but it’s not currently engaged in looking at alternatives for the sale of the entire company. So to the extent that there are other significant changes about the SRC, we’ll make that announcement public..

Okay, great. That color helps. Now I think – I would like to clarify I think you said at 2017 you expect to be up revenue year-over-year versus 2016. I just want to make sure I heard that correctly.

Can you give us a sense of what kind of long-term growth rate you might be expecting perhaps by segment for the overall company?.

Yes. Suji, so we normally give one quarter guidance at a time, but we gave some high level qualitative guidance that the 2017 look like better year than 2016, but to focus on the short-term in Q4 all the business is very strong. The non-AMOLED will be growing, the foundry looks strong and the power looks strong.

And then what we said the AMOLED may have some slowdown in Q4 and linger into Q1 due to seasonality, but we expect the AMOLED to pick up in the second half of 2017 with our new 40-nanometer offerings which we expect to be very competitive in the market and we expect in many new customers and the end customers will be adapting AMOLED next year..

Okay, great. And then on the foundry side, what's the competitive dynamic that's allowing you to gain – win customers and gain share. If you can give us some insight there that will be helpful..

So we focused on the – growing the foundry business on the BCD process where it’s targeted for the power and communications sectors. We focus on getting into growing application of the fingerprint in IoT. If you look at all these three new growth opportunities really well aligned with our fab geometry and capability.

So we feel confident that those three key types of new application will keep our fab very busy for the next foreseeable 5 to 10 years and very well aligned with the geometry..

Okay.

And then on the AMOLED product, can you elaborate on the transition that's making the near-term growth challenging if I understand for the dynamic was there?.

Yes. Suji, if you look at our AMOLED growth this year, I mean it was spectacular. So I mean in the first half of this year, we shipped more than entire last year and in the Q3, we shipped nearly fourfold of the Q2 of last year. So that growth rate that cannot be kept out and we already told you last call that that kind of growth is not sustainable.

And if you look at our big picture, the AMOLED smartphone panel growth shipment is expected to be about 24% CAGR over next five years and this year supposedly between 40% to 50%. So we really blew that away this year. We had a phenomenal couple product that really exceeded our expectation. So that kind of growth level is not sustainable.

But what we are confident is that the over a long run that Company is capable of delivering and meeting and meet or exceeding that industry CAGR of 24% over five years..

Okay. And then last question here on the gross margin. You had a lower result this quarter. You're guiding it up again.

Should we expect the range of it as we go through the next several quarters to be fluctuating in the kind of performance we saw here 20% to the mid-20s or is there a secular kind of improvement that should take the low end out as we look ahead?.

So we guided our gross margin to be 22% to 24% for the next quarter which is an improvement from this quarter and as to the gross margin this quarter was impacted by our product mix and this was a result of us being opportunistic about certain logos margin product demand.

And by bringing that business in although it impacted our product mix, it allowed us to have a positive impact to our cash flows. And so when you look at our gross profit dollars $39.1 million which is the highest in the last two years and so that had a positive impact to our cash flow.

So this is a continuous process and although our results in the past may not be linear as we execute our plan both on the revenue and the cost side we're confident that our gross margin will improve over time..

And to add that because we achieved very high utilization rate that's going to also help us in the next quarter, because many of the parts sold in Q4 will have a better margin due to higher utilization. We are laser focused on improving the gross margin that is now the top one priority.

This is our second phase of turning the company around with the profitability..

Great to hear. Nice progress here. Thanks guys. End of Q&A.

Thank you. This ends the Q&A portion of today’s conference. I’d like to turn the call over to management for any closing remarks..

Thank you, Tyrone. So this concludes our third quarter earnings conference call. Please look for details of our future events on MagnaChip's investor relations website and thank you for joining us today..

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day..