Magnachip Semiconductor Corp (MX) 2006 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the MagnaChip Semiconductor, Ltd., Second Quarter 2006 Results Earnings Conference Call. [OPERATOR INSTRUCTIONS.] As a reminder, this conference is being recorded.

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

Thank you, operator, and welcome everyone to MagnaChip’s Second Quarter 2006 Earnings Call. Joining us today from the Company are Mr. Sang Park, the Company’s new President and Chief Executive Officer, and Mr. Bob Krakauer, Executive Vice President of Corporate Operations and CFO.

Mr. Park 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 at The Ruth Group, or you can get a copy off of the release 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 historical 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 believes, expects, anticipates, intends, estimated, the negative of these terms, or other comparable terminology.

Factors that could cause actual results to differ include general business and economic conditions and the state of the semiconductor industry; demand for any of these products by consumers and inventory levels of such products in the supply chain; changes in demand from significant customers; changes in customer order pattern; changes in product mix; capacity utilization; the 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 report on 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 Mr. Park. Please go ahead, sir.

Good morning and thank you for joining us on today’s call.

On a personal note, this is the first time I’m speaking with most of you as I have now been at the MagnaChip for just over 50 days. This is a bit of a homecoming for me since earlier in my career I served as COO and CEO of Hynix and managed in both memory and system IC businesses.

With over 30 years of experience in semiconductors and electronic industries that included Hynix, iSuppli, IBM, and Hewlett-Packard, I bring a lot of experience and broad electronic industry relationships to assist MagnaChip in getting back on track for growth in revenue and earnings.

When I was initially approached about this position, I knew I could jump right in and help the Company obtain the growth it is capable of. I know what technology and manufacturing capability and the human assets of MagnaChip are capable of. And I’ll tell you with a confidence that it can be a much-- it can be much more than a $200 million in revenue per quarter company. I’m not happy with that performance. Our management team and employees are not happy. We understand that our investors are not happy with this performance as well. I assure you we are taking steps to fix this in the longer term.

We have launched aggressive corrective actions for the business going forward. Our actions, with a customer-centric in mind, include escalating our technology delivery into CMOS Imaging Sensor markets, achieving a world-class quality level, and expanding our portfolio of offerings in the wafer foundry business to include more advanced [inaudible] technology tailored to specialty niches which serves panel-- power management and mixed signal application areas. My goal is for everybody at MagnaChip to take on a renewed sense of urgency and accountability in these efforts.

We are more focused than ever before, executing [inaudible] on our revenue through strengthening customer relationships, new product introductions, and the expansion of our foundry services.

I would like to thank everybody at the company for making my transition very smooth. I was able to jump in and to make the progress immediately. We have no time to waste given the important launches we have underway, and our planned recovery in revenue growth.

Our 2 meg CMOS Imagining Sensor and our high performance 1.3 meg CMOS Imagining Sensor have passed important qualification milestones with our key customers, and we expect the volume from this product to ramp up into fourth quarter and 2007. We believe that our recovery in this key area has begun.

We were surprised by sudden downturn of orders in Display Driver business, as end market of this product had sudden slowdown and [inaudible] to build up eventually in the later half of the quarter. As a result, we will be looking further [inaudible] issues in the channel into next quarter as these inventory levels are reduced.

Our wafer foundry business continues to show stable growth, and we expect to expand our 0.18 micron services to the customers into fourth quarter. Our pipeline of new customers has never been better, and we continue to work through the qualifications and volume ramp up with over 10 new customers.

Now, let me turn this over to Bob for the review of financials.

Thank you, Sang.

Net revenue for the three months ended July 3rd, 2006, was $197.6 million compared to $236 million in the second quarter of 2005. This is a decline of 7.3% from the first quarter of 2006.

Average selling price erosion during the quarter was 5.1% in our Display Driver business, 4.8% in our Wafer Foundry, and essentially flat in our CMOS Image Sensor products.

Revenue by geography was 51% in Korea, 25% from Greater China, 10% from Japan, and 14% from Rest of World. Revenue by end market for the quarter was 10% from Wireless, 27% from Computer, 1% Industrial, 11% from Consumer, and 51% from our wafer foundry business. And further in our wafer foundry business, it’s broken down into 26% from Wireless, 33% from Computing, 37% from Consumer, and the remaining 4% in Industrial.

In the first quarter we had one customer greater than 10%, and the top 10 customers represented 57% of total revenue. The top customers in alphabetical order include AATI, Cirrus Logic, ELAN Microelectronics, LG Philips LCD, [Hon] Semiconductor, Samsung AMLCD, Sharp, SII, Citronics and Solomon Systech.

Gross margin was $20.3 or 10.3% of revenue for the quarter ended July 3rd, 2006, compared to $60.4 million or 25.6% of revenue for the quarter ended June 30, 2005. This was lower than our expectations due to price pressure in the Display Driver business, lower margin mix in our foundry business, and the impact of Legacy’s CMOS Image Sensor products volume falling off faster than we had expected, prior to our expected ramp in new and better margin product into the future quarters.

Underutilization of Fab 5 capacity continued this quarter and, therefore, we took a charge pursuant to the Statement of Financial Accounting Standards #151, charging related overhead expenses to the current period versus capitalizing them into inventory value.

We also recorded inventory charges of $6 million for excess, slow moving, or lower cost or market charges, as well as had an inventory use that reduced gross margin in the period. That inventory use was $19.5 million, reduced from the overhead absorption.

Additionally, the majority of our costs are denominated in Korean Won. And the strengthening of the Korean Won versus the U.S. dollar has effectively raised our cost structure $5.8 million U.S. in the second quarter versus the prior quarter.

Operating expenses were $149.6 million in the second quarter. This included restructuring and impairment charges of $93.7 million. The impairment charges were taken pursuant to Statement of Financial Accounting Standards #144, Impairment of Disposal of Long-Lived Assets. We made an impairment of our Fab 5 wafer fabrication facility as it has been significantly underutilized, and its related customer intangibles. The impairment charge for tangible assets was $65.6 million, and $27.0 million for intangible assets. We utilized third-party valuations in making these impairments.

Excluding the restructuring and impairment charges, operating expenses for the second quarter of 2006 were $55.9 million, or 28.3% of net revenue, compared to $57.4 million or 24.3% of net revenue during the second quarter of 2005. the decline on both the dollar and percentage basis reflects our cost control efforts and the structural changes to our business.

We had an operating loss of $129.3 million during the quarter. Excluding the restructuring and impairment charges, the operating loss for the second quarter of 2006 was $35.6 million compared to an operating income of $3 million in the prior year’s second quarter.

R&D Expense in the second quarter was $33.9 million or 17% of revenue, compared to $27.5 million in the year ago period. These operating expenses include a one-time expenses for R&D of approximately $4 million for technology licensing during the quarter.

Net interest expense for the second quarter was $14.4 million, compared to $14 million in the second quarter of 2005.

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

Net loss for the three months ended July 3rd, 2006, was $132.1 million. Excluding the restructuring and impairment charges, the loss was $38.4 million compared to a net loss of $22.2 million in the prior year’s second quarter.

Depreciation and amortization expense was $52.2 million, or approximately 26% of revenue in the second quarter. As a result of the impairment charge, we expect depreciation and amortization to be reduced in the following quarter by $9.6 million.

EBITDA for the second quarter was $16.5 million compared to $39.2 million in the prior quarter, and $51.9 million in the year ago period. While EBITDA is not defined by generally accepted accounting principles, it is commonly used to measure a company’s ability to service debt.

Our current revolving line of credit for $100 million has financial covenants linked to EBITDA performance. We have successfully amended our credit agreement with our lenders to take into account our current EBITDA performance, and we thank them for their continuing support of the Company. The full line continues to be available.

Head count as of July 3rd, 2006 was approximately 3,725. This is a reduction of 8.7% from one year ago.

Capital expenditures for the second quarter were $6.3 million versus $14.3 million in the prior quarter.

We expect CapEx will be approximately $58 to $80 million for the full year, dependent on the volume ramp requirements for our CMOS Image Sensor business, and 0.18 foundry services in the fourth quarter.

Total available cash and cash equivalence were $86.5 million as of the end of the second quarter.

Accounts payable days were at 40, a decrease from 49 in the first quarter, due to the timing of payments related to capital equipment and working capital management.

Accounts receivable net of reserves was $96 million at quarter end, a reduction of $410,000 from the first quarter. Accounts receivable days of sales outstanding were 44 compared to 42 in the prior quarter.

Inventory days of supply were 32, down from 43 in the first quarter, and net inventory was $62.2 million, a significant reduction from the prior quarter as we shipped $19.5 million from inventory.

In terms of our outlook for the third quarter of 2006, we expect revenue to be 6% to 9% lower compared to the second quarter given inventory issues in our end markets. We expect gross margins to be flat and core operating expenses to come down in the next quarter.

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

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

Guys, a few questions here. The first question’s for Sang. I guess-- you made the promise about corrective actions that you guys have undertaken and your, I guess, sort of confidence in the customer pipeline. Can you give us some more detail as to specifically on the corrective actions what you’re actually putting in place? What tangible evidence we should be able to see over the next one or two quarters, the main timeframe we should expect to see from that? Are there any headcount reductions we should expect as well?

And then, on the new customer pipeline, what gives you guys as much confidence as you’re suggesting in terms of what you have in the pipeline? And maybe if you could give us a little bit more detail to help us out on that.

Okay. Corrective actions. In the management side of it, obviously, I’m focusing on executions of our plans and our processes, and giving accountability for the result they have. So, they will be responsible for their performance. And also as corrective action in proving that our new product introduction process as well as our executions.

And also, I’m focusing on cross-function with teamwork so we can maximize these trends of our business unit for capability, as well as our manufacturing capabilities and sales and so on.

About the customer expansions, I think that we have room for new customers. And obviously, you will see us expanding our customer base. But, there are a wide range of relationships that I have from my past career, and which I’m pretty positive that I can help MagnaChip to expand our customer base.

We have no plan at this time on doing headcount reductions. But Bob, is there anything you want to add to this?

Yes. I think we are doing some systematic restructuring in G&A and our normal performance management. But as you’ve seen from the quantitative numbers, we’ve successfully reduced headcount 8.7% year-over-year, and so we will be smart in that regard on a go-forward basis as well.

I think from a structural perspective you can tell we had significant one-time charges this quarter. Some of those we don’t expect to repeat into Q3 and Q4. That will help us on a go-forward basis.

I think from an execution perspective, there’s a couple specific things that will show up in the business results. As Sang said, you had new product introduction, but also our results of our Six Sigma quality effort and continuing efforts to drive zero PPM quality levels in our Display Driver business should help our business ramp from a quality perspective in our DDI segment more specifically.

From a customer expansion side, I think part of our confidence also comes from the fact that the qualification periods for our product is quite long. So for example, in our foundry business, the 10 customers we have in the pipeline we’ve been working with upwards of 6 to 9 months. So, it has been a long process and we’re getting toward the end of that process with a number of customers. That’s why we have confidence in that piece.

Similarly with our Image Sensor business, we recently passed the technical qualifications at several very large customers that were key milestones for us in Q2, and we feel like we’ve succeeded at those key milestones. Next is receiving the purchase orders and shipping product, and we’re hopeful on that regard as we move into fourth quarter for the Imaging business.

Okay. Just getting back to the customers for a second. LG and Samsung, you guys have-- I believe you’ve bought some share from them over the course of the past years in the Image Sensor side. Is there anything in terms of Sang’s early [inaudible] of the company in terms of getting back involved with those two large customers? Any sort of comments on that?

Well, we don’t want to be commenting specific to any customer names. But, there are more than Samsung and LG in the industry and we are working on those other customers.

Okay. Just a few questions for Bob. One, can you provide us a little color on the covenant changes so we can gauge what you’re basing the covenants on? In addition, how should we think about inventory and working capital in the second half? Your comments say there was about a $19 million reduction of inventory. How should we think about working capital in those items in the second half of the year?

Yes. Let me answer the first half. Relative to covenants, we have amended the covenants with the lenders through the third quarter. They’ve been very supportive and we feel like, collectively, that those are going to be fine through that period and they will continue to work with us on providing that additional liquidity.

Obviously, our cash flow forecast and our cash position are quite strong today. We have almost $90 million in the bank in cash. And we’ve obviously, I feel, done a good job at managing our cap on [inaudible].

We’ve forecasted an increase that’s back-end of the year loaded on volume ramps. So, our confidence in some of these customer ramps will get supported with CapEx as required. But, it’ll get funded through that operating cash driving the need.

So, our business model continues to be pretty positive from a cash perspective, but we do have that additional liquidity. We would be posting the completed amendment with our 10Q, so you’ll see that in our SEC filings in total.

On the back half cash flow, we do expect to have some cash use with the capital on the high end of our forecast, but we still don’t see that ever going below $50 - $60 million, even in some downside [inaudible]. So, we expect to be able to maintain a very health cash position, as well as the $100 liquidity provided by our lender group.

Okay. I have more questions, but I’ll pass the floor over to someone else. Thanks.

Jeff Harlib with Lehman Brothers.

Just, could you talk about your operating rate during the second quarter? And what were the products that were being sold out of inventory? It looks like your inventory is a pretty low given the weak sales outlook. I’m just wondering what’s been happening at the factory and maybe-- and I’ll follow up after that.

Yes. I’ll handle the first part of the question and then Sang can talk about the markets.

The first part of the question is the way the quarter unfolded--declined--pardon?

That was someone else’s line.

Oh, sorry. No, we through the quarter, weak into mid-quarter for us and that declined further in June primarily on the end market correction that happened in our customers for Display Drivers ICs. So, that was a surprise to some of our customers and, therefore, was a surprise to us.

We believe that that same market will be burning off inventory here through third quarter, and that it would recover toward the end of the quarter with normal seasonality. So, we made the choice to tighten the belt in Q2 and ship from inventory versus building up additional excess that could potentially build with us, trying to reduce the inventory in the full channel given the signals from our customers.

So, you’re correct. The inventory is pretty low and we did reduce it quite significantly in the Display Driver IC part of our business. We really don’t carry inventory in our foundry business.

And from the perspective of just the books, you also have to realize we booked some pretty significant valuation allowances as well, so that it’s kind of a double impact on the balance sheet.

Well, talking about our whole market, the market is still healthy. And probably some of the inventory issues specific to some of our customers that we’re serving with, but we anticipate in the third quarter and continues to grow in industry [inaudible] probably somewhere between 17% to 21%. Again, that we’re working with that customer very well and so we don’t have any inventory issues at our factory.

What was the capacity utilization rate at your factories in Q2 overall for the company?

About 76%.

Yes.

Okay. And how do you see it in Q3?

Going down a little bit.

Okay. And just on the CMOS Image Sensor qualifications that you say you’ve gotten from several customers, it looks like a pretty big range on your CapEx expectation. First, maybe just talk a little bit-- do you have design wins with these customers? In other words, do you have some confidence that you’ll be ramping up as significance applies to these customers?

Well, our factory is ready to ramp up. We will not need additional CapEx to support this business. Like [inaudible] qualification is done and we’re ready to ship. And we’re going to go through again that getting a PO from the customer and that’s in progress. And it looks positive, but there is nothing that obviously we can [inaudible] until we do receive the PO. But usually, the hurdle is getting over these technical qualifications which we’ve passed.

Okay.

Yes. I think the issue on the CapEx is just one of timing. So, some of the variability in this year forecast is a cutoff issue. So in my view, we’re going to either spend that on fourth quarter or Q1. It’s close to the cusp of whether it goes in November/December versus going in January/February, but that amount of money will be spent. It’s just a matter of if it’s Q4 of Q1, and we will manage the timing as needed to support the customer ramp.

Okay. But most of that CapEx, is more on CMOS Image Sensor products or foundry?

Both.

Okay. And on the foundry wins, any quantification of the new business that’s ramping at all? In other words, is it significant relative to your revenue run rate?

We don’t expect that it’s a significant growth. We expect it’s a stable growth. But, the customer base we have is a very solid and that’s exactly how we want to stay in the foundry business.

Okay. And last question, Bob. When you say flat gross margin in Q2, that’s with about $10 million less depreciation, right?

About-- that $9.6 million is a reduction of D&A. The amortization fees, operating expenses, and that’s about $2 million of the number.

Okay. Okay. All right. Thank you.

[Philip Graf] with Symphony Asset Management.

Hey, guys. So, a lot of [inaudible] sensor side of the business. A lot of new competition has entered the market over the last year or so. And I just wanted to get your thoughts on the competitive environment and how you plan to compete going forward. Is it going to be price reductions or your technology or, just a little color there?

Well, as you know, the market is growing faster than probably what suppliers can handle and to meet the longer term. But, there are expansion of supplier base, obviously, there will be some competition. But the way we see that declining of price is not really something that we have to worry about.

Our [inaudible] sensor in we [inaudible] new technology. We do have our own fab. And that fab has a very good cost structure so we can offer, obviously, very competitive products in terms of cost, quality to our customers.

And can you give a forecast of where you see pricing going throughout the rest of the year?

Bob, do you have any numbers?

No. I think for competitive reasons we’d rather not share our pricing strategy, but appreciate the question.

Okay. Thanks.

[Huanda Valengeron] with Deutsche Bank.

Yes. Hi, guys. Thanks. A couple of questions for you. On the CMOS side, you talked about product qualifications. Could you clarify now from a process standpoint that these are for products where the customer has already [inaudible] selected you as the provider, or you are probably one among two or three vendors that have been qualified, number one.

And number two, when do you have to get the purchase orders by for you to actually participate meaningfully in the fourth quarter or in the holiday seasons ramp for this year?

Well, obviously, we’re not the first one in the market. So there are more than MagnaChip in their supply list. So, that’s the first.

When are we going to get a PO? I wish that I can get it yesterday, but that’s up to our customers so we’re working on it.

Fair enough. But no, I’m not asking for the timing, but from your-- for you to hit the kind of a fourth quarter number, from a lead time perspective and so on, when do you have to start getting it by so that it becomes a material impact. So, from a timing perspective, when do you think these orders should-- by when do you think it should come in?

Well, we’re expecting the PO [inaudible] more than one customer we’re talking about. So, there will be PO coming this quarter and next quarter. And obviously, to keep on schedule we’ll probably in the fourth quarter and next year.

Okay. And Bob, on the CapEx side, you gave a range of 58 to 80. Now, should we look at 58 as the minimum or do you have more flexible-- you’ll cut that down if things kind of slow down or don’t kind of play out as you’re expecting in the second half?

No. We have an ability to flex it down. But I would say it is at my conservative-- from a cast planning perspective, it’s-- our upside scenario. 58’s kind of my base.

Okay.

Is more in line with the guidance I’ve given in total, but we do see some potential for an upside. So, I’ve given it in a conservative range.

I think you’d notice that previously, if our expectations haven’t been met, we have very actively reduced CapEx. This quarter is an example.

And are you guys still kind of sourcing stuff from the aftermarket kind of stuff, or are you actually placing orders with your original equipment vendors?

We do both, but we have been very successful in being able to source capital in the lease market, frankly, from equipment coming off of leases.

Okay. And finally, could you give us a sense from an operating expense standpoint. You said it’s going to be down. Could you kind of put some numbers around it in terms of dollars? Where do you expect it to kind of play out from an SG&A, R&D standpoint?

Well, I think part of it is that we had a one-time expense in R&D of about just under $4 million that we don’t expect to repeat. That plus we expect G&A to be down about $1 million.

And this is including the $2 million reduction in amortization?

Excluding that. So, that will also be an additional reduction.

So around maybe $7 million then in total.

Yes.

[OPERATOR INSTRUCTIONS.] [Guy Baron] from Credit Suisse.

Hi, there. Just a few questions here. Bob, could you just quickly recap what the one-time items were in the quarter?

Yes. Let me just go through the script. You’ve got the inventory charges and cost of sales, the asset impairment and restructuring, and the one-time expense in R&D. And additionally, we had an inventory use of $19.5 million, so we had reduced overhead absorption as well.

Okay. And what are the numbers associated with those?

Yes. The increase in inventory charges was $6 million, the R&D one-time expense was 4, the asset impairment restructuring is on the face of the income statement. We had an inventory use of 19.5, so the inventory absorption fee for that is about half that number. And additionally, we were negatively impacted by the strengthening of the Korean Won for an impact of about $5.8 million in the second quarter versus the first quarter.

Okay. From a EBITDA or sort of EBIT perspective, is there any way that you can sort of quantify and sort of abridge, whether it be versus last quarter or last year as it relates to the areas of the business the impact, mixed pricing in Display that you saw? And sort of how that then bridges also on what you saw last quarter or last year to where we are now? Even if it’s just by order of magnitude.

Yes, I think some of the one-time items I just described would obviously be in that bridge. And I did give the ASP erosion, which was about 4% for foundry and 5% for Display Driver IC. Now, that was with quarter-over-quarter numbers. But, I would say ASP was one of the bigger items, as well as the one-time items I just described.

Okay. Looking ahead to the third quarter or fourth quarter, if you-- or for some reason growth or return in Displays is stalled, is there sort of a plan B from your perspective, from a structural cost perspective to attempt to kind of, I support, realign somewhat or return margins?

Yes. I think, as any management team that’s proved we obviously have different scenarios that we go manage the business in. Frankly, at this point, we don’t expect that to be the case give our discussions with customers. But, we do have such proof of plans.

Well, as I started at MagnaChip and I realized that we have a very good, strong financial team and working well with our operations. But like what Bob said, we do have multiple plans that depends on our business situations. But again, we don’t see any sudden drop of our business plans that which we will share with you. So, yes, we do have a plan.

Okay. And then finally, on the IPO front, is there any commentary or anything you can add from a timing perspective given the results?

Yes. I mean, given this result, I think it would be inappropriate for us to be entertaining that kind of discussion right now. But obviously, no, our team is very excited about Sang’s running the company. And we think we can drive this company to the future kind of growth profile that will allow us to go public in the future. But, we have to go perform first.

Are there other sort of specific milestones you’re able to articulate, sort of a 1, 2, 3 before you’re comfortable even being in a position to explore that further?

I think it’s pretty straightforward. It’s just pay attention to our customers, take care of their needs and, with that, our revenue will grow and our profitability will take care of itself given our operational capabilities.

You know, our fall through on additional revenue right now is pretty darn high because we’re running low utilization. So, incremental revenue dollars falls through to the bottom line at about a 50% to 60% rate. And profitability, in my view, will improve pretty quickly if we get back on the revenue track with our new products that are in the pipeline because we still continue to have that great confidence in our ability to perform with the excellent fabs that we have.

[Jay Khenuni] with Morgan Stanley.

Hi. Thanks. Just wanted a clarification on the CapEx. Is the 58 to 80 for the full-year, or is that for the next two quarters?

It’s a full-year number.

And you might have mentioned this, but how do you plan on financing that? Are you going to pull down on the revolver or are you going to pull down on the cash balance?

Based on operating cash flow and our current cash balance.

Okay. And on the working capital front, can you just-- just clarification on that. Did you say working capital is going to be a source or a use of cash in the last two quarters?

With the inventory so low, if inventory grows it could be a use. But frankly, I expect it to be mutual with where we’re at.

Quinn Bolton with Needham & Co.

Just wanted to explore the CMOS Image Sensor business a little bit more. You talked about some qualifications. I was just wondering if you could say whether those were sort of with Korean customers or [inaudible], or both?

I will say to global customers.

To global customers. Okay. Great. And then just looking into China, it looks like China continues to demand sort of packaged CMOS Image Sensors. I think you guys recently put out a press release saying that you now have a complete line. Can you just give us your sort of strategy for trying to attack the Chinese CMOS Image Sensor Module manufacturers?

Well, obviously China is a big market and we’re interested in getting into that market and so we have a multiple strategy. And traditionally that MagnaChip and [inaudible] a few years ago and have a very strong network and understanding of China market. So we’re using those and gearing up that strategy and execute it. So, we’ll be pretty soon in China market.

Have you run any designs with those new packaged parts? Can you comment?

Yes.

Okay, great. And then just lastly on the panel side, obviously going through some inventory. Can you just talk about your business. Are you sort of equally exposed to notebook, monitors and TVs, or are you more heavily exposed to one segment of the large panel market?

No, we are equally exposed.

Okay. Now are you seeing-- so are you seeing the slowdown then across all three segments, or are you seeing it more monitor or TV, one area in particular?

Probably there is more slowdown in TV compared to other markets.

Okay. And then sorry, one last one just on the analog foundry outlook. I know your overall sales are forecast to be down 6% to 9%. Is analog foundry sort of in that range, or is analog foundry going to be a more stable revenue performer in the third quarter?

I think that the-- it’s more stable.

[John Thomas] with Cimarron Capital.

Yes. Hi. Your volume ramp-up in the fourth quarter due to new products, how do you expect that to affect revenue, and will it be marginal or will it make more of an impact?

That’s-- Bob, do you have any comment?

Yes, yes. Well, we haven’t provided formal guidance, but we expect to be able to get back on our revenue growth curve and we’re shooting for to then recover to a number higher than where we’re at here in the second quarter.

As a percentage of overall sales? Any guidance there?

Well, no. I mean, I’m expecting total company revenue to be back over the Q2 level in the fourth quarter.

Are you referring to [inaudible]?

Yes. Yes, the new products. What percentage do you think that will add to your revenue mix?

Yes, we haven’t broken that out specifically.

Okay. And your cash, or your restructuring charges during the quarter, how much of that was cash or was all of it non-cash?

There was about $1 million that was cash.

$1 million. Okay. Great. Thanks.

[Michael Sneets] with [Sanctity Advisors].

Yes, I have a couple of quick questions about foundry. So, foundry revenues look fairly strong and stable, but ASPs are showing some downside. Do you expect that to continue going forward?

Yes, that ASP was on mix. It didn’t have a lot of pure period-over-period price drop. It was we sold more six-inch wafers this quarter versus last. So, it’s completely a mix based ASP drop.

Okay. And do you expect that to reverse or stay flat, at least, going forward?

By the exiting of this year, we actually expect ASPs to go up, again, because of mix. Not because of pricing power.

Okay. You said last year that gross margins in that business were comparable to, say, at CSMC. Is that still the case?

No, they’ve dropped currently, because of mix.

Just because of the-- okay, that mix.

Yes.

All right. That’s all I have. Thanks.

[Steven Polevec] with Goldman Sachs Asset Management.

Yes, I have a very quick question on gross margin and the guidance that you gave. Given that your gross margin this quarter was negatively impacted by several inventory items that are perhaps one-time in nature, when you say you’re looking for a flat gross margins next quarters in your guidance, is that versus the reported number or an adjusted number? Thanks.

Based on the reported number. And the reason for that is-- frankly, with the revenue drop, we’re expecting lower utilization in our factories in the third quarter where we’re expecting to bottom.

[Fizel Albay] with [Chiman Asset Management].

Hi. Just had a follow-up question on the covenants. I was a little confused in terms of how to think about it. Did I hear correctly that the relief from the banks was just for the third quarter and that it would revert back to the original or the prior amended covenants to the fourth quarter? Is that the right way of looking at it?

No. I’ve amended Q2 and the period ending Q3, and we will deal with out periods as they come.

Oh, I see. Okay. Because in the prior-- it was like a-- it was a much lower level, so-- on that [test].

And then, is the test based on just senior leverage or a total leverage?

There’s a number of different covenants.

So I should--.

Yes. The debt to leverage-- the leverage is total.

Okay. Thank you.

[OPERATOR INSTRUCTIONS.] Eric Toubin with Banc of America Securities.

Thanks. Just a couple of quick follow-ups. Did you say where you expected utilization to bottom in Q3?

76%. Maybe 74 to 76.

Okay. And then also, you had indicated what the Won impact was on expenses. How about on the top line?

I didn’t break out the top line because a lot of the revenues are U.S. followers.

Okay, great. Thank you.

[Dillon Moore] with Robert W. Baird.

Thanks for taking my question. You guys mentioned that your legacy CMOS Image Sensor products were falling off a little bit faster than expected. Is that a little bit more of a function of your own products, or is that kind of the trend in the industry? I’m assuming kind of referring to VGA. Is that correct?

Yes, it is the industry trend.

Yes. But part of that is our definition. We actually have a new VGA product out in the market. It’s a smaller form factor VGA. We consider that a new product. It’s actually ramping right now. So, I don’t think that relates to VGA. It just relates to our older product portfolio has fallen off faster than we expected. And so we’re in the middle of a ramp on the newer products, including a new VGA.

Okay. And would you care to comment on how pricing in VGA is doing currently in the industry?

For strategic reasons, we don’t disclose price.

Okay. Thanks so much.

[OPERATOR INSTRUCTIONS.] At this time, there are no further questions. I would like to turn the call back over to Mr. Sang Park and Mr. Robert Krakauer for closing comments.

Bob, do you want to make--?

Yes. First of all, thank you for your time and your support. As San said in his introduction, we fully realize that for our investors this is disappointing financial performance. We recognize that. Our board recognizes that. And we all welcome Sang as a CEO to help lead us back to recovery, which we all will be working very hard to accomplish on your behalf.

Well, thank you again for joining us for the conference call. And like what Bob said, that this quarter has been very disappointing and it’s going to take a little time to bring this company up and running where it should be. And we have all those action items in place. And I have a great team supporting me. And we’ll be one heck of one management team that’s delivering what we promise to our shareholders and investors and to our employees. So, we look forward to working with you in the future with appropriate new numbers. Thank you for joining us.

Thank you.

Ladies and gentlemen, this concludes today’s teleconference. Thank you for your participation. You may disconnect your lines at this time.