Magnachip Semiconductor Corp (MX) 2008 Q2 法說會逐字稿

Greetings, and welcome to the MagnaChip Semiconductor second quarter 2008 results conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS).

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

Thank you operator, and welcome everyone to MagnaChip's second 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 remarks, we will 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 at MagnaChip's global website at www.magnachip.com.

Before we begin the formal remarks, the Company's attorneys advise us 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 involve 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 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 in its annual form, on Form-10K, for the period ending December 31, 2007.

Although we believe that these 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 to this call. Despite challenging market conditions in Q2, revenue came in at $194.7m; a decrease of 4.1% as compared to the first quarter of 2008 and a slight increase as compared to the second quarter of 2007.

We achieved this result even though demand was lower than expected, as our customer tightened their inventory control due to current uncertain economic involvement. Importantly, we continue to add new accounts and to offer new products and services which we expect to contribute to revenue growth in the future quarters.

In our Power Solution business we are pleased with how quickly we have learned this business line. We shipped our first products and recorded our first revenue in this quarter. We have built our new product pipeline with the launch of our 30 volts and 40 volts MOFSETS series and development of LDO and USB solutions.

We have signed a new contract with the three leading Asian distributors to support our sales in the region. We expect these new channel partners to help us -- our market entry by supporting us in design and process and in supply chain management. Further, in keeping with our commitment to produce environmentally-friendly products our Power Solutions offer halogen-free packaging for LCD backlight and battery pack applications.

We expect our Power Solutions business to ramp even more quickly in the second half of 2008. We expect the number of products released to grow more than five-fold as we expand our portfolio to include more new products, for example, high-voltage MOFSETS. Our new MOFSETS products are being well received by customers, as they offer better thermal performance than competitors' products.

In our Display Solutions business we added a large new account, to which we are selling a distinctive chip-on-glass all COG solution. We have also expanded our AIM OLED product offering in the growing, mid-size display market. We have both WQVGA and HVGA solutions now available to meet the widening demand for the high-resolution displays.

In addition, as with our Power Solutions, we are focusing on environmentally-friendly products. For example, many of our display driver devices offer a smart, mobile luminance control, or SMLC technology which reduce the power consumption of displays.

Our Imaging Solution business achieved a significant number of design wins in the second quarter. We have 5 mega pixel product currently under development and recently launched a 2.2 micron one-tenth inch VGA sensor. We have several new solutions now available for the security and PC markets, including two new products they are currently designing in for growing PC and notebook camera market.

Development of our 1.75 micron solution is on track. We have broken into several first-tier mobile manufacturers for our new family of sensors. Our Semiconductor Manufacturing Service business has number of new [technologies] such as a .18 ultra low noise, triple-gate and dual trench and .35 BCB that are creating new business opportunities for us.

We also have a number of new accounts in the final stages of qualifications. And just announced that we have begun final qualification of ultra seamless silicon on [sharp] higher technology with a Peregrine semiconductor. Our [Eastfield] EEPROM technology, offering one of the smallest cell sides available on the market, is helping us further expand our customer base. Additionally, we launched the backside process for the Power product customers, expanding our offering to provide more one-stop service to our customers.

We recorded a gross margin over 25% which was a significant accomplishment in this market environment. Importantly, our new product portion of revenue is continuing to rise, and we expect it to be at all-time high in the second half of 2008. We believe this will drive profits and sustain demand to our 2008 and into 2009. Though we expect the market to remain tough throughout the year, our newly-introduced products and strong customer relationships provide a solid base for the performance improvement.

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

Thank you, Sang. Revenue for the three-month ending June 29, 2008 was $194.7m compared to $203.1m in the first quarter of 2008. This is a decrease of 4.1% from the prior quarter. The decrease was due to the combination of higher than expected average selling price erosion and the lower than expected sales in our Display Solution products, as our customers tightened their inventory control.

Revenue by segment for the quarter was, $83.7m for Display Solutions, $20.9m for Imaging Solutions, $86.7m for Semiconductor Manufacturing Services, $0.1m for Power Solutions and $1.3m in Other revenue. We are pleased to report our Power Solutions as our new segment this quarter, and marked the beginning of a volume shipment for this unit during the quarter.

Revenue by geography was 51% from Korea, 24% from Great China, 12% from Japan and 13% from the Rest of the World. Revenue by end market for the quarter was 27% from Computing, 18% from Wireless, 10% from Consumer and 45% from Wafer Foundry.

Our Wafer Foundry business is further broken down as 17% from Computing, 13% from Wireless, 65% from Consumer and 5% from Industrial. These results reflect the challenges we experienced in the Wireless market in second quarter as we were exposed to sectors and geography that were particularly high hit in terms of demand and inventory corrections, such as China.

In the second quarter we had one customer greater than 10% and the top-10 customers represented 58% of total revenue.

Gross margin was 49.2m, or 25.2% of the revenue for the quarter ended June 29, 2008, compared to 47.9m, or 23.6% of revenue in the prior quarter. Gross margin improvement was driven by continued cost management and the product mix.

Operating expenses were 58.5m, or 30.1% of revenue in the current quarter, compared to 54.7m, or 26.9% of revenue in the first quarter. Hiring expense in the second quarter was 35.5m, or 18.2% of revenue, compared to 36.3mo r 17.9% of the revenue in the prior quarter.

We had an operating loss of 9.4m during the quarter compared to an operating loss of 6.8m in the first quarter. Net interest expense for the second quarter was 15.8m compared to 15.7m in the prior quarter.

Net loss for the three months ending June 29, 2008 was 59.6m compared to a loss of 67.9m in the prior quarter. Net loss includes other non-operating expense which is comprised of the net effect of currency gains and losses during the period. Most of these currency effects are non-cash impacts on outstanding inter-company debt.

Depreciation and amortization expense was 20.6m, or approximately 10.6% of the revenue in the second quarter. EBITDA for the second quarter was 11.3m compared to 13.6m 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 100m 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 June 29, 2008 was 3,602, which is a slight increase from the first quarter.

Capital expenditures for the second quarter was 11.1m versus 16.6m in the year-ago quarter. Total available cash and cash equivalents were 36.5m as of the end of the second quarter. We had excellent working capital performance during the quarter making improvements in both AP and AR days. Accounts payable days were 89 compared with 83 days in the first quarter of 2008.

Inventory days of supply were 40 compared to 38 days in the prior quarter. Net inventory was 63.5m compared to 64.9m in the prior quarter. Accounts receivable net of results was 149.2m at quarter end. Our accounts receivable days of sales outstanding were 70 in the current quarter compared to 65 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. The macroeconomic environment continues to have many uncertainties about consumer spending and end-market demand and, accordingly, our customers have continued to tighten their inventory levels. This has been most pronounced in our Wireless business.

We improved our gross margin performance this quarter despite weaker than expected revenue. We made improvements on several fronts. Labor productivity improved by 5.9% from earlier this year due to the implementation of a systematic labor productivity management system that gives our Fab managers visibility into opportunities for improvement, as well as see the hard work of our employees.

Material procurement savings have been 7.7% year to date and helped offset downward ASP pressure. In particular, we have made both efficiency savings as well as procurement price savings for key commodities in our Display Driver business for year-to-date savings of 14.1%. Supply constraints and price increases we saw last year for wafers has alleviated in 2008, and we are now seeing price declines in this commodity category.

Inventory management and the need for less reserves contributed 620 basis points of improvement. While much of our overhead cost structure is fairly fixed, we have achieved price savings of around 8% for repairs and supplies that are included in factory overhead year to date. Combined with higher factory utilization, we achieved volume leverage-related improvements of 260 basis points versus the prior quarter. These efforts, as well as a higher percentage mix of new products, contributed to higher quarter-over-quarter gross margins.

Factory utilization was 87% for the quarter based on our ramp of products in our Imaging Solutions and Mobile Display Driver businesses. We continue to expect to be at utilization of Fab 5 by the end of the third quarter.

Now, on to guidance. We expect revenue in the third quarter to be in the range of 205m to 215m based on customer forecasts and design wins in progress. We have several technology and product introductions that should materialize into new revenue and market share in the fourth quarter. And, despite difficult consumer end-market conditions globally, we expect revenue to be in the range of 240m to 260m. We have made a major push into the Power market and expect this business to be at an annualized rate of 80m in the fourth quarter, from zero one year ago.

This significant growth is indicative of the power of our customer relationships and the strategic market need for a large Power IDM located in Asia. We expect gross margins for the third quarter to improve 50 to 130 basis points. This forecast includes many variables and uncertainties that are outside of the Company's control.

However, it includes our forecast of revenues, productivity efforts, the impact of expected volume increases and assumptions on product mix, partially offset by forecasted average selling price erosion. With additional volume leverage from higher revenue and based on expectations and forecasts from the same variables as discussed on the third quarter, we hope to achieve our goal of 30% gross margins in the fourth quarter.

We forecast a reduced operating loss in the third quarter and a return to operating profit in the fourth quarter, with an operating margin between 3.5% to 5%. We've obtained operating lease commitments and plan to enter into operating leases on approximately $16m worth of equipment in the third quarter.

In addition, we concluded a focused effort on capital productivity, have been able to achieve higher unit volumes with less capital investment and, therefore, we are reducing our guidance for capital expenditures for the full year to approximately $35m.

Forecasts of cash and liquidity have many variables and uncertainties, including assumptions on end-market demand, revenue, timing of design wins, gross margins, operating expenses, exchange rates, working capital terms, timing of capital purchases and other factors. We forecast that, while liquidity will be tighter in the third quarter, we expect to generate cash in the fourth quarter, and we are targeting to be at the same liquidity position at the end of the year as we were at the end of the second quarter.

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

(OPERATOR INSTRUCTIONS). Our first question comes from Eric Reubel, MTR Securities. Please proceed with your question.

Thank you. Good morning, guys. Can you give us any sense of what you're thinking about the capital expenditure requirements will be for 2009 at this time, Bob?

Yes. Given the capital productivity we're achieving right now, I would expect it to be about 8% of revenue.

And on the liquidity, are there -- do you have any plans to put another facility in place, or something to improve liquidity up from the $30m -- $36m that you're targeting for the end of the year?

Obviously, we would have those options and I would announce those at the time that we would do them. At this time, as I mentioned, we believe our liquidity will be about the same as we exit the year, based on our forecast.

Then, one point of clarification. Did you provide any revenue guidance for Q4?

I did.

Could you repeat it, I'm sorry?

Okay, $240m to $260m.

Okay, great. On the working capital, in the last quarter there was kind of a big uptick in your working capital. And then I believe that you'd received any big -- relatively large cash inflow right as the quarter began. I was hoping that receivables could have come down a little more this quarter. They were about flat. Any comment or guidance on what we should expect next quarter?

Yes. The second quarter for us was very back-end loaded. So there's really been -- actually, our fundamental AR days inter-quarter are actually improved in Q2. The issue is that the actual operational revenue was very back-end loaded so that's what impacted that AR. We'd expect AR days to not fundamentally change much in Q3.

Okay, great. Thank you.

Our next question comes from Jeff Harlib with Lehman Brothers. Please proceed with your question.

Hi. Bob, just on the CapEx, now you're saying $35m, I assume the $60m of lease is on top of that, right?

Correct.

So how were you able to be at that level, given your expected revenue ramp into Q4? And your current utilization of 87% seems like a low number.

Well we expect that our utilization will be around 100% to 103% in fourth quarter. And, obviously, with that CapEx spending in third quarter and increased capacity, we will able to do $260m without much of a problem.

Okay. Is that better efficiency on your existing equipment?

It is. We actually did a concerted effort to review capital productivity and we were very pleased with the results, and expect to continue to be able to make some of those gains through the back half of this year.

Okay. And just the ramp you're expecting in Q4, can you talk about -- you mentioned Power Solutions is clearly one of the areas. Can you just mention, looking at your other businesses, where you expect that ramp and which businesses, and where you stand on design wins to support that?

Well, (inaudible) to 2.2 micron products definitely will help us to ramp up in fourth quarter. And also the -- we've been supplying so-called chip-on-glass solutions for our wide -- the notebook computers and that's going to pick up fourth quarter.

And the same thing with our mobile DDI. We expect that the mid-size display is going to be more demand -- in demand and into third and fourth quarter. So it's across the border. And our Foundry business offering new technology, which I introduced at my readings, and those [components] will help.

But again, though, this is not just fourth quarter, and we're anticipating this ramp will continue to increase into 2009.

Okay. And with -- in the Sensor business, where do you stand on the design ins for the handsets -- the 2008 handsets. I know there are different cycles to designing in your products. Where do you stand on that?

Well, we shipped our first 2 mega pixel production volume this last quarter. And we are now designed in several of the tier-one providers and continue to expand the models that are being assigned to us. So we're very encouraged with the reception that we're receiving right now across the product portfolio.

Okay. And can you just say how you see markets during 3Q, as you look at your key Wireless, Display, Foundry customers during the third quarter?

Well, I think as we mentioned in our comments, we did see weakness out of China, part of that probably due to the various calamities that have occurred, but also just a slowdown in that market. I think that's been generally reported. We saw that in our business as well. So we've tried to factor in difficult consumer end-markets relative to Wireless into our forecasts, especially in that sector.

The consumer market definitely weak demand but somehow game industry is very solid. And still notebook-related and PC demand is strong. But overall, obviously, our customers trying to manage their inventory level very conservatively.

Yes. I think what's reflected in our revenue guidance is the fact that we've been working for the past couple quarters on several new technologies in several of our businesses. We're now forecasting and seeing design wins that are bearing fruit, relative to that investment of the last several quarters.

Right. Most of those going to ramp up throughout Q3 and Q4, and in the full volume in early next year.

Okay. And, lastly, just on payables. I think you mentioned 89 days, payables.

Yes.

Okay. Is that -- have you -- is that a sustainable level? I think it's higher than you've been trending.

Yes, we believe it's sustainable based on the negotiations that we've done.

Negotiations of credit -- of -- with some of your key customers?

With suppliers, yes.

Okay, thank you.

Our next question comes from Robert Hopper with UBS. Please proceed with your question.

Hi, guys, this is Brian Peters for Rob. First question I had was about R&D. You've been trending 17%, 18% last couple of years and this year, but that's [likely] quite different across your business lines. I was wondering if we could get some color around that, specifically around the CMOS business and the R&D intensity there.

Yes. The R&D intensity in our CMOS image sensor business over the last year is higher than our other businesses, as we've been repairing that business. And, as I mentioned earlier, we're now starting to bear the fruit of that and (technical difficulty).

And how about --

-- back half of the year.

How about the -- any color into the fixed versus variable nature of that spend across your business lines? Is there -- on the flip side, how much room is there to flex that spending if necessary?

Yes, the R&D spend is approximately 30% to 40% variable, related to spending on [mass] and wafers.

On liquidity front, have you mentioned the letters of credit outstanding at the end of 2Q? I don't know if I caught that.

Our credit outstanding is around $11m.

$11m? Okay. And that's --

Yes.

And that's essentially where it was at the end of 1Q. Is that right?

Yes.

Okay. On the inventory and SG&A side there were -- past quarters, there were some one-time adjustments, I guess you can categorize them as. Was there anything -- would you say those are both normalized levels in 2Q or were there some -- was there something behind the numbers in 2Q?

No. Historically, we've had several occasions where we've cleaned up inventories. In this quarter, inventories were well in control. And, as I said, quarter-over-quarter basis was actually a positive.

And SG&A side as well? I think there was something in the --

In the first quarter we had a one-time (multiple speakers) reserve from the closure of our Fab 1 and we did not have that occur in Q2.

Okay. So Q2 would be a more -- the run rate there, at 12% of revenue, is that -- would you categorize that as more normal? How does that -- I would think it would be.

Yes.

Yes, okay. And then, finally, just on the Power Management business, you had -- I think you made the comment about an $80m run rate to exit the year. Is that -- how should we think about that? Is that for the full fourth quarter or is that exiting December do you expect to be at an $80m run rate?

For the fourth quarter.

Okay, thanks.

(OPERATOR INSTRUCTIONS). Our next question comes from Quinn Bolton from Needham & Company. Please proceed with your question.

Hi, Sang. Hi, Bob. I was just wondering what sort of assumptions you've made as you look into the second half about some of your customer inventory policies. Do you see those loosening back up as we get into the second half build? Or you think at this point they're likely to stay pretty conservative with inventory?

Probably getting into the third quarter, they are very conservative. And, again, that throughout the Wireless and then the Consumer and then PC sectors are they tightening their inventory level.

Okay. And you'd made some comments that the handset market in China is weak. Is that -- have you seen any pickup here ahead of the Olympics, or do you think that the China handset market stays weak until the Beijing Games have concluded?

We don't expect any booms before the Olympics. At least, we don't see any signs.

Okay. Are customer forecasts indicating a pickup after the Olympics?

That business in China is a very short-term driven so we have a very little visibility for the next month.

Okay. And then, just lastly, on the fourth quarter revenue, pretty strong revenue growth forecast for that quarter. Is that -- I know you talked about a number of drivers across each of your product lines. So should we think about similar growth or a similar mix in Q4 that you reported here in the second quarter? Or do you think one of the businesses really drives that incremental growth into the fourth quarter?

I think it's a growth for across the board. And, obviously, we have a new additional business growing quickly, which is the Power Solutions, and the recovering of our CMOS imaging senor. On the top of it, other business continues to be growing.

And those projections that we provide today, it's coming from our CRM numbers which are in the salesforce.com. And we do a very thorough review of those opportunity line by line, and that's where our projection came from. And so we look forward to fourth quarter.

Okay, great. Thank you.

Our next question comes from [Oliver Colette] with [RW Prestige & Company]. Please proceed with your question.

Good morning. You didn't break out the ASP change by segment this quarter. Is that something you're going to do or not?

No, we weren't going to do that this quarter.

Okay. But, generally speaking, there were pretty severe declines in ASPs across the board?

No, I wouldn't characterize it that way. We had a shift in mix in our Foundry business. We have what I'd call typical ASP erosion in our Display Driver IC business and a little bit of an aggressive ASP erosion in our CMOS and our Sensor business.

Okay. And as far as the liquidity situation again, I guess if you had $11m [LCs out there], you had about $4m available on the revolvers. Is that about right?

Yes.

Yes.

And, given the cash movements in the last couple of quarters, that seems pretty tight. Do you expect to actually generate cash during the -- during this quarter, Q3, and bring that down a little bit?

No. As per my prepared comments, I expect liquidity to be a little bit tighter by the end of third quarter, and for us to generate cash in the fourth quarter.

Okay. What's the minimum level of cash that you think you can operate with?

Well, we're pretty tightly controlled from our Treasury function. I think that number is probably $10m to $15m.

Okay. And could you just remind me of what the Covenants are on the revolver right now?

I think that's probably best covered in a follow up. It's publicly attached to our SEC filings but there's a number of different Covenants.

Okay.

And we are complying full now.

Yes, we're in compliance with the Covenants and expect to be in compliance with the Covenants in the coming quarter.

Okay. That's all I had. Thank you very much.

(OPERATOR INSTRUCTIONS).

Okay. So, at this point, if there's no other questions we appreciate everyone's continued interest in MagnaChip and look forward to talking to you again next quarter.