Magnachip Semiconductor Corp (MX) 2007 Q2 法說會逐字稿

Welcome to MagnaChip's Second Quarter Results Conference Call. We will cover operating and financial results for the second quarter 2007.

(OPERATOR INSTRUCTIONS.)

As a reminder, this conference is being recorded today. A replay will be available two hours after the call until Midnight Eastern Time on August, 2, 2007. The replay dial-in number is 201-612-7415, with account number 3055 and conference ID number 247275. 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. You may begin.

Thank you, Operator, and welcome, everyone, to MagnaChip's second quarter 2007 earnings call. Joining us today from the company are Sang Park, the company's Chairman and CEO, Bob Krakauer, President, and Margaret Sakai, SVP of Finance. After management's prepared comments, we will then have time for 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 of the release off of MagnaChip's global website, 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, anticipants, 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 products construction, continued success in technological innovations and delivery of products with the features customers demand, 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 10K for the period ended December 31, 2006.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, 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 Sang Park. Please go ahead, sir.

Thank you, David. Thank you for -- thank everyone for join us today's call. We exceeded our revenue guidance in Q2, with the revenue rising 28% from the Q1 to Q2 versus our guideline of 10% to 12%. This improvement is a result of design wins, which enhanced the new product develop, and a strong operational execution, all of which contributed to achievement of market share gains at current and new customers' accounts.

As a company, we focused on bringing high quality display and imaging solutions and [foundry] (inaudible) to the market faster. We also offer distinctive products and services by building deep strategic relationships with our core customers in order to provide tailored solution in timely manner, creating a win-and-win for our customers and MagnaChip.

Our large and small display business in particular has performed extremely well. We now have a full pipeline of current and new products that will allow us to gain bigger market share continuously at core accounts. Our foundry business is also improving as we add new services and new customers to our portfolio. Further, our imaging business is progressing by [re-engineering] our organizations and processors, and improving our new product plan execution.

Our capacity utilization output base was 82% for the Q2 and is continuing to rise. As such, we have made some strategic expansions of capacity to meet our business expansion needs in this year and early next year. Further, we've continued to evaluate ways to maximize our asset usage. As a part of our review, we made a decision to close Fab One, our 5-inch wafer fab, by the end of 2007. It is expected that, strategically and financially, this move will benefit MagnaChip, and is being done with the full cooperation of our customers as we continue to work towards higher [probability] and growth.

Overall, we expect continued improvement of our performance in the rest of 2007 and 2008 as the organizational and process improvements we have implemented pay off and our market share continues to grow. We expect to benefit from new product launches, particularly in Q4.

Now, I would like to turn the call over to Margaret for a review of financials.

Thank you, Sang.

Net revenue for the three months ended July 1, 2007 was $194.1 million compared to $151.8 million in the first quarter of 2007. This is an increase of 27.9% from the prior quarter, which is significantly higher than the guidance of 10% to 12% growth we gave in our last conference call.

Average selling price erosion from Q1 2007 to Q2 2007 was approximately 11% for display driver ICs and 9% for CMOS imaging sensors, based on our shift in mix to small form factor VGA products, while averaging selling price for our wafer foundry business increased by 5%.

Revenue by segment for the quarter was $85.1 million from display solutions, $17.4 million from imaging solutions, $75.1 million from semiconductor and manufacturing services, and $16.5 million from others.

Display solutions revenue increased 44.6% from the prior quarter, significantly higher than our expectations primarily due to higher volume, driven from both current and new products in spite of higher than expected average selling price erosion.

Imaging solutions revenue increased 47.6% from the prior quarter due to an increase in small form factor VGA product sales and 1.3 megapixel design wins.

Semiconductor manufacturing services revenue increased 30% due to the addition of new customers, increase in average selling price, and improved mix.

Revenue by geography was 63% from Korea, 17% from greater China, 8% from Japan, and 12% from rest of world.

Revenue by end market for the quarter was 26% from computing, 17% from wireless, 15% from consumer, and 42% from wafer foundry. Our wafer foundry business is further broken down at 25% from computing, 17% from wireless, 55% from consumer, and 3% from industrial.

In the second quarter, we had one customer greater than 10%, and the top 10 customers represented 68% of total revenue.

Gross margin was $27.8 million or 14.3% of our revenue for the quarter ended July 1, 2007. Operating expenses were $70.1 million in the current quarter. This included $13.4 million in special charges, which was comprised of $12.1 million in restructuring and impairment charges related to the closure of Fab One and $1.3 million from our settlement with our former subcontractors. The impairment was made related to the closure of Fab One. This restructuring plan was undertaken as this facility currently generates a loss and no longer supports our strategic technology roadmap.

Excluding the special charges, operating expenses were $56.8 million, or 29.3% of our revenue in the second quarter. R&D expense in the second quarter was $32.5 million, or 16.8% of our revenue compared to $33.9 million, or 17.2% in the year-ago period. We had an operating loss of $42.4 million during the quarter. Excluding the special charges, the loss was $29 million compared to a loss of $35.7 million, excluding special charges in the prior year's second quarter.

Net interest expense for the second quarter was $15 million compared to $14.4 million in the second quarter of 2006. Other non-operating income is comprised out 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 July 1, 2007 was $45.3 million. Excluding special charges, the loss was $31.9 million compared to a loss of $67 million in the prior quarter.

Depreciation and amortization expense was $46 million, or approximately 23.7% of revenue in the second quarter. EBITDA for the second quarter was $17 million compared to $1 million in the prior quarter. 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 were in full compliance with these covenants at the end of the second quarter.

Headcount as of July 1 of 2007 was approximately 3,531. This is a 2% decrease from one year ago.

Capital expenditures for the second quarter were $16.6 million versus $6.3 million in the year-ago quarter. We expect CapEx will be approximately 10% of revenue in 2007. The total cash and cash equivalents were $54.7 million as of the end of the second quarter. Accounts payable days were 62 compared to 60 days in the first quarter of 2007. Accounts receivable net of reserves was [$117.2] million at the quarter-end, an increase of $36.5 million from the first quarter 2007. our accounts receivable days of sales outstanding were 55 in the current quarter compared to 48 days in the prior quarter.

Inventory days of supply was 39 compared to 46 in the prior quarter. Net inventory was $71.7 million compared to $69.4 [billion] in the prior quarters.

Now let me turn the call over to Bob.

Thank you, Margaret.

The overachievement of our financial targets is a result of operational changes made over the past several quarters. You are now seeing the results of a more rigorous new product introduction process, more rigorous quality process, and rigorous attention to our key customer needs. Revenue from new products was 48% of the total during the past quarter, underscoring the importance of our efforts to improve new product execution.

We have successfully turned around each business unit with growth greater than the industry in each segment. Each employee at MagnaChip is focused on making 2007 the year of the MagnaChip turnaround, and this past quarter is our first step. Over the past several quarters, our operations staff has focused hard on improving the delivered quality to customers as represented by improvements in our PPM failure rate, reduce RMA cycle time, more rigorous statistical process control and preventative process engineering, which is resulting in better scorecard ratings from our customers and, in turn, improved growth prospects. These efforts are one of the keys to our customer relationships.

In the second half of the year, we expect several large design wins to ramp, especially into the fourth quarter. In the near-term, we expect some consumer end-market inventory shifts, but expect them to be fully resolved as we enter the fourth quarter. We therefore are forecasting flat growth into Q3 and significant growth in the fourth quarter. And taken as a whole, very good growth in the second half of 2007.

Core technology introductions continue to aid our growth. Our display driver density features and fabrication processes continue to accelerate in our product offerings, helping fuel our growth and gain share with customers as we help them provide value to end consumers. These new products include high pin count, 647 and 720 channel devices and new interface products with LCDS for full chip-on-glass in large displays, and one key RAM technology, automatic brightness control, and support for high-speed interfaces such as MBDI and [MIPI] for small displays, supporting digital TV, notebook and PC monitors, cellular phones and mobile TV end markets.

Imaging solutions is now shipping volume 1.3 megapixel products in production quantities, and have successfully sampled our 3.2-megapixel digital autofocus product. We see expanded interest in our small form factor VGA products, and have expanded the product line with new package alternatives for module maker flexibility.

Our Semiconductor manufacturing services has expanded its process technology portfolio with the introduction of new offerings for power technology, such as .6 micron 40 volt and .18 micron 30 volt, and the startup development for .18 DCD and .18 BE [prom] technology, as well as a revitalization improvement in our online Web services for customers.

We continue our drive for profitability as evidenced by our cost improvement action with Fab One. All of the employees of MagnaChip are focused on improving our operating performance and resulting financial results in the remainder of the year.

Thank you for your continued interest in MagnaChip. And Operator, at this time, we are prepared to take questions.

(OPERATOR INSTRUCTIONS.)

Robert Hopper with UBS.

Thanks, guys. A couple questions for you.

Nice job on the revenue side this quarter. In terms of when we're looking out to 3Q with flat revenue, can you talk about any opportunities there are for further margin expansion? I'm more talking on the EBITDA side versus the gross margin side, because I think your depreciation is going to tick down heading into 3Q. But, just to try to see, should we be thinking about margins holding tight, or are there opportunities for you to expand beyond where you are right now?

Yes. We're expecting improvements in yield and other operational metrics that will improve our margin into the next quarter.

And also, we continuously [shrinking] our technology and give us better profit.

OK.

I guess one of the obvious questions is on the revolver. Could you just walk us through sort of the draw, the thought process there, the -- why 40 million? I saw that the working capital spiked up a little -- you spiked up in the quarter a little bit. And also, talk about your covenant. I think as you look out to 3Q with the revolver, your covenant steps down to, I think, 15 times. Do you feel you're pretty comfortable with the current guidance that you set forth in terms of the covenant they have, or do you feel like you're going to need to amend that?

Yes. Our expectations are that -- first, let me answer (inaudible) questions. You asked multiple questions. The first one, on cash and revolver, we have full availability to our liquidity, and it was important for us to manage cash for both customer issues as well as our CapEx needs. That's the purpose for the draw. Relative to the bank covenants and our management of our bank group, we have a very supportive group, and we've continued to be able to work with them to provide continuing liquidity, and we expect to be able to manage that successfully in the third quarter as well.

Well, I guess could you get any more specific? Do you feel like you're going to have to seek another amendment, or do you think the [constraints] that you have currently are sufficient?

We will determine that -- determine the answer to that question in the quarter.

OK. I'll jump back in queue. Thanks.

Jeff Harlib with Lehman Brothers.

Hi.

Just regarding the flat revenue guidance, Bob, maybe you can talk a little bit about the ramp of the design wins. I mean, Q2 obviously was exceptional growth, and I'm just wondering, the design wins in your key businesses, how much of the flatness is due to a slowdown there versus some slowdown in the consumer segments that you spoke about before?

Yes, it's probably better Sang answer that question.

The reason that we've forecast the flat revenue, based on two reasons. Number one, obviously as our fab getting full and we're not able to provide Hynix unit process support as much as we did in the past, and therefore our actual avenue for our own product and service grow, but the total number staying flat.

And number two, our forecast into the third quarter based on market is not fully recovered. Therefore, we're trying to be conservative again, and then stay at that flat growth into the third quarter.

OK. And the ramp on design wins you expect in Q4 underlying that revenue ramp, can you talk about which businesses they are focused in? Maybe I'll start with that.

Well, actually, it's [here] that we're growing into every three business unit second quarter. And fourth quarter it happens to all of them. All three units show us the strong growth. And since it's the design wins and we're talking about six to 12 months long pipeline and, therefore, most of action is already happening. So, that's why we are more confident that Q4 will be a strong quarter.

OK. And last question. On image sensors, because there was some slippage in the introduction of some of your products this year, can you talk about where you stand and how you're positioned for new models and design wins on your 2-megapixel, 3.2-megapixel products?

Yes. As I stated in the script, we've succeeded to go to production volume on several design wins on 1.3-megapixel, and continue expansion on SVGA, and we are working to do the same on 2 and 3-megapixel as we move through the year. But, we do not have confirmed design wins for those two nodes at this time.

Great. Thank you.

Aaron Husock with Morgan Stanley.

Great. Thanks for taking my call. A couple things.

First, just I kind of missed this. when you're talking about ASPs, the down 9% for image sensors, was that quarter over quarter or year-over-year?

Quarter over quarter.

OK, great.

And was that entirely mix, or was a portion of that -- I mean, how's that split between mix and like-for-like price erosion?

Like-for-like price erosion was about 60% of that number.

OK.

And then, just kind of can you go over what your overall mix, unit-wise, was in image sensors between 1.3 megapixel and VGA in the quarter?

No, we don't disclose that for competitive reasons.

Oh. Was 1.3 a meaningful portion of -- I mean, greater than 20% of unit shipments, or is it still relatively small?

It was material, but we don't break it out.

OK.

And then, as far as the consumer-related inventory correction you were expecting in Q3, is that in the imaging side or on the display driver side?

Again, we'd rather not disclose the individual units. Our comment is more about the general market.

OK. So, I mean, when you speak about consumer, do you mean the handset market, or is it different (inaudible)?

No. We separate wireless and consumer. So -- but, we see that in both markets.

OK, so there's some inventory overhang in both markets?

Yes.

OK. Is it on one -- on the finished handset side, or is it more excess component inventory at some of your customers?

We see that inventory [independent] for both.

OK. OK, great. Thank you.

Eric Reubel with Miller Tabak Roberts Securities.

Gentlemen, thanks for taking my call.

Question on working capital in Q3. Do you see that as -- turning around to be a source, or are you -- more use in Q3?

Expect it to be a slight source.

Great.

Turning to the product side for a second, on DDIC, you mentioned that you're seeing a movement to the higher pin count products. Is that -- can you update us on what the DDIC mix is between large and small panels?

In terms of revenue, or in terms of volume?

Revenue would be great.

Revenue will be good. Largely it's -- see, about three times EBITDA in small, so maybe about 66% large and maybe 33% small.

Great.

And on large panel displays, can you give any color on the customer diversification strategy that you've been executing on, and how that's driving revenue and whether or not you think that's sustainable?

Oh, yes. We're making great progress, and that is continuous trend into third and fourth quarter particularly. And so, yes.

If I can turn to a second to the high pin count, is it fair to say that the high pin count is not going to be a factor on the large panel displays, but that it is being kind of widely adopted in the small panels? And how is that driving pricing?

The large pin count is not helping us sustain on average sales price because a pin count's greater and they use less number of chips. But, obviously we are shipping to customer in large volume so, still, we have strong growth. We see that trend more in large.

Here's one last question, and then I'll turn it over to the queue. There's this thesis out there that display driver IC at .35 micron was -- created a lot of capacity constraints and limited market entrants. And with the migration to .18, that there's more .18 capacity, it opens up the field more, with that out--capacity constraint, that there could be more entrants and more competition.

How do you see that thesis? And is the migration to smaller pin count going to be something that really is a driver to ASPs that you can't manage? And I'll turn it back.

Actually, what I hear is sort of opposite of what you say. And I don't see any shortage in .35 capacities available in the market. As a matter of fact, we don't do -- we do very little DDI in .35. We move to .22 and .18 and .13 -- I mean, .15, and we don't hear much of a shortage in .35, or we don't see much of over-capacity in .18, either. So, I hear sort of reverse of what are you saying.

I guess the thinking was that, because people weren't investing in .35 and there was a lot more available .18, that it could make the market more competitive, with the understanding that (inaudible) has migrated to .18.

Well, there is a strong demand for the .35 because of increased need for the power semiconductor. Most of the power semiconductor use .25 and .35 and .5. So, there is a great need for the different products, but DDI, I think the people moving out of .35 rather quickly.

OK, thank you.

(OPERATOR INSTRUCTIONS.)

Guy Baron with Credit Suisse.

Hi. I just have a few questions here.

First off, Bob, what are really sort of the key factors right now that could change -- that are preventing you still from providing margin guidance for the next quarter?

It's a strategic decision by my Board to provide revenue guidance only. Many companies today don't provide guidance at all for legal reasons. So, obviously, our company has full visibility and understanding about where we expect our financial results to be. We just choose not to disclose them on these earnings calls.

OK. But, I guess internally, you have a fairly decent sense of the stage, or do you feel like there's sort of two or three items that are still kind of wait-see that you ...

No. We feel like our ability to forecast our financial results continues to improve as we've matured as a management team together.

Well, another reason to it, maybe last about three quarters, we always exceeding our guidelines, which shows that our ability of [projecting] revenue and profits continuously improving.

OK. You talked about Q4 design wins and the level of confidence that revenues were going to go up. How much volume variability exists at this stage as it relates to some of those products?

When you say volume of variables, what do you mean by that?

I mean how much -- are the volumes, in the sense of confidence you have in that ramp -- I guess what I'm trying to say is, is it in the bank, or is there some variability still on to what degree those volumes will ramp in Q4?

We have a pretty accurate -- the pipeline projection. The tools, they're fully implemented. And obviously, the most of Q4 projections, it's based on that our design win and about-to-be-completed qualifications at customers. So, our visibility into that fourth quarter and at this time is much clearer, and we're confident we'll do it.

OK. I was sort of -- just from a liquidity perspective, I was sort of under the impression that you could allow or afford to have cash balances go lower in terms of sort of a minimum cash level. Is there some color you can provide on why you chose to draw the revolver for the -- pretty much the entirety of the cash burn as opposed to use at least some of your cash?

No. We just wanted to be sure that everyone understands that we have available liquidity visible there on the balance sheet, and so why we chose to draw at the end of the quarter. And we still have full liquidity available under our line, and obviously from our cash on hand.

OK. And if I remember correctly, and I might be mistaken, but I think I remember, Bob, there was discussion about you not expecting to use your revolver this quarter. I guess -- that necessarily the case. Maybe I missed it.

And secondly, what sort of changed during the course of the quarter that led you to obviously do otherwise?

Well, I think as you see, the cash on hand was greater than the revolver drop, but we felt it was important to show to customers more of our available liquidity so that they can understand that simply on the balance sheet.

OK. But, I guess it was your sense at the beginning of the quarter when you made the comments that, from a margin perspective, you'd be doing better and not necessarily have to draw cash down to this ...

No. We just -- we changed our minds.

OK. All right.

And then, I guess just sort of a left-field question here, if I could. There's been some market speculation, some discussion out there, that Micron could be looking to exit the image sensor business. Any sense on implications or on the sector, or what kind of effect that could have on your positioning?

I think it's probably best that we don't comment on speculation in the marketplace.

All right. Thank you.

[Shekar Minkovic] with JP Morgan.

Hi, guys. Thanks for taking my call. Just a couple of quick questions, one just coming back to the prior question here on the revolver.

Given that you didn't actually need the revolver, you did have more net cash relative to how much you had drawn down, did you actually pay down the revolver now that you've shown it to the customers on the first -- on the financial statement?

We did have a pay-down on the revolver after the quarter-end, yes.

OK.

Second is I know you've talked about past utilization in this quarter. I think, if I recall correctly, it was 82%. Can you talk about where you see that going in the third quarter and then again in the fourth quarter?

That's our output base, 82%. Our input base is 90%. So, you will see third quarter output base probably little higher than current input base, which is at 90%.

So, above 90% in the third quarter.

That's our projection.

And in the fourth quarter, do you have a view yet?

We do have some numbers but, at this time, I'd prefer not to say.

Well, I think part of it -- I think you realize that we're expanding capacity with CapEx, and the reason we're doing that is what's there is getting full. So, at that point we're trying to load our factory to optimal efficiency. But, we do have significant CapEx that we'll spend in Q3 and Q4, and that's to support the growth of -- we expect in the fourth quarter and into 2008.

OK. And are you bringing some capacity that was in Fab One into some of the other facilities?

No. Fab One is a 5-inch, and we can use it to (inaudible) bring up capacity of other plants.

OK. So, you're just letting that business go, essentially?

We transferred some of 5-inch wafers business into 6-inch, and some of them probably go with the other customers.

OK. And then ...

Other suppliers.

OK.

And then, just finally from -- more of a housekeeping issue, I actually missed the segment sales breakdown. If you could just run through that quickly, display drivers, image sensors, and foundry and other?

On the revenue?

On the revenue, yes.

It's revenue Q2.

Yes, here it is. The revenue out of display solutions, 85.1, imaging, 17.4, SMS, 75.1, and other, 16.5.

Great. Thank you so much.

[Oliver Corlett] with [R.W. Pressbridge].

Hi. Thanks for taking my call.

Just could you give us a little guidance on what is going to happen to depreciation in Q3 and beyond? Is that affected by the Fab One write-down or by the write-down of the other assets?

No. Depreciation in fourth quarter, we've given prior guidance on this, will drop significant from Q3, but it's because the depreciable lives of our asset from the point in time when we did the leverage buyout was actually about half the economic life. So, we're coming to end-of-life depreciation on a large majority of our assets, so we expect D&A to drop about $20 million from Q3 to Q4.

Obviously, this write-down -- these pieces of equipment were part of that group primarily, so there is a drop from -- in Q3 and in Q4 relative to this. But, that's small compared to the other impact.

So, Q3 will be a little lower than Q2, and then Q4 will be a lot ...

No. Q3 D&A we actually expect to be up, given the fact that we've made capital investments on it for new equipment. You know, obviously offset a little bit by this charge, but the Q3 to Q4 D&A is dropping mostly because we're coming to end-of-life depreciation on a large group of assets from our acquisition date back to 2004.

Right, OK.

The foundry business, you mentioned a couple of quarters ago that you were signing MOUs with various new customers, I think three or four, or maybe five customers you were talking about back then. How is that in terms of number of customers? And do they have long-term commitments on this business, or what's going on there?

Yes. We don't have long-term commitments going today, but we've made very good progress on the new customer acquisition, as evidenced by the very good growth rate we saw in the SMS business here from Q1 to Q2. And I believe that growth rate is above our peer group in the quarter, based on what we've seen others report.

And how many new customers have you signed so far this year?

Several.

OK. And are there any particular segments that are more active than others in terms of the products?

It's all mixed, right? We see more customers expansion in power area.

OK.

I saw a comment somewhere in the press recently from Hynix that they might be starting to compete in various areas, or non-memory areas. Do you see them competing with you at all in image sensors or in the display driver business?

Yes. I mean, we -- again, I don't think it's prudent for us to comment about other companies. But, we have many competitors. We're in a competitive market, and we compete based on our intellectual property, you know, our quality and service to customers, and I think that will continue in the future.

But by the way, I talked to Hynix executive, and that is not true. That's what they told me.

Oh, really? Oh, OK.

Just one more question. On the revolver, do you expect that you're going to be drawing it down further by the end of the year with your -- with working capital requirements having to go up with the ramp-up in Q4?

In the third quarter we expect to have a similar pattern to the prior quarter, given our intentions to continue to invest for our growth we're expecting in Q4, and have -- not going to give further guidance out to fourth quarter (inaudible).

OK. That's all I have. Thank you very much.

Sundar Varadarajan with Deutsche Bank.

Yes, hi. Thanks.

Bob, the utilization level at 84%, was that the end of the quarter or average? And do you expect that to continue to go up in Q3?

It was at the end of quarter, and we do expect it to go up in Q3.

OK. And one of the things you've been stating in the past was, as you start seeing volume growth and revenue increasing with better mix, you will have, like, a 50% flow through the bottom line. We didn't see that quite happen this quarter. was there anything kind of going on this quarter that prevented that, and when will we kind of see -- start seeing that kind of flow-through to the bottom line?

Yes. I think from our comments, you saw that we had a little bit higher ASP erosion than expected, and that was the offsetting issue.

And any reason to expect that starts kind of abating in the next few quarters?

Well, that is our expectation.

OK.

And on the Fab One closure, do you expect that to kind of all be completed by the end of the year? And how does that affect utilization? And is there any prospects for any sale of assets there in '08?

It will be closed the end of this year, and selling that asset, yes, we are working on it.

OK. Thank you.

Aaron Husock with Morgan Stanley.

Great, thanks. I was wondering if you guys could comment on how you see the overall image sensor pricing environment going forward, because there have been some comments from your competitors about Samsung starting to be less aggressive in image sensor pricing and about Micron being less aggressive now that they've burned through some of the excess inventory they were carrying.

So, I was wondering what your thoughts are there.

Yes. I think the pricing will continue to be extremely aggressive. And frankly, as we target growing the share, we'll be aggressive. The fact that we own our own fab, we think it's highly competitive, and going to be here shortly a big part of the depreciation dropping off. We'll have a good ability to compete and drive share gain for MagnaChip.

OK, great. Thank you.

Eric Reubel with Miller Tabak Roberts Securities.

Hey, thanks for taking a follow-up.

Bob, on CapEx for Q3, can you give us any guidance on what it's going to be? And also kind of a longer-term question about CapEx relating to image sensors, have you guys looked at all at wafer level cameras for VGA? Do you think that's something that you could adopt? And if you did, what would be the CapEx impact?

Yes, I'll answer the first one. We're expecting CapEx to be about 10% of revenue. And relative to your second question, we continue to evaluate that technology. For us, there would not necessarily be a CapEx impact because there's availability of that wafer-level approach in the outsource market, which would be our intention.

Fair enough. Thank you.

Our next question comes from Robert Hopper with UBS.

Thanks. Just two quick clarifications.

First off, I'm not sure if you mentioned it, but did you say what the expected cost of the facility closure will be, the cash cost of that?

We didn't disclose cash cost. It's actually a very small percentage, approximately 15% of that number. The majority of that is asset impairment.

OK, so it's $15 million -- 15% of the $12 million charge?

Approximately.

OK. How much did that fab actually lose in the second quarter from an operating profit perspective, just to give it ...

Yes. We haven't disclosed that.

OK.

And then lastly, I just want to go back to the revolver question. You mentioned something about you're expecting to follow a similar pattern. Where do you stand today with the revolver borrowings? You said you paid some of it down, and I'm just trying to understand where we should expect you to be.

Is it -- should we expect you to have a similar draw so that you're showing $50 million of cash balance at the end of third quarter, or is there going to be an incremental 40 or so on top of what you had at the end of the second quarter? I'm just trying to understand what we should expect.

Yes. I think it's best I not get into this detail of my tactics in treasury. But, in essence, what I'm saying is we expect a--fairly neutral cash flow changes, given that our cash generated from operations, we're expecting the majority of that to be invested in CapEx this next quarter. So, our general liquidity picture didn't change too much quarter-over-quarter.

OK. Can you just tell us how much you -- where you stand on the revolver today?

Why don't we discuss the end of the quarter number next call?

OK, thanks.

There are no further questions at this time. I will turn the conference back over to management to conclude.

Thank you very much. We feel like we had a great quarter and, hopefully, you as our investors feel the same way. This is our first step toward driving toward break-even and profitability, which we're all focused on achieving here in the near-term. Thank you very much for your time.

Thank you for joining us today. And what we have demonstrated last three quarters and with exceeding the performance and--better than our guidance, and that shows that our pricings and our ability of managing business significantly improved. And that's the reason that we will -- the recovery at MagnaChip and going into very strong fourth quarter.

Thank you again, and good day.

Thank you.

This concludes today's conference. Thank you all for your participation. All parties may disconnect now.