Magnachip Semiconductor Corp (MX) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the MagnaChip Semiconductor Ltd. fourth-quarter earnings 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) Also as a reminder this conference is being recorded.

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

Good morning and welcome to MagnaChip's fourth-quarter 2005 earnings call. Joining us today from the Company are Dr. Youm Huh, President and Chief Executive Officer, and Bob Krakauer, Executive Vice President Strategic Operations and CFO. Dr. Huh will review the overall performance 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 questions. If you have not yet received a copy of the 4Q release, please call Sharon [Lew] of the The Ruth Group at 646-536-7026 or you can get a copy of the release off of MagnaChip's Investor Relations website.

Before we begin the formal remarks, the Company's attorneys advise 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 forward-looking statements. 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 foundry industry; timing and 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 suppliers to provide materials; equipment and services on a timely and 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 and labor 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 the Form S-4 that was submitted to the SEC and became effective on July 20, 2005 or the most recent Form 10-Q filed on September 6, 2005. The Company undertakes no obligation to revise or update any forward-looking statements to reflect events 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.

Thank you for joining us on today's call. We are pleased with the progress MagnaChip has achieved in 2005. Over the past year we have raised the profile of MagnaChip with several important announcements and new strategic relationships. Notably we entered into a development and a foundry relationship with AMI Semiconductor. This development effort will leverage our respective core competencies to enable a next generation of medical devices and expand the strategic market opportunities in ultra low-power applications such as mobile devices.

We introduced new technology in our SMS business with the availability of a ModularBCD technology. This technology is unique in comparison with the traditional BiCMOS technology by offering lower-cost and more versatility in supporting our multiple operating opportunities on a single chip. This ModularBCD technology will expand our opportunities in our mobile power applications.

During the quarter, we strengthened the image sensor development capability and processed technology with CIS 13 technology and 2.2 micron pixels. We also introduced our 2 meg and 30.2 mega pixel cameras for mobile applications as well as a low-profile phone sector VGA camera modules for the mass cellphone market and PC and PDA applications.

Our Display Solutions division introduced a mini LVDS 6 [bps] subscriber IC for a (indiscernible) PC monitor applications which was one of our fastest-growing large DDI products in our history. In the small DDI, we improved our driver solution for high-end portable gaming applications, as well as introducing several advanced technology solutions for mobile phones and MP3 players.

Additionally in December, 2005, we successfully divested our applications processor business, the so-called AP business. We believe this will enable us to get a focused Company on our three core businesses, Display Solutions, Imaging Solutions, and our semiconductor manufacturing services. Additionally we believe that this transaction will strengthen our operating structure and help us position MagnaChip for continued success.

Let me now give you a brief summary of the fourth quarter. The fourth quarter came in as expected. Revenues were strengthened by the expected seasonal demand increase of consumer electronic devices at several of our customers. We believe the Company managed its inventory levels and our balance sheet conservatively, which can be difficult to do during a seasonal demand cycle.

The pricing environment during the fourth quarter was at expectations. Revenue by geography is determined by the headquarters location of our customer and for the quarter revenue was 54% came from Korea; 10% from Greater China; 11% from Japan; and 25% came from rest of world. Revenue from our U.S.-based foundry customers doubled from first quarter to fourth quarter for us this year on a strong surge of interest in our specialty services.

Revenue by end market for the quarter was 14% from wireless; 29% from computing; 2% came from industrial; 15% from consumer; and 40% from our wafer foundry. Our wafer foundry business is sort of broken down into 25% from wireless; 16% from computing; 1% from industrial; and 48% came from consumer.

In the fourth quarter we had one customer greater than 10% and the top 10 customers represented 60% of total revenue. Top customers in the quarter include (indiscernible) Logic, BOE-Hydis, LG Philips Ltd., LG Electronics, TAICO Instruments, Samsung, Sharp, [Tektronix], (indiscernible), and [VIA] Technologies. Our foundry division has without DRAM hit a record level in the fourth quarter and has had four consecutive quarters of growth, successfully transitioning to fully focus on the need for specialty foundry services in analog, high-voltage, mixed signal, power and embedded memory.

Gross margin for the fourth quarter was 24.6%, slightly down from the prior quarter, so fourth quarter included a charge related to underloading of our facilities. As for our FAS 151, for $[8.1] million, which reduced the gross margin by 330 basis points for the quarter.

Finally I want to take a minute to review our outlook before turning the call over to Bob. In terms of the first quarter 2006, based on our current business levels and the new forecast from customers, we expect the revenue to be down from the fourth quarter 15 to 20% due to seasonal trends and average selling price (indiscernible). Specifically in our Imaging Solutions division the demand for our old products is decreasing at a faster pace than originally anticipated. Traction at existing new customers remains strong for our new 2 meg and 3.2 mega pixel products, but while we are currently in production, the more significant volume ramp with our current in the second half of the year.

We managed core and inventory levels well in our Display Solutions division as we exited the fourth quarter and feel we are well positioned to handle an increase in the pricing pressure that we anticipate moving into the first quarter.

Finally our specialty foundry business is providing a stability to our revenue and performing at or slightly above expectations and we expect this trend to continue into the first quarter. We are working to streamline our spending and correctly size our business model in order to lower our breakeven point. Overall we remain confident in our underlying business strategy and our ability to deliver highly differentiated products to our customers that will ultimately result in a market share gain in each of our business areas.

Now let me turn it over to Bob.

Thank you, Dr. Huh. Revenue for the three months ended December 31, 2005 increased 1% to 245.2 million, compared to 243.1 million for the third quarter ended October 2, 2005. Revenue for the full year ended December 31, 2005 was 937.7 million. Adjusted for the divestiture of the AP business and exiting the DRAM foundry, the year-over-year revenue growth was 2.1%.

Gross margin on a U.S. GAAP basis was 60.4 million or 24.6% of revenue for the fourth quarter, compared to 61.9 million or 25.5% of revenue for the third quarter of 2005. Gross margin for the full year 2005 was 208.7 million or 22.3% of revenue. The fourth-quarter gross margin included 8.1 million in FAS 151 charges. FAS 151 is required for fiscal years beginning after June 2005; however, earlier application is permitted. We believe this pronouncement is consistent with our conservative accounting policies and deemed it appropriate to adopt it during the fourth quarter to reflect the appropriate carrying value of inventory.

While our overall combined factory utilization was in line with expectations at approximately 90%, Fab 5, which has newer technology and thus higher fixed costs related to our other fabs, experienced 51% average utilization during the quarter. We expect the utilization of this fab to improve through the coming year as our Imaging Solutions and foundry businesses grow.

Excluding this charge, gross margin was 28% for the quarter, an improvement of 340 basis points from the prior quarter. On an adjusted basis, gross margin for the full year was 221.3 million or 23.6% of revenue. We expect structural cost improvements in our Display Solutions business as we have expanded the in-house capacity for package and test of our Driver ICs. This improves our service levels to some of our largest customers and reduces our dependence on external suppliers. We are achieving an improvement of approximately 20% versus outsourcing currently.

Operating expenses of 88.5 million for the quarter were 36.1% of revenue. We recorded restructuring and impairment charges of 27.5 million during the quarter primarily due to the sale of the application processor business and related intellectual property and other intangible assets as well as 1.7 million for various equipment related charges.

Operating expenses adjusted for the onetime charges were 59.3 million. That compares to 55.1 million recorded in the third quarter. The increase is due primarily to the accrual of various expenses including incentive expenses for non-executive staff achievement of various objectives achieved during the quarter.

On a U.S.-GAAP basis, the operating loss for the quarter was 28.1 million. Adjusted for the special charges, operating income was 7.5 million or 3.1% of revenue. Operating loss for the fourth quarter was 28.1 million, a decrease of 34.8 million over the operating income of 6.7 million in the third quarter ended October 2, 2005.

Full year operating loss was 58.4 million. Adjusted for the special charges, the operating loss was 4 million for the year.

R&D expense in the fourth quarter was 27 million or 11% of revenue and flat from the prior quarter. For the full year R&D was 107.6 million. R&D investments in our Imaging Solutions products centered on the advanced pixel architectures and the development of our 2 and 3.2 mega pixel products. Our display driver R&D investments focused on full system solutions, providing source, gate and timing controller solutions as well as migrating to 10 bit products, wider channels, and increasingly integrated product solutions.

In small displays, our acquisition of ISRON increased our investments in solutions available to the open market. Foundry service investment centered on increasing our IP library available for customers, ModularBCD technology, and extreme voltage support both at high voltages and ultra low voltages. The amount for the full year included special charges for in process R&D of 2.6 million from the acquisition of IC Media earlier in the year.

Net interest expense was 14.4 million for the quarter and 57.2 million for the full year 2005. Other nonoperating income is comprised of the net effect of currency gains and losses during the period and for the fourth quarter the gain was 21.2 million versus a loss of 5.5 million in the third quarter primarily on changes between the Korean won and U.S. dollar. Net loss for the three months ended December 31, 2005 on a U.S.-GAAP basis was 22.9 million, compared to a net loss of 13.2 million in the third quarter ended October 2, 2005. Adjusted for the special charges, net income was 12.8 million for the fourth quarter 2005. Net loss for the full year ended December 31, 2005 was 100.9 million. Adjusted for the special charges, the net loss was 46.5 million for all of the year.

Depreciation and amortization expense was 48.2 million or approximately 19.6% of revenue in the fourth quarter, and 195.8 million for the full year 2005. EBITDA for the fourth quarter was 55.7 million, a small improvement from the prior quarter. For the full year the Company generated 188.9 million of EBITDA. 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 December 31, 2005 was approximately 4000. This number includes approximately 50 employees who will either transfer with the AP business in January or have elected to accept an early retirement program offered by the Company.

Capital expenditures for the fourth quarter were 23 million versus 22 million in the prior quarter and full year 2005 were 64.4 million. Total available cash and cash equivalents were 86.6 million as of the end of the fourth quarter. Accounts payable days were 63, an increase from 52 in the third quarter due to the timing of payments related to capital equipment and working capital management.

Accounts receivable net of reserves was 112 million at year end, a reduction of 4.5 million from the third quarter. Our Accounts receivable days of sales outstanding were 41, a decrease from 44 in the third quarter but below our goals to improve working capital usage by another 10 million.

Inventory days of supply were 43, an increase from 42 days in the third quarter. Net inventory was $88.7 million. We exited the quarter with our full revolving line of credit available and undrawn.

Now as the business model guidance, as Doctor Huh mentioned, we expect revenue to be approximately 15 to 20% below the fourth quarter which we believe would be lower-than-expected seasonal trends in our end markets primarily on higher average selling price erosion. With the expected seasonal slowdown in volume, we expect manufacturing utilization to be between the range of 70 to 75% and operational leverage to adversely impact margins.

We have instituted a cost management program to lower the Company's break even point over the next several quarters while also setting aside funds for strategic investments to fuel our core design growth engines to support our customers' technology requirements. We will not take shortsighted measures that could impact our long-term strategy to grow the business.

We expect capital expenditures to be approximately 15 million for the first quarter, with our range for the full year of between 9% to 12% of revenues dependent on the steepness of the volume ramp requirements of our customers and several new product areas that we expect in the second half of the year.

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

(OPERATOR INSTRUCTIONS) Robert Hopper, UBS Securities.

I guess if you could first give us a little bit more color on the inventory adjustment, is this effectively -- I'm trying to understand is this more of a write-down for fair market value and you are just implementing the accounting procedure currently versus sometime next year?

It is not a write-down of fair market value per se. It was inventory that was previously on our books but because of loading, we are now writing it down and expensing it immediately. So there is a onetime adjustment as that happens. On a go forward basis we would not be putting that cost structure into inventory out of Fab 5 until the utilization was at a more normalized rate.

That is specifically with Fab 5 did you say?

Yes.

What happened to utilization with the remaining fabs during the quarter? You said Fab 5 was 51%.

Yes, the utilization on average for all the fabs combined was 90%. Obviously with Fab 5 at a lower utilization and our other fabs had higher utilization.

What was Fab 5 in the third quarter? Could you give a sense of how it trended?

It is up several percentage points.

It is up from third quarter?

Yes. Q3 total was 88% versus 90% quarter in quarter four.

But is it safe to say that Fab 5 saw a sharp drop-off in fourth quarter?

Actually the drop-off was just for a single month of December. I gave you the average for the quarter, but it was higher October/November with a falloff in December.

Okay. How are you thinking about utilization going into the first quarter? With your guidance, within Fab 5, is your guidance mostly driven by pricing? We really didn't talk about that on the call. Is it pricing or is it mostly utilization?

My guidance on utilization was approximately 70, 75% overall. So utilization would fall off with the revenue drop. But also Fab 5 would be expected to be down as well.

Okay.

But we expect Fab 5 to fill up pretty well through the year as our Imaging Solutions products and foundry business accelerate into the second half.

Okay, I may have some follow-ups but for now thanks.

Tim Luke, Lehman Brothers.

I was wondering if you could give some color on how you see the shape of demand developing for you in the image sensor business as you go into the -- as you look into the second half of the year and as some of the new products come on line? I was also wondering if just from an industry perspective in some of the areas where you play, you might even be able to give us some sense of generally how you perceive inventory levels to be? Thank you.

I think it's probably more of appropriate that Dr. Huh answer that answer that question.

First let me answer how we look at the (indiscernible) sensor in demand. As you know, for first quarter we are rolling out 4 meg, already we load out 3 meg, so a low-profile BCA and we just are sampling new image with 1.3 meg. So a lot of activities are going on but as you know, there will be a delay until really a volume ramp up so we expect our ramp up will start from late second quarter. So we expect the [ratio] and price ramp up throughout the second half of this year. Overall as you see mobile phone demand is good; cell phone demand is good. So as we are more ready I would expect we can materialize this opportunity for our revenue. What is the other question?

With respect how you perceived inventories in some of the different segments?

Inventories are overall under control.

Sorry?

You're talking about inventories at MagnaChip or at the customers, Tim?

A little bit of both, really. More at the customer.

Okay. Based on our observation, customers usually have seasonality beginning of the year, first quarter, but by end of first quarter things are (indiscernible) TDMA share are sold and our side of the inventory is pretty much under control.

Just to give some more color, I think in the display driver side we're seeing a little bit of inventory, probably a little bit healthier in some of the other consumer markets that we see out of our foundry business. And in Imaging Solutions with really the product transition we have, we probably have a little less visibility in that today than we have but you would have typical normal seasonality in the cellphone market that you would see kind of in Q1 and early Q2. We would expect it to pick up after that.

Great. Thanks guys very much.

Sundar Varadarajan, Deutsche Bank.

Your Q1 guidance, could you kind of give a little bit more specific color on which end market particularly is driving this weakness? Because most of the other guys that are coming out seems like they are having an in general unseasonably stronger quarters and you are kind of guiding to more weaknesses than the normal seasonality would imply. So if you could provide some more color as to where you are seeing this weakness in particular and how long does it take to get back to more seasonal patterns for you?

We've got two things. First of all we divested one business so part of what is embedded in the Q4 to Q1 guidance is the fact that we are exiting the application and processor business.

Can you quantify that part for us? At least so that we know how much of it is --?

That is approximately about 5 to $8 million of the number. We have one month in January that we are expecting to be on our books versus our selling of the business, but frankly in the transition obviously, you've got a bit of a pause as well, but that is about the extent. Then also we have had the DRAM business ramping down for some time. The last bit of that was at the beginning of fourth quarter about 2.8 million that won't repeat in Q1, which is now at zero. So you've got that.

I think for us we're seeing our foundry business frankly flat to a slight increase from seasonal, so that is probably mirroring some of the strength that you mentioned that you have seen from some other companies. I think one of the things that might be a bit different is in the display driver IC business, you have a normal post Christmas adjustment relative to inventory through the channel and Christmas inventories being worked as well as ASPs. So the ASP pressure is slightly greater than what we had expected one month ago and might that contribute to some of that that we had.

And then as we said, we've got a product transition relative to the life time on some of the older VGA products that we have got before we have got an expected ramp -- our mega pixel product later in the year.

And again, do you think it is probably not until the third quarter that we see some of this kind of roll back more normal?

That is our expectation, yes.

Again from a margin perspective, you did adjusting for the inventory adjustments, you added like more 28% gross margin. Do you now -- when we look year-over-year comps for the next two quarters, is it going to be at least more directionally worse or better than what we did in the '05? Because I thought you had --?

I think on a structural basis we believe we have improved our business' gross margin. If you think about kind of the achievements over the last year, we have been doing some product pruning as this latest divestiture is one and product repositioning. We've done some things on the cost structure relative to our leaded IC that we outsource, our display driver IC which we are in sourcing. We're actually maximizing the cost structure so our expectation is that on a year-over-year basis we can achieve better gross margin and EBITDA on like revenue. And in addition, we are working to lower the Company's breakeven over the next couple of quarters to help that even further.

Finally on the OpEx side, I noticed that SG&A had ticked up by $6 million in the quarter. Is that a permanent tick up? Are we going to see something coming back? It's a little surprising that when you're trying to take expenses down that SG&A actually picked up by about 6 million on flat revenues.

The biggest piece of that was something accrued in incentive for nonexecutive employees for some achievements that they made through the year that got accrued all in the fourth quarter. As the likelihood of that achievement got realized in the fourth quarter.

So is it fair to say that next quarter you should go down by about the same amount then? You won't be accruing it all together in the first quarter, right?

We will not be accruing it all in the first quarter. There will be improvements on that (inaudible). at.

And this accrual, is being paid out or from a cash perspective, it didn't get paid out until the first quarter?

It was paid out right before Lunar New Year, so in January.

Thank you.

Jeff Harlib, Lehman Brothers.

Can you just talk about where you are with design wins from existing and new customers on the new mega pixel products? Are they in process? Have you received the wins yet and the timing of that?

Yes, basically through our previous VGA CMOS sensors chips, we are still maintaining a very solid relationship with the maker, the existing cellphone manufacturer, our existing customers. Currently we are working with those customers for our new mega pixel design-in activities. So this process is going on. And also we are closely working with the other major manufacturers in the United States, also closely working with one in Europe. That is one of the major suppliers worldwide, so all this activity is going on.

Okay. When do you expect to have those design wins in hand?

It is actually specific is going on now and the specific models now are under development, so in a couple of months we will see more clear outcome, but already a good seasonal is coming in.

Okay, and just in display drivers, can you quantify the kind of price pressure you're seeing versus what you expected and what you saw in the '05?

Yes. Basically through the market with kind of average of 20% prices annually is coming along, but according to our customers, the timing is somewhat different. And so based on our [particularly] negotiation depending on the supplier demand relationships, we are [divesting] it.

Okay.

One thing I can share with you is that basically there is a little of product mix change at our major customer sites, particularly they see more demand coming along for HDTV side so they are allocated capacity more to TV side.

Okay. Can you just clarify again on the foundry side these new products and the ramp you see in the second half? Where is that coming from again? What types of customers and products?

Basically all new customers. All new designing customers in our specialty area, particularly the power area, and also high-voltage analog mixed signal. And geographically U.S. is very active now and also Taiwan is active.

And just lastly, Bob, it looks like based on the revenue guidance you may be in line with Q1 '05 but you are saying you expect the margins to be better because of your actions or just generally how can you -- how do you look at overall bottom line?

We have not given specific bottom line guidance, but yes, we do expect margins to be better on a year-over-year basis versus '05 based on frankly some of the controls and cost structure improvements we have made.

Okay, thanks very much.

[Brad Adams], [Chiltman Investment Company].

Bob, could you give more specifics on the ASP decline for image sensors on a like-for-like basis in the first quarter? And then your expectations for market overall image sensor market decline the first quarter?

Sure. Dr. Huh, do you want to cover that?

Yes. Just a moment. In general CMOS image sensors throughout this year, we expect the kind of price ASP drop of about 30% per year in VGA and also about 35% range in 1.3 meg; 2 meg, about 40%.

Let's give it. I'll add some color to that. While that is a very steep ASP erosion, essentially I think it signals that in this market you have got to stay on the new product generations because the way you are able to deliver the market, the way we are able to deliver that market, that kind of price reduction is essentially through die strings and the follow-on product having a lower cost structure for us to offset that steep decline.

It is a remote, competitive market this year.

What about the actual -- you mentioned like a month ago or so that things got -- did it get more competitive? What has happened exactly? Is there new (technical difficulty) or existing players are more competitive or what is happening?

I would say that our product is in transition, so the bigger part of our volume has been in VGA and as those phones, the life of those phone designs are getting a little bit slower than we expected, we are in the process of designing in our two and three mega pixel products with customers and that we do expect to ramp through this year. But in the interim period, there is a bit of a gulf for us in the volume in that business that we expect that we'll get corrected through the year.

Do you expect any impact from Samsung making their own image sensors?

That has been the case for us competitively for a number of years. There is no change in the environment.

Thank you.

(OPERATOR INSTRUCTIONS) Alex Gauna, UBS.

Dr. Huh, I know you have already given a lot of color on image sensors. I'm wondering -- here in North America I have seen very few mega pixel camera phones shipping at present. I'm wondering have your OEM customers given you an idea of what percentage of the market has already gone over to the two or higher mega pixel camera phones? And have they given any targets on where they would like to be by the end of the year in terms of penetration of these higher mega pixel type of cellphones?

If you have any chance, fly to Asia. You will see a lot of mega pixel camera phones here. This is almost the standard. Overall, this is what I observe is at the beginning of the fifth year, about 50% volumes with the VGA; 4 mega, 35%; 2 mega roughly is about 15%. Overall 2006 as we move into the second half, we expect about 40% for VGA; and 30% for 1.3 meg; 2 meg of around 30%. So it is a shift happening towards the higher resolution.

Is there any particular region that you expect will be faster growing than the others? I guess you mentioned that Asia is already well ahead of the curve. Should that continue or are there some areas that are going to be playing catch up?

I think Asia will continue because the product life cycle is much shorter here, people changing the new model more frequently. And also a lot of new applications are coming along with targeting at these higher resolutions.

Are there any key metrics by which you are measuring your multi mega pixel product offerings versus the competition that's giving you an advantage right now in targeting key OEMs?

Basically in terms of production mix, still we are heavily -- depending on our VGA, but recently we're introducing our (indiscernible) VGA also mega pixel, so I expect we will change the product mix in terms of (indiscernible) throughout this year.

I think part of what you're asking was product features, correct? I think from a product feature perspective, there are some extremely technical measures that our customers use, but I would say competitively one of our approaches is to add as many camera functions in our ISP logic surrounding the actual picture so the reason our business is called Imaging Solutions, it is not just a pixel array. We are actually trying to add as many of the camera functions in the embedded logic, and I think that is really our competitive approach to the market that we're trying to differentiate in the 2 entry mega pixel product.

One more point that driving force moving the resolution toward a mega pixel is, in the past people thought of us will we need autofocus features to a cellphone for mega picture and now we can have just [64] colors for 2 mega pixel, so it will reduce the cost a lot or the contacts are smaller, much easier to fit into the camera phones. So it gives us another driving force which will employ the mega pixel applications.

Okay. On the foundry side, you've seen some pretty good growth with your North American customers. Can you give me a little color on what type of process technologies they are particularly attracted to and do you expect the rate of growth in this opportunity to increase, decrease, stay the same?

Still the volume sensors of 0.35 moving to the 0.25 particularly mixed signal power. As I said earlier, our modular PC technology is very unique. We have a lot of attractiveness in supporting power management. For every mobile device, the device will require power management. This is a items are coming along and also mixed signal as well. And today we more -- it is kind of a time to move into a more 0.18 micron geometry for applications in analog mixed signal. So also driver chips targeting at the mobile application and now it is shrink and down to a .18 geometry. So this is really the timing from our standpoint.

Is that move to 0.18 a part of the capital expenditure plans you already have dialed into 2006 projections?

It is but also we have already previously on the call talked about Fab 5, and that is open capacity for that specific revenue expansion. We actually have initiatives with various customers where that capacity will get utilized.

And you gave a CapEx target range of 9 to 12% of revenues. Should we think about it in terms of a fixed type of number that if revenues are better than expected it's going to come in at the lower end of that range or should we think of it in terms of if revenues are coming in better than expected that opens up the avenue or the window of opportunity for higher investments and it would actually be a larger percentage?

Higher revenue equals the bigger percentage.

Okay. That's what I thought.

And the issue for us is really we are expecting more of a hockey stick and a volume ramp in the back half of year and so you have to put the CapEx in front of that expansion.

Very good. Thank you.

Satya Chillara, American Technology Research.

Hi Bob and Dr. Huh. Bob, this question is for you. Gross margins on your image sensors, your direct competitor was giving out some numbers in their 10-Qs which I believe is close to high 40, 45, 48 kind of a number. Compared with OmniVision being a fabless guy. Where are you in terms of gross margins on your image sensor product line? Can you shed some light please?

Yes. We don't disclose the numbers, Satya. I appreciate that some of my competitors do. But frankly the mix of our product is not as comparable. I would say though in general the IDM cost structure is helpful for a large gross margin.

Right, okay. That's what I thought. Okay. Then the other question for Dr. Huh is, you guys talked about VGAs coming off. I am wondering what is the status with your 1 mega pixel image sensor? Where is it in terms of your production? And I thought still 1 mega pixel could have a lot of momentum in the first half of '06.

Yes, 1 mega pixel actually, a lot of momentum first half according to the second half as well. And currently the product we're shipping 1 mega pixel is [only] the one. But as I said, we're rolling out this quarter a version of 1.3 meg there, so we expect it has a smaller geometry with more competitive to meet the full sector requirement from major manufacturers. But this will bring us a new opportunity.

Okay. One last question. In terms of marketshare, if you look back in 2005 just looking at cellphones, where is your marketshare in cellphones assuming 300 to 350 million phones, camera phones were shipped? What kind of marketshare do you have?

Let me see, the last 2005, I don't have an exact number in my mind, but about 60 million units, that is my rough estimation. I will correct later if there is a discrepancy, but that is the number I have in my mind.

You shipped around 60 million units -- that's in cellphones, right?

Yes.

Great. Thank you.

[Toby Lewis], [Blackstone].

Just a few quick questions. I am curious with the DRAM ramp down and the backfill that you have gotten with other business, can you give us a sense how that has gone and has that business and completely replaced from the standpoint of utilization levels?

On the DRAM side, no. We have freed up overcapacity. It has provided room for growth for our foundry businesses, as we said out of North America. It doubled through from Q1 to Q4. But it does have room for growth into next year and that is important capacity for us. But frankly the DRAM business, that foundry business had gotten to the point where it was neutral to slightly negative on EBITDA. But we were going to continue that on a forward basis.

Our expectations as we head toward the end of '06 and end of '07, we will have filled the capacity that was otherwise there and then we'll have to invest as we grow. So we look at it on the positive side that that gives us the room for growth through this year.

Okay, and from the perspective of looking at utilization levels today, where do you think those would be if not for the DRAM overhang?

It would be close to 100%.

Bob, lastly, just speaking a little bit more about the restructuring that you mentioned, can you provide any more detail in terms of headcount capacity? What percent of headcount capacity might be impacted by the restructuring? What the timing of these actions might be?

We just completed them in the fourth quarter.

So it's all actions that have been completed? There's nothing going forward that you've got planned at this point?

We're trying to reduce our breakeven point through cost management initiatives, but we don't have further restructuring.

Okay, my apologies. I caught on a little late. Okay. Thank you.

Eric Toubin, America Securities.

Can you guys describe at all how much the application processor business contributed to the margin in the fourth quarter?

Yes, I think I stated before that was just a couple million dollars. But from a market perspective, the business that we are selling we will be doing foundry services in our SMS business and net-net we will be neutral to gross margin quarter-over-quarter.

Okay, and then the working capital, maybe the working capital improvement that wasn't recognized in the fourth quarter, do you expect to see more of the source in 1Q?

Not necessarily. We are continuing to try to make progress on our AR days and inventory days. We were pleased about where we were on the AP side. While we will continue to make efforts, I am not going to bake it in this next quarter.

Thanks.

Adam Benjamin, Jefferies & Co.

With respect to this sensor business, you talked a little bit about the market as to what you expect the mix to be between VGA, 1 mega pixel and 2 mega pixel. With respect to your specific business, can you comment on where you expect that mix to kind of shake out?

Yes, as I told you earlier about 30%, slightly less than 30% of volumes in the mega pixel, the majority is in VGA as of today. We will improve the mix moving into the toward the second half of this year particularly fourth quarter.

So as you exit calendar year '06, would you expect -- what would you expect that mix to look like?

By that time we expect about 50-50. That is the current expectation.

50-50 between VGA and 1 mega pixel?

VGA and the mega pixel. Mega pixel means the combining together 1 meg, 2 meg. And also we have (inaudible).

Within the breakout between 1 and 2, is it obviously slanted more toward one?

Our (indiscernible) will be similar because we expect more toward mega pixel volume will come up moving into the fourth quarter.

So more heavily weighted toward 2.

More heavily weighted toward as you exit the year?

Yes.

Okay. With respect just the current environment in terms of just seeing some better than normal seasonality in Q1 for camera phones, just curious what you were seeing with respect to your customers and just the channel in general?

In general the channel customers, they have sort of seasonality first-quarter but we will get back to normal from second quarter. So the demand is still there.

So you think this is normal seasonality in Q1?

I think so in our camera phone operation area.

Okay, and then as you look out over the next couple years, are there any other areas you're looking at as potential opportunities for future growth?

Future growth basically is CMOS image sensor as we roll the products, certainly this is one specific area. We can have the growth and also driver chip side as of today we see a lot of growth potential in driver chip specifically for HDTV. That is the area also we bring out new product as well. And also some more (indiscernible), that is a growing area. So also our specialty foundry we expect continued growth. We see all our three strategic business lines they are all growing business.

And just on just different applications sectors, I think, when we think about Imaging Solutions we've focused on the camera market and I think into the future we will have the ability to migrate that to other markets that have some other growth potential and other sensor applications in general. In the display driver IC side, I think the general trend is we are seeing people add more and more logic closer to the analog part of the circuitry. So our ability to have a higher value add in applications is definitely there on our technical roadmap and display driver IC.

Okay, great. Thanks a lot and good luck.

Quinn Bolton, Needham & Co.

You have gotten a lot of questions on the CMOS image sensor side of the business. I was wondering if you could just give a little bit more commentary on the display driver? Are you seeing sort of corporate average revenue declines in both large panel, small panel driver ICs in the first quarter? Are you seeing a difference in large or small panel market?

In our small DDI, I can see a slight increase as we are getting into first quarter, in the first and fourth quarter, okay? And a lot of the DDI is actually with the seasonality and also the customers more are allocating their capacity toward HGTV. As you know, both [LVDS] and HDTV for instance is smaller size per share of the PC monitors. A smaller application will consume more number of our shares, so according to their production mix which is some kind of carriers here.

Do you think the growth quarter-to-quarter in small panel, is that more through market share gains? It sounds like you are -- in the image sensor business, you're looking for more of a seasonal decline and some product transition issues but I guess I'm surprised to hear the --?

I think that's mostly because of the application spaces that we are in. We have got product that is in MP3s and is in handheld gaming and some application sectors that are doing quite well.

Actually small DDI, the whole market is growing; the whole market is growing.

But I would also say that we feel pretty good about the progress we’ve made with our acquisition of ISRON earlier in the year. So some of our penetration in the small space has recovered through 2005 through the addition of more technical people (inaudible).

In the case of small display case particularly mobile application, [TFC] and others of technologies of LVDS. We expect more market growth in the LVDS display because of head of display quality and also (indiscernible) in the applications. So we have a pretty good technology in LVDS driver chip, so this is another area for us as an opportunity.

Just last question can remind me of the annual price declines you're looking for both in the large panel and small panel DDI market?

Panel is over driver chip. As I said, about 20% and for small DDI, I expect for the rest of this year about 20% average annually.

Thank you.

[James Groome], [Regimen Capital].

Could you just talk a little bit about -- does your guidance sort of take in anything going on for Chinese New Year? And absent that, would we expect things to be a little bit better? Then you mentioned a little bit about CapEx. Any issues I guess on the back end especially away from Fab 5?

Let's take the last question first. Wafer foundries, our wafer fabs we do ourselves, so we don't have issues there. You asked about the back end. One of the major trends that we have done is in-source our display driver IC assembly and test as there is a cost advantage to do that. So at the end of fourth quarter, we expanded our capacity from 2 million a month to 8 million a month and doing that it saves us about 20% from what it would cost us on an outsourced basis. As that stabilizes, we are actually looking to extend it further through the year for both the cost advantages as well as to avoid some capacity tightness that we have seen in the outsourced market for display driver IC assembly and test. So I will leave the other part of the question to Dr. Huh.

Will you repeat the first question?

The first question is does your guidance take into account the impact of the New Year?

Because as a chip supplier we have longer lead times, so this weekend is Lunar New Year. So most of the case, it comes to early January, late December timeframe.

And then just lastly, you made a couple acquisitions last year to broaden your product capability. Where do you stand in terms of acquisitions? Is there you need to fill out?

No. Those two acquisitions strategically accomplished what we wanted and one in each of our core businesses in the foundry business. Really the only acquisitions we've done is acquisitions of resources internally expanding our customer engineering and customer support staff on a more global basis. And we're well on our way of accomplishing that as well. So in that case we were building it and I think our customers have validated that they are happy with the progress we have made on that side as well.

Thank you.

Sundar Varadarajan, Deutsche Bank.

Just another follow-up on CapEx. You've guided to $15 million for the first quarter and you also mentioned that given the ramps you expect in the second half, you expect CapEx to be a little front-end loaded but does that mean you're going to see a significant ramp in Q2? And if so, could you provide some more definitive visibility on what the CapEx might be?

We expect there to be heavier CapEx in the second and third quarter versus Q1 and Q4.

And given the outlook you have for Q1, from a free cash flow perspective, what is your viewpoint on '06 for right now? Do you expect to be --?

For the full year we expect to be building cash.

Still expect to be building cash?

Yes.

[Jeffrey Brown], Credit Suisse.

Just a quick question. As it relates to the unit volumes going sequentially from the fourth to the first quarter, is that still increasing a lot -- it's just the spicing that's offsetting that, bringing the revenue down significantly or units also softening as well? I'm talking about the image sensors. Sorry.

Image sensors, yes, unit volume is down.

I guess through the year looking into next year given that demand generally has been good I guess outside of the first quarter, is there any reason why price declines have been so steep? I mean is there just extra inventory out there or there are a lot of competitors coming in or is that just normally what you see every year?

Just as the semiconductor CMOS image sensor case, you can see certain similarities to DRAM because demand -- in a supply/demand there, so by lowering down the price, they can create more demand. So (indiscernible), this is the pace of semiconductor device so hard to control the [COMs], but bring out the right amount of gross margin.

Help me then just lastly, the (indiscernible) on the image sensors, is there any fear that you are losing any share given that as you try to ramp up the mega pixels and other companies are ahead of you guys -- is there any issues of losing some customers to your competitors?

I think objectively we have lost share through this year from where we were in the product transition from VGA to mega pixel. It is partly why we did the acquisition of IC Media and added technical staff. And really it has taken us about nine months to recover our technical position. Now we are hoping to reap the benefits of those new products into the market in getting some of that share back.

Okay, thanks.

Thank you, everyone, for joining us today on the call. I think that was the last person in line. So operator, thank you very much.

Okay, thank you.

This concludes this morning's teleconference. Thank you for your participation, ladies and gentlemen, and you may disconnect your lines at this time.