Magnachip Semiconductor Corp (MX) 2006 Q3 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to MagnaChip Semiconductor Ltd. third-quarter 2006 results conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. It is 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 third-quarter 2006 earnings call. Joining us today from the Company are Mr. Sang Park, the Company's President and Chief Executive Officer; and Mr. Bob Krakauer, EVP 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 receive a copy off of MagnaChip's web site.

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 a forward-looking statement that involves a number of risks and uncertainties that could cause actual results to 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 end-use products by consumers from the inventory levels of such products in the supply chain, changes in demand from significant customers, changes in customer order patterns, changes in product mix, capacity utilization, level of competition, pricing pressure and declines in average selling price, delays in new product introductions, continued success in technological innovations and delivery of products with the features customers demand, a shortage in supply of materials or capacity requirements, availability of financing, exchange rate fluctuations, litigation and other risks as described in the Company's SEC filings 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.

Thank you, David. Good morning and thanks for joining us on today's call. While in the short term, our revenue has been under decline, I remain highly confident in the Company's prospects for growth and success based on our new product sales pipeline. We are more focused than ever before on the turnaround of our revenue through its execution of our new product ramp-up, managing the sales pipeline and extension of foundry services with the new customers.

On the customer front, we have had some exciting developments in this quarter. Our CMOS imaging sensors have been chosen by three major handset manufacturers across multiple markets. Our large LCD drivers were chosen by top two LCD/TV manufacturers as well.

We launched our Unix solutions, which offers our highly integrated PMOLED solution for use in many leading mobile phones and MP3 player displays. This is an exciting opportunity for MagnaChip as PMOLED technology is expected to be applied to QQVGA mobile phones beginning in fourth quarter of 2006.

We also launched our flexible high-resolution LC driver solution for high-end mobile phones [which told me they're broadcasting] and Mobile TV phones. This is our third generation of one-chip solutions with a dramatic size reduction by integrating two chipsets into one.

Our display driver business has been recognized -- reorganized to focus on aligning service and product development teams to strategic customers' requirements.

Our 2-megapixel CMOS imaging sensor SoC and our high-performance 1.3 megapixel CMOS imaging sensor SoC have passed important qualification milestones with key customers, and we expect the volume from these products to ramp into 2007. We have design wins on both SVGA and 1.3 megapixel products. We are working with our multiple modules and handset manufacturers to qualify our 2-megapixel products, and we have successfully demonstrated our Next-Generation 2.2-micron pixel products.

We now have a multiple generation of products in the pipeline, and we have already designed our 1.3-micron pixel architecture. We believe that our recovery in this key market has begun.

We opened a new European office, expanding our sales and marketing resources in order to more efficiently develop our new customers in this region and provide the highest level of support.

So, in summary, we are making considerable progress, and we expect to make recovery in our revenue growth next year. Now let me turn it over to Bob for the review of financials.

Net revenue for the three months ended October 1st, 2006, was $171.3 million compared to $197.6 million in the second quarter of 2006. This is a decline of 13.3% from the prior quarter. With the addition of Sang Park as CEO, and our increased focus on the individual execution of each segment of our businesses, starting this quarter we will begin breaking out segment information in our SEC filings.

Revenue by segment for the quarter was display solutions, $56.1 million; imaging solutions, $12.7 million; semiconductor manufacturing services, $84.4 million; and other, including memory unit processing, of $18.1 million.

Display solutions' revenue declined 23.5% from the prior quarter due to an inventory correction at the start of the quarter in large display drivers as well as product transitions at our largest customer that are unfavorable to us in the short term. Large display drivers are now approximately 68% of our total revenue for display solutions.

Imaging solutions revenue declined 18.6% from the prior quarter, primarily due to our historical concentration in VGA products and heavy ASP erosion in that sector as our customers moved from one-quarter-inch optical format VGA products to 1/7-inch optical format products.

Our one-quarter-inch optical format megapixel products are currently in various stages of design-in at major customers, with four out of the five top handset manufacturers actively working on programs with us. We have design wins currently and expect significant revenue growth as a result in 2007 over 2006, with new product revenue in imaging of between $150 million and $200 million in 2007 forecasted.

Semiconductor manufacturing services revenue declined 13% from the prior quarter, due to weakness in the analog and display driver portion of our foundry business. Our initiative to grow our business from the 0.18 process geometry continues to make progress with an increase of $1.8 million from the prior quarter.

Revenue by geography was 52% Korea and 20% from Greater China, 13% from Japan and the remainder from rest of world. Revenue by end market for the quarter was 10.3% from wireless, 21.4% from computing, 1.1% from industrial, 11.7% from consumer and 55.5% from wafer foundry.

In the third quarter, we had one customer greater than 10%, and the top 10 customers represented 53.1% of total revenues.

Gross margin was $20.9 million or 12.2% of revenue for the quarter ended October 1, 2006, compared to $61.9 million or 25.5% of revenue in the year-ago quarter. 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 CMOS image sensor business volume falling off faster than we had expected prior to our expected ramp in new imaging products.

Operating expenses were $55.1 million in the third quarter. This included restructuring charges of $264,000 as a result of headcount reductions. Excluding the restructuring charges, operating expenses for the third quarter of 2006 were $54.8 million or 32% of net revenue compared to $55.2 million or 22.7% of net revenue during the third quarter of 2005.

We had an operating loss of $34.2 million during the quarter. Excluding a restructuring charge, the operating loss for the third quarter 2006 was $33.9 million compared to an operating income of $6.7 million in the prior year's third quarter.

R&D expense in the third quarter was $32 million or 18.7% of revenue compared to $27 million or 11.1% of revenue in the year-ago period. Net interest expense for the third quarter was $13.9 million compared to $14.9 million in the third quarter of 2005.

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

Net loss for the three months ended October 1st, 2006 was $47.7 million. Excluding the restructuring charge was $47.4 million compared to a net loss of $13.2 million in the prior year's third quarter.

Depreciation and amortization expense was $43 million or approximately 25.1% of revenue in the third quarter. As a result of the impairment charge taken during the prior quarter, depreciation and amortization expense was reduced in the current quarter by $9.2 million.

EBITDA for the third quarter was $9 million compared to $16.5 million in the prior quarter and $54.7 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 of $100 million has financial covenants linked to EBITDA performance. We are in full compliance with these covenants at the end of the third quarter, and the full line is available.

Headcount as of October 1st, 2006 was approximately 3670 people. This is a reduction of 9% from one year ago.

Capital expenditures for the third quarter was $7.5 million versus $6.3 million in the prior quarter. We expect CapEx will approximately be $9 million in Q4.

Total available cash and cash equivalents was $107.5 million as of the end of the third quarter, in improved working capital management. We are very pleased with the cash generation during the quarter.

Accounts Payable days were 53, an increase from 40 in the second quarter. Accounts Receivable net of reserves were $82.2 million at quarter end, a reduction of $13.8 million from the second quarter. And our Accounts Receivable days of sales outstanding were 44 in the current quarter, consistent with the prior quarter.

Inventory days of supply were 36, up from 32 in the second quarter, and net inventory was $59.3 million, a reduction from the prior quarter as we shipped $2.9 million from inventory.

The outlook for the fourth quarter of 2006 -- we expect revenues to be down 10% to 12% compared to the third quarter, reflecting reduced visibility and the potential for a slowdown in our wafer foundry services business. The Company expects gross margins to be approximately 9% to 10% due to reduced loadings and partially offset by cost-containment measures.

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

(OPERATOR INSTRUCTIONS). Robert Hopper with UBS.

First, just a clarification on the new product revenue. I think you are referring to [CMOS] revenue (technical difficulty). Is that what you were referring to as incremental from '06 to '07, or what your total expectation is?

That's our expectation off of new products, so it does not include legacy VGA.

So is it safe to assume that we're going to have some falloff in legacy VGA?

Yes.

On the handset side, you said that you got three new customers. Can you tell us if they were Asia, Europe, North America? I know you have been working on North American customer for quite some time. Just update your progress on that?

It is a global company. That's all I can say.

In terms of utilization rates, what was the utilization rate of Fab 5 in the quarter? I believe it was 30% or so in the second quarter?

Yes; it was just about 50%. Overall utilization for the total Company was 72%.

In terms of some of the segment data, you have provided -- thanks for providing the revenue breakdown. Can you give us some color on the gross margins by the -- by the different business lines? Are you going to be breaking it out in the SEC filings?

We will be breaking out gross margins in the 10-Q end 10-K filings.

Can you give us some color into that?

We will do that in the next conference call.

On the bank facility, I know you're in compliance at the end of the third quarter; but, based on your guidance, it's clear that you are going to have to get some (technical difficulty) again. Can you please provide us some color on your discussions with the bank group to date in terms of confidence levels being (technical difficulty)?

Secondly, just in terms of looking at the business as we go forward from an R&D perspective, it looks like you are still spending in the [8 to] $30 million range per quarter. Do you expect that to continue on a go-forward basis?

Yes. Let me answer the R&D question first. The answer is yes; that's about the level of R&D that we're expecting on a go-forward basis.

On the bank covenants, we have had a very constructive dialogue with our banks; they are completely supportive. When we reset covenants in third quarter based on the timing, we did it one quarter out with the full expectation that we would set the remaining covenants in Q4 and on a go-forward basis through the next quarter. That will happen, I think, on a very constructive basis.

Based on the cash generation capability of the Company, as you saw this quarter, I think that should be a very straightforward discussion with the strength in our balance sheet and the value of our assets.

Jeff Harlib with Lehman Brothers.

With the ramp of the image sensor revenues, for that, I just want to clarify. The design wins you talked about -- that was all in 1.3 megapixel. What was the other product?

It is the [Suku] VGA, 1.3 megapixel and 2 megapixel.

Now, you say you have design wins. What about purchase orders? How confident are you that you will be getting -- that you will be able to ramp to certain revenue levels? You gave that $150 million to $200 million number. I am just wondering what gives you confidence that you'll see such a ramp there in terms of your market share on certain products. What do you expect to be the timing of that ramp? We initially thought there would be some ramp in Q4. Maybe talk a little bit about that.

Well, we are working with multiple customers. Obviously, some of them would have ramp-up started at fourth quarter of this year, but typically CMOS imaging sensor has a long sales cycle time; it's about a year, year and a half. But throughout the next year they will all be adding more new customers, adding more new product revenues. So we can't really pinpoint to you with a specific name, but starting from the fourth quarter.

And that $150 million to $200 million you were talking about, that is an '07 expectation, calendar year; right?

Yes.

In display drivers, you talked about some customer transitions and issues there. Can you talk about what's happening there in terms of new product introductions and recovering business there?

We have a very strong pipeline for new product introductions, so there are a significant number of new products being introduced from fourth quarter and on. With, as I said in my remarks, with the execution of this new product introduction ramp-up, we are confident that we can get our market share back, starting from early next year, and then strongly ramp into 2007.

With your revenue guidance Q4 down 10% to 12%, you talked about weakness in foundry. What about some of the other product areas -- display drivers and image sensors? How do they fit into your guidance in terms of what you are seeing for Q4?

We see recovering into fourth quarter of our standard product, including CMOS imaging sensors and display drivers. But the foundry, that the market [eats you], as you know. But standard products is recovering into fourth quarter.

On CapEx, Bob, I think you gave a much higher range on CapEx on the last conference call. Can you talk about the spending you see over the next several quarters on CapEx and maybe what you are planning on for '07?

We have not committed to an '07 number yet. We will in the next conference call. But I think right now, with the guidance that we gave on our expectations in CMOS image sensors, once Fab 5 is full, we would expect in the middle of next year to have to expand capacity for CMOS image sensors in the middle of the year, to a greater degree than we have so far this year.

Additionally, our expansion of 0.18 foundry services also equally will need that same investment in Fab 5, and we expect to do that in the middle of the year. Given the cash position, that should be pretty straightforward.

[Guy Barron] with Credit Suisse.

Just to follow up on a couple of the other questions on the CMOS side, to clarify, is there any sense you can give of how much of that $150 to $200 million ramp would occur in the first quarter or two?

Obviously, that's more back-end loaded as programs mature. We will give guidance on that quarter by quarter as we work through the year.

Any sense or anything you can give us as to how we should think about the drop-down rate on that incremental business?

Yes. Our fab costs are pretty fixed. In the short run, we would expect a fall-through rate of approximately 50% on that business. As we make an investment in the middle of the year, that percentage will go down a certain degree.

On a pure income statement perspective, we also have another symptom that will impact next year, which is the falloff of depreciation. As the initial equipment and manufacturing assets we bought in the original leverage buyout will be fully depreciated in third quarter 2007. So as you get to fourth quarter, depreciation should decline dramatically Q3 versus Q4.

On the LCD display driver side, there has been a lot of commentary out there in terms of the outlook for '07 and the impact of pricing pressure in that market. How should we think about the impact that that may have on volumes and ultimately on pricing as it relates to what you're supplying?

Well, it is the market that is driving price down. So we are managing the pressure with shrinking our technology and bringing the next generation LCD driver and then maintaining our margins; that's our plan, and we are executing it.

Is there a sense in general terms of how much of that pricing pressure experienced at the OE level tends to translate to you and what offset, if any, occurs as a result of higher volume?

Well, the pressure percentage obviously depends on which market and depends on which cycle of display. So I can't give you one number, but there are pressures, and we have to deal with it. Also we lost market share early this year, and as we are gaining that market share back, I think that we are -- I'm confident that we will have -- maintaining good volume.

On the third part, on the foundry business, you talked about the issues going on in the end market with a bit of softness there. How does that relate, if at all, to the ramp as far as new foundry customers that you talked about last quarter and where you are in the qualification process and ultimately, of course, when you see that translating into real business?

Obviously, the overall market is soft, and that's the time that our end customers have some hesitation of moving the volume to us. That is the fact. So the ramp-up is slower than we would have anticipated, but we have a very strong new customer pipeline.

As you know, it takes about a year, and year and a half to complete the qualification and go through all those steps. So we're confident that this is getting improved by quarter by quarter. As a matter of fact, last couple months, there are more databases transferred to us from our end customers, and that is a very positive sign.

But given how far along you were, if I remember correctly, to the commentary you gave last quarter, do you see yourself or rather can you quantify how close you are to actually having business materialize from at least a few of those customers?

When you are looking for the quantitative numbers, that's hard to give to you. But obviously, we are significantly improved first quarter and second quarter in terms of ramp-up. As you know, first quarter is a typically weak quarter, but I firmly believe second quarter [will get].

Looking at the facilities and specifically Fab 5, given the utilization rates, what options do you have in terms of looking to potentially use that capacity towards outsourcing or potentially even towards Hynix business versus keeping it as dry powder as you look to ramp up business in '07?

The reason I say in my remarks that I'm confident recovery is coming is, based on data that we have in sales pipeline. And sales pipeline looks real good. Again, the things that we need to do is gaining that market share that we had and executing on new products that are in the pipeline. Those things are going to help us to have good recovery into next year.

So Fab 5 will be fully utilized. I can't tell you which quarter, into next year. Therefore, we have no plan at this time to do any additional things for the Fab 5.

To your point, in the short term, we're supporting Hynix on memory unit processing, and they are a customer for us helping us back fill open capacity in the short run, and we appreciate that.

On the cost containment side that you talked about, given that you may be now at that additional phase or rather that next phase of assessment as it relates to the cost structure, are there additional actions which you have taken or significant ones you would expect to take to try to mitigate some of the pressure in the short term?

We have been going that pretty continuously for the last four quarters. You saw there was another small restructuring charge this quarter. We reorganized our G&A functions and got more efficient there, here in Q3. We have several big initiatives on indirect materials and repair costs and key commodity reductions that are doing quite well right now on the materials cost line.

As you can see, headcount year over year was down 9%. All of those keeping the business the right size in response to what has happened on the top line. Now, frankly, we see a recovery in revenue growth longer term, so we don't see a massive structural change as required today, but we continue to be a cost-driven Company and, thankfully, have highly productive low-cost assets in our manufacturing base. So we have got a great cost structure already to help support new customers.

I think the key for us is fab loading. The fall-through rate, from the prior question, is quite dramatic. As we can fill these fabs, the benefit of that incremental revenue will help our financial performance quite a bit.

I have to say that we do have a real-time management methodology in our team. Bob and I balance each other of different perspectives and different management -- the methodology, and we work as a team. I'm confident that we're controlling our costs in a real-time base.

So the bottom line is that, as of today, looking at the growth and we don't have to do any major -- another cost reduction.

On the working capital front, you made significant progress in the quarter. How should we think about the sustainability of that?

I think, if you look at the A/R days, A/P days, they didn't change; we're just responding to the market. We had one receivable that we had missed last quarter, which was negative to us prior quarter. We are back to the normal A/R and A/P days that we would expect. So I think it's highly sustainable.

Obviously, we have periodic interest expense payments, that are scheduled out. But the working capital program, I think, is on track. Inventory days actually went up, and that was on a key commodity, wafers, where we're stocking in strategic inventory levels on wafers to assure supply. But besides that, we have been able to keep inventory levels and all other commodities at a great rate.

Sundar Varadarajan with Deutsche Bank.

Starting off with the $150 million to $200 million of revenue you expect on the image sensor side, is that an annual number or is that like a run rate number that you are talking about by the time you exit next year?

Annual number.

Secondly, on the display driver side, you talked about some market share loss early part of this year, and you're confident about getting that back. How much of that market share loss was because of customer issues and a customer market share loss as opposed to you losing market share because of some product-related issues?

It's mostly because of our problem which we fixed.

Could you explain what that problem was and whether it was a product issue or --

Well it was -- relates to execution. Some of them as quality issues 2005, and some of them is we're not executing the new product development as we promised to the customer. So in my remarks that I mentioned about reorganization of that function which we completed and we have all those processes in place and monitoring our performance of each development group and I am confident that there is a significant improvement in that area.

Going back to the new business ramp, the $150 million, is it fair to understand from your comments it is going to be more back-half loaded as opposed to linearly progress throughout the year?

Correct. It's going to be loaded to the back end.

In terms of -- I don't know if you mentioned this earlier in the call. If you look at your kind of quarterly progression this year, every quarter your revenue has been down sequentially. When we look at '07, Q1 is normally a seasonally weak quarter. But given that you are coming off of pretty easy comps, is there any reason to believe that your seasonality will not be as -- would kind of buck the trends of normal seasonality in Q1?

Well I guess the reason is, as I say, that we have a strong sales pipeline. That's going to help us to stay on same level. But we have to close every sales deal, again, that execution is something that we need to focus. I am confident we can do it.

Bob, do you want to add something?

Yes. We will update for Q1 guidance on the next call.

Lance Vitanza, Concordia.

First, just on the SG&A, it looks like -- it's clearly a lot lower than year-ago level, which is great. It's been kicking up a little bit for the past couple quarters. How should we think about Q4? Is that -- have you found a range here, or is it still going to be ticking higher as we go?

No; it's about at the right range. What is not evident on the face of the income statement is that the mix of spending within SG&A has been changing. We have been investing in FAE resources, extra sales and support people as we have been doing some of this new product development in both our ISD, and DSD businesses. So we believe they are in more productive areas of SG&A relative to revenue generation on a go-forward basis.

On the depreciation, I think you started talking about this a little bit, but I wasn't quite clear. Was the one-time item -- that was something that made it higher previously? So going forward, low -- $40 million to $45 million -- is that where you would expect quarterly depreciation to be?

Yes. We had an impairment last quarter, so we're back to the normal run rate now. But as I stated in the prior question, D&A will drop significantly in Q3, after Q3 2007 next year.

: We have heard a lot of discussion about share loss and how we -- I think we're going to get back to better share. Could you outline your estimates for markets, for your market share, in your key product categories?

Well, let me give you serve ballpark number. We were used to be somewhere around 35% to 40%. That went down to 20% range, and we are confident we can gain back most of our market share.

Is that -- those numbers -- those work for both of your core product areas?

It depends on which customer. So I am giving you a customer example. So you can apply to -- obviously, there's some customers we have a lower market share. But most of market share sort of went down and coming back [and exactly] the same thing. You have got to have a [constant back] from the customer. Last four months I have been traveling and meeting more than 60 customers worldwide. I felt that we are gaining back those [constant]. It's a matter of bringing the new product out, go through the qualifications and close the deal and getting the PO. So that's what it takes.

Lastly, on the CapEx, could you explain the reason for the shortfall? Is it just an effort to retain liquidity, or is it really just the fact that the new product ramp -- you can kind of handle that with your existing capacity and there's not much new tooling that needs to happen?

Yes. Essentially, our Fab 5 is at a utilization level of 50%. So until that is filled, we're being conservative on capital investment. So we think it's just the normal appropriate discipline to preserve liquidity on just a normal basis. So we will always do that. We will probably have a significant increase in CapEx at the time that Fab 5 is full. As I said previously, we expect that sometime in the middle of 2007.

The money that you are spending, the $7.5 million in Q3, the $9 million in Q4 -- that will be more than adequate to -- to do the tooling that you need for your new products? Because it sounds like you have kept the R&D spending up, which -- I'm glad to see that. I'm a little concerned when I see the CapEx dropping so dramatically, when you're talking about new products that have been qualified but that are not yet in full production. Typically that would be associated with some incremental CapEx?

One of -- my main focus as a CEO is, of course, functional team. We have very good teamwork between finance and manufacturing. So, as I said earlier, that we do have a real-time adjustment in CapEx and some market needs, and which many times that [T.Y. Wong] and Bob Krakauer and both of them in good communications, and we act to any real demand. So I am confident that we can do that in real-time base. That's exactly what you see under our earnings statement. That will continue.

Eric Reubel, Miller Tabak Roberts.

One last question on CapEx, I think that the budget had been around $75 million to $80 million with, possibly, for the year with that flexing into 1Q '06, do I assume that this same number, like $75 million to $80 million, flexes all the way to first half of '06 -- sorry, '07 -- first half of -- from -- into 2Q '07?

Not necessarily. I think the key issue is our factory utilization. So our factory utilization dipped down a little bit this past quarter. Once it goes back up, we will expand capacity.

The CapEx that you're seeing right now is essentially adding new capabilities. It's kind of to the prior question. We have actually extended our than Fab 5 technology down to 0.11 over the last six months. So our process capability is becoming more and more advanced. Then, as volume grows through next year, we will add capacity to go build that product. For that, as well as for our foundry customers at 0.18.

Just clarifying what Bob said, 0.11 is a similar technology, 0.11. Actually, we are ramping up 0.13, a logic technology, which is equivalent of 0.11 of similar [simesing] technology.

Then, if I can go back to image sensors line for a minute, there's multiple levels -- factors here. We talked about densities at 2.0 and 1.3. You talked about pixel size at 2.2 and 1.3. We didn't talk about the process geometry for the current generation. Then we also talked about quarter inch.

Bob, on the design wins for 1/4 inch, in your conversations with module makers, is 1/4 inch sort of this standard for '07? And how does 1/5 of an inch come in, and how do we see that playing out in '07?

There are demand not only in 1/4 inch and other -- there are other -- the demand for the other size as well. But 1/4 inch is the dominating, getting into second half of 2007.

In terms of our technology, mainly we do a 0.18-micron, and we are ramping up 0.13.

How do you see 1/5 of an inch, coming in, in '07?

That's for the SVGA.

I think 1/5 of an inch is for 1.3 and 2.0 megapixel on the market?

There are some demands, but it's not major.

Do you have products ramping at 1/5 of an inch for --?

Yes, we do have both, yes.

But you don't expect it to be a major part of the market for next year?

Well, as I say that, it depends on execution; it depends on our end customers' markets. There are demands for both. But it depends on our capability, depends on our focus on each customer. So demand varies.

In the wireless market there has been kind of a -- there has been widely discussed under-performance of the high-end phones and better volumes, better performance for lower-end phones in the current mix. How does that play out for MagnaChip if the current trends continue into '07?

Actually they will continue to follow us because we are more aligned with the lower-end side, and we're working on trying to get higher-end. But until we have those products ready for the higher end, the lower-end market expansion is a great opportunity for us.

Does 1.3 megapixel 1/4 ramp into the sort of low-end phone -- does that become the dominant package die image sensor for next year?

I don't think so. That's probably mid to high end.

If I can ask a couple questions on display driver. Based on some of the recent data points that have come out, the end market has definitely responded but you guys could be maybe seeing a little headwind, in that your lead customer there is a little underperforming to the market, losing some share on panel modules. But that customer in the market with the 42-inch panel, not quite, at the sort of standard -- but that customer expecting 42-inch to be getting good yield and getting good prices in the market next year. You also talked about not only seeing a little headwind but losing some market share on sockets.

How are you guys lined up for 42-inch with your lead customer? Is that a secure relationship?

In my remarks, I said that we are making good progress, and that's what that is. In [console] we are losing market share. I would like to correct you that the [past] sentence. It's not current situation. So we are coming back and gaining our market share.

The display driver business -- do you feel confident that you are designed in at 42-inch?

More than designed in; we're making good progress.

Tore Svanberg with Piper Jaffray.

This is Evan Wang calling for Tore Svanberg. I was wondering if you could just, please, talk a little bit about the competitive pricing environment that your two core businesses' units faced this past quarter, and what it looks like going into Q4. Mainly, I was wondering who you might have been running into and was there any new suppliers in these two segments. Also, if you could talk a little bit about the average selling price erosion?

The market we are in -- obviously, there are price pressures, just like any other market in electronics industry. To maintain our margin we are shrinking our chips, and we are lowering our costs. So that is something that we need to -- we need to deal with it. Bob, do you have any average sales price numbers?

Yes. The ASP drop in general was pretty severe for CMOS image centers, and that's primarily on the legacy VGA because the new form factor SVGA has got a much lower price point but it's also got a much lower cost point. We actually have a better gross margin on SVGA even on a lower ASP, but that was quite dramatic. On display driver IC's it was slightly more than 5%.

What about competition? Are you seeing any new competitors? If you lost any market share this past quarter, who are some of the people you ran into?

Which side of business are you asking?

Actually, I am thinking about the CMOS image sensor side.

Well, as you know, we delayed our new product introduction into [out to] 2006. So we are sort of coming back with a new product that's available for our competitor -- I mean, for our customer. So we are one of the newer suppliers. But, because of our relationship with our customers and because our past performance we're gaining back some of market share.

But I think, in general, in our [Chilean] markets, they are markets where big players are playing, there's really not too many significant new emergents. There's really not new entrants that are impactful.

Eric Toubin, Banc of America Securities.

In the foundry business, was there more weakness in any specific segment or customer type, either in the quarter or that you see going forward?

I think more of our customer side, they are very tight on inventory. That's what we see, one of the weakest segments.

For the quarter, ASP's in the foundry?

Obviously, when fab is not fully filled, then there are pressure on --

It was about 3%.

See, all the numbers coming from Bob. So --

You had talked also in the past about in-sourcing on the back end. Where does that stand?

No; that was a past accomplishment for -- it saved us money in display driver IC's. That's complete.

Michael Lipsky with Deutsche Bank.

Gentlemen, first of all I would like to applaud the additional disclosure on a segment basis.

There's $1.9 million of a source of cash in cash flow from investing. What's the nature of that?

It's in intangible assets -- software.

On the second-quarter conference call, you talked about working capital most likely being a use of cash in the second half of the year. Obviously, you release a lot of cash in the quarter. Do you see some unwind of that in the second half of the year, or at this point are you changing over where working capital will be a source of cash for the fourth quarter?

We're going to try to keep the days. So A/R days, inventory days, A/P days -- I would like to stick where I am at. That's what we're working to achieve.

There are no further questions at this time. I would now like to turn the floor back over to Mr. Bob Krakauer or Mr. Park for any closing comments.

I just wanted to say thank you for your time and attention and just to reassure everyone that we're extremely focused as an executive team on our execution and making improvements on a go-forward basis.

Yes. I second to Bob. Execution is our focus. In addition to it, we have a great teamwork in my management team, and we have enhanced that our processes with a lot of great data in our sales pipeline. I'm looking forward to 2007. Thank you very much joining us.

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