Good day ladies and gentlemen and welcome to MagnaChip Semiconductor Corps First Quarter 2019 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 will be given at that time. [Operator Instructions] As a reminder, today's conference is being recorded.

I would now like to turn the call over to Mr. Bruce Entin, Head of Investor Relations. Sir you may begin..

Thank you and thank you for joining us to discuss MagnaChip's financial results for the first quarter ended March 31, 2019. The first quarter earnings release that we filed today after the stock market closed and other releases can be found on the company's Investor Relations Web site.

The telephone replay of today's call will be available shortly after the completion of the call and the webcast will be archived on the Web site 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 our Chief Financial Officer.

YJ will discuss the company's recent operating performance and market outlook for our product categories. And Jonathan will provide an overview of Q1 results and provide financial guidance for Q2 2019. 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 our 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 earnings release available on our Web site under the Investor Relations tab at www.magnachip.com. I will now turn the call over to YJ Kim.

YJ?.

Welcome to everyone on the Q1 conference call. Revenue of $157.4 million in Q1 was down 5% from a year ago, but exceeded our guidance of $152 million to $155 million due to stronger customer demand for products from our standard products group.

OLED DDICs and power scanner products both set all time revenue records for the first quarter of a year despite soft seasonal trends and a weak China's smartphone market. OLED DDIC revenue of $48.5 million increased 41.5% year-over-year and power standard product revenue of $42 million increased nearly 9%.

Foundry revenue of $57.1 million declined 26% from Q1 a year ago, which was a disappointing, but was in line with guidance we provided. We pointed out on the Q4 earnings call in February that the foundry business will be under severe pressure in Q1 and would remain weak for the first half of 2019.

That scenario is playing out as forecasted, but notably the foundry business is stabilizing around these levels and current market signals point to a gradual improvement in the second half of the year.

The downdraft in foundry in Q1 was primarily due to inventory correction by customers stemming from softening global market conditions and macro economy uncertainties. General uncertainty about China, fears of a trade war and typical seasonality also contributed to the weakness.

We also decided to be more selective about taking new foundry business in Q1 as a result of the strategic evaluation process of the foundry business and Fab 4 that was undertaken in February by the company.

While the foundry business will remain weak in Q2, customer inventories are slowly being worked down, the China market appears to have leveled off and several new products from foundry customers are in early stage production. For now at least it seems the worse of the foundry downturn is behind us.

Before we leave the topic of the foundry, let me address the strategic evaluation process involving our foundry business and Fab 4. As a reminder Fab 4 is the larger of our [indiscernible] and accounts for approximately 73% of the company's total wafer capacity. Fab 4 primarily serves the wafer needs of our foundry customers.

We first announced the strategic evaluation process in our Q4 2018 earnings release. We have since named JPMorgan as our financial advisor and Paul Weiss as our legal advisor. Both are highly regarded global firms with broad experience and successful track records.

We undertook the strategic evaluation process because we believe it's in the best interests of shareholders, customers and employees and we intend to be mindful of the best interests of all of our stakeholders as we work our way through this process.

We intend to provide updates to the market in a timely manner when meaningful milestones are achieved. So please stay tuned. Now turning to the takeaways in the Standard Products Group. Q1 revenue in Standard Products Group or SPG was $100.3 million up 13.5% from the first quarter of 2018. Display represented 58% of SPG and power represented 42%.

OLED DDICs represented 83% of the display segment as compared to about 69% in Q1 or a year ago, which demonstrates both the growth in our OLED business as well as our success in strategically reducing their contribution of lower margin and legacy LCD drivers.

We were awarded the 6 OLED design wins in Q1 from leading smartphone makers in China and also started volume production of OLED display drivers for mid-range smartphones from a major Korean brand. Eight new OLED smartphones using our OLED DDICs launched in Q1.

We also launched the industry's most power efficient 28-nanometer OLED display driver, which is manufactured with the industry's most advanced process technology used for DDICs.

Our 28-nanometer OLED device is 20% smaller, 20% more power efficient as compared to the previous 40-nanometer generation and is expected to improve call quality by reducing EMI or electromagnetic interference levels by 20%.

The 28-nanometer driver supports various display types such as rigid, flexible, foldable and virtual reality and augmented reality applications and maximizes design flexibility for the latest full screen displays such as bezel-less and hole-type displays.

We already won two design ins at leading smartphone manufacturers in Asia with our 28-nanometer DDIC. With revenue expect to begin in the second half of this year.

We now have nine advanced OLED display drive by seizing our portfolio and have accumulated 47 OLED design wins from smartphone makers in China and Korea with 39 models currently in production.

Looking ahead, we believe 5G network deployments will accelerate applications such as VR and AR, where users will need a 120 hertz OLED display and we are well aligned with this technology. If 5G spurs a smartphone upgrade cycle as many analysts expect then this has the potential to be a net positive for MagnaChip.

Turning now to the television market. We've been a supplier of display components into the LCD TV market for several years. But we now are extending our reach into the fast growing OLED TV market.

In Q1, we kicked off a project to develop a major new OLED DDIC for ultra high definition TV displays for a major OLED panel maker in Korea with initial production scheduled for the tail-end of 2019. We are also working on developing a micro LCD driver for very large next generation TVs.

Micro LED TV's offer the potential for high luminescence, fast response time, excellent contrast ratio and long product lifetimes.

Lastly, during Q1, we also form an OLED ecosystem initiative to optimize the functionality of OLED display platform solutions in a wide range of products with the goal to improve our competitive position in the marketplace. ELAN microelectronics, HiDeep and Melfas are the first three partners, we've announced.

Each will collaborate with MagnaChip to develop and standardize innovative human interface solutions based upon smart touch, stylus and fingerprint technologies. We also intend to extend the collaboration beyond smartphone and mobile devices into new applications including IoT and automotive.

We believe automotive infotainment, side mirrors and console applications are ideal for OLED DDICs, but electric vehicles will also be an especially attractive market for our power standard products because electric motors consume huge numbers of high voltage power products. Speaking of the power segment, let's turn to a review of that business.

Revenue from premium power products increased nearly 46% in Q1 from Q1 a year ago and accounted for nearly 55% of power standard product revenue as compared with 40% in the first quarter of 2018. Our battery fab power standard product helps protect lithium ion batteries in smartphones.

We are working on nearly a dozen different battery-related projects for smartphone makers in Korea and China. We have the number one market share for the battery fab at a leading Korean smartphone maker.

We also continue to make inroads in the automotive sector as we won two new designs and started a shipment of one-high voltage power standard products to a major auto manufacturer that development came on the heels of being awarded five power discrete design wins in Q4 2018 for automotive applications that we expect to go through full qualification in 2019.

We expect to begin production on these devices in 2020. We continue to believe that automotive sector will account for approximately 5% of our power discrete revenue in 2021 and 10% in 2022 due mainly to the sharp growth expected in the electric vehicle market. Now I'd like to share our current business outlook for Q2 and the full year.

We currently expect robust revenue growth in Q2 fueled by strong customer demand for our standard products particularly OLED DDICs for smartphones in China and Korea. OLED DDIC revenue is expected to grow about 30% sequentially. Revenue from power standard product is anticipated to increase by double digits from Q1.

Foundry revenue is expected to be flattish sequentially in Q2, but a gradual improvement in the second half of the year now seems possible. Turning now to our view of the full year.

On our Q4 earnings call in February, we said we are cautiously optimistic that revenue likely will decline by no more than mid-single digit percentage points in 2019 as compared with 2018, despite current weakness in foundry.

While that distribution of revenue by quarter may vary this year for each of our three business units, we continue to remain cautiously optimistic for 2019. Now, I'll turn the call over to Jonathan and come back for the Q&A.

Jonathan?.

Thank you YJ and welcome to everyone on the call. Let's do a brief recap of revenue by business segment and then discuss profitability metrics. Revenue of $157.4 million in Q1 declined 5.1% from $165.8 million in the same period a year ago due to a decline in foundry revenue offset in part by an increase in revenue from Standard Products.

Foundry revenue of $57.1 million declined 26.3% from $77.4 million in Q1 a year ago due primarily to inventory correction by customers stemming from softening global market conditions and macroeconomic uncertainties.

As mentioned previously, we also were more selective about new business as a result of the strategic evaluation of the foundry business and Fab 4. Revenue in the Standard Products Group was $100.3 million up 13.5% from $88.4 million in Q1 a year ago.

This increase was primarily due to an increase in revenue related to our mobile OLED display driver ICs due to the introduction of new OLEDs smartphones by Chinese and Korean manufacturers and higher demand for premium power products such as high-end MOSFETs and IGBTs primarily for TV and industrial applications.

This increase was offset in part by a strategic reduction of our lower margin LCD business. The LCD business totaled $9.7 million in Q1, a decline of 37% from Q1 a year ago and down 42.9% from Q4 2018. Turning now to profitability metrics. Total gross profit in Q1 was $22.7 million down 49.1% from $44.6 million in Q1 a year ago.

Gross margin was 14.4% in Q1 compared to gross margin of 26.9% in Q1 a year ago. Gross margin in Q1 was within the guidance range of 14% to 16%. A significant drop in fab utilization affected gross margin for both the foundry services group and Standard Products Group.

Total fab utilization for the company was mid to high 60% in Q1 as compared to mid to high 80% range in Q1 a year ago. We believe fab utilization will show modest improvement in Q2 with gradual improvement expected in the second half of the year.

Notably raw wafer costs stabilized in Q1 and we expect those costs to trend flat to down during 2019 following negotiations with our wafer vendors. Gross profit margin in the foundry services group was 6.4% compared to 26.7% for Q1 2018 due to factors described elsewhere on this call.

Gross profit margin in our Standard Products Group was 19% compared to 27.2% in Q1 2018. The gross profit in the Standard Products Group was impacted by an inventory reserve of $3.3 million related to a legacy display product.

In addition, lower fab utilization related in part to a strategic reduction in revenue of our lower margin LCD business also was a contributing factor. Turning now to operating expenses in Q1. SG&A was $18.1 million or 11.5% of revenue as compared to $17.6 million or 10.6% in Q1 2018.

SG&A was flattish year-over-year on a normalized basis excluding a one-time payment to settle a claim with a prior customer. R&D was $20 million or $12.7% of revenue about flat as compared to $19.6 million or 11.8% in Q1 a year ago. The increase was related to OLED development activities.

Both SG&A and R&D in 2019 are expected to be lower than in 2018 as we continue to focus on cost control. Turning now to the balance sheet, cash was $105.8 million at the end of Q1 2019 as compared to $132.4 million in Q4 2018 due primarily to a decline in gross profit dollars caused mainly by a significant drop in fab utilization.

We anticipate our cash balance will increase in Q2 due primarily to an anticipated increase in gross profit dollars. Accounts receivable totaled $92.1 million an increase of 15.1% from $80 million in Q4 2018.

Over 70% of the increase was attributable to the timing of payments from certain customers as the quarter end fell on a weekend and the related payments were collected during the first week of Q2.

Inventories totaled $80.8 million up 12.8% from $71.6 million in Q4 2018 due primarily to meet an anticipated increase in customer demand for OLED and power standard products. CapEx was $11.2 million in Q1 as compared to $7.3 million in Q1 2018.

We provide CapEx on a cash basis and a significant portion of capital requirement was deployed in Q4 2018 but paid for in Q1 2019. CapEx on a normalized basis for 2019 will be lower than the normalized CapEx expenditures made in 2018, which was approximately $29 million. With that, here's our guidance for Q2.

For the second quarter of 2019, MagnaChip anticipates revenue to be in the range of $173 million to $181 million up 12.5% as the midpoint of the projected range when compared with revenue of $157.4 million in the first quarter of 2019 and down 11.4% year-on-year when compared to the $199.7 million revenue recorded in the second quarter of 2018.

Revenue guidance for the second quarter reflects an expectation that standard product revenue will show double-digit sequential improvement and foundry revenue will be flattish as compared with Q1 2019. Gross profit margin to be in the range of 16% to 18% as compared to 14.4% in the first quarter of 2019 and 27% in the second quarter of 2018.

Gross margin guidance reflects the expectation that fab utilization in the foundry business has stabilized. With that, I'll turn the call back to Bruce.

Bruce?.

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

Yes sir. [Operator Instructions] Our first question comes from the line of Suji Desilva from ROTH Capital. You may begin..

Hi, YJ. Hi, Jon. Congratulations on the recovery. You guys are targeting here and stabilization for foundry.

So on the OLED side, you have a bunch of things going on here but I'm curious how the pipeline for 28-nanometer wins are shaping up and how that looks versus the current sort of win profile, will that expand your footprint and share or will it sustain the position you have and move it forward?.

Hi, Suji. Thank you. So as you mentioned today, we have up to two OLED 28-nanometer design wins so far. One we did in Q1, another one just came in April. So, we continue to have progress and design wins. As you know we just sample that device a few months ago or a month ago. We expect the production to begin in second half of this year.

And I think with that we'll see -- hope to see more design wins.

What's critical about this 28-nanometer is what we said before this is most power efficient, our design has the lowest power in the industry, also it reduce the EMI by 20% which improves the quality and 28-nanometer is what you need to do ultra high definition on the smartphone and big application like AR, VR to foldable and things like that.

So we are excited that we see a good platform that we have that's going to generate new design win going forward..

Okay. And then, on your existing OLED driver position.

Do you find that, how's the China smartphone inventory situation at this point after a few months of working down and is that impacting you, are you exposed to some of the new program that the newer phones that are seeing sort of initial ramps?.

So obviously if you look at our Q1, we actually had a stronger than expected OLED sales. So what that translates to is that there are new smartphones, new models being launched. Then we said we had launched about eight or nine phones in Q1.

So the momentum is there for still new phones and the 40-nanometer provides very good price point on the rigid platform. So I think we have that kind of a phenomenon..

Okay.

And then, on the [nano-LED] [ph] path that you've taken some action with the display business, is that current level just under 10 million, is that a sustainable level from here forward or is there another step down in that amount comprehended in your guidance?.

For now, I think it's safe to or not safe -- I think it's good to assume that is around 10 million level for this year..

Okay. And then one question on the foundry side, the utilization you gave us for the quarter what's given all the actions you're taking in this activity, you're experiencing the customers.

What's the steady state utilization target that we can now think about versus what you might be under typical operating conditions or is that similar?.

I think -- I don't think we can say exact number, but as we remarked said today that we see a gradual improvement throughout second half. So we hope to keep increasing the utilization..

Okay. Fair enough. All right. Thanks guys..

Thank you..

Thank you. And our next question comes from the line of Ari Shusterman. One moment..

Hey, YJ. Hey, Jonathan. Congrats on the good quarter. So, one just -- going to your foundry business, since you guys have stabilized this for -- I guess the most part.

Do you think you are less likely to sell it as part of your strategic evaluation? And also there has recently been a rumor that SK Hynix is considering buying this business or considering bidding for it.

Can you comment on that as well? Do you have any information?.

Well, I think there's a couple of questions there. But look internally we continue to review our business and operation team improve our financial performance and the operational efficiencies and maximize shareholder value and this is why we are doing these strategic evaluation of foundry business.

And I'm sure you understand I can't really comment on the speculation rumors, but our specialty 8-inch fab is a strategic asset and you'd expect that it tends to generate a fair amount of interest..

Okay. Yes. Thank you. And just transitioning over to China smartphone market. Do you guys see any sort of stabilization on that in the second half of 2019? Any update in the past few months in terms of orders and unit or anything like that? Thank you..

Could I understand your question? Are you saying second half, what's the outlook for the smartphone in China?.

Correct..

Okay. Well, obviously we guide one quarter at a time as you know. And what we did say is that Q2, we are looking OLED DDIC to grow by 30%. We also said on overall year we feel good about revenue growing on the Standard Products Group and the OLED. So I will give more color when we go to the next earnings call on the second half..

Okay. Thank you..

Thank you..

Thank you. [Operator Instructions] Our next question comes from the line of Atif Malik from Citi. You may begin..

Hi. Thanks for taking my questions and good job in a tough environment. YJ I have a question on the OLED smartphone market. There is some kind of speculation that the Chinese handset maker in particular one of them could be buying components in light of the U.S.-China tariff situation.

Are you seeing any of that in your business that there is a pull forward of some component demand for some handset makers in China..

Atif, thank you. That's a very interesting question. I also heard from that kind of comments in the industry as well. But you know who knows, but from what we concern was I mean we have a new design wins continue to grow with multiple Chinese vendor.

And as we said, we have about six new designs in China smartphone maker, so far as I think these revenue growth comes in with number of design wins as well as success. But I think the Huawei has been growing and strong. So, but beyond that I cannot speculate..

Understood. And then, and Jonathan a question on the gross margins. I'm not asking for an outlook for the second half of the year, but just directionally it's good to see that the wafer pricing started to come down now as you pointed out.

How should we think about the different moving parts in your gross margins for the second half of the year? The mix between display, power standards, foundries utilization improving and in the cost of wafers coming down..

Atif, thank you for that question. As we discussed Q1 and first half of the year really are going to be impacted by the decline in utilization and primarily related to the foundry business. And we've also mentioned that we see that business stabilizing.

And so as we are recovering in the second half, we should see an improvement in gross margin as well. And we -- as the utilization improves, the fixed cost allocation to the products will also be decreased. And so, therefore, the impact of gross margin will be trending up.

So, directionally, our gross margin will continue to increase in the second half..

Thank you..

Thank you. And I'm showing no further questions at this time. I'd like to turn the call back to Mr. Bruce Entin for closing remarks..

Okay. Thank you, Victor. So this concludes our first quarter 2019 earnings conference call. Please look for details of our future events on MagnaChip's Investor Relations Web site. Thank you for joining us today..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. And you may all disconnect. Everyone have a great day..