Magnachip Semiconductor Corp (MX) 2006 Q4 法說會逐字稿

Welcome to MagnaChip's fourth-quarter results conference call. We will cover operating and financial results for the fourth quarter 2006. (OPERATOR INSTRUCTIONS). The call is scheduled for one hour. As a reminder, this conference is being recorded today. A replay will be available two hours after the call today, through midnight Eastern Standard Time on February 2, 2007. The replay dial-in number is 1-201-612-7415, with account number 3055 and conference ID number 224173. The replay will also be accessible at www.magnachip.com. 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 fourth quarter 2006 earnings call. Joining us today from the Company are Mr. Sang Park, the Company's Chairman and CEO, and Mr. Bob Krakauer, President and CFO. Mr. Park will review the Company's strategy, overview of performance and business outlook; Mr. Krakauer 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 from MagnaChip's global Web site, www.magnachip.com.

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 and 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 introduction, continued success in technological innovations and delivery of products with the features customers' demand, shortage and 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. Thank you for joining us on today's call. We are committed to making 2007 the year of MagnaChip's recovery. Our team's focus is to show this recovery with action and execution over the coming quarters. We made important progress on several key initiatives in the last six months that position us for this turnaround.

First, we started by achieving financial performance in the fourth quarter we forecast to you, our investors. I am pleased that both revenue and gross margin guidance was achieved. Our sales teams have made a fundamental improvement in our sales focusing process, as well as in customer relationship management capabilities, through our implementation of salesforce.com software and our focus on larger account customer service. This process improvement improved our visibility into complexity of (indiscernible) multilayer of qualification processes through the design win process, but also forecasting the revenue for those design wins once they transition to mass production for both our standard products and the foundry services. The linkage of this process to our supply chain management systems ensures seamless execution to our customers as we transition to the volume production.

In our large display driver IC business, we continue to maintain some of the industry's highest quality standards, based on our statistics and customer feedback. This is important in growing our market share in 2007, and I am (indiscernible) so many of our employees that have made such a great progress in quality performance over the past six months.

We see significant growth potential in digital TV, due to the expansion of our addressable market in the fourth quarter, and especially we see 37-inch and 42-inch formats for the high-definition and full high-definition screens as having good revenue potential for us in coming quarters. We have also recently added one new large account in our effort to diversify our business.

Our small display driver technologies are well positioned for the growth into the second half of this year, as end markets for the small drivers are seasonally slower in first quarter. We have introduced cutting-edge products to service the cell phone panel makers, and are especially well positioned to serve the needs of high-resolution screens for both internal panel in mobile phones as well as external panel of clamshell designed phones using (indiscernible) and (indiscernible) displays.

We saw weakness in our foundry business, with a loss of revenue for several of our top customers negatively impacting us. We are focused on expanding our new customer base and are increasingly (indiscernible) hit rate of our conversion of new business opportunities to production volume. In the fourth quarter we completed a letter of understanding on a long-term (indiscernible) of a major new foundry customer in the power area. This gives us the growth profile we expect from our foundry business through 2007.

We have refreshed our entire product offerings of [amazing] solutions. At our peak we had revenue over $80 million a quarter and leading market share. After a very difficult 2006, where we had effectively no new product to sell for the majority of the year, now we are once again in a position to return to revenue growth in this segment. We have begun production volume shipment for the 1.3 megapixel products, and have also introduced packet products to serve the needs of smaller forming factors in PC camera applications. The full lineup of products will be demonstrated at the 3GSM conference in Europe next month. Our 3.2 megapixel SoC solution with an integrated digital autofocus is generating significant customer interest and should be an industry-leading technology offering for us in 2007. It is our intention to expand this autofocus feature across our future platforms, spanning from 3.2 megapixels to the 5 megapixel.

While we expect the first quarter to be seasonally slower than the fourth quarter, the momentum from our fourth-quarter achievements and continued execution will pave the way for our 2007 recovery. I am confident in the global MagnaChip team and our ability to serve the needs of our customers with a combination of [refreshed] technology offerings and world-class productivity of our employees and manufacturing plants. We are -- we are all working to make 2007 the year of MagnaChip's recovery.

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

Thank you, Sang. Net revenue for the three months ended December 31, 2006 was 162.3 million, compared to 171.3 million in the third quarter. This is a decline of 5.3% from the prior quarter. Average selling price erosion from Q3 2006 to Q4 was approximately 3.8% for display driver ICs, 20.6 for CMOS image sensors, based on a shift in mix to small form factor VGA, and 2.2% in our wafer foundry business.

Revenue by segment for the quarter was 58.5 million from Display Solutions, 12.8 million in Imaging Solutions, 61.6 million from Semiconductor Manufacturing Services, and 29.4 million of other revenue. Display Solutions revenue increased 4.4% from the prior quarter, in line with our expectations. Imaging Solutions revenue was essentially flat with the prior quarter despite normal ASP erosion in the segment. Semiconductor Manufacturing Services revenue declined significantly, due to continued weakness in the analog and power end markets for semiconductors during the quarter, and the loss of market share for one of our customers that, therefore, also negatively impacted us. We are targeting a return to growth in SMS in 2007 as we benefit from a series of initiatives and the addition of new customers.

Revenue by geography was 67% Korea, 17% from Greater China, 7% from Japan and 9% from rest of world. Revenue by end market for the quarter was 26% from computing, 16% from wireless, 11% from consumer, 1% from industrial and 46% from wafer foundry. Our wafer foundry business is further broken down as 29% from computing, 22% from wireless, 46% from consumer and 3% from industrial. In the fourth quarter we had one customer greater than 10%, and the top 10 customers represented 51% of total revenue.

Gross margin was 18 million, or 11% of revenue for the quarter ended December 31, 2006, slightly higher than our prior guidance. Operating expenses were 57 million, or 35% of revenue in the fourth quarter. This included onetime charges of 2.1 million taken in association with disposition of assets previously classified as assets held for sale. We had an operating loss of 39 million during the quarter. Excluding the onetime charges, the operating loss for the fourth quarter 2006 was 36.9 million, compared to an adjusted operating income of 7.5 million in the prior-year fourth quarter.

R&D expense in the fourth quarter was 35.4 million, or 22% of revenue, compared to 27 million, or 11% of revenue in the year-ago period. We had a significant increase in spending on R&D mass and wafers during the quarter, due to the increase in the introduction of new products versus the prior quarter and the prior year's quarter.

Net interest for the fourth quarter was 14.1 million, compared to 14.4 million in the fourth quarter of 2005. Other nonoperating 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 intercompany debt.

Net loss for the three months ended December 31, 2006 was 45.6 million. Excluding the onetime charges, the loss was 43.5 million, compared to adjusted net loss of 47.4 million in the prior quarter. Depreciation and amortization expense was 43.1 million, or approximately 26.6% of revenue in the fourth quarter.

EBITDA for the fourth quarter was 6.2 million, compared to 9 million in the prior quarter. While EBITDA is not defined by Generally Accepted Accounting Principles, it's 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 fourth quarter. The full line is open and available. I want to take a minute here to quickly comment on our covenants.

There was some confusion in the marketplace when we filed amendments a few weeks ago in an 8-K filing. The revision was not an indication of where we see the business going. Rather, we've renegotiated our bank line agreements several times since 2004. We wanted to put in conservative terms that were favorable to the Company so that we do not have to go back to our banks each quarter for revisions. It is no indication of what we think our future potential is. We appreciate our lenders' continued support and understanding in these matters.

Headcount as of December 31, 2006 was approximately 3600, and this is a 10% decreased from the one-year-ago period. Capital expenditures for the fourth quarter were 13.4 million, versus 23 million in the year-ago quarter. We expect CapEx will be approximately 10% of revenue in 2007. Total available cash and cash equivalents were 89.2 million as of the end of the fourth quarter.

Accounts Payable days were 60, compared to 53 in the third quarter. Accounts receivable net of reserves was 76.7 million at quarter end, a reduction from 82.2 million from the third quarter. Our accounts receivable days of sales outstanding were 43 in the current quarter, a slight improvement from 44 days in the prior quarter.

Inventory days of supply were 36, consistent with the prior third quarter. Net inventory was 57.8 million, compared to 59.3 million in the prior quarter.

As to first-quarter outlook for 2007, the Company expects revenues to decline by 10 to 12% compared to the fourth quarter of 2006, reflecting typically lower seasonal demand and an inventory correction in the analog and power areas of our foundry business. The Company expects gross margins to be approximately 4 to 6% due to reduced loadings and partially offset by cost containment measures.

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

(OPERATOR INSTRUCTIONS). Robert Hopper, UBS.

I guess I just want to first drill in a little bit to the -- some of the segment revenues that you guys reported. Within the foundry, we recognize that there's the weakness going on in the market. Can you sort of help us thing about a breakout between the market, the analog market weakening up, and the loss of some of your customers' market share, and sort of how that influenced quarter-to-quarter decline?

I would say about half of it is market and the other half is related to some specific customer market share losses that rolled through to us as well.

And in the other segment, you saw a pretty big spike up. Was that more Hynix manufacturing in the quarter?

Yes.

That makes sense in. When we look out to 1Q, if you give us a little bit more color by some of the -- by the segments a little bit, how we think about that. Do you think we've reached the trough in the image sensor side, and we should see this start to ramp from here on out? And I guess, if you could give us a little bit more color on guidance by the different segments.

There are a number of reasons that we believe that this quarter will be the lowest. Typically a foundry first quarter is the lowest quarter historically, and all the seasonality issues for the foundry business, obviously, is the reason that we forecast that first quarter will be lower than fourth quarter.

But our sales pipeline looks real healthy for our standard product, which means that most of new product that we introduce lasts about three to six months, and finally complete the qualification at the customers. And customers is about to ramp up their product. And therefore, we are expecting those standard product revenues are going to go up. Foundry second quarter, third quarter are usually one of the best quarters. And there are slight positive signs in the last couple weeks on our foundry services. So (indiscernible) we're working with a number of new customers. And even though foundry takes a long cycle time to get qualified and actual shipment happens, but yes; it is coming and starting to happen second quarter. And that's the reason that we think that this quarter it will be lowest. Did I answer your question?

Yes. I think you helped on the foundry side and the image sensor side. On the display driver side, when we think of sort of the seasonality that's in that business, as well as the pricing issue -- because I think you generally have price reductions that place in the first quarter -- how should we think about the volumes as well as pricing going into first quarter for that business?

As you know, display business is a very competitive business. So our business strategy sort of embedded that erosion of [everyday] sales price. We are shrinking our technology and we're increasing our volume. We're cutting all the costs, and -- to be competitive in this market. And I believe that we have a really good position and are continuously maintaining gross margin, and actually spending -- increasing our gross margin regardless of erosion of everyday sales price.

I just have two other things, and then I'll pass it on and come back into the queue. First off is, on the working capital side, it looked like you guys were still able to manage that pretty effectively. I guess if you help us think about how we're looking into the first quarter, any sort of working capital swings that we should expect. And lastly if, Bob, if you could just give us what the utilization was in the quarter overall, as well as within Fab 5. Thanks.

On utilization, overall was 59%, and Fab 5 was around 51, 52. And relative to working capital, we would assume similar terms statistics on AR, AP and inventory, although we feel like we did a good job of maximizing that at the end of Q4. So, it will be a challenge to repeat that kind of performance Q1. But that's what our target is.

What I would like to add [to it is], obviously, last year a problem was that our leading fab was not fully filled. And our recovery plan for the next few quarters, actually we can achieve all this revenue recovery without significant CapEx investment. Of course we will continuously look into the CapEx, and because we need the next generations. But our this year business projection, we don't have to have significant CapEx investment.

Jeff Harlib, Lehman Brothers.

In image sensors, can you talk a little bit about where you stand? You mentioned you're in production on 1.3 megapixel. How about on the SVGA 2 megapixel, and just the visibility on the ramp of production on those products?

We have completed qualification at customers. As you know, this is a long qualification cycle. We've got to qualify by [module] makers and cell manufactures -- cellphone manufactures, as well as their customers as well. We're in the ramp-up of 1.3 in SVGA and 2 meg at this time.

And how many -- how many cellphone manufacturers are you selling these products to?

Several.

How many Korean? How many European? Will you talk about that?

It's [a mix], but heavily Korean.

Okay. And visibility on the ramp in that business for Q1 and into Q2?

Yes. Heavily on Q2.

Okay. And just Q1, with your revenue guidance, can you just talk about each business, whether you expect -- each business sequentially, how you're looking at it? And also with the Hynix revenues, how do you see that over the next several quarters? Did it ramp pretty significantly in Q4?

We expect the Hynix process revenue will go down second quarter significantly, and we don't expect much out of that in third quarter, because our leading fab is getting filled with our own products. But again, we do have a good partnership (indiscernible) Hynix, and mutually benefit, and we'll do every possible way in supporting them as well.

Okay. And the other businesses? You said foundry is going to be down in Q1. How about display and image sensor?

I think we gave guidance overall for the Company, and it isn't our intention to break it out in detail for each business unit. But I think from a color perspective, as Sang said, the foundry business has -- is normally seasonally down. Plus, I think it's fairly well known through the industry that the analog and power segment is burning off inventory in the first quarter. We do see that with our customer base as well, and have built that into our expectations. We are ramping some programs in our own product areas, both display driver ICs and CMOS image sensors. But it will be more heavily impactful, our belief is, Q2 forward on those production ramps, I think, just based on normal seasonality in the consumer end markets that we play in.

But also, as I said in my statement, we have a very good (indiscernible) in our sales pipeline. So, the forecast that we shared today is not based on our optimistic forecast; it's based on data from the salesforce.com that we have just completed.

So that's -- are those design wins and purchase orders as well?

Yes.

[Jordan Terrano], Brigade Capital Management.

Can you -- in the Q4 -- the Q3 call, you discussed getting to 150 million to 200 million of revenue in '07 for display driver, and I think you may have modified that since then. Can we get an update as to where you think you're actually going to be on this ramp?

I think you mean CMOS image sensors.

I'm sorry. Yes, that's what I meant.

I would say, just based on timing, we're probably more on the 150 end. But we're still targeting an exit rate Q4 of about 60 million, 70 million quarter is what we're hoping to achieve as we exit 2007.

Now, you talked about qualifications. You are qualified -- are you qualified anywhere for the 3.2 megapixel digital autofocus yet?

, No. That is in process with a number of customers, and will be fully demonstrated at the 3GSM show coming up here shortly.

What's the general timeline in terms of from qualification, once you do get qualified, to mass production?

It is about -- it depends on which customer, and depends on where we are in terms of product. But from the beginning to the end, maybe about six months.

Okay. And you're not qualified yet with it; you say, maybe ballpark, it takes six months.

(indiscernible) in the process.

I know; but it's not done yet. Where -- of the 150 million you expect to exit '07 with in image sensor, how much of that is assumed revenue from the digital autofocus?

I'm not sure that we want to break into the detailed numbers. (multiple speakers) will be some reasonable percentage.

Some reasonable percentage. Okay. And then, with regards to the half-inch SoC, the 1.3 megapixel, are you qualified with that anywhere?

Yes.

Okay. When do you expect mass production there?

We started shipping in December.

And is that the largest percentage of the Q4 or 2007 revenue in image sensor?

No. Right now our largest percentage of the shipments for a while has been SVGA, our smaller form factor VGA.

Are you talking about fourth quarter of 2006 or 2007?

I'm talking about 2007. I'm trying to get an understanding (multiple speakers) you are expecting it to come from.

2007 will be well-mixed of SVGA 1.3, 2 meg, 3.2. We project that it's well-mixed revenue.

I mean, is it a third, a third, a third? Can you give me any kind of (multiple speakers)

Didn't we tell you that we can't give you percentage (multiple speakers)

No. You said a decent percentage, and then you said well-mixed. So, I'm just (multiple speakers)

Well-mixed, okay?

(OPERATOR INSTRUCTIONS). Eric Reubel, Miller Tabak Roberts.

A question -- a couple of questions here on the image sensor side. Can you break out what the mix -- what the mix of shipments were between megapixel and SVGA in 4Q '06?

It was a small percentage. A smaller percentage was megapixel. The majority was SVGA for Q4 2006. I accidentally tried to answer that same one when someone asked 2007, so hopefully that clarifies it.

Very good. Last quarter you guys mentioned that you had design wins with three of the top five handset OEMs. I'm assuming that there's no change in that. Could you clarify -- could you confirm that?

Yes. There is no change. We are working with additional customers at this time.

Then, the image sensor market for '07, it's going to be composed of a cellphone component, and then there's also this growing portion of other new markets and security, auto, and other areas where image sensors are going to be. Can you give us a sense, sort of to the exit 4Q '07 $70 million of revenue, how much of it is going to be coming from the cellphone market and how much from those new sort of emerging markets? If you could talk about that in a general sense.

Majority of income coming from cellphones. And there are some revenues coming from [PC] applications, PC camera applications. And other applications we work with, I expect that there will be probably very little income by the end of 2007 in those applications.

So, the majority of the revenue expectation exiting 4Q '07 is still to be coming from the cellphone side?

Yes.

Bob, a question for you on the analog foundry. You talked about a new customer coming in in the power management area. Could you talk a little bit more about that, about the long-term supply agreement? And if you could also talk about what is the Company's leverage to power management with respect to Vista and the PC and as that rolls out in 2007. Thanks.

I think, in general, we've added a significant customer for a multiyear agreement, with a letter of understanding between the two companies. That should scale up through 2007 and into '08, '09. We have done well in that segment historically, and expect to continue to be able to attract new customers in that space. When we talk about kind of analog and power management being weak currently, I think, part of that is an inventory buildup that did happen in the PC segment. And the Vista rollout does impact our customers in the foundry space, a fairly large percentage, and therefore, does impact us as well. So, those analog and power management customers, I think, are impacted. And to the extent they are, it impacts us as well.

(indiscernible) just mention in power area that the beginning of wave of new customers we've been working with -- so there will be a number of MOU signed in next couple of quarters, and that enhancing that our customer portfolio in upcoming years.

Brad Adams, Chilton Investment Company.

Sorry about all the questions on the image sensors, but you do have quite a ramp going throughout 2007, and we just saw a 20% price decline. So, I am kind of curious as to thoughts on pricing going forward. And then one -- OmniVision (indiscernible) you spoke about difficult conditions existing throughout the year. And it seems like Samsung is making -- which I think was a customer in that division -- is making a pretty aggressive push there, and primarily driven by pricing. So, I was wondering if you could maybe broadly talk about pricing going into '07, and what the implication --

Honestly, for us, if you take mix out of the equation, pricing was not difficult Q3 to Q4 in our CMOS image sensor business. And in my prepared comments, I tried to clearly state that the ASP reduction was mix-related, going from older, traditional VGA to SVGA. We feel our profitability on the SVGA gross margin percentages, etcetera, are healthy, because we did a very significant die shrink going from our older VGA to our new SVGA. So, we feel like we've got a great die cost into that product. So, the competitive landscape relative to pricing, we don't see as the core issue. It is whether or not you've kept up with the latest technology, getting your die size correct and your wafer die cost correct, which we think we have. So we're comfortable with the shift in market that's happened to the SVGA, and feel like we've got a very competitive product there.

Not only that, also our cost structure in our front end -- very competitive. And plus, as you know, we don't have to use foundry (indiscernible) produce from our own fab give us the (indiscernible) advantage compared to some of our competitors. So just continuously rolling average sales price, I think, we can survive. And as a matter of fact, we can even probably win the market.

Sundar Varadarajan, Deutsche Bank.

Bob, going back to this $150 million new business that we expect to ramp by the second half, since your last quarter's call, could you give us some more color in terms of whether you've translated any of those kind of qualifications to actual purchase orders at this point, or you're still kind of working towards that? Any more color in terms of your ability to feel more comfortable with that number?

Yes. As I stated earlier, we did ship megapixel to new customers in December, as expected. SVGA ramped in the quarter. And we feel we are making progress with the customers that we were hoping for. I think there are different timing with different customers, and that should settle for us through the end of Q1. But, yes; we are shipping production volumes on megapixel and SVGA, and expect that to continue to be able to expand through the year.

So, our visibility and are tracking on this is actually, in my view, better quarter-over-quarter, as we are now building bottoms-up qualification by qualification forecasts with customers. So, I think our visibility has improved over the last 90 days.

So, of the 150, or the number that we talked about, what percent is actually coming from stuff you're already shipping and then you're just waiting for the ramp, versus stuff that still has to come online in the second half of the year?

About 15, 20% is what we're currently doing. The rest still has to complete going through the final steps of the qualification and scale.

Let me clarify on this. Our SVGA 1.3 and 2 meg that we're ramping up today, coming from 2.8 microns of the technology platform. And 3.2, and next generation of 1.3 and 2 meg, coming from 2.2 micron technology platform, which is going through the customer qualification at this time. So, there are products ramping up stage, and there are products that we completing the qualification at customers. So, that's one of the reasons that we cannot give you more breakdown numbers, because one is ramping up and one is going through qualification.

Also, Bob, one more thing. Of these new products, how many are new products for your customers also? In other words, are you just displacing existing -- existing sensor in a phone that's already kind of selling for your customer, or many of these are also new phones that your customer might be launching over the course of the year?

The cellphone cycle time is very short. So, most of these (indiscernible) getting into the new model.

So, these are (multiple speakers)

So the new vision is getting into the new cellphone models.

So there is some risk of the customer launching this stuff in time and that ramping, too, that you need to factor in into your estimates? Right?

(multiple speakers) [talked about risk of] the whole industry.

I know, but I just wanted to make sure that that was in fact (multiple speakers)

I mean, obviously, yes, it is.

And the 150 you're talking about is all CMOS, or does it also include some of the new display driver customers that you guys said you won in the quarter?

That was Imaging Solutions (multiple speakers)

So, the display driver side would be incremental to that 150?

Much higher. Much higher [than that].

And turning to operating expenses, now, you guys have been running at about 55 million a quarter. Do you think that kind of stays flat? Is there any opportunity to kind of reduce that over the next couple of quarters, or is that pretty much kind of steady state, but you kind of leverage as you grow your revenue?

No. I think we've continued to try to improve our efficiency as a company. As you saw in my script, if you look on a year-over-year basis, headcount was down 10% in response to our business performance. Obviously, with our guidance on revenue in Q1, we are working to be prudent on the cost element of our company in the first quarter. But at the same time, we're very committed to the growth part of our company. We've been investing very heavily in CMOS image sensors and revitalizing that product, as well as new product areas for DSD, and a major push in our power management area. So frankly, we've been in a pretty heavy investment mode, given our financial performance for the last three, four quarters. We're hoping that that pays off for us through '07. And therefore, we're not going to get too Draconian on cost given that expectation.

Probably what you see from MagnaChip is this is one of the, probably -- the unusual setup for any Asian company headquartered in Asian country. We have a well-balanced management team that Bob is, obviously, focused on, corporate operation (indiscernible) focused on business and development and manufacturing. And then by doing so, I think that we have one of the best ways of controlling our expense. But looking down to rest of the 2007, obviously, we're controlling our expense, but our focus is revenue recovery. And obviously, when revenue going up, there is potential that expense is going to increase, and due to using more wafers and -- so, those things that [you usually] expect, but will be a minimum as we are managing this expense under good control.

Aaron Husock, Morgan Stanley.

I guess, first, I just actually missed when you said what you're imaging sales were in the quarter. If you could repeat that number.

Do you have a next question while we're looking for that number?

It was 12.8.

It looks like you're expecting a pretty good increase in CMOS sensor sales by the fourth quarter of '07. Can you talk about what like-for-like pricing erosion assumption you have baked into that?

I mean, it's kind of an interesting issue. First of all, on a year-over-year basis, there is no like to like. In essence, all the product that we had in the first half of '06, legacy product, will be gone for '07. So we've refreshed our entire product family here at the end of '06 and start of '07. But I think, in general, on a like-for-like basis, 5 to 10% is the issue. I think in this sector, though, the more important thing is the new product introductions and the price points that those get introduced at, there's a pretty short cycle time of products in the cellphone market in general. I think the same thing has to be said for CMOS image sensors.

Okay. I guess if you look at -- right now, are you shipping 2 megapixel product to customers?

Actually, we in final the ramp up. So, yes; we will soon.

Okay, good. Then I guess just lastly, there seemed to be some inventory issues in various parts of the handset supply chain. When you talk to your end customers and to the module makers, are you seeing any pockets of excess inventory, either at the finished module level or at the image sensor level?

I don't think we're seeing that for CMOS image sensors, but we do see that symptom relative to our foundry customers in wireless. And frankly, our small display drivers also go into handsets, and we do see it in that part of the business, and it's factored into our guidance on the first quarter.

(OPERATOR INSTRUCTIONS). [Jay Kamani], Morgan Stanley.

Could you just give us a little bit of color as to your particular competitive advantage on image sensors and display drivers, and what differentiates you from your customers? And if price is one of the major differentiators, how can you compete effectively on price, given your 50% utilization rate?

I said that earlier, that an advantage of MagnaChip is we do have our own fab. And so, we have got to have right technology and continuously shrinking our technology as well. And as long as we -- in that leading-edge technology and positioning our product, we do have advantage in cost for the both CMOS and (indiscernible) sensor and display drivers and. CMOS imaging sensor -- that is not really cost; it is the technology (indiscernible) to customers. And we mentioned earlier that our new 3.2 megapixel with a digital -- auto digital focus are attracting customer interest. I think that will be a good product (indiscernible) increasing our revenue. Display drivers, same. Obviously, we are ready for any pricing in the market, but our technology is well positioned. And particularly small drivers, we do have [TFP], [LPDS], LTPS and OLED -- all this technology that we have offering to the customer, I think that we're well-positioned in the market.

Also, I'm a little confused by the second half of your question, which said how can we compete with a fab at 50% utilization. Someone with lower utilization, every incremental dollar of revenue is dramatically more helpful to me (indiscernible) on a variable basis than it is for someone with a fab that's 100% full. Give us a fab 100% full and you get incremental revenue; you've got to make investment. For me, incremental revenue, I have no investment, and I'm looking at it on a variable basis. So frankly, my cost structure from a pure short-term perspective is better than someone who's got a fuller fab. So, unless someone out there is running a fab that's 30% utilized, I think, I'm probably going to win on a short-term basis relative to cost.

[Lee Selter], Merrill Lynch.

On the image sensor product, you mentioned the $150 million guidance for '07. Can you talk about your target gross and EBITDA margins based on that revenue for that product?

Can you repeat the question?

Sure. With respect to the image sensor, you mentioned guidance of 150 million in revenues. What kind of gross margins and EBITDA margins are you guys targeting?

I think we haven't given specific guidance. But, on this refreshed product line, we see very healthy margins for CMOS image sensors, upwards of 35% and greater.

Guy Baron, Credit Suisse.

I might have a hard time with the one-question rule, but I'll try to be quick. What would you consider normal seasonality, or normal seasonal percentage declines in each one of the businesses for Q1?

Typically in the foundry sector, 10%. And frankly, our display driver ICs are really tied more to cellphones and digital TV. So, you'd have maybe a seasonal down minus five, you know. And for -- those markets are really consumer-driven, so I think it's in line with the end-consumer demand, relative to our own product area.

[James Croom], [Regiment].

I was just wondering if you could talk a little bit about, I guess, capital. One of the advantages now you have you talked about, Bob, is your utilization is lower, and you've refreshed your entire product. But your CapEx has been a little constrained over the last couple of quarters. And heavier competition could spend more while you guys are sort of managing your cash flow. So, is there a risk that the next design cycle you're kind of behind the eight ball as you can't spend the capital to meet the next design cycle?

In the semiconductor business, obviously, we have to prepare for the next technologies. And I have to say that we're right there on schedule. And that's one of the reasons that you will see 10% of our revenue spend on CapEx 2007, (indiscernible) enough for position us into strong 2008, in terms of 2007 revenue. And again, that with a minimum CapEx we spend last year, still we have a lot of room for revenue growth. So we think that we are well-managed, our CapEx numbers.

But also, I think, your characterization of our CapEx, historical CapEx is inappropriate, in that you've got to remember [we're a leveraged] buyout. We bought a company with significant assets in place at a great price. So, the reason we haven't spent as much CapEx is we didn't have the demand. We have every ability to go spend as much CapEx as we need, given the superior financial sponsors we have backing this company, the cash position, plus our bank line of credit. So, I think, we have not been cash constrained; we've been demand constrained. So, [staying] focused as we focus on our revenue recovery, we will invest appropriately as we have full factories; we just haven't had a full factory.

[Andrew Ligio], [Par 4 Capital].

Could you add some color to the display driver segment, specifically given the news that LG Philips has been kind of tough? And as you look out to '07 for that segment, how much of the revenues are tied to handheld units, to monitors and to televisions? Thanks.

Throughout the 2007 second half, we see that (technical difficulty) more than 30%, 40% coming from TV applications, and maybe small display, maybe about 20, 25%. That's what we forecast as of today.

[Tom Cook], Turnaround Capital.

I was wondering if you could help clarify kind of a mix of where you're going with your foundry margins, and kind of how that ties in with your requirements going forward for CapEx. And what I'm looking at is -- I don't have the Q for the whole year, the last quarter here. But for the first nine months, your revenues in foundry were down a little bit, but your gross margin went from $30 million to $5 million, the gross profit. So, how do you see that over the next year or two? It sounds like you're talking about new customers and filling up that pipeline. But, where do we get back to there as -- on a gross margin basis over the next several years? And how much CapEx is required, if any, in that business?

And kind of a follow-up to the previous question, you're talking about 10% CapEx spend. So, if you do 600 million of revenues, that $60 million. If you boost this company in '08 to $1 billion of revenues, do you then need to spend $100 million?

So let me answer your question. Relative to foundry, we are serving a very specific niche in analog and power management and certain consumer application spaces that require generations of process technology that actually follow after what we're doing in CMOS image sensors ourselves. So right now, for us, our leading-edge process technology is driven by our CMOS image sensor business.

As we just kind of think about it economically, it goes through a lifecycle supporting our Imaging Solutions; then would support display driver ICs and our foundry. And over time, all three of our segments continue to march down on process geometry, but they actually follow each other. So, for us, our foundry business, just where it's positioned, naturally extends the economic life of our R&D efforts and of our facilities at each process node. So, it isn't actually the bigger CapEx driver for us today, given that strategy that we've got. Really, the bigger driver are our display driver IC business and our CMOS image sensor business. But, then it gets reutilized by our foundry.

Now, our foundry business, as it grows, we will support its CapEx requirements as well. But if you look at the analog semiconductor space, in general, the capital intensity has typically been about 10 to 12% of revenue on an ongoing basis. And we still think that's a good rule of thumb long run.

Michael Lipsky, Deutsche Bank.

Just a quick clarification on the -- you talked about 150 of revenue, and 60 to 70 million of that coming in 2007. So, to be clear, is there -- is there 80 to 90 million that comes in 2008?

No. I think you may have confused our -- confused what we said. We're hoping for an exit rate of 60 to 70 million in the fourth quarter 2007, with the other pieces in Q1, 2 and 3.

I see.

That was an annual guidance (multiple speakers)

So, 150 would be a 2007 topline revenue number from CMOS design wins and purchasing orders? Correct?

That's what we are shooting for, yes.

One last question on this. If we took out the business that you're doing for Hynix, what is capacity utilization in the fifth fabrication facility?

Lower. It's mostly being done out of Fab 5, and it's probably running about 40%, absent the Hynix processing.

Thank you, sir. At this time I would like to turn the floor back over to management for closing comments.

First of all, I want to thank everyone for joining the call today. I think we had a record number of attendees. We appreciate your attention and support of MagnaChip, and look forward to talking to you in the future and on our following calls. Thank you very much.

In closing statement, I have to say that last six months, we are preparing for recovery. And it's well-positioned as of today, and we're looking into 2007 again -- the recovery year of MagnaChip. Thanks for joining us today. Bye.

Thank you, gentlemen. This concludes today's conference call. Thank you all for your participation. You may disconnect your lines at this time, and have a wonderful day.