Good day, and thank you for standing by. Welcome to the First Quarter 2024 Magnachip Semiconductor Corporation Earnings Conference Call. [Operator Instructions] Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Steven Pelayo. Please go ahead. .

Thank you. Hello, everyone. Thank you for joining us to discuss Magnachip's financial results for the first quarter ended March 31, 2024. The first quarter earnings release that was issued today after the market closed can be found on the company's Investor Relations website.

The webcast replay of today's call will be archived on our website shortly afterwards. Joining me today are YJ Kim, Magnachip's Chief Executive Officer; and Shin Young Park, our Chief Financial Officer.

YJ 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 second quarter. There will be a Q&A session following the prepared remarks..

During the course of this conference call, we may make forward-looking statements about 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.

Such statements are based upon the information available to the company as of the date hereof and are subject to change for future developments. Except as required by law, the company does not undertake any obligation to update these statements..

During the call, we also will discuss non-GAAP financial measures. The non-GAAP measures are not prepared in accordance with generally accepted accounting principles but are intended as supplemental measures of Magnachip'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 first quarter earnings release in the Investor Relations section of our website..

With that, I'll now turn the call over to YJ Kim.

YJ?.

Hello, everyone, and thank you for joining us today, and welcome to Magnachip's Q1 earnings call. Our overall Q1 results were in line with our guidance. Q1 revenue was $49.1 million, down 13.9% year-over-year and down 3.5% sequentially.

Consolidated gross profit margin was 18.3%, down 2.9 percentage points year-over-year and 4.4 percentage points sequentially, mostly due to the wind down of the transitional foundry services..

Excluding transitional foundry services, revenue in our standard product business, which is comprised of MSS and PAS businesses, was up 10.6% sequentially, while gross margin was 21.2%, down 1.7 percentage points sequentially.

The decline in gross margin was mostly due to lower Gumi fab utilization, driven by the wind-down of the Transitional Foundry Services, which also impacts PAS margins because they share the fab..

Despite typical Chinese New Year seasonality, the solid sequential revenue growth of our standard product business in Q1 suggests overall market conditions are improving with the inventory correction possibly nearing an end for some verticals. In particular, we saw improvement in the inventory channel for our PAS business.

We also saw better-than-expected demand from our design for the after-service OLED display market, and we benefit from increased demand in our automotive display business. The PAS business strength was primarily from smartphones, e-motors, consumer appliances and server power applications..

Now let me provide more detailed comments for each of our standard product business lines, beginning with MSS. Q1 revenue was in line with our guidance at $9.0 million, down 29.7% year-over-year and up 5.2% sequentially. As we mentioned before, the quarter-over-quarter revenue growth was due to increased demand from automotive LCD and OLED products.

Overall, we continue to collaborate with several OLED panel makers and smartphone OEMs targeting the China market. While third-party market researcher Omdia predicts only slight growth in the global smartphone market in 2024, the top 5 China brands are forecast to enjoy more than 18% growth in OLED smartphone shipments..

As a reminder, we have DDIC designs and customer engagements underway that span the entire smartphone market spectrum from the mass market tier to the premium tier segments as well as other display markets such as automotive. We had an additional 2 new OLED design this quarter that we'll discuss more in detail later..

More specifically, during the quarter, our display IC business had a new design-in of a high-end OLED smartphone for a top-tier Chinese smartphone vendor. This design-in is based on our QHD+ OLED DDIC that we sampled in Q1 2024. This chip provides the latest 8 transistor LTPO panel feature support and is produced in 28-nanometer.

We expect this design to go into production by the end of the year..

We also started the initial ramp in Q1 for our first-generation OLED DDIC chip for China that we taped out in 2022 for the after-service market. We are now working to expand this segment with other China panel makers..

As mentioned previously, we received a pilot production PO as a second source supplier from a leading Chinese smartphone OEM. We expect revenue to begin in the second half of the year. Moreover, we also have been chosen to work with them on their fall 2024 model with our next-generation chip that we taped out and expect to sample in Q2 this quarter..

Finally, we taped out in Q1 and expect sample in Q2 our first smartwatch OLED DDIC. We're excited about this partnership with a smartwatch solution provider in China, as it showcases our strategies to expand into new high-growth adjacent markets..

With regard to our automotive DDIC business, we saw strength in the first quarter that will likely to continue in Q2. Notably, we had a new OLED design win in EV that has commenced production in Q2 targeted for a leading European automaker..

Our Power IC business is now including MSS. We saw sequential strength from LED TVs during Q1 and expect business to broaden to include multiple notebooks and tablet models in Q2. We continue to secure new design wins with a major Korean customer..

Moving on to PAS. Q1 revenue was $36.5 million, down 5.6% year-over-year and up 12% quarter-to-quarter. The sequential increase was due primarily to increased demand for medium voltage MOSFET for industrial e-motor markets in China, consumer appliances and server power.

The results are in line with our earlier expectation for a gradual recovery in our power business during the first half of 2024 and are further supported by initial signs of inventory reduction in the distribution channel for our PAS products..

More specifically, we saw strength in the high-speed e-motor market for scooters and motorcycles where we benefit from the approximate doubling of the bill of material compared to a traditional e-bike. We believe our power solution for e-motors are now outperforming our competition..

We are seeing steady demand in low-voltage MOSFETs due to contribution from new high-end smartphone models as well as increased demand in mid-range smartphones. Further, the PAS design pipeline looks solid for the next generation of smartphones coming in late 2024 and into 2025.

We saw a sequential uptick in demand for our Super Junction MOSFETs and obtained a 600-volt design win in the PC power and power supply market. We also had an IGBT design win at 650 volt from a major Korean appliance company.

Lastly, within automotive power, we had our first medium-voltage MOSFET design win for an electric cooling fan with a China-based SUV supplier as well as additional power steering-related win in Korea..

We have a strong product pipeline for power in 2024, and they are on track. These products expect to contribute revenue by end of the year.

The new 650-volt IGBT finished the qualification and expect to begin commercial sample this month, sixth generation IGBT and super junction samples will begin in this quarter, Q2, and eighth generation LV MOSFET samples is ready and eighth generation MV MOSFET samples are ready in this second quarter '24..

In summary, PAS saw strong sequential growth in Q1. With the addition of new products and streamlined channel inventory, we are optimistic for the growth trajectory in 2024. In MSS, we're executing our China-focused strategy and making steady inroads with the top-tier panel makers and major smartphone OEMs..

I will come back to wrap up the call after Shin Young gives you more details of our financial performance in the first quarter and provide Q2 guidance.

Shin Young?.

Thank you, YJ, and welcome, everyone, on the call. Let's start with key financial metrics for Q1. Quarter revenue in Q1 was $49.1 million, which came slightly above the midpoint of our guidance range of $46 million to $51 million. This was down 13.9% year-over-year and down 3.5% sequentially.

Revenue from MSS business was $9 million, at the midpoint of our guidance range of $8 million to $10 million. This was down 29.7% year-over-year but up 5.2% sequentially. PAS business revenue was $36.5 million and at the midpoint of our guidance range of $35 million to $38 million. This was down 5.6% year-over-year but up 12% sequentially.

Revenue from Transitional Foundry Services declined to $3.5 million as we continue to wind down this service over the next couple of quarters, as we've explained previously..

Consolidated gross profit margin in Q1 was 18.3%, within our guidance range of 17% to 20% but down from 21.2% year-over-year and down from 22.7% sequentially. MSS gross profit margin in Q1 was 44.6%, above the upper end of the guidance range of 40% to 43%, up from 30.2% in Q1 '23 and up from 41.3% in Q4 '23.

The margin expansion was primarily due to nonrecurring engineering revenue and higher-than-expected revenue from our first-generation DDIC for the after-service market. The volatility of the MSS gross profit margin is also due to the smaller relative size of its revenue. .

PAS gross profit margin in Q1 was 15.4%, below the midpoint of the guidance range of 15% to 18%, down from 26.7% in Q1 '23 and down from 18.1% in Q4 '23. This year-over-year and sequential decline was mainly due to a lower Gumi fab utilization rate from the wind-down of Transitional Foundry Services and unfavorable product mix..

Turning now to operating expenses. Q1 SG&A was $11.3 million as compared to $12.1 million in Q4 2023 and $12.2 million in Q1 last year. The sequential and year-over-year decline in SG&A was primarily attributable to our cost reduction efforts with respect to certain onetime employee-related benefits..

Q1 R&D was $11.2 million as compared to $15.4 million in Q4 '23 and $13.3 million in Q1 last year. As a reminder, R&D expense in Q4 last year included higher mask set costs due to the timing of product development..

Stock compensation charges included in operating expenses were $0.9 million in Q1 compared to $1.7 million in Q4 and $1.1 million in Q1 last year. .

Q1 operating loss was $13.5 million. This compares to an operating loss of $15.9 million in Q4 and operating loss of $21.8 million in Q1 2023. On a non-GAAP basis, Q1 adjusted operating loss was $12.6 million compared to adjusted operating loss of $14.1 million in Q4 and $12.2 million in Q1 last year..

Net loss in Q1 was $15.4 million as compared with a net loss of $6 million in Q4 and a net loss of $21.5 million in Q1 last year. Q1 adjusted EBITDA was negative $8.4 million. This compares to a negative $10 million in Q4 and negative $7.9 million in Q1 last year..

Our GAAP diluted loss per share in Q1 was $0.40 as compared with diluted loss per share of $0.16 in Q4 and diluted loss per share of $0.49 in Q1 last year. Our non-GAAP diluted loss per share in Q1 was $0.28. This compares with diluted loss per share of $0.21 in Q4 and $0.24 in Q1 last year..

Our weighted average diluted shares outstanding for the quarter were 38.5 million shares. Under our $50 million stock buyback program authorized in July 2023, we repurchased in Q1 2024 approximately 0.6 million shares or $4.1 million, leaving about $32.3 million remaining authorization at the end of March 31, 2024..

Moving to the balance sheet. We ended Q1 with cash of $171.6 million, which includes approximately $29.7 million in long-term borrowing, up from $158.1 million at the end of Q4 2023.

We added the long-term borrowing in March this year in order to opportunistically take advantage of favorable financing terms while exploring strategic options, including share buybacks and strategic investments to enhance shareholder value.

This loan bears a variable interest rate and the initial interest rate was 4.86% per annum and matures on March 26, 2027. We pledged our Gumi properties as collateral. Please refer to the Form 8-K filed on March 29, 2024, for further details. .

Net accounts receivable at the end of the quarter totaled $30.3 million, which represents a decrease of 7.2% from Q4 2023. Our days sales outstanding for Q1 was 56 days and compares to 59 days in Q4. Our average days in inventory for Q1 was 71 days and compares to 77 days in Q4.

Inventories net at the end of the quarter was $31.5 million and $32.7 million in Q4 2023..

Lastly, Q1 CapEx $0.7 million. For the full year 2024, we anticipate to spend approximately $10 million to $12 million, primarily for our PAS business and Gumi fab. This includes approximately $3 million to $4 million of onetime CapEx for our newly established operating entity in China..

consolidated revenue to be in the range of $49 million to $54 million, including about -- approximately $1.5 million of Transitional Foundry Services; MSS revenues to be in the range of $9.5 million to $11.5 million.

This compares with MSS equivalent revenue of $9 million in Q1 2024 and $12.4 million in Q2 2023; PAS revenue in the range of $38 million to $41 million. This compares with PAS equivalent revenue of $36.5 million in Q1 2024 and $39 million in Q2 2023. .

Consolidated gross profit margin to be in the range of 17% to 19%; MSS gross profit margin to be in the range of 30% to 33%.

This compares with MSS equivalent gross profit margin of 44.6% in Q1 2024, which included nonrecurring engineering revenue and 36.4% in Q2 2023; PAS gross profit margin to be in the range of 15% to 17%, primarily as a result of the impact of idle capacity from the expected decline in Transitional Foundry Services revenue.

This compares with PAS equivalent gross profit margin of 15.4% in Q1 2024 and 23.1% in Q2 2023..

MSS revenue to the grow double digits year-over-year as compared with MSS equivalent revenue of $44.4 million in 2023; PAS revenue to grow double digits year-over-year as compared with PAS equivalent revenue of $151.3 million in 2023; consolidated revenue flat to up slightly year-over-year as recovery in MSS and PAS is offset by the phase-out of Transitional Foundry Services; consolidated gross profit margin between 17% to 20%, primarily as a result of the impact of idle capacity expected from the phase-out of Transitional Foundry Services.

This compares with the consolidated gross profit margin of 22.4% in 2023..

Thank you. And now I'll turn the call back over to YJ for his final remarks.

YJ?.

As we noted in our previous earnings call, we are undergoing a substantial transformation in our business over the next couple of years. One, we have shifted the priorities in our display business to be laser focused primarily on China business expansion.

We have now begun operations at our new Chinese entity Magnachip Technology Company, MTC, with our China headquarters now up and running; and we expect to significantly expand our China operation in 2024. We are strengthening strategic relationship with panel customers, OEMs and suppliers. I am encouraged with the progress thus far..

Two, Q1 is the first period in our financial results reflect the operating performance under the new MSS and PAS structure. The separation of those business streamlines our go-to-market strategy, strengthens the potential for increased shareholder value via strategic investments and also improves transparency for investors..

Three, we are working very hard to fill idle fab capacity in our Gumi fab caused by the wind-down of the Transitional Foundry Services. Our current power products are experiencing an increase in demand, and we are launching a new slate of higher-margin products throughout the year.

I look forward to sharing updates on our progress on future earnings calls..

Now I will turn the call back to Steven.

Steven?.

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

[Operator Instructions] Our first question comes from Quinn Bolton with Needham. .

Guys, can you hear me?.

We can but a little breaking up. .

Okay. Hopefully, this comes through. I guess I wanted to ask, YJ, the biggest -- you've introduced a number of new products in the MSS segment over the last 12 to 24 months. And it sounds like a lot of those are slotted to start to go into production towards the end of this year and into early 2025.

And I guess as you look at the number of new products, could you kind of just rank order which do you think are going to be the biggest contributors to growth in the second half in the MSS segment?.

Okay. Very good, Quinn. Thank you. So the initial business ramp right now study with the first-generation product we taped down in 2022, that's the after-service market. And then we announced a win with our second-generation product with one of the key Chinese phone maker that expect to go to revenue in second half.

And today, we taped out and it's going to sample, the third-generation product. And that one will also go into production towards the fall or end of the year. And then we will have another product that will hit the market. That tapes out and sample this -- in the next quarter..

So in terms of the volume products, it's going to be the second-generation product that we talked about that we won that will go production in second half. And then the chip that we will sample this quarter, in the second quarter, that will be aligned with the fall model. And those 2 will be the high-volume model..

And then additionally, we also said the -- we sampled QHD+ high-end model, and that will also drive a decent revenue starting end of the year. So -- and then there's a smartwatch that we taped out, we'll sample. So those are the products that will drive the revenue.

And I think the high end and the second generation and the first, third generation have a good potential towards the end of the year. .

Okay. Got you.

So it sounds like -- to summarize that, the second generation, where you already have a win with the China smartphone maker, going to production in the second half and then the third-generation product, which you expect to start to ramp perhaps a little bit later in the fall but before year-end, those are the 2 sort of highest volume runners as you see it today.

.

Yes. And then I would say, because of the QHD, the high end, even the volume may be a little lower but the higher ASP, so that, we sample. That will also hit towards the end of the year. That will have probably a decent revenue as well. .

Got it. Okay. Perfect. And then just kind of looking at the -- on the PAS segment, you commented that you're starting to see some signs of inventory clearance.

Kind of wondering, how much longer do you think inventory is going to be a headwind? Do you think it sort of continues into the second half of the calendar year? Or do you think we'll be mostly through it by the end of the second quarter? Just any update on kind of where you think we are on the inventory clearance.

And I guess a related question, as you get better line of sight into inventory in the channel, do you have any sense -- where do you think consumption is today of your product versus what you're shipping, which I imagine you're sell -- shipping below end consumption?.

Yes. Thank you, Quinn. So we sell about the -- I would say, about 80% in Asian region and then 20% in the Europe and U.S. And for the industrial market and automotive tend to be a very big portion for other power makers. They tend to be maybe 78%. But for us, industrial automotive is like 35%, 40%..

And so for us, the consumer communication and computing already went through the inventory correction [ 1.5 years ]. So in the first quarter, our industrial segment actually grew over fourth quarter. And even this quarter, we expect the industry to grow..

On the consumer, we grew in Q1, and then we expect flattish. And computing, we grew, and we expect flattish in Q2. Communication was slightly down in Q1, but we expect strong growth in Q2. So for us, the inventory correction in industrial segment for us seems to have gone away, the -- so already adjusted.

And the usually second half, the Q3, Q4 is a strong quarter, season for us given that we have more consumer communication and computing segment, which tend to be cyclical. So we are guiding up in the Q2, and then we see a strong Q3. So that's how we see based on today's indicators. .

Got it. One last quick just clarification. I think you said it was consumer and comms where you had sort of a flatter outlook in the second quarter.

Is that just more what you would call seasonality? Or are there other factors slowing end demand that are leading to a flatter outlook for those 2 segments?.

I think it's also really aligning with some of the consumer or computing communication model. So I think it's -- I wouldn't say it's really time to seasonality, but it's also model alignment and so forth. So I think it goes up and down for us. So I don't think it's a pure seasonality. The Q2 is -- seasonality or the overall is better for us. Yes. .

Our next question comes from Andrew Northcutt with Oppenheimer. .

This is Andrew on for Martin. You touched upon it a little bit.

But can you talk a little bit about how much exposure the PAS segment has to the consumer home appliance market? And how do you think China's recently announced home appliance trade-in subsidy will impact the business?.

Could you repeat the subsidy on consumer appliance by whom? Oh, China. .

Yes, by China. .

Okay. So mostly the consumer is mostly in Korea at the moment. We do some in -- consumer in China. We do more of the industry like e-bikes and communications and cell phone in China. But I think that will also -- if they are doing that, I think that will also help us out because China definitely is about 45% -- 40% to 45% of revenue for us in PAS. .

Our next question comes from Suji Desilva with ROTH MKM. .

So YJ, the China smartphone wins, can you talk about whether those are a premium model or mainstream or across the platform? Trying to understand what the initial ramp can look like for those wins. .

Yes. The one that we announced a new win, it's a really high end. It's a QHD+. The QHD+, as you know, is higher than the WXGA, which is a resolution of iPhone. So it's higher than that. So we see that segment growing starting this year. So we are preparing more solution around there.

And this is the first one that we are going there with a new model, and that's for the top 3 Chinese smartphone maker. .

Okay. Great. Okay. And then you talked about -- in the power segment, you talked about server opportunity.

Can you talk about whether that's early or that's starting to ramp and what the kind of opportunity is, whether it's AI type servers? Or just some color there as to what the opportunities, opportunities seem like it's newer to you and the competitive landscape there, perhaps it would be interesting to know as well. .

Yes. So we're starting the server powers. So we got qualified and start shipping. And we do hear that the AI portion of servers are the fastest growing within the server segment. So we look forward to see whether we get more subsequent design in the AI servers in the future, but the -- it's for the server power supply. .

Server power supply. One last quick question. The formation of the MTC, the China organization there, entity, just wondering what the implications of that are from MX perspective and sort of running the business and thoughts as what that maybe allows you to do and that you maybe couldn't in the past. Any thought would be helpful. .

Yes. So the creation of MTC is to address the Chinese customer well with a local presence. I think given the sensitivity there politically, I think it's good to have a local company focused on Chinese suppliers, so -- and then have an independent operation to service and support and grow opportunity with independent operation.

So that's the idea, and that's been very welcomed by the Chinese customers. .

And I'm not showing any further questions at this time. I'd like to turn the call back over to Steven for any closing remarks. .

Great. Thank you. This concludes our Q1 earnings conference call. Please look for details of our future events on Magnachip's Investor Relation website. Thank you, and take care. .

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day..