Magnachip Semiconductor Corp (MX) 2007 Q4 法說會逐字稿

Greeting, ladies and gentlemen, and welcome to MagnaChip's Fourth Quarter 2007 Results Conference Call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. A replay will be available approximately one hour following the call. To access the replay, please dial 201.612.7415, using account number 3055 and conference ID number 268781.

It is now my pleasure to introduce your host, Mr. Joseph Villalta of The Ruth Group. Thank you, sir. You may begin.

Thank you, operator, and welcome, everyone, to MagnaChip's Fourth 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, Senior Vice President Finance. After management's prepared comments, we will then have time for questions.

If you have not 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 Website at 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 could identify forward-looking statements by such terms as believes, expects, anticipates, intends, estimated, the negative of these terms, or the 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 use of products by consumers and inventory levels of such products in the supply chain; changes in demand for 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 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 included in its annual report on Form 10-K for the period ending December 31, 2006. Although we believe 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, Joseph. Thank you, everyone, for joining us on today's call. We are highly pleased with how fourth quarter developed. Revenue came in at $246.5 million, above prior guidance. Q4 revenue also represents a 51.9% increase over our revenue of $162.3 million in the fourth quarter of 2006.

At the beginning of last year, we designated 2007 to be the year of MagnaChip's recovery. We believe that our strong performance this quarter demonstrates we have achieved this objective. Importantly, our results this quarter are based on solid fundamentals, especially increased design wins and new account development, which contributed to the share gains at current and new customer accounts. We expect these improved fundamentals to contribute revenue growth in the future periods.

We showed significant revenue increases across all of our businesses versus Q4 2006, with our display solutions growing 85.3%, imaging solutions growing 144.5%, and semiconductor manufacturing solutions growing 67.9%. In our display solutions business, we continued to experience strong demand for our newly introduced interface, LCDS, with design wins in very thin notebook computers at recognized global notebook PC manufacturers. We continued to strengthen our market position due to critical leadership in display driver ICs for AMOLED displays. Further, (inaudible) our DDI products with our so-called green technology functions that manage power consumption efficiently - these functions including automatic brightness control and Smart Mobile Luminous Control algorithms. We believe AMOLED solutions and these green technologies are timely due to increasing market requirements for the high-resolution and feature-rich displays that consume less power.

In our imaging solutions business, we successfully met our aggressive target to tape out four new products and have a complete suite of products ranging from VGA to 3.2 megapixel products that are now designing at our customers. And we introduced 1.3 megapixel SXGA resolution sensors, leveraging on our advanced low-noise pixel process that provides excellent low-light performance and is well suited for the PC applications.

In our semiconductor manufacturing service business, we continued to expand our business, achieving over $100 million in revenue in this quarter for the first time in our Company history. Our current and new customer engagement continues to increase worldwide. We entered an agreement with a European fabless semiconductor company to produce a MEMS device, and we also engaged with two European accounts.

We began our exciting new initiative for our foundry service - so-called AS Tech, which stands for application-specific technology. This initiative is focused on leveraging our deep analog and mixed-signal process technology platform to create tailored solutions for our customers so as to deliver distinctive and cost-effective solutions. We believe this initiative will drive future revenue growth and differentiate our foundry offerings versus others available today.

We are currently pursuing a number of growth initiatives. As recently announced, we have begun marketing our new line of power management products as a part of overall strategy to leverage our leading analog and mixed-signal technology platform to expand our market opportunity and meet more of our customers' needs. The initial power management products will focus on LDOs and MOFSETs. We are finding that our system-level understanding of applications and strong customer relationships in Asia allow us to quickly develop and customize products versus other competitors in this market.

Importantly, we posted our first operating profit since the third quarter of 2005. I am highly focused on improving overall profitability in 2008 as a top Company priority. We have a number of specific initiatives in place across the Company, focused on gross margin improvement. With our 2007 recovery and execution culture we have implemented across the Company, I'm confident that we will continue our growth at higher profitability levels in future periods.

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

Thank you, Sang.

Net revenue for the three months ended December 31, 2007 was $246.5 million compared to $200 million in the third quarter of 2007. This is an increase of 23.3% from the prior quarter.

The average selling price increase from Q3 2007 to Q4 2007 was approximately 0.6% for our wafer foundry business, 3.5% for CMOS image sensors, and 3.1% for display solutions products.

Revenue by segment for the quarter was $108.4 million for display solutions, $31.3 million for imaging solutions, $103.4 million for semiconductor manufacturing services, and $3.4 million from others. Display solutions revenue increased 36.7% from the prior quarter due to our higher volume increase in display driver products for LCD panels for TV, PC monitors, and mobile devices. Imaging solutions revenue increased 40.1% from the prior quarter due to higher sales driven by small form factor VGA and the 1.3 megapixel product. Semiconductor manufacturing services revenue increased 21.9% due to volume increases from new and existing customers.

Revenue by geography was 54% from Korea, 21% from Great China, 12% from Japan, and 13% from rest of the world.

Revenue by end market for the quarter was 19% from computing, 20% from wireless, 19% from consumer, and 42% from wafer foundry. Our wafer foundry business is further broken down as 22% from computing, 18% from wireless, 57% from consumer, and 3% from industrial.

In the fourth quarter, we had two customers greater than 10%, and the top ten customers represented 62% of total revenue.

Gross margin was $63.5 million, or 25.8% of revenue, for the quarter ended December 31, 2007, which improved by 10 percentage points compared to $31.3 million, or 15.7% of revenue, in the prior quarter. This significant improvement was achieved due to lower depreciation, volume leverage, and improvement in procured materials prices, partially offset by reduced overhead absorption due to a reduction in our inventory balance third quarter and the charges to revalue inventory to our lower process structure achieved in the fourth quarter.

Operating expenses were $58.9 million, or 23.9% of revenue, in the current quarter compared to $57 million, or 28.5% of revenue, in the third quarter of this year.

R&D expense in the fourth quarter was $37.7 million, or 15.3% of revenue, compared to $33.4 million, or 16.7% of revenue, in the prior quarter due to higher spending on wafers and masks for product development.

We had an operating income of $4.7 million during the quarter compared to a loss of $25.7 million in the third quarter of this year.

Net interest expense for the fourth quarter was $15.6 million compared to $15.3 million in the prior quarter of 2007.

Other non-operating expense is comprised of the net effect of currency gains and losses during the period. Most of this caused the effect on noncash impact of outstanding inter-Company debt.

Net loss for the three months ended December 31, 2007 was $29.5 million compared to a loss of $38.8 million in the prior quarter of this year.

Depreciation and amortization expense was $24.6 million, or approximately 10% of revenue, in the fourth quarter.

EBITDA for the fourth quarter was $29.3 million compared to $23.1 million in the prior quarter. While EBITDA is not defined by generally accepted accounting principles, it is commonly used to measure our Company's ability to serve 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 fourth quarter.

Headcount as of December 31, 2007 was approximately 3,605. This is a 0.6% increase from one year ago.

Capital expenditures for the fourth quarter were $21.6 million versus $13.4 million in the year-ago quarter. Total CapEx was $86.6 million, or 10.9% of revenue, in 2007, which was as we had forecasted at the start of that year.

Total available cash and cash equivalents were $64.3 million as of the end of the fourth quarter.

Accounts payable days were 61 compared to 82 days in the third quarter of 2007, primarily due to a decrease in inventory-related payables. Inventory days of supply were 38 compared to 51 in the prior quarter. Net inventory was $75.9 million compared to $94 million in the prior quarter.

Accounts receivable, net of reserves, was $123.8 million at quarter end. Our accounts receivable days of sales outstanding were 46 in the current quarter compared to 57 days in the prior quarter.

Now, let me turn the call over to Bob.

Thank you, Margaret. The quarter resulted in slightly better revenue and, as expected, gross margin improvement versus our guidance one quarter ago. The quarter was back-end loaded with a seasonal falloff in December. This is similar seasonality to prior years. As a result, we were able to reduce our inventory level significantly, while this overhead absorption reduces our risk heading into the seasonally slower first quarter. This was a fantastic result, given that the cost of goods sold was mostly from inventory built in the prior quarter at higher costs than those achieved in Q4. We expect this lower cost structure to be fully realized in the next quarter.

Factory utilization was 87% for the quarter and 80% in December. We expect the first quarter to be seasonally slower and, therefore, factory utilization to drop in January and February, with higher loading rates expected after the lunar new year. Customer forecasts indicate a much stronger March as we typically see each Q1.

As part of our drive to improve gross margins in 2008, we're focused on making improvements in capacity effectiveness and productivity to realize more capacity from existing, as well as new, equipment. This program will be ongoing this year.

As we currently have a filed S-1, our attorneys have advised us that we should not separately provide formal guidance as we normally have on these calls. We hope that you understand these circumstances.

For us, 2007 was the year of the MagnaChip turnaround, and, in 2008, we are focused on making our speed of execution the key to attainment of our revenue growth and margin expansion goals.

Thank you for your continued support and interest in MagnaChip. Operator, that concludes our prepared remarks. We can now take any questions.

Thank you. (OPERATOR INSTRUCTIONS). Our first question comes from the line of Robert Hopper with UBS.

A quick question for you on liquidity. I'm not sure if you guys talked about it, but you drew down a little bit more on the revolver. What is total availability that you guys have remaining on that, including letters of credit?

The total availability of our line of credit continues to be $100 million, and we typically draw down on that at the end of the quarter and repay it afterwards.

Right. I remember you doing that second quarter. How much availability did you have? I mean, you had $80 million drawn, but letters of credit go against that as well. And you've had letters of credit the past couple quarters.

Yes. It ranges between $10 million and $15 million.

Okay. So, is it fair to say that, at quarter end, you had fully drawn on that?

We weren't fully drawn, but, yes, I guess closer to that.

Okay. That's fine. R&D seemed to have spiked quite a bit. I guess it's sort of to be backed into the back half of the year. Maybe if you could just talk a little bit about how we should think about your R&D spending. Was this mostly related to the upcoming launches of the CIS products or the power management, or have we reset the bar for where that spending is going to go?

Well, let me answer with the financial perspective, and, then, I guess, Sang can add on on the technology side.

From a financial perspective, we had greater spending in Q3 and Q4 in R&D around wafers and masks as we introduced significant new products in both Q3 and Q4. In ISD, in particular, we introduced five new products in the fourth quarter that were introduced into the market with significant mask wafer spending. And, in some of our other product lines -- additionally, in display driver ICs, similar spending levels with new product introductions relative to technologies heading into next year.

Yes, those are mostly platform technology product, which has a tendency to have a revision from their mask. So that's one of the reasons.

Okay. On the image sensor side for a second, the numbers were better than we had expected for the revenue ramp. I'm not sure if I heard it correct, but I know you said that you had launched a bunch of products. Are you designed in at 3.2 right now? I think I heard you say that, Sang.

No. We've introduced those products, and we would expect to be competing for those design wins over the next six months and have that revenue contribute in the back half of 2008. We have some stretch targets internally to try to convert some design wins sooner than that, but that would be upsides for us.

Okay. And just a last question. The power management business -- how does this affect your overall capital intensity at all? My sense is that it really shouldn't affect too much, given that you're doing a lot of this already. But I just want to hear your perspective.

Yes. Our power products utilize already-installed capacity. It's extremely synergistic to our manufacturing profile, and we have the manufacturing processes already in place to support this line and already scaled up from already-possessed intellectual property.

Thanks a lot.

Our next question comes from the line of Jeff Harlib with Lehman Brothers.

Can you just talk about SG&A during the quarter? It was lower -- lower than I expected. I thought there were going to be some additional costs there. Can you just talk about what drove that and what your spending levels are looking like going forward?

Yes. I mean, we've been focused on profitability, so we've tried to keep control on the SG&A spending. Obviously, we made investments in R&D. And, in addition, we had some favorable impacts from intellectual property sales that helped with SG&A expenses in Q4.

Okay. Can you quantify that?

Yes. It was about $4 million positive.

Okay. And, just the -- when you talked about -- I know you're not giving specific guidance for Q1. I just want to understand. You've been growing extremely rapidly in several of your businesses. Where do you see this ramp of new business from either new customers or existing customers? I mean, are you -- is there some near-term visibility, I should say, into the first half on continued ramp and market share gains? And how do you -- how is that consistent with what you're seeing in Q1, which it sounds like your production will be going down?

Our recoveries are based on design wins and customer relationships. Our products, once they got designed in, they will use for a year or a year and a half. So it's a much longer design -- longer lifetime. Obviously, that has impact by customers' demand in their own market. But, other than that, fundamentals are very solid. I think that we have a good base. And, plus, we have all new technology that I described in my statement, such as AMOLED and LDCS. And that's going to help us into our future business.

Okay. And, just in terms of the foundry business and that ramp, do you still have new programs that will be ramping in '08 in that business? Or are you pretty much --?

Yes. We have a very strong pipeline. And, as a matter of fact, I made my statement -- one of the examples is one of the MEMS devices. But, in addition to it, we have strong new technology and new customers in the pipeline. So I feel it's going to continue to grow in 2008.

Okay. And, just on your Q1 -- just talking about revenues down in line with seasonality -- just some color on what you're seeing from your different market segments, given some of the concerns in the economy and with the consumer.

I'll say something, and I'm sure that Bob will add to it. We don't hear much from customers. There is not much change of getting the POs, and our forecast has not been changed as of today. Bob, do you want to add anything to it?

No. I don't think we've seen -- obviously, the stock market has had drastic volatility over the last 10 or 15 days. We've had very little volatility relative to customer dialog.

Okay. Thank you.

Our next question comes from the line of Eric Reubel with MTR Securities.

A couple of clarifications, if I could, quickly. The one-time charge you mentioned to SG&A, Bob, of $4 million, is that one-time in nature and that we would expect that to sort of go up again in Q1 and kind of run at that rate?

We had a one-time positive of $4 million due to an intellectual property sale that reduced our SG&A spending.

And was there an inventory charge in the quarter?

Not charge, per se. Because we had a significant drop in depreciation, inventory valued at cost at the end of the quarter was valued significantly less than what was done in Q3. So it was inventory revaluation. So we didn't have that inventory, per se; the value of it, though, was significantly reduced with the drop of depreciation. So, effectively, yes, we did have an inventory charge embedded in the cost of goods sold.

How much was that?

Approximately $14 million.

And, just a clarification on the foundry and other revenue -- the way you report. Is Hynix inside the foundry portion, or is that part of the other segment?

Other.

Hynix is other. Okay.

Very little.

Great. Then, if I can ask a couple of -- a quick one on the revolver. If I recall correctly, the credit agreement will allow an upcharge to the revolver. Is that anything that you guys are looking at as far as strategies for additional liquidity into 2008, or how do you feel with the current level?

We feel comfortable with our liquidity forecast as is. Obviously, given an opportunity, I would expand liquidity. But we don't consider it necessary. Right now, you've got to realize that, in the fourth quarter, we had a significant reduction in accounts payable. We had a working capital use that was pretty drastic in the quarter. Obviously, we did better on A/R days but still had significant accounts receivable. So working capital, in general, plus the interest payment that we made, was a difficult pull on liquidity in Q4. The liquidity profile in Q1 and Q2 is actually dramatically better, and we have lower CapEx typically in the first half of the year. Our profile on CapEx spending typically gets much more centered in the middle of the year, where we usually have a much stronger Q3, just from normal seasonality. And, given where our CapEx that we spent toward the end of the year, we should have a lower CapEx profile both Q1 and Q2. So liquidity, actually, we expect to improve over the next couple of quarters.

Do you have a sense of what the CapEx budget could be for '08 at this time?

Yes. We're expecting the same model -- about 10% of revenue -- and expect CapEx next year to be about $110 million.

And working capital -- you spent some time there talking about working capital, and payables were down. And they consumed cash. Do you think that payables can be a source of cash as well as driving some additional out of inventories? Or how do you think that could play out? I guess you're saying that working capital can be a source over the first half of the year?

I expect it to be, because we don't have the reduction in A/P days that we saw in Q4.

Then, if I can, just quickly, on the image sensor products -- you said you've taped out four new products from SVGA to 3.2. Is there -- are there any design wins for 2.0? Or, if you could kind of walk through SVGA, 1.3, 2.0, and 3.2, how does it look in terms of design wins at present?

The five products that we introduced in the fourth quarter -- we don't have design wins on those yet. We have had a series of customer demonstrations for a number of those products and have a significant rollout schedule demonstrating those products with customers through this quarter. So we'll be able to provide better clarity on our progress on those in the next earnings call.

Because the products came out of fab the last few weeks.

In December.

Yes, in December.

I'm sorry. So are they taped out? Are they at a production yield, would you say?

Yes. The products are coming out from the fab now.

Very good, gentlemen. Thank you.

Our next question comes from the line of Guy Baron with Credit Suisse.

Just first off, in Q4, how much of the pop in revenue that you saw -- the increase in revenue you saw -- was a function of seasonality as opposed to maybe some of the -- any new business that you saw come in in that quarter?

7% of revenue in Q4 came from new products we introduced the last four quarters. So that indicates, fundamentally, which means (inaudible) business. There are some fourth quarter seasonality, but, typically, our business, third and fourth quarter is about the same. So it's mostly due to new-product-generated revenue and the new customers.

Okay. And is there any -- do you have an ability to maybe tell us maybe what your sense is of what gross margins would have looked like in the quarter were it not for some of the December slowdown effects?

Yes. Actually, that's a difficult question, and it's off the top of my head. Obviously, we expected that. So the gross margin guidance we gave expected that seasonality, and that's typically what we've seen over the last three years, every single year. Q1 is the opposite. It's usually slower January and February, and it's very back-end loaded in the quarter. So I think that's just part of our normal expectation, given how people manage year-end inventory. You can even see that in our inventory number. We also, on top of that, reduced our own inventory levels pretty significantly, ourselves, as well. So I think factory utilization -- the gross margin could have been probably 3 to 5 percentage points higher than estimate.

Okay. As a function of business mix and growth from revenue.

Yes, assuming the same mix.

Okay. All right. Can you maybe provide any data points or references for current market participants in the power management area for a sense of what you might expect from sort of a margin and growth perspective?

Power management gross margins, I expect, probably better than most of our existing business based on current product plans and based on our revenue predictions, because we use 8-inch rather than 6-inch, and we use 0.35, 0.25, and that's going to give us more expenses.

All right. You view this model as being -- I mean, how does this model compare with maybe some of the other competitors' or existing players' in this market in terms of what they've experienced?

It's our expectation that we'll be about the median outcome for a typical analog company as we start. And, obviously, we push to be upper quartile after we have mature larger business, as we're being a new entrant. Our gross margin profile we expect to be better, given our die count for wafer and our designs, given what Sang talked about with smaller geometry and 8-inch wafers versus a majority of the competitors in the segments we're in that continue with 6-inch wafers and a larger process geometry.

Okay. What's your sense of normal seasonality in Q1?

We've typically seen between 18% to 21% or 22% through our history. We expect to be fairly similar.

So that's revenue down sequentially?

Yes.

All right. And, then, just a quick one on the liquidity question. Is your level of comfort still there, regardless of whether you see a liquidity event in the near term from the public markets?

I can't comment. I mean -- my comments before -- I can't assume that transaction until that transaction happens.

Okay. So your level of comfort is there, regardless.

Yes.

And, then, I guess the last one here is just in terms of some of the Hynix developments and their entry into some of the business that was speculated -- Silicon (inaudible) -- what your view is of that partnership and how that could impact the market.

We have no detail of that information. And own experience doing similar (inaudible) back in 2004 and 2005 it takes about three years to get that process in place at the factory. So we're interested in seeing if Hynix made a final decision, and there will be some learning curve. But, as of today, we have no data points.

Okay. Thank you.

Our next question comes from the line of Oliver Corlett with R.W. Pressprich.

I missed the ASP numbers for the quarter. Can you give me those again?

Yes. ASP increased for display driver ICs by 3.1%; ISD - 3.5%; and our foundry business - 0.6%.

Okay. And that's a sequential number?

Sequential, yes.

And did you say it increased?

I did.

Isn't that kind of unusual?

Not when you're introducing new technologies on new design wins and enriching your mix.

It's the product mix.

So, in all three sectors, the ASP was up?

Yes.

Okay. Now, on the inventory thing, I didn't quite understand exactly what's going on there. Is that a one-time event, or can we expect some permanent change in cost of goods sort of ratios, other than the depreciation that we already know about?

Yes. Essentially, to help explain it, in our Q4 revenue, we had a cost of goods sold that was based on the prior quarter's inventory selling out at the prior quarter's cost. Because depreciation dropped down so significantly Q3 to Q4, the remaining inventory was revalued.

Okay. But isn't the inventory kind of valued as you go? I mean, shouldn't that be done --?

Yes. It's first in/first out. My point is that is at the start of Q4, we had the prior quarter's inventory of $94 million built at Q3's cost.

Okay. So, going forward, other than that one-time effect -- I mean, on a cash basis, it's going to be the same basic number. Right? The same basic sort of ratio -- I mean, other things being equal?

Yes.

Okay. On the -- in the markets, generally, I've been hearing -- I don't know if it's true or not. But you know there's some possibility of buildup in the handset business of inventory in the channels. Have you heard anything of that, and is that having any impact on either of your chip businesses?

Well, as of today, no. As I said before, we're getting the PO as we projected, and the forecast has not been changed. And so we don't see that.

Okay. And, in the display driver business, people seem to be a bit more optimistic about the flat-panel shipments for 2008. Are you -- have you seen any change in your sort of ratio between handset and the larger displays?

Not really. We're consistently growing in our larger display, and that focused on TV, as well as in notebooks and the monitors. And mobile is strongly -- continues to grow. It's two separate businesses. And we don't see any change.

Right. I guess it seems that some of the green manufacturers in the handset business are also doing better, perhaps at the expense of Motorola and some other players. Are you seeing your customers doing better than your competitors' in the handset business?

Obviously, our business is growing.

Okay. Finally, on the revolver, can you say -- you said it was down after the end of the quarter. Can you say what the revolver is at now and what letters of credit are outstanding now?

We usually just comment as to the end of quarter.

Okay. That's all I have. Thank you.

All right. Well, thank you very much for your support, and good questions. I look forward to talking to you on our next earnings call.

Ladies and gentlemen, this concludes today's teleconference. Thank you, all, for your participation.