Magnachip Semiconductor Corp (MX) 2005 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to MagnaChip Semiconductor’s Third Quarter Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [OPERATOR INSTRUCTIONS]. As a reminder this conference is being recorded.

It is my pleasure to now introduce your host, Mr. David Pasquale of The Ruth Group. Mr. Pasquale you may begin.

Than you Operator, and welcome everyone to MagnaChip’s Third Quarter Conference Call. Joining us from the Company today are Dr. Youm Huh, President and Chief Executive Officer and Bob Krakauer, Executive Vice President Strategic Operations and CFO. Dr. Huh will review the quarter results as well as MagnaChip’s business outlook. Bob will then review the Company’s key performance metrics and financial results. We will then have time for any question.

If you have not yet received a copy of today’s results release, Sharon Ruth at the Ruth Group at 646/536-7026, or you can get a copy of the release off of MagnaChip’s website.

Before we begin the formal remarks, the Company’s attorney has advised that this conference call contains statements about future events and expectations which are forward-looking statements. Any statement in this call that is not a statement of historical fact may be deemed to be a forward-looking statement.

Actual results may differ materially depending on a number of risk factors, including but not limited to the following: competitive conditions in and unpredictability of the semiconductor founder industry, timing of success and new success of new product introductions, customer demand, the Company’s ability to meet volume production and development time, the ongoing quality of the Company’s services, the ability to execute restructuring plans, improved asset utilization, the ability of the Company’s suppliers to provide materials, equipment, and services on a timely cost-competitive basis, exchange rates, industry improvement, competitive pricing and decline in average selling prices, growth in electronic product demand, enforcement of intellectual property rights, general market conditions, the worldwide effect of military conflict and terrorist attacks, and general economic and political conditions.

For a full list of risks inherent in the business of the Company, please refer to the Company’s recent Offering Memorandum dated December 16, 2004, or Form S-4 which was submitted to the SEC and became effective on July 20, 2005, or the most recent 10-Q filed on September 6, 2005. The Company undertakes no obligation to revise or update any forward-looking statements to reflect vents or circumstances after the day of this call.

At this time, I would now like to turn the call over to Dr. Huh. Please go ahead sir.

Okay, thank you for joining us on today’s call. Our financial results for the quarter were slightly ahead of our expectations. We continue to focus on the improvements within the entire organization and believe we are making good progress. The demand for our products in our core business continues to be strong. We are cautiously optimistic about the opportunities to grow market share and continue our objectives to be the leading global supplier of display drivers, CMOS imaging sensors, and specialty foundry services.

We made several new product announcements during the quarter, and are making good progress in winning designs at new and existing customers in each of our product lines. Our business division structure is now in place and each product line has a seasoned industry [inaudible] managing day-to-day operations. I believe this will allow us to continue to focus on the specific needs of our customers and the market for each specific strategic business unit while also allowing for maximum efficiency in our operations.

Let me now give you a quick summary of the third quarter. Revenue by geography is coming by the headquarters location of our customers was 54% in Korea; 9% from Greater China; 9% from Japan; 28% for the rest of the world. Revenue by end of market for the quarter was 2% from wireless; 28% from computing; 2% from industry; 24% [ph] from consumer; and 42% from wafer foundry.

In the third quarter we had one customer greater than 10% of our net revenue, and the top 10 customers represented 63% of net revenue. Top customers in alphabetical order include Cirrus Logic, Elant [ph], IMIX [ph], Philips SCD, Samsung, Sharp, [inaudible].

Gross margin was essentially flat quarter-over-quarter with operating margin improving significantly from the second quarter. We continue to see progress in our improvement programs and are confident that we the steps we have taken to [inaudible] are sustainable. We also believe that these efforts will allow us to launch new products with higher yield when moved into a final production allowing us to [inaudible] investment and generate the returns earlier in the product life cycle.

Operating income on a U.S. GAAP basis for the quarter was $6.7 million. This is our first quarter of operating profits on a U.S. GAAP basis, and our second consecutive quarter on a non-GAAP basis. EBITDA for the quarter was $54.7 million.

Finally, I will take a minute to review our outlook before turning the call over to Bob. We expect revenue in the fourth quarter of 2005 to be flat with normal seasonality in December and in light of increased concerns over official inventory corrections in the supply chain. For the first quarter of 2006 we expect revenue to be down due to seasonality and the new product conditions that will [inaudible] to hit the volume until the second quarter and the third quarter timeframe. We think that this is a realistic outlook based on the customer discussions, and we also believe t his is a fixed [ph] cycle in the markets we serve.

WE expect to see flat to slightly down [inaudible] in the fourth quarter due to ending [inaudible] foundry services and normal seasonality. Our forecast indicates a portion of the [inaudible] in loading but that will be recovered in improvements; however, we expect margins to continue at [inaudible] levels during the fourth quarter.

We will continue our efforts to manage utilization, focus on [inaudible], and practice prudent cost control which we would expect to realize in incremental improvements in EBITDA. We are relatively forecasting flat EBITDA quarter-over-quarter.

Let me turn it over to Bob.

Thank you Dr. Huh. Net revenue for the third quarter ended October 2, 2005 was $243.1 million. This represents an approximately 3% increase quarter-over-quarter when compared to $236 million in Q2. Gross margin for the quarter was $61.9 million or 25.5% of revenue on a U.S. GAAP basis.

Material cost containment improved yield and a favorable product mix was offset expected ASP degradation, image sensor and display driver business. Operating income for the quarter was $6.7 million on a U.S. GAAP basis. Operating expenses for the third quarter were $55.2 million. This is a decrease of $13.5 million from the prior quarter due to one-time charges of $11.3 million that we took in the prior quarter related to impairment of long-lived assets under FAS-144 and a charge for in-process R&D associated with the IT Media acquisition.

R&D expense in the third quarter was $27 million compared to $27.5 million in the second quarter. R&D as a percentage of net revenue was 11.1% for the quarter. We expect Research & Development spending to be flat into the next quarter. Net interest expense was $14.9 million for the quarter.

Other non-operating income is comprised of the net effect of gains and losses during the period, and for the third quarter the loss was $5.5 million versus a loss of $12.8 million in the second quarter, primarily on changes between the Korean won and the U.S. dollar.

Net loss for the 3 months ended October 2, 2005 was $13.2 million on a U.S. GAAP basis compared to a net loss of $33.5 million in the second quarter. Depreciation and amortization expense was $48 million, or approximately 19.7% of revenue in the third quarter. EBITDA for the third quarter was $54.7 million. While EBITDA is not defined by Generally Accepted Accounting Principles it is commonly used to measure a company’s ability to service debt.

Headcount as of October 2, 2005 was approximately 4,035, a reduction of just over 40 from the prior quarter. Total aided [inaudible] and capacity at the end of the quarter was flat. The prior our fab utilization for the quarter was approximately 89% compared to 95% in the second quarter of 2005 as we transitioned away from de-ramped foundry business.

Capital expenditures for the third quarter were $22 million versus $6.5 million in the prior quarter. Total available cash and short-term investments was $71 million as of the end of the third quarter, and accounts payable days were 52, a slight increase from 48 in the second quarter due to the timing of payments related to capital equipment. Accounts receivable days of sales outstanding were 44, an increase from 41 in the second quarter. Inventory days of supply were 42, an increase from 40 days in the second quarter. Net inventory was $83 million and this built an inventory to prepare for year-end seasonal sales in new products that have solid demand from our customers. We use a conservative inventory evaluation policy and reserve for any product that does not have demand or forecast in the [inaudible] of operation.

As to business [inaudible] guidance as Dr. Huh mentioned we expect revenue growth to be sequentially flat in the fourth quarter. While there are many variables and uncertainties in achievement of our gross margin forecast, our current estimate of our first quarter gross margin is to be flat versus the prior quarter on increase volume, savings in procurement off materials, improving yield and new product introduction offset by flat to slightly down utilization and average selling price pressure. We expect capital expenditures to be approximately $30 million in the fourth quarter and we continue to successfully manage capital expenditure timing and support growth of new customer business as well as optimize returns on investment.

Operator, that concludes our prepared remarks. We can now take any question.

Thank you. [OPERATOR INSTRUCTIONS]. Robert Hopper, UBS

Hi guys; I’ve got just a couple of questions here for you. First off I guess if we looked into the business as we stand right now and how we’re going into the guidance, looking at the image sensor side can you talk a little bit about the fix of VGA, megapixel, what your growth outlook is fall [ph] as well as the pricing side of both of those.

In addition, if you could give us data point of utilization for the quarter and some understanding as to the bills in AR? I mean the DSO is up 4 days and I’m just trying to get a little color as to why that’s increasing like that.

Okay I covered the first [inaudible] and the second [ph] so [inaudible] right now. Imaging sensor actually throughout the fourth quarter we expect the volumes to stable and in our case [inaudible]. So we expect the same for fourth quarter unless the 15% range [inaudible] we expect and [inaudible] Company maintain its gross margin to [inaudible]. And we plan to roll out our next version of the megapixel in the fourth quarter. After that we expect [inaudible] product mix.

What was the mix you said in the quarter? I couldn’t quite hear that.

The [inaudible] between the VGA and the megapixels 75%.

Okay so moving to your second and third question on utilization in Q3 89%; we forecasted slightly down in Q4 as seasonality tails off at the end of the quarter. On ARJ growth, really very small change primarily due to one large payment from our largest customer that came right after quarter end.

Just on the utilization, that was a little bit lower than I think it was in the second quarter as I recall, is that related to the DRAM business rolling off and where do we stand on that today in terms of DRAM revenue expected to receive going forward effect?

Yes, it is related to the DRAM foundry business rolling off and we expect insignificant revenue from DRAM foundry and fourth quarter I think just a couple million.

Thanks.

Jeff Hollig [ph], Lehman Brothers.

Hi, good morning; just with your comments on concerns over inventory correction in the first quarter, can you just talk about what products that you may be more concerned about there as you look at your image sensor, your flat-panel display drivers and your foundry business how you see those businesses?

Okay for each year our product line business is growing. Our driver is very stable; actually our unit numbers are growing and also our revenue is growing.

But I think in the display driver business Jeff, you have normal seasonality. And if you look back at last year in the panel business it’s very consumer-centric so you’d have the normal post-Christmas stall on and that was a little bit larger than expected last year and I think we’re just being prudent in our planning this year as well as in general concerns that are out in this marketplace, although we’re not directly hearing those across the board from customers.

Okay that’s helpful. And just in terms of CapEx what you’re looking at now for ’06, any preliminary estimates on that?

No I think our business model that we’ve typically discussed is still intact and we would expect CapEx to be between 10% and 15% of revenue. And we will adjust that as we go quarter-to-quarter and probably give guidance one quarter out kind of through the year. I will try to give you a full-year guidance number on the next call.

Okay, and what are some of the areas you’ll be doing that DRAM capacity freed up by the DRAM business going away.

Yeah, that allows for our growth in our foundry and CMOS image sensor business.

Okay, that’s all for me thanks.

Tristan Garrow, Baird.

Hi there; as I follow up to your comments about potential inventory correction in the supply chain, are you being prudent in terms of your outlook in display drivers, or is there any other end market where you think it is prudent to be at that time? And also is it based on just what you saw last year and the need to be cautious this year as a result of that or actual signs that you’re seeing in the end market?

No I’d say we were just in general consumer markets, so in the foundry business we also support a large consumer business. And if you look to prior year, not just last year but years prior, the first quarter does have a normal seasonality especially in the consumer [inaudible] of his space where we play in a couple of different markets. So that’s being prudent. But also as we talk to customers, they typically would be adjusting their inventory toward the end of December and January consistent with that prior pattern.

Okay, and also where was your mix, your CMOS sensor sales in the quarter and what was the sequential growth and what are you looking at specifically in CMOS sensors sequentially?

We didn’t break out each of those individual businesses except to say that VGA was about 75% versus megapixel.

Okay but could you say though that CMOS sensors are about 50% of your total revenues?

We didn’t break that out.

Okay thank you.

Sindar [ph] Vardarjant [ph].

Yeah thanks, a couple of quick questions; at our conference recently Bob you’d mentioned that your CapEx for the quarter was going to more like $40 million and it came in at $43 million. Is it just a timing issue and we’re going to see a higher CapEx quarter in the fourth quarter? I’d like some clarification on that.

Yeah, it is a timing issue, and manufacturing organizations have done a very good job this year of running very close timing on CapEx to when we needed it. But yes, that was below our expectations then we’ve tried to be more careful in our guidance into Q4 with our $30 million that we’ve stated.

So you’re saying it’s going to be all said and done? Are we still looking at an $80 million year for this year or is it going to be lower?

It’s actually a little bit lower.

Okay, and how much of the CapEx that you’re spending this year is basically direct year-end capacity and would you be done with all that this year or are we going to see some more spending in terms of making that capacity -- ?

That work has already been finished in the prior quarter.

So you are all done with that?

Yes we are.

And again, there have been some reports about how utilization has been going up at the foundry level and especially for some training in technologies, and yet you are guiding to flat numbers. And even if you look at the high-mix business it’s kind of getting close to zero but I think you were probably around $10 million in the third quarter. So how come you’re not seeing some of that strength yet in your projections?

In our foundry business, we are seeing what I consider normal industry growth. We’ve got a mix of different businesses that we don’t break them all out. But on the foundry side our best part of our growth actually was in what some people consider trailing as we consider specialty, but our .25, .35 as well a .6 did have the best growth quarter-over-quarter in Q3.

And when you look ahead for next year, given where things are, are we still looking at generating consistent cash flow for ’06 or is there anything that might change that view?

Well, given the business model guidance I gave on CapEx and our current EBITDA generation capability, we do expect to generate free cash flow as we have this year. We currently expect to adjust around $100 million in cash as we exit 2005, and during this year we’ve done acquisitions and started cast at the $40 million range. So this has been a very high cash-generation year for us. It puts us in very good shape to make the right kinds of investments we need to grow to support customers next year and as we get to our next earnings call we’ll give that guidance for the full year 2006.

Okay and then one final housekeeping question, it seems like there was some shotgun borrowing of $11 million this quarter. Was that a draw down on you bank [inaudible] or something else, and if so, what?

No that was a letter of credit, banker’s issuance that was only outstanding for less than 5 days related to an equipment import. And so that really is a non-issue at this point. Actually, you should think about that as accounts past.

All right so it’s probably going to show up in the CapEx line next quarter if it’s for equipment?

It will.

All right, thank you.

That is essentially the timing issue on the CapEx guidance we gave last quarter.

All right, thanks.

[OPERATOR INSTRUCTIONS]. James Krune [ph], Retama [ph] Capital.

Yes 2 things; one is you mentioned you made some acquisitions in ’05. I guess if you could just talk about what types of acquisitions you would be compensating going forward? Would that be for geography? Would that be product capability? And then where do you stand on customer diversification?

Well, on acquisitions we don’t have any slate at this point because strategically we accomplished what we wanted with the 2 acquisitions we did, one being in Jap, the other in the U.S. So our global footprint is where we want it currently. So we don’t currently have anything specifically identified as required there.

On the customer diversification we have a pretty diverse business already and don’t have specific targets on diversification although we definitely have new customer acquisitions in mind and in progress and we’re pleased with some of the new customer traction we’re getting on our [inaudible] on megapixel on 2 and 3 that are cooing out this quarter, and the work we’re doing there. And small display drivers we’re confident that we’ll be adding new customers through 2006.

Thanks.

Ken Luke, Lehman Brothers.

Thanks, on the Cypress’ recent call they talked about a partnership with you guys and I was wondering if you’d provide any color on what some of the areas you may be working with them are? And just to be clear it sounds, in the initial comments you talked obviously about inventory correction in the supply chain. It seems that what you’re suggesting is that that is in the consumer area including displays didn’t want a bit of that?

Let me answer the first one. In our foundry business, we do support a variety of different customers including Cypress -- that’s who I think you said, correct? Which customer did you talk about?

Obviously you were talking about diversification and Cypress seemed one person here that could do a partnership with you [ph]. And I was just wondering if -- ?

Yes we support them in the foundry business along with a number of customers; very pleased to do that. But as to the second part of your question, we support different consumer markets; handsets, displays, there’s different computing including audio codex for our foundry customers, so in general those consumer markets all have a pretty steep post-Christmas fall-off traditionally in December/January and we’re just planning prudently on that regard.

Is it fair to say that you saw a strong July/August and things have moderated somewhat or -- ?

I wouldn’t say that; we just think that the quarter is front-end loaded.

Okay thanks very much Bob.

Quinn Bolton, Needham and Company.

Good evening; just wanted to sort of again talk about this inventory issue, king of talk about customer behavior. Are you sort of seeing just normal customer reduction in orders now that we’re getting past the holiday season, or is this something that seems to be downward revisions to prior estimates showing greater concern now about holidays? So I’m just trying to get a sense is this really, are you just trying to be conservative and anticipate a normal seasonal pattern post-holiday, or have you seen reduction in customer estimates or forecasts over the last month or so that leads you to be more conservative than you might otherwise be?

We haven’t seen negative revisions to forecasts but we’ve [inaudible].

Okay great, thank you.

And also the actual seasonality we need more time as we get into the fourth quarter approaching December.

Eric Talbin, Bank of America Securities.

Hi Bob, just wondering with the EBITDA flattish, around $55 million, the coupon payments at around $30 million of CapEx, what will be the key driver to add an additional $30 million of cash in the fourth quarter?

Because it’s right after the quarter end on the interest payment, the interest payment plus the timing of the CapEx.

Thank you.

Steve Roland, Sanctity Advisors.

Hi guy, how are you doing? If any of you guys could talk a little bit about the trends in the CMOS image sensor versus LCD driver in terms of strength in the quarter, pricing trends in the quarter versus each other? And then with respect to LCDs I’m wondering if you could talk a little bit about your progress with outsourcing on the manufacturing end and where you expect to ramp.

Let me answer the last question and I’ll leave the first one for Dr. Huh. The last question, we’re not outsourcing LCD driver assembly and test. We’re actually insourcing that, we’re actually increasing our internal capacity for assembly and test of display driver. What we did outsource was all of our leaded IC for our applications processors business, and that assembly test and that has been principally completed here in the third quarter. So on the display driver business, actually our internal manufacturing costs are slightly than what we get from outsourced providers today.

And you asked about LCD trend. In case of a DDI we expect about less than 5% increase quarter-to-quarter, and CMOS sensor in general in the market expecting about 10% to 15% of [inaudible] in conjunction with the availability to [inaudible].

And I was just wondering in the fourth current quarter in terms of revenue growth how do compare how the 2 businesses performed?

I will give you this; we had better business with DDI.

Okay thank you guys.

Jordan Toramo, Nikkei Shield.

Hey guys, how are you? If you can -- I kind of understand the CapEx this year it seems like it’s going to come in around $71 million, only around 7% of revenue or so. Are you -- I guess it was kind of asked -- but did you not have to spend as much this year because there wasn’t a need from the customers to provide certain chips or advances in technology? And why is it with the fabs you seem to be able to spend this lower amount compared to some other companies?

That’s because, as we’ve said before our product lines, our specialty foundry market is focused on mixed-signal analog, and if you look at other comparable mixed-signal analog companies their percentage CapEx to revenue spend is a lot lower than those are in digital-logic markets. We were not that far off; we just, our timing is a little bit more prudent than we otherwise would have expected.

We just spent what we needed.

Okay, do you think -- you say the model is 10% to 15%; you spent 7 this year. Can we be over 15% next year? Or is that just really, you generally don’t think it will be much more than 10% of revenues?

No I do believe in the range of 10% to 15% and I think 15% is more the high end and this year from a timing perspective we’re closer to the 10%.

Okay, thank you.

[OPERATOR INSTRUCTIONS]. Mike Linear, AIG.

Hi Bob; on the [inaudible] side you said 75% were still VGA and I think way back in the first part of the year you were talking that the market was going to be majority megapixel coming into this Christmas season or whatever. I mean where do you want to be on that mix, and how soon will you get to where you want to be?

Well we’re very pleased with the results of our 2 and 3 megapixel R&D product developments and we’re out sampling with customers on the 2 and very shortly on the 3, so we feel very well positioned as we go into 2006. The majority of the new designs will likely come at 2 megapixels for higher end phones, but we’ve been pleasantly surprised at the staying power of VGA as well. Its penetration into kind of lower-end models continues, and so that’s been kind of a little bit different than expected as well.

If I add one more thing here as of this day statistics show that 55% to 60% volumes in VGA.

So because the shipments are up to the, up in the lower price point markets, the VGA in hanging in there a little bit better?

Yes.

And then I saw on some these new phones that they’re using megapixels for still; VGA for video. Do you make VGA cameras in that application?

Yeah actually the new application actually which is the PC cameras for media.

Okay and then -- but as far as the mix you would expect going forward that as you hit sales with these larger megapixels that you mix will in fact shift, but for the moment you’re happing with, given the strength of VGA, you’re happy where you are.

We have a strength in VGA and with that we [inaudible] and megapixel fourth quarter then also we will make the mix change going forward.

And have you forged any new relationships with any of the cell phone guys?

Oh yeah, we have already forged a relationship with a key strategy customer and also we’re [inaudible].

Are you actually shipping to anybody that you weren’t shipping to 6 months ago?

In the telephone area?

Yes.

Yeah we have some small players, but also we are working very closely with big players.

Okay, and then on the display driver side, you said you were looking for maybe the prices are hanging in the ASDs finally dropped 5%; have you made any new relationships on that side? And has there been -- ?

Oh yeah; actually we have a strong presence in major Korean manufacturers but we’re extending our relationship outside of Korea now.

And is there any -- are you seeing any technology on that side? It seems like I read where some of these guys are developing displays that are able to utilize fewer more powerful chips, display driver chips. Is t hat -- ?

Right, we actually made some announcement of a new [ph], so we have a current plan using more advanced technology to [inaudible] and also applications for much bigger SD/HD TVs. First we’re taking more [inaudible]. We are at the [inaudible] now.

And how does that -- if that is the trend does the revenue from the new chips effectively, how does that work as far as offsetting a fewer number of chips? Is that a break-even equation for you, or is it slighter negative, or how does that look like it’s going to work out?

Yeah well general trend as you said supporting more number of channels, so for instance an H-panel requires a less number of chips but [inaudible] in increasing their support in [inaudible] resolutions, so in that way I don’t expect any decrease of shipment numbers.

We get a better value on a higher functional chip we provide, but there is a value that’s traded for the end of the supply.

And I think you guys are pretty proud of being called leaders on the OLED front on the display drivers. I’m seeing more and more announcements of the organic OEDs.

In t his area, also we’re more active in the volume area [inaudible] in the application area.

Is that area becoming meaningful yet, or is it still kind of cutting edge regular volume?

It’s becoming a mainstream.

All right, I guess that’s all of my technology-oriented questions, thanks.

[OPERATOR INSTRUCTIONS].

Ladies and gentlemen there are no further question at t his time. I will now turn the conference back over to management to close. Thank you.

Okay thank you Operator and also thank everybody for joining us on today’s call. Thank you and good night.

Thank you. This concludes today’s conference. Thank you all for your participation.