Magnachip Semiconductor Corp (MX) 2008 Q1 法說會逐字稿

Greetings, and welcome to the MagnaChip Semiconductor First Quarter 2008 Results Conference Call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded.

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

Thank you, operator, and welcome, everyone, to MagnaChip's first quarter 2008 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'll then have time for questions.

If you have not received a copy of today's results release, please call 646.536.7026 at The Ruth Group. Or you can get a copy from 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 could 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 feature 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 in the annual report, Form 10-K, for the period ending December 31, 2007. 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.

Thanks, Joseph. Thank you, everyone, for joining us on today's call. We are pleased to report continued progress in 2008. Revenue came in at $203.1 million. This represents a 33.8% increase over our revenue of $151.8 million in the first quarter of 2007. We achieved this result in spite of seasonality and challenging market conditions due to the current economic environment. Importantly, we continue to achieve design wins at key customer accounts, which we expect to contribute to revenue growth in the future periods.

In our power solutions business, we began sampling our initial MOSFET products and expect to begin mass production this quarter. We also passed a key reliability test for our single LDO products. We are finding our manufacturing technology expertise and our customer relations allow us to quickly develop and market our power solutions products. We have a significant design-in activity underway and have built our distribution channel. We are pleased with how quickly we have ramped this new business line.

Our display solutions business grew 59.6% versus the first quarter of 2007. We continue to achieve design wins at strategic customers with our seven models going into production in one key account. We are finalizing qualification on our [tier-two] VGA product for a leading global game application and continuing our design-in activity with our leading AMOLED products. Our account development efforts in Taiwan and China are progressing and are expected to contribute to the future revenue growth. We are continuing to expand our portfolio of products, targeting the high-resolution market, as well as our technology to reduce power consumption and improve image quality in display applications.

Our imaging solutions business grew 106.6% versus the first quarter of 2007. We successfully entered the toy market and have over 60 design wins in progress. Our 2.2 micron image sensor products are passing evaluations in key customers and showing best-in-class image quality. We have started production of next-generation VGA and 3.2 megapixel products. We continue to make significant progress in the China market, where, as many of you know, more than 50% of worldwide mobile phones are manufactured.

Our semiconductor manufacturing services business grew 43.4% versus the first quarter of 2007. We continued to strengthen our specialty technology portfolio. For example, we are sampling 0.18 micron, 18 volts, dual trench process for source driver applications and delivered to our customer the lowest-noise 0.18 micron process. We also qualified our 0.18 EEPROM process and achieved a design win from a recognized market leader for microcontroller.

We remain highly focused on continuing to grow revenue and improve overall profit in 2008 as a top Company priority. Our product pipeline is strong and growing, and design-in activity is at an all-time high in our Company history. Though some of our markets are slower than expected, we will not let this stand in the way of our continued progress.

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

Thank you, Sang. Net revenue for the three months ended March 30, 2008 was $203.1 million compared to $246.5 million in the fourth quarter of 2007. This is a decrease of 17.6% from the prior quarter due to normal seasonality and weakness in the wireless end market.

Average selling price decreased approximately 0.8% for our wafer foundry business, 1.5% for CMOS image sensors, and 7% for display solutions products on a sequential basis in the quarter.

Revenue by segment for the quarter was $94 million for display solutions, $24.3 million for imaging solutions, $82.9 million for semiconductor manufacturing services, and $1.9 million in other revenue.

Revenue by geography was 51% from Korea, 20% from Great China, 14% from Japan, and 15% from the rest of the world.

Revenue by end market for the quarter was 26% from computing, 22% from wireless, 11% from consumer, and 41% from wafer foundry. Our wafer foundry business is further broken down as 23% from computing, 17% from wireless, 57% from consumer, and 3% from industrial.

In the first quarter, we had one customer greater than 10%, and the top ten customers represented 62.8% of total revenue.

Gross margin was $47.9 million, or 23.6% of revenue, for the quarter ended March 30, 2008 compared to $63.5 million, or 25.8% of revenue, in the prior quarter.

Operating expenses were $54.7 million, or 26.9% of revenue, in the current quarter compared to $58.9 million, or 23.9% of revenue, in the fourth quarter of last year.

R&D expense in the first quarter was $36.3 million, or 17.9% of revenue, compared to $37.7 million, or 15.3% of revenue, in the prior quarter.

We had operating loss of $6.8 million during the quarter compared to operating income of $4.7 million in the fourth quarter of last year.

Net interest expense for the first quarter was $15.7 million compared to $15.6 million in the prior quarter.

Other non-operating expense is comprised of the net effect of currency gains and losses during the period. Most of these currency effects are noncash impacts on outstanding intercompany debt.

Net loss of the three months ended March 30, 2008 was $67.9 million compared to a loss of $29.9 million in the prior quarter.

Depreciation and amortization expense was $20.3 million, or approximately 10.5% of revenue, in the first quarter.

EBITDA for the first quarter was $13.6 million compared to $29.3 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 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 first quarter.

Headcount as of March 30, 2008 was 3,557. This is a 3.1% increase from one year ago.

Capital expenditures for the first quarter were $10.1 million versus $8.4 million in the year-ago quarter.

Total available cash and cash equivalents were $53.5 million as of the end of the first quarter.

Accounts payable days were 83 compared to 61 days in the first quarter of 2007 due to the timing of payment at the quarter end.

Inventory days of supply was at 38 and the same as the prior quarter.

Net inventory was $64.9 million compared to $75.9 million in the prior quarter.

Accounts receivable, net of reserves, were $147.3 million at the quarter end. Our accounts receivable days of sales outstanding were 65 in the current quarter compared to 46 days in the prior quarter due to the timing of receipts at the quarter end.

Now let me turn the call over to Bob.

Thank you, Margaret. While our revenue was down seasonally during the quarter, we are pleased with our year-over-year results, giving us a good start to the year. While we recognize that the macroeconomic environment has many uncertainties about consumer spending and end market demand, we feel that the tight inventory levels in the supply chain improve our visibility to end market demand. Based on forecasts from customers and design wins, we expect sequential revenue growth of approximately 4% in the second quarter.

One of our key goals this year is to improve our gross margin. This quarter's result of 23.6% was a big improvement from the year-ago period, which was 9.8%. On a year-over-year basis, the key contributors to more than doubling our gross margin percentage were depreciation reduction for 790 basis points of improvement, factory utilization for 640 basis points of improvement, product mix enrichment for 400 basis points of improvement, with ASP reductions being mostly offset by the positive impacts of volume increases.

Additionally, we took more reserves this quarter to conservatively value our inventory levels, which we are keeping very tight control of, in light of reduced inventory levels throughout the supply chain. These inventory reserves were $8.9 million higher this quarter versus the year-ago period.

Factory utilization was 82% for the quarter. Based on our ramp of products in our imaging solutions and mobile display driver businesses, we expect to be at full utilization at Fab 5 by the end of the third quarter.

Given our expectations for improved capacity utilization and the positive impacts of new product introductions, we expect to be able to reach our target of 30% gross margin in the fourth quarter of the year.

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

(OPERATOR INSTRUCTIONS). Our first question is coming from Robert Hopper with UBS. Please state your question.

A couple questions, guys. First, Bob, I want to just go back to the inventory issue for a second. You guys worked it down, but you also just mentioned that you took some additional reserves for two quarters in a row. Can you give a little bit more color behind what's going on in your inventory and, moreover, with how you've worked it down a little bit, do you feel that you're positioned well enough for the ramp that you're expecting for the business?

I think what we've seen is that, throughout the supply chain, we've seen everyone reduce their inventory levels, given uncertainty in the overall markets. We've done likewise and are managing our inventory very closely. Yes, that puts our ability to respond in quick cycle time of utmost importance as we move forward, and it's something that we're focused on to be able to achieve ramp ups in the back half of the year.

How does your reserve look like relative to what it was in the fourth quarter versus your -- instead of year over year?

It's slightly less than the year-over-year number.

Okay. I'm not sure if I heard it, but did you actually give the utilization number for the quarter?

Yes. 82%.

Okay. I apologize. I didn't hear that. I want to get back to a little bit more on the balance sheet. Just to confirm, do you have any capacity on the revolver, or are they all used up by letters of credit?

I think on the balance sheet it shows that we've pulled the revolver at quarter end to $80 million.

Right. But are there any letters of credit against that?

Yes, there is.

Okay. And, then, two things. On the receivables, you said that it was a spike and that your payment at the end of the quarter -- what was the magnitude of that, because it was a pretty substantial spike in receivables?

It's a one-day difference in the calendar versus the accounting calendar cutoff. We received a big amount of inventory one day after the quarter -- excuse me -- a big amount of receivables were closed out one day after the quarter.

Okay. Can you give us any sort of level of magnitude to get a sense on how that affects your liquidity profile?

Okay. It's around the $15 million to $20 million level.

You said $15 million to $20 million? I just want to make sure.

Yes, the day after.

Okay. That's helpful. And, on the payables, I'm just -- there was a bit of a spike there. CapEx was lower than expected. And I don't know if you really addressed that much. But, as you look at CapEx, was there any CapEx that you put in payables that didn't flow through the balance sheet -- or through the cash flow statement that would have resulted in the spike in payables, or is this just all due to just interest and --?

It's due to specific efforts on working capital management.

Okay. And, on the CapEx side, you had communicated sort of a $110-million number with more of that being front loaded, I believe, last quarter. Is that still a target that you should be thinking about?

I don't think that's what we said last quarter. I think, last quarter, we said we expected CapEx to be about 10% of revenue and that we expect it to have a similar pattern as we had in the prior year, which is actually back-end loaded. So we -- if you look at 2007, the majority of our CapEx was in Q3 and then again in Q4, and we expected a similar annual profile.

Okay. I'll jump back in. Thanks.

Our next question is coming from Jeff Harlib with Lehman Brothers. Please state your question.

Just on the gross margin, Bob, can you just talk about sequentially what were some of the dynamics there? Because I know, Q4, you were hurt by a pretty big negative effect due to the change in depreciation. And I thought normalized gross margins were decently higher. So I was just wondering -- sequentially, I realize revenues were lower, but what were some of the other issues? It doesn't sound like pricing was a big issue. If you could help me out with that.

I think you said that gross margins were hurt in Q4 by depreciation going down; I think they were helped. I think it's the opposite. But, to kind of give you an idea, on a sequential basis, the majority of the delta between Q4 and Q1 is related to just the volume fall off. We had, actually, depreciation increase a bit on the CapEx. But I think it's mostly volume.

Okay. And, just on the revenue guidance of 4%, can you just talk a little bit about which markets might be weak? You had been ramping very, very strongly, clearly gaining market share, and, now, it looks like there's a little bit less than seasonal revenue ramp. Can you just talk about some of the individual markets what you're seeing?

Consumer market reasonably stays stable. Wireless is something that we have concern. And, also, the forecast that we received has been more low side. So that's one of the reasons that we took a conservative approach giving you Q2 projection.

Okay. Anything else out there with the display drivers or any of your other key product lines?

Display drivers continue meeting our expectations. The notebook panel is still in shortage and going well. And, overall, business is stable. We don't see significant upturns, but it's stable.

I think that's an end market example where we saw, really, several spots in the supply chain reduce their inventory levels from Q4 -- end of Q4 to end of Q1.

Okay. And, just with the image sensor, you have been sampling a number of products - 2.0, 1.3 megapixel, and you talked about design wins and revenues expected in second half '08. Can you just update us on that?

I think we fully described that in the -- I think, the prepared comments. We've done several press releases this last quarter announcing a design win in the toy market, for example. We've done significant promotion globally but especially in China this last month. And so we continue to get very good reception in China, where a very large percentage of the world's cell phones are made. And we will announce as we can individual material design wins as they come. But, right now, we're in a process of trying to get through the qualifications on over 60 design wins in progress. That's kind of a key metric that we're releasing this quarter.

Typical qualification cycle time for this product is two months to six months. So you can just add up to our central [releasing] schedule.

Okay. And just lastly, for Q2, any general guidance on gross margin -- what we should expect? Should it improve?

Well, I think we have given guidance on revenue at 4%. Obviously, we would expect gross margin to be able to improve slightly from that, just pure volume. And we've tried to give some guidance on the back half of the year in our prepared comments.

Okay. Thank you.

Our next question is coming from Eric Reubel with MTR Securities. Please state your question.

Bob, on the cash flow statement, the source of inventory was less than the actual decline on the balance sheet. Does that delta equal roughly the inventory write-down in the quarter?

Well, there wasn't an inventory write-down per se. So, this isn't throwing inventory away, but we did have additional reserves. Yes.

Okay.

So, yes. That's the difference between accrual and cash.

In thinking about working capital for the year, payables are up, and receivables are also up a lot. Can you guide my expectations about how I should be thinking about working capital for the second quarter? And, then, do you think you can manage working capital as well in the back half of '08 as you did in the back half of 2006?

Let me answer your last question first. The answer to the last question is yes. The answer to the first question -- I think we tried to give specifics in the last question that the AR bump up was because of a one-day delta between the calendar quarter and the accounting quarter end. So, we had $15 million to $20 million of AR flexion the day after the balance sheet end. So our AR days, in general, is in very good control. We've done a good job on the AP, and we're keeping tight control of inventory. So I feel pretty confident on our working capital management. If you look this quarter, we had, I guess, an operating use of a couple million dollars. So, obviously, as we grow in the back half of the year, we should have some working capital use. But, because of the AP turns being so good, it really helps mitigate that for us.

Okay. Then, I have a question on severance that's on the cash flow statement. We've been adding that back this year and last year. Can you give a little color around that? Is that mostly cash charges that are non-operational, or how should I be thinking about that severance charge?

That's building up the -- we have both a buildup of an accrued liability that's on the Korean pension system. And then we have minor payouts as employees leave.

Okay. If I can just -- so, do you think that -- should we be adding that severance back, or is that something that we should not be adding back? You didn't add it back in your discussion of EBITDA for the quarter.

I don't. My EBITDA is the most simple -- the simplest EBITDA. It's a GAAP kind of based EBITDA. It's strictly earnings before backing out only interest, tax, and D&A. I back out nothing else.

Bob, if I can ask you about the confidence and the quality -- the confidence in the design wins and the quality that you have at this juncture at the beginning of the year, any color on where -- how these design wins can ramp out in the back half of the year and the timing for those?

I think that generic question should probably go to Sang. If you want to ask specific on ISD, I can help.

Well, typically, we're looking at, again, at the shortest, two months to typical three to six months' qualification cycle time. But, definitely, all those design wins in this quarter and the last quarter are going to add up the second half revenue.

I guess what I'm really driving at, Sang, is, in the prepared remarks, you talk about design win activity being at an all-time high. And, if you can give any color around the confidence you have and how this is going to ramp.

Well, we do have the good sales information (inaudible). And, also, that's the database that is aligning development and our field salespeople. So we have a very good confidence, first of all, all those design wins and, plus, how we can materialize those opportunities into our revenue. I'm pretty confident.

Okay. And, then, one last question for both you and Bob. When you talked about the new analog power solution products that are sampling this quarter, the LDL product that's qualifying, can you give us a sense of what the target markets are for these analog products that you're looking to go into so that we can make some share assumptions about what you could possibly get from those markets? And can you talk about what the barriers are to get penetration into these markets, because they're competitive, and where you think your competitive advantage lies in breaking into these markets?

That's a good question. The typical applications we're targeting are LCD flat panel, battery pack application for the cell phone, and also cell phone itself. And we don't see much of issue working with our customers. And we already have a relationship. We already have a significant presence with our manufacturing capability. So it's more of how quickly we develop this product and passing through those qualification processes. Other than that, we don't see much of a issue. As a matter of fact, we are [setting] sort of a very rapid progress in terms of getting product developed and bringing it out to the customers.

Yes. I think, also, from a competitive advantage standpoint, we're supporting this business with an 8-inch fab. There are -- a significant portion of the competitors in this space are trying to compete with 6-inch fabs. Our fab profile, as you know, is with very depreciated equipment as well. So we think we have a great cost advantage. I think, from a service model perspective, we're supporting and targeting very large accounts in Asia that are very, very close to our executive leadership team and our service staff. And our sales force is a sales force that sells CMOS image sensors, display drivers, ICs, and, now, power devices. For an example, with the cell phone market, there's a great synergy to that sale. You know, a big part of the power infrastructure in a cell phone is to support what's going on in the display. So, for us, there's a synergy to our system knowledge.

Plus, we have quality proven throughout the product. So that's another advantage we can sell our power product to those customers as well.

Great. Thank you.

Our next question is coming from Phillip Armstrong with RBC Capital Markets. Please state your question.

Just two. I think last quarter you guys said that the revolver would come down this quarter, and it actually did not. Do we expect it to come down next quarter? And then, secondly, could you give me the EBITDA number again?

Yes. I think our comment from last quarter is that we typically pay down the revolver after quarter end. But, obviously, then, we have reused it. I think you see that on the cash flow statement. There was both a use and a payment that flowed in and out. And I'd expect that to continue in the next quarter as well. So I don't think there's going to be any change to the revolver pattern.

I think, on EBITDA, we were at a little over $13 million in the quarter.

Great. Thanks.

(OPERATOR INSTRUCTIONS). Our next question is coming from Guy Baron with Credit Suisse.

Bob, what is normal seasonality in Q2?

I think probably this was more than normal seasonal in wireless, and I think it did a little bit better in computing. I think, if you --.

(Inaudible).

Oh, Q2. Excuse me. I answering Q1. Q2, I think we've typically seen it be flat to plus 5%. So this is -- what we're seeing this year is pretty typical for MagnaChip, except, I think, for one year, where we had a different pattern. But I think, in our markets, this is about normal.

Okay. And can you give a bit of color on the gross margin dynamics of the new product that you're expecting to ramp in the second half of the year?

Typically, the new product coming out should give us a little boost on margins. But, obviously, we're talking about combined of many different products. So we can't just give you one number. But I expect it's going to help.

Yes. And I think, just kind of on a conceptual basis, bridging Q1 to the Q4 target we gave you, to get to that 30% gross margin target, we're expecting about half of that to come from better factory utilization, some volume and ASP offset, and then the other bigger part being from product mix.

Okay. All right. And what is utilization at Fab 5 now? You gave it overall, but what is it specifically at Fab 5?

I believe it's around 75%.

Okay. All right. So, looking at CapEx spend, I think you've said in the past that you would probably look to spend CapEx probably roughly about six months ahead of when you'd really need that capacity. How do I -- how does one sort of reconcile the spending that you're talking about of roughly 10% of revenue, which you're not running at now, with the anticipated ramp and the current state of utilization?

Yes. Let me clarify. We've typically said three months, not six. And, in the current environment, with reduced semiconductor capital equipment spending in general in the industry, the lead time for equipment is actually down from that three months, down to almost instantaneous -- to just shipping time. So the lead time for equipment is very, very short, which makes our lead time on CapEx spend shorter than it was a year ago.

The reason for that is that it's almost 95% between what we buy and [are used]. So it's widely available and needs to access and needs to bring it over. So that's the reason.

Okay. And then, just looking at SG&A, do you expect that for the rest of the year to be sort of a fairly constant percentage of revenue -- sort of around the 11% mark, or is it something more consistent with what you did in Q4?

No. I think relative to SG&A, I think the right metric isn't percent of revenue, it's a dollar number. So we expect it to go up a bit as we're growing the business on a dollars basis and to improve as a percentage of revenue. We should see significant operating margin leverage as we grow.

Okay. So, low 20s is a good number to use for SG&A?

I actually don't look at it on a percent of revenue basis.

I mean dollar-wise.

Between [$65 million to $60 million].

Okay. All right. And then, I guess, looking at liquidity here, given the state of the public markets, and, as I look at Q2, you've got a cash interest quarter. And so it looks like liquidity is going to be pretty tight. What's your feeling on that?

Yes. I agree with you that liquidity will get tighter. But we're confident that we will manage through that professionally and as needed in the back half of the year. If the equity market doesn't open up, we would access equipment leasing as needed to support our growth.

Okay. Any sense for how much capacity, just generally, you have as far as a liquidity source in that area?

I think we'll have enough to support our business plan, given the increasing cash generation of the business as well.

Okay. And then, I guess, for the rest of the year, is it fair to assume you're probably going to be a user of cash?

All in, yes.

Okay. All right. Thank you.

This does conclude the Q&A session. I'd like to turn the floor back over to management for any closing comments.

Well, thank you, everyone, for your attendance this quarter. Given uncertain markets, we feel like we've performed very well and, relative to our expectations, in line with what we expected. We hope you agree. And we look forward to talking to you next quarter with good results for Q2.

Well, thanks for joining us on today's call. And the responsibility of management is meeting the expectations, and that's what we've committed to and we'll continuously deliver. And thank you again.

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