Thank you for standing by and welcome to the Magnachip Semiconductor Corporation's Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today’s program is being recorded.

And now I'd like to introduce to your speaker today, Yujia Zhai, Managing Director of the Blueshirt Group. Please go ahead sir..

Thanks operator. Hello, everyone. Thank you for joining us to discuss Magnachip’s financial results for the third quarter ended September 30, 2023. The third quarter earnings release that was issued today after the market close 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 is YJ Kim, Magnachip’s Chief Executive Officer; Shinyoung Park, our Chief Financial Officer.

YJ will discuss the company’s recent operating performance and business overview, and Shinyoung will review the financial results for the quarter and provide guidance for the fourth quarter of 2023. There will be a Q&A session following the prepared remarks.

During the course of this earnings 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 statement found in our SEC filings. During the call, we also will discuss 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 measure can be found in our second quarter earnings release in the investor relations section of our website. And with that, I will now turn the call over to YJ Kim.

YJ?.

Q3 revenue was $45.2 million, down 19.9% year-over-year and up 8.4% sequentially. Sequentially, our Power business benefited from a higher mix of premium tier products and strong demand in Consumer, Computing, and Communication markets, such as TVs, notebooks, and smartphones.

However, industrial markets, which had been an area of strength for us over the past several quarters, slowed by double-digit percentages in Q3 as our customers reduced orders to better manage their inventories. Operationally, we continued our strong momentum of design activities, particularly in Automotive Power products.

In Q3, we secured two new design-wins and three design-ins with two of the top five automakers in the world and we expect revenue contribution over the coming quarters. We also continue to innovate.

In September, we announced two new IGBTs for the EV market that provide best-in-class efficiency and Heat Dissipation featuring advanced field stop technology. In October, we unveiled our 8th generation 150V Medium Voltage MOSFETs. Finally, Power products ASPs continued to remain stable, increasing 11.3% YoY but down slightly by 5% sequentially.

In summary, in our Power business, our product portfolio is getting stronger as we continue to focus on rolling out next-generation power products to maintain our momentum of design-ins and wins.

Looking ahead, amid heightened global geopolitical and macroeconomic uncertainty, we expect demand to remain weak driven by normal Q4 seasonality and inventory correction in industrial end markets. In our Display business, we're very optimistic about the long-term growth of our OLED business.

We continue to collaborate closely with our new global panel customer and we are excited about the new products and new Asia-based panel customer partnerships. These new products offer compelling competitive advantages and are strategically aimed at tapping into the rapidly expanding OLED market in the Asia region.

Finally, a few comments on our previously announced plan to separate our Display and Power businesses into separate legal entities. As we announced previously, our internal separation of the Display and Power businesses will be effectuated by establishing a separate operating company under Magnachip Semiconductor, Ltd.

MSK, the company’s primary operating subsidiary. In September, we established a limited liability company registered in South Korea, named Magnachip Mixed-Signal, Ltd., MMS.

The separation will include the contribution of assets and liabilities of the display business and the power IC business to MMS, transfer of directly associated resources such as sales, marketing and R&D, as well as allocation of shared expenses of certain corporate functions including HR, Finance, Legal and IT.

This internal separation is expected to be completed and go effect on January 1st, 2024. Thank you to our shareholders for your patience, and we appreciate your support as we work towards our goals. I will now turn the call over to Shinyoung to review the financials in detail..

Thank you YJ, and welcome to everyone on the call. Let’s start with key financial metrics for Q3. Total revenue in Q3 was $61.2 million, up 0.4% sequentially and down 14% year-over-year. Revenue from the standard products business was $51.6 million and revenue from Transitional Foundry Services was $9.6 million.

Within standard products, Display business revenue was $6.4 million and Power business revenue was $45.2 million. Gross margin in Q3 was 23.6%, up from 22.2% in Q2 mainly, driven by higher fab utilization.

Compared to the same period last year, gross margin decreased 60 basis points from 24.2% primarily as a result of unfavorable product mix and higher fab costs. As a reminder, our Transitional Foundry Services contract with Key Foundry expired at the end of August and we are planning to wind down these foundry services over the next several quarters.

Transitional Foundry Services accounts for approximately 30% of our Gumi capacity. We anticipate to begin the process of converting portions of the idle capacity to Power Standard products around the middle of 2024.

Until such wind down is completed, we will continue to provide these foundry services to Key Foundry based on mutually agreed pricing terms. Turning now to operating expenses. Q3 combined R&D and SG&A was $23.7 million. This compares to R&D and SG&A of $23.4 million in Q2 2023 and $24.7 million in Q3 last year.

Stock compensation charges included in operating expenses were $2.1 million in Q3 compared to $2 million in Q2 and $0.8 million in Q3 last year. Q3 operating loss was $9.2 million. This compares to an operating loss of $10.7 million in Q2 and operating loss of $10 million in Q3 2022.

On a non-GAAP basis, Q3 adjusted operating loss was $7.1 million compared to adjusted operating loss of $7.8 million in Q2 and $6.6 million in Q3 last year. Q3 adjusted EBITDA was negative $2.7 million. This compares to a negative $3.6 million in Q2 and negative $3 million in Q3 last year.

Net loss in Q3 was $5.2 million as compared with a net loss of $3.9 million in Q2 and a net loss of $17.2 million in Q3 last year. Our GAAP diluted loss per share in Q3 was $0.13 as compared with diluted loss per share of $0.09 in Q2 and $0.38 in Q3 last year. Our non-GAAP diluted loss per share in Q3 was $0.04.

This compares with diluted loss per share of $0.06 in Q2 and an earnings per share of $0.02 in Q3 last year. Our weighted average diluted shares outstanding for the quarter were 40.1 million shares. In Q3, under our new stock buyback program of $50 million, we repurchased approximately 0.7 million shares or $5.4 million. Moving to the balance sheet.

We ended the quarter with no debt and cash of $166.6 million, down from $173 million at the end of Q2 2023. The primary cash outflows during the quarter were approximately $5.4 million of stock buybacks and $0.8 million in capital expenditures.

Net accounts receivable at the end of the quarter totaled $41.1 million, which represents an increase of 17.5% from Q2 2023. Our days sales outstanding for Q3 was 62 days and compares to 52 days in Q2.

The increase in accounts receivable and days sales outstanding was attributable to the timing of payments from certain customers as the quarter end fell on a holiday in Korea, and the vast majority of related payments were collected in early October. Inventories, net at the end of the quarter totaled $30.8 million.

This compares to $32.3 million in Q2 2023. Our average days in inventory for Q3 was 61 days and compares to 62 days in Q2. Lastly, Q3 CapEx was $0.8 million. We continue to expect our CapEx in 2023 to be approximately $7 million as we previously forecast on our Q2 earnings call. This is nearly 70% lower from the 2022 level.

Now, moving to our fourth quarter guidance. Amid heightened global geopolitical and macroeconomic uncertainty, we expect Power demand to soften in Q4, driven by normal weaker Q4 seasonality and inventory correction in industrial end markets.

While actual results may vary, for Q4, Magnachip currently expects; revenue to be in the range of $50 million to $55 million, including approximately $8 million of Transitional Fab 3 Foundry Services. Gross profit margin to be in the range of 22.5% to 24.5%. Thank you and now I will turn the call back over to Yujia.

Yujia?.

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

Certainly. [Operator Instructions] Our first question comes from the line of Suji Desilva from ROTH Capital Markets. Your question please..

Hi, YJ. Hi, Shinyoung.

So, the second and third chips for the lead Asia customer in the display market, are the smartphone designs that are downstream from them? Are those secured already or still being competed for? I know you talked about volume ramp timing, but curious whether that customer has already won smartphone designs to understand that where we are in that process?.

Suji, thank you for the question. So, on those two smartphones, first of all, those two smartphones are for the premium smartphones. On the second chip, it's -- for the Chinese, flagship phone, and we are going through the final qualification. We are the two two finalists for the phone, and we will be the second source.

So, the volume will be determined after the qualification is done. On the second chip, it's for a global smartphone maker. They typically sell around 10 million a year, but they do have several models. And at this time, we are the considered vendor for one of the model, and we are for the low end model and caries volume.

And that is expected to launch in the Q2 next year. The first chip is expected to a launch end of the this year, the Chinese flagship..

Okay. That's very helpful, YJ.

And then the second China panel customer who's coming on after this first one, are there -- should we think of that one as coming to market faster than the first one? Are there I guess, any more broader learnings in the China market that you've been able to benefit from as you bring incremental panel customers over up over there?.

No, I think the first three chip will come to revenue first, the fourth chip will come, probably towards second half of next year..

Okay. And on the gross margin side, I know the revenue is kind of below trend here and that's dampening the gross margin.

But what are the drivers and timing of gross margin recovery? Is it simply utilization or are there factors? Is the wind down of the Fab 3 service contract? Is that part of what gets margin back up? Any color on the trajectory, of course, margin from here would be helpful..

I mean the gross margin itself, as you explained -- I mean, that's combination of the factory, manufacturing cost, production cost, utilization rate, and product mix in the next year. So, it will all going to impact our gross margin going forward.

But the -- I mean, YJ can add to this one, but, I mean, the power we explained that we have a record levels of the design-ins and wins. And although the revenue was, I mean, not the level, but the ASP trend has been strong. And we have been increasing the mix of the premium product.

So, with all of those, we're going to, kind of, help offset some of the impact that we will have from the winding down the boundary transitional the services..

Okay. My next question is on the, the Fab 3 wind down in mid-2024.

Can you remind us the incremental revenue opportunity, I guess, would be for power? As you free up that capacity for a non-service business?.

I mean, really depending on the mix, right? Because when we got the bulk of the power product from key foundry that depending on, like, 20%, 25%. And we also explained that about 30% of our Gumi capacity was for the foundry services.

So, I mean, it will be depending on the demand and the mix, but we'll have to kind of take a recommend for the foundry services and put it back or another equipment for the power. So, I mean, the 2024 is going to be some transition period because we are going to start the process in the middle of 2024..

I see.

And then lastly, YJ, on the separation plan for the end of the year, can you just remind us what the benefits you expect are for investors as we get closer to that so we can kind of prepare for that separation and look for some what the -- what that triggers for you guys?.

Yes. So, it provides a many advantages. A, you get to focus; two, really focus on the P&L; and three, transparency; as well as four, there are more freedom for independent investments and the strategic opportunities..

Okay. Terrific. Thanks. YJ thanks..

Thank you..

Thank you. [Operator Instructions] And our next question comes from the line of Quinn Bolton from Needham & Company. Your question please..

Hey guys, this is Nick on for Quinn. You gave some color on the power and foundry business for next quarter.

Can you give color on Display? Will it be flat quarter-over-quarter? And maybe discuss the drivers near term of that business?.

Yes. I think, the business on the Display, it'd be flattish, but as Shinyoung explained, there are some weakness in the industrial end market on the power. So, that's the most revenue down driver. And that's the, similar trend we are seeing from our peers. We know this TiO on semi called out the weakness in industrial end.

And we already said today that we had double-digit percent decline in industrial. The industrial was, one of the key strengths that we saw this year. So, I guess this is happening right now on the industrial weakness in the market..

That makes sense. Yes, we've heard that from a number of other companies.

Can you talk about the automotive contribution that you've seen in the quarter? I think we were talking, maybe a 1 million, 2 million in 2024, just wondering if we're -- for 2023 -- calendar 2023, just wondering if we're on track for that or coming in a little soft?.

Yes. So, we did not have automotive until, like, last year where we shipped there about 600,000, 700,000. And this year, we expect to finish a couple of million dollars. So, we are on track. So, we are accelerating design wins on the automotive, but you saw we had a two design win and three design-in this quarter.

So, we look forward to get more design wins. And also the automotive section on the EVs, we see a big opportunity also in China. China has the EV that ranges from $25,000 to $50,000, that's the sweet spot, and then they're introducing $100,000. So, I think the -- that's why they're doing 3 million unit of EV alone.

So, that -- those are the new things we see and to be competitive in the low end EV market, I think IGBT is a key. And that's one of our strengths as well..

Thanks. Can we actually send another second down, the China EVs? May be too early for you to get a really good pulse, but we've heard mixed data points as far as demand evaporating and but then we just heard from Allego [ph] this morning that the demand's actually really strong.

Are you seeing anything specific as far as near-term demand in China?.

On the automotive EV, I believe China is strong. I think the -- what we are hearing, the EVs in the non-China market is slowing down. So, I think that's because of the EV price in China is much competitive. Rest of the word, the EV price are very high. I think that's what it is. And I just said, the IGBT is a key solution for more, affordable EVs..

Yes. That makes a lot of sense. Thanks for that. And then last one for me, the Fab 3 wind down, is there incremental CapEx required to transition those tools to your power products? And how should we think about CapEx in in 2024? Thanks..

We haven't guided for the 2024 CapEx, but in terms of the wind down process and conversion process, at this point, we do not really expect any material CapEx to be spent. So, probably couple million, but not a lot..

And I think we mentioned before that if we increase the capacity by 40%, the CapEx is only $20 million to $25 million. So, it's not a big thing..

Does that answer your questions?.

Yes. Thank you..

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Yujia Zhai..

Thanks everyone. This concludes our Q3 earnings conference call. Please look for details of our future events on Magnachip's Investor Relations website and thank you and take care..

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day..