Magnachip Semiconductor Corp (MX) 2006 Q1 法說會逐字稿

Accented speakers, some parts unintelligible; transcript is best product.

Greetings, ladies and gentlemen, and welcome to the MagnaChip Semiconductor, Ltd., First Quarter 2006 Results Earnings Conference Call. [Operator Instructions]

It is now my pleasure to introduce your host, Mr. David Pasquale of the Ruth Group.

Thank you, operator, and welcome everyone to MagnaChip’s First Quarter 2006 Earnings Call. Joining us today from the Company are Dr. Youm Huh, President and Chief Executive Officer and Bob Krakauer, Executive Vice President of Strategic Operations and CFO.

Dr. Huh will review the overview of 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 today’s results release, please call (646) 536-7003 or you can get a copy off of MagnaChip’s website.

Before we begin the former 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 a certain fact may be deemed to be a forward-looking statement that involves a number of risks and uncertainties that could cause actual results differ materially. In some cases, you can identify forward-looking statements by such terms as ‘believe,’ ‘expect,’ ‘anticipate,’ ‘intend,’ ‘estimated,’ the negative of these terms or other comparable terminology. Factors that could cause actual results to differ include general business and economic conditions in the state of the semiconductor industry, demand for any of these products by consumers and inventory levels of such product in the supply chain. Changes in demand from significant customers, changes in customer order pattern, changes in product mix, capacity utilization, level of competition, pricing pressure, and declines in average selling price, delays in new product introduction, continued success in technological innovations, and delivery of products with the features customers demand. Shortage in supply of materials for capacity requirements, availability of financing, exchange rate fluctuation, litigation, and other risks as described in the Company’s SEC Filing including its annual reporting form 10-K for the period ended December 31, 2005. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance, or achievements. You should not place undue reliance on these forward-looking statements.

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

Thank you for joining us on today’s call. We were able to achieve, essentially, pleasant revenue on a year over year basis. Even so, the prior year included a full quarter’s revenue from our application process, DigitNet, which we have now sold and those are from [Digi] foundry, DigitNet, which we have now discontinued.

On a net basis, revenue generated from our core business has increased 13% year over year. This is encouraging and it reflects strength of our core business and the new programs we are bringing online.

We are encouraged by the positive reception of our approach to grow our foundry services with the needs of our analog and mixed signal customers down to the 0.18 and 0.15 micro-geometries, which have developed and seen [inaudible] design pipeline.

We have already started promotion of a new 1.3 and 2.0 megapixel CMOS SOC Image Sensors and we focus on designing ones with customer samples available for May.

Additionally, we are working on major designing of a small compact of VGA, CMOS Image Sensor with a large mobile phone and the pictures around the world.

We believe these efforts will drive our volume in the second half of the year.

Our small DDI products continue to penetrate all the market designs, particularly, in mobile phone applications.

In Q1, we starting to deliver customer samples of QC and QQVGA Display Driver Chips for high volume and color TFT display. We now have a product portfolio of QVGA, QC, and the QQVGA targeted at customers in mobile applications.

Design activities are in progress and we expect design wins at the major module suppliers in Q2. We also started to ship our first timing controller for LCD monitor displays for 420 [inaudible] Solutions.

In line with these efforts, we had a very successful SMS technology symposium in Beijing with attendees from IC design houses, customers and technology partners from China, and also showcased our line of Imaging Solutions at the 3GSM World Congress in Barcelona, Spain.

In terms of our overall business trends, the pricing environment during the first quarter was in- line with expectations, and we expect a slight decrease in Q2. Average selling price risen from Q4 2005 to Q1 2006 was approximately 4.8% for Display Driver IC, 4.3% for CMOS Image Sensors, and 7.4% in our wafer foundry business.

Revenue by geography was 50% from Korea, 20% from Greater China, 12% from Japan, and 18% from the rest of the world. For revenue by end of market four quarters, 11% from wireless, 25% from computing, 2% [industry], 18% the consumer, and 44% from wafer foundry.

In the first quarter, we had one customer greater than 10% and out of the top 10 customers represented of 58% of our quarter revenue.

Top customers in alphabetical order include LL MicroElectronics, LG Phillips LCD, LG Electronics, Samsung, Sharp, Seiko Instrument, Syncronex, [inaudible] Tech, Sunplus and TLSI. TLSI is a [inaudible] company in Korea.

Our foundry business remains 11th with the prior quarter as we fully focus on the needs for specialty foundries overseas, in analog, mixed signal, power, and embedded memory. We experienced a surge demand in some of our older processes offset by some inventory assessment and the customers in the display driver segment.

We have experienced average selling price [erosion] in our large display driver IT business as we expected in the first quarter. This is a [inaudible] is slower first quarter of the year.

Gross margin for the first quarter was at 19.2%

Finally, [inaudible]. For the second quarter of 2006, we expect reduced revenues in the range of 5% to 7% as we make the transition to new products and also expect softer demand from the [inaudible] markets for business being-- driver chips.

We expect the transition will improve our revenue growth profile into the second half of the year.

We [currently] have over 70 designs in process with customers for our megapixel CMOS Image Sensors. We have [imported] [inaudible] and the potential volume ramps coming in the second half of the year.

We will be able to update you on our progress in our next call.

Based on mixed chips and our customers demand at the end of market, additional price pressure, and inventory assessment, we expect to hit a flat revenue in display drivers in coming quarter. Our growth prospect in the small DDI device continues to gain momentum with the new design wins, and we expect an improvement in revenue growth in the second half of the year.

Now, let me turn it over to Bob.

Thank you, Dr. Huh. Overall, the first quarter developed as we expected. We continue to drive our core business while implementing structural enhancements aimed at improving our profitability. One such initiative is a Six Sigma Management System we formerly launched this quarter. This is expected to result in an improved product quality, substantial cost savings, and enhance our industry leading profile.

This initiative specifically focuses on three areas within MagnaChip, sales and marketing, research and development, and production. We have completed extensive greenbelt training for team leaders as well as black belt training for core Six Sigma members, that focuses on the application of statistics on root cause problem- solving.

This program is already achieving results with an improvement of 4 percentage points of improvement and overall yield in production from January to March.

Our Six Sigma initiatives will allow us to more effectively deliver industry leading solutions to our consumer electronics and communication customers worldwide, and place us on the same corporate development path as recognized global industry leaders.

This program is not only limited to enhancing cost savings and quality, but will be actively used to improve overall business management, innovation, and execution.

This quarter we also completed the sale of our application process of business to ABOV Semiconductor Company, Ltd., and the close of this sale allows us to focus on our three core businesses, Display Solutions, Imaging Solutions, and our Semiconductor Manufacturing Services.

MagnaChip will continue to provide foundry services to this new entity.

Now, let me move to the detailed financials.

Net revenue for the three months ended April 2, 2006, was $213.3 million compared to $213.4 million in the first quarter of 2005.

Gross margin was $40.3 or 18.9% of revenue for the quarter ended April 2, 2006, compared to $26 million or 12.2% of revenue in the quarter ended March 31, 2005.

We continue to expect structural cost improvements in our Display Solution business, as we have expanded in-house capacity to package and test the Driver ICs. This improves the service levels to some of our largest customers and reduces our dependence on external suppliers who have increasingly had capacity constraints.

We are achieving in improvement of approximately 30% versus outsourcing currently.

Operating expenses were $51.4 million in the first quarter or 24.1% of net revenue compared to $54.6 million or 25.6% of net revenue during the first quarter of 2005.

The decline on both the dollar and percentage basis reflects our cost control efforts in the structural changes to our business.

We had an operating loss of $11.1 million during the quarter compared to an operating loss of $28.6 million in the prior year quarter.

R&D Expense in the first quarter was $29.9 million or 14% of revenue compared to $26.1 million in the year ago period.

Net interest expense for the first quarter was $14.7 million compared to $13.9 million in the first quarter of 2005.

Other non-operating income is comprised of the net affected currency gains and losses during the period and most of these currency affects are non-cash impacts of outstanding inter-company debt.

Debt loss for the three months ended March 31, 2006, was $3.3 million compared to a net loss of $31.3 million in the prior year quarter. Excuse me, and that was April 2, 2006.

Depreciation and Amortization expense was $50.3 million or approximately 24% of revenue in the first quarter.

EBDA for the first quarter was $39.2 million compared to $26.7 million in the year ago period. While EBDA is not defined by generally accepted accounting principles, is commonly used to measure a company’s ability to service debt.

[Day] count as of the end of the quarter was approximately $3,807, this is a reduction of 9.4% from one year ago.

Capital expenditures for the first quarter was $14.2 million versus $13 million in the prior quarter.

We expect CapEx will be approximately $78 to $85 million this year dependent on the volume ramp requirements for our CMOS Image Sensor business in the fourth quarter.

Total available cash and cash equivalence were $88.6 million at the end of the first quarter.

Accounts payable base were at 49, a decrease from 63 in the fourth quarter due to the timing of payments related to [inaudible] equipment and working capital management at the end of the year.

Accounts receivable and other reserves were $96.4 million at quarter end, a reduction of $15.7 million from the fourth quarter, and our accounts receivable days of sales outstanding were 42 compared to 41 in the prior quarter.

Inventory days of supply were 43, consistent with the fourth quarter, and net inventory was $81.6 million.

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

[Operator Instructions] Sundar [Varadarajan] of Fletcher Bank.

On the SG&A side, you are down remarkably from Q4, almost down $13 million. What was driving that improvement and on a go forward basis can we expect on dollar terms as SG&A to continue at the levels you saw in Q1?

Well, on a non-GAAP basis, no charges is down several million, so it wasn’t as big, but we continue to manage SG&A. In the fourth quarter you got to remember we had a charge related to the sale of our application processor business--

But, that wasn’t restructuring, right?

Yes, but after that we dropped SG&A several million just on cost control.

And, again, on a go forward basis, do you think it straight-lines in and around where you are right now or any reason to see any pickup as to ramp up on the other businesses in the second half?

No, we will have some additional investments in R&D that will accelerate for the year that we hope to offset with reductions and control in SG&A. The debt net operating sense is we’re hoping to keep fairly steady.

All right. And, on the megapixel products, could you talk a little bit more about design wins? When can we hear more on any design wins in the new products? Is it sometime during the second quarter? How do we get more comfortable that we’re going to see the second half ramp with these new products?

Okay. For megapixel products, still we are in process of designing [inaudible] major customers, and since we introduced the [inaudible] or so we went through one cycle with our customers-- different customers because we include the picture quality and, so we are in shape-- we already have a-- second quarter we expect, I believe, the weekend, we have the position to share something with you and, so reserved was the-- extra reserve, we can see profits second half of the--

Okay. When you say FIDA is 7%, you’re talking sequential here, right?

Yes, we are.

All right. Thanks.

Jeff Harlib of Lehman Bros.

All right. Just with the Q2 revenue guidance, what are some of the other areas accounting for that given that it’s, typically, seasonal pickup in that quarter? I realize you had to delay the image sensor, but talk a little bit about the foundry and the display driver businesses.

Okay. We expect flat revenue going to second quarter and, maybe, slightly down. When we look at the second quarter, actually, we see some potential inventory [inaudible]and let’s hope the demand in [inaudible] tied to PC side. So, that’s one thing. And, as you know from our driver chips standpoint, actually, more [inaudible]consumes the more number of chips than [SBTV], or even [inaudible]. So, it ties to our revenue and this small DDI, we expect will continue and foundry side, I think is slightly down because of our customer situation.

Okay, and all the new product and the new customers design activities, we can see some affect that has over the year.

Yes, and just to clarify, Jeff, in the CMOS sensor business I think it’s, as we discussed before, we didn’t expect Q2 to be our low point from a product transition perspective. Q2 of 2006, this year, will be the low point and it won’t be until Q3-- Q4 when we get new design wins that ramp into volume.

So, you know that there’s a delay from actual designing to actual revenues generation from volume ramp up from our customers.

Right, right. And, just can you amplify on the foundry business? You said due to a customer’s situation with the foundry business? What--

Well, there’s some of our customers that are in our foundry business that also in the Display Driver IT business and are being impacted by that end market as well. I’d also say in the small display business we’ve seen one end market in gaming that’s been a little slower than that customer’s expecting. So, nothing to do with us, but just some slowness in the customer end market.

Okay. Okay, and the-- on the CMOS Image Sensor business then you’re looking at the ramp-- more at the late Q3 into Q4 as things stand now?

Yes, more in Q4.

Okay. And, any general discussion on gross margin, 2Q versus-- 1Q is just [inaudible] now?

I think given our guidance on revenue, we would expect gross margin in the best case to be flat and in the worse case to be down somewhere we’re currently at.

Okay. Okay, and with the Six Sigma program, can you just talk about the implementation of these actions and some of the key things you’re doing operationally?

Yes, I think this is the application of detail problem-solving games, applying the design of experiments and fiscal problem-solving. Two specific yield points in our factories and we’re very pleased to see the first four-- what we call Master Black Belt Projects, have helped directly impact yield improvements in the first quarter when we saw yield go out from that, plus just general efforts by 4 percentage points January to March is, actually, what helped achieve some of our gross margin this quarter and, so we’re hopeful based on the first start, that that benefit will continue to accrue as we move forward.

Additionally, we also have some technical consultation on specific yield enhancement on our 0.18 process on a technical, semi conductor physics perspective, that’s also helping us on that--

Okay, good, and what was your overall factor of utilization this quarter?

Up 79%.

Okay. Thank you.

[Operator Instructions] Jeffrey Brown of Credit Suisse.

Hi. How long does it take to ramp up volume production if you’re still in the process of binding and getting the finally design and we’re already in May, do you expect the ramp to be-- is there potential for a ramp to be pushed out beyond the fourth quarter of this year into early next year based upon when you finalize those customer wins?

Yes, there’s a typical delay in six to nine months from initial design to volume [inaudible]. Yes, six to nine months. The cycles are pretty long because CMOS Image Sensor case, our customer, they always need to get another qualification plan. They are end customers. Heavier providers, so it’s somewhat longer.

Well, I’m trying to get a sense as to what the likelihood of you being able to-- it sounds like you’ve done the design part of it, is there any possibility that that ramp that you’re hoping to happen in the fourth quarter gets delayed based upon customers not coming in quickly-- ?

Well, we expect-- actually, the much [inaudible] design is in process, so all this stuff-- we can see a ramp up around fourth quarter, surely.

But, I would say that, yes, we have risks, and as we said in our earnings script, we will continue to update the market about how we’re progressing.

As it relates to the potential IPO in the second half, is that still something that you’re thinking about or something you’re still evaluating, or any change in your thought process there?

No, we are still expecting that we would go public when our revenue ramps, and as we just discussed, the timing of that is still uncertain, although, we expect it in the fourth quarter, I think it’s realistic to say at this point that we don’t expect that process to start here in 2006.

Okay. Thanks, a lot.

Tore Svanberg of Piper Jaffray.

Hi, this is Heidi Poon calling for Tore. Could you give us a little bit more color on the display driver market? So, you [inaudible] you’re seeing some weakness on the PC side, and your customers seeing some particular weakness in a gaming side, but you can comment on your overall view of the large panel display driver versus the small panel display driver demand?

Okay, actually, I already covered about monitor display case for 630 PC application and, actually, another volume increase coming in the TVL application, STTV, that increase is very [inaudible], but as I told you earlier, from MagnaChip’s endpoint, we have a setback for a certain period technically. The reason is our major customers allocated more capacity to STTV from monitors and the STTV case or unit base for a unit display module base, they consume less number of chips from a less capacity standpoint. Okay. So, actually, at that kind of a softer demand, but we have to go through this transition period, that from the point the actual the unit numbers demand would increase, okay, and our mobile application side, cell phones continues growing, and we expect potential the demand for driver chip, particularly, the STTV side add more-- today the color is TN displaced, changing to [TSHCD]. As you know, camera phones will require more higher quality display and, so as it comes in, in the second half of the year, we can see some benefits.

What is your mix to date between large and small panel drivers?

Large and what? Small?

Yes.

As the [inaudible] much bigger percentage is with large media. Almost 70% of shipment is with large media for the quarter.

Great. And, with the design wins that is still in progress, should those work out? What is your anticipation of your mix by the end of the year between your VGA 1.0 megapixel and 2.0 megapixel product for the-- ?

Let’s see, are you asking what number of a design is or-- ?

With ramp that could be anticipated if its design wouldn’t work out--

Okay. Because in a crunch we’re making a [inaudible]with a major mobile phone manufacturers. Korea’s [work] is outside of Korea. We see a good opportunity here, but the actual demand, we are depending on a couple of factors. First one, even when we get a design in and take to model, that model will pick up in the market once the product is released by our customers. Okay. As you know, [inaudible] that most mobile phone manufacturers they use 7 to 10 models in market, and couple of them [inaudible] and they will create a pretty good demand. Okay. So, say the [inaudible] is there, and also in how the market will move ahead, in a couple of directions, so we have to consider all this together. So, much harder to say, some you can predict a number, but we trying to make as many as design wins and, so we expect some ramp up opportunities out there in fourth quarter.

Great. Thank you.

Quinn Bolton of Needham & Co.

Hi, Dr. Huh. Hi, Bob. Just wondering if you could give us just an update on what you see going on the competitive landscape for CMOS Image Sensors. Sounds like you and a number of your competitors have improved the quality, the megapixel and 2 megapixel designs, but I’m wondering if you have seen the market become more competitive, what you think that might imply for pricing heading into the second half. Do you think it stayed pretty aggressive or do you think we, actually, see stabilization as the market just shifts from VGA to the megapixel and 2 megapixel designs?

Okay. Yes, it’s [inaudible] completely the landscape. As of today, you can compare two years ago with when VGA was a major volume and [inaudible]. There were about 8 to 10 major suppliers in the world, and as of today, when we got into our megapixel arena, you can see only a few volume suppliers in the market. Unfortunately, today, actually, one supplier and also [inaudible]. Okay. So, because of that, this is the case that the difficulties of-- technical difficulties coming up more as we’re moving ahead and more megapixel with, actually, a smaller picture size.

So, because of that, we know that our computers improving the picture quality, but also we make a very good progress in catching up and our recent [inaudible], I’m confident the picture quality is very competitive and, particularly, we’re using all the metric technology, but providing same [inaudible] smaller bite size, consequently, we can have a cost advantage.

So, we’re combining this together. We, maybe, actually, moving ahead for designing and for mid size, right, very interesting thing is a year as of today, a lot of new demands are coming along from lower end size, particularly, India, China, [inaudible]. So, it continues to be a camera phone applications expanded toward the lower end size as well. So, because of that, we expect about-- in the last earnings [inaudible] about 40% of a unit volume [we’ll] have a VGA, but we’ll still see a strong demand for VGA by end of the year, about 35%. Also, 1.3 megapixels demand is very strong, 35% range and only a 20% over above would require a 2.0 megapixel.

Okay. So, it’s in the major mobile phone manufactures. Its company had little different product position in the market. So, but as we’re combining to get it, this is our information.

Okay. Given this ramp or intended ramp in the fourth quarter and beyond, any plans to temporarily fill that, I believe we moved the D ramp business out of Fab Five, and it sounds like we’ve got a couple of quarters before the big CMOS Image Sensor ramp hits and, so is there any plans near term to try and prove the utilization or profitability of that Fab Five facility?

The Fab Five doesn’t just support CMOS Image Sensors. It also supports our wafer foundry business and we, actually, have a very large pipeline of customers targeted towards Fab Five and our foundry business for mixed signal and large, and power management application based. So, it’ll, actually, get Fab longer term, reflecting more boundaries than it is a CMOS Image Center even in the long-term.

And, also a small driver chips, more smoother to using a 0.18 with the new design.

Okay. You made a couple of comments about the analog and mixed signal business being down a little bit in Q2 and then also some weakness on a monitor side. Do you think that that’s a reflection of just market demand softening? Do you think it’s inventory build or is it really more end customer or end market specific? Again, you made a comment specifically about monitors, but any broader trends you can see about inventories or just demand across your end markets?

I didn’t see much inventory situation coming along from major customers in general, but this is very customer specific.

Okay, great. Thank you.

Eric Toubin of Banc of America Securities.

Eric Toubin. Hi. Could you tell us what portion of your 2Q ’05 revenue you would have considered non-core and what that might have contributed to gross margin?

Yes, it was about $30 million and at the time the business was just a little bit needed that positive, so it was gross margin negative.

Great. Thank you.

Michael Bretz of WR Hambrecht.

Good evening, gentlemen. Going down the path of the driver IT business, can you talk specifically about some of the customer issues, particularly, for monitors and switching over some business to TVs. When you talked about the weakness you’re seeing there with the monitors, would you characterize that as being more specific to manage because those customers which you went through or is it something that you think is more industry-wide?

Yes, I’m not sure I-- [inaudible] correctly. We have several big customers, right, and they’re customers see their inventory leverage, so they typing up the inventory level and, usually, they kept it about two weeks, but now they’re just down to one week to give us impact. I showed them back in the second quarter.

Let me give a little color on your question. I think from where we sit, we would only be guessing as to some of the causes, but it would appear to us to either be a little bit of softening in the competing markets and/or an active choice, moving the mix towards digital TV or a bit of both.

Okay. Fair enough. So, nothing like where you would see industry-wide inventory problems in monitors, but more just a mix issue [inaudible] your customers?

Not general, but as you see, if you look at all [inaudible] pictures, worldwide capacities, supplies versus the demand is somewhat balanced and, so but as a new larger capacities coming up with a seventh generation, that-- in how they arrange the mix allocations, that becomes an issue.

Okay, terrific. And, then switching over to the Image Sensor side, as you look forward over the later part of this year and then on into ’07, can you talk a little bit about what percentage you guys are projected to have more than one sensor or per phone, and if it’s looking at where it’s VGA and 1.3, does that transition over to 1.3 and 2.0 at some point in time or this is VGA supposed to be pretty good for just the video side of it?

Well, two image sensors, right. Usually, a 3GSM supporting video conferencing, in that case, most of applications using two sensors.

Okay, I’m just asking to project forward, do you have an identification about what percentage you expect to have two sensors in the phones and especially in the customers you target, or is it pretty much going to be a small piece of market?

As of today, it’s more percentage, but it went [inaudible] it would be a more of the higher percentage--

Okay. And, then you have an idea about where you think your current market shares stood in terms of interest right now?

Of course, the market share is over 50 years because we have [inaudible]. So, that we expect about 12% range-- 12% or 14% range. That’s our estimation.

For 2006?

2006, yes. This is our rough estimation.

Okay, great. In terms of, Bob, specifically, on timeline for your current litigation with your fellow Korean Image Sensor supplier, what timeframe should be milestones for that?

Yes, obviously, that process takes a long time. So, we’ll work it through the court system, typically, one to two years in total.

Okay, great. Thanks, guys.

Just to add onto that, I think you point out something that doesn’t get discussed too often, but we are fully behind protecting our intellectual property around the globe, and we will continue to do so.

[Operator Instructions] Sundar Varadarajan of Fletcher Bank.

Could you quantify how much revenue you add in the last year’s quarter from that part of the business and, also you maintained a foundry relationship with them, so was there-- did you get some of that revenue from them this quarter as well as on a net basis if you look at that business could you, actually, give us a dollar number of what you lost on the retail side but, maybe, picked up on the foundry side this year versus last?

Yes. Net difference fourth quarter to first quarter is down $5 million, but it’s at a better margin.

Okay. And, what about first of-- ?

Yes, year over year basis down-- it’s about $5.8.

So, similar number on a net basis. Okay. And, on the working capital front, you did pay down tables. Now, do we expect that to build up during the remainder of the year or are you going to stay flat, and also you ramp up on the new products, are we going to see some inventory build up as you try to get the megapixel products ramped up in the second half?

Yes, and A/P, actually, it’s a low level right now, so I expect it to go up to the 50 to 60 days range as we go through the year. On the inventory, we actually stocked up inventory for wafers because of wafer constraints this year. I’d expect inventory on a dollar bases to grow as we go through the ramp through the year, but I think in general the inventory turns is, actually, a little bit on the high side for our business based on that strategic choice to stock up on extra inventory on a wafer supply.

Okay. All right. Thank you.

So, I’m not expecting inventory days to grow that much.

There are not further questions in the queue at this time. I’d like to turn the floor back over to management for closing comments.

Okay. Thank you, very much, all of you on joining us. Thank you, very much.

Thank you.

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