Magnachip Semiconductor Corp (MX) 2008 Q3 法說會逐字稿

Greetings and welcome to the MagnaChip Semiconductor Third Quarter 2008 results conference call. At this time all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. 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 third 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 yet received a copy of today's results release, please call The Ruth Group at (646) 536-7026 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 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 involves a number of risks and uncertainties that could cause actual results to differ materially. In some cases you can identify forward-looking statements by such terms as; believes, expects, anticipates, intends, estimated, the negative of these terms or other comparable terminology.

Factors that could cause actual results to differ include general business and economic conditions and the state of the semiconductor industry, demand for end-user 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 future's customers' demand, shortage and supply of materials or capacity requirements, availability of financing, exchange rate fluctuations, litigation and other risks as described in the Company's SEC filings including in its annual report on Form 10K for the period ended December 31, 2007.

Although the Company believes that expectations reflected in the forward-looking statements are reasonable, the Company 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 today's call. Despite challenging market conditions in the third quarter, revenue came in at $176 million, a decrease of 9.6% as compared to the second quarter of 2008. Due to the current market situation, demand from the customers was much weaker than expected. We expect the current market conditions and weak customer demand to continue in the short-term. We continue to add new accounts and to offer new products and services which we expect to contribute to market share improvement mid to long-term.

In our Power Solutions business we released 17 new products in the third quarter, including the release of a single LDO product and expansion of our (inaudible) solutions to the additional applications. This is threefold increase in the number of products released from the second quarter.

Based on technical benchmarking testing, we believe that our products are showing better thermal performance than our competitors'. Our existing 30 volt and 40 volt (inaudible) products achieved several design wins in the quarter, and we expanded the number of distributors for our Power Solutions business in China, Taiwan and Japan.

We finished the development of our own high voltage (inaudible) technology and expect the first product using this technology to be released in the fourth quarter.

Overall, we continue to be pleased with our quick ramp up performance on this new business line.

In our Display Solutions business, we continue to make good progress in the recovery of market share in our LCD TV and notebook applications with our new design wins and model expansions at Korean and Japanese customers.

In addition, our mid-size panel application for Netbook computers are on track and we achieve design wins with our two global accounts. We are now offering a technology-leading one chip solution for the mid-size panels which will enable our customers to reduce their costs.

Furthermore, we had a design win for the True VGA TFT product, that will be used by a world class handset maker.

We continue to add new product features, such as a development of integrated touch panel solutions for DDI and controller in a single chip.

Our Semiconductor Manufacturing Services business, similar to other foundry players, will likely be more impacted by slower market due to the overall tight economy. However, we began mass production for the new products and existing account, and started mass production for the new accounts.

Our new process technology offerings such as deep trench isolation process, and 0.35 micron BC technology, are receiving favorable customer review and helping them to reduce cost and performance improvement.

For the Company as a whole, we recorded a gross margin 23% which was a significant accomplishment in this market environment. That said, we do expect the market to remain tough throughout the year. Though our newly introduced products and strong customer relationship provide a solid foundation for growth in the future periods, given the current market situation, we expect to benefit from this more when the external environment for our products and services improve.

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 28 September 2008 was $176 million, compared to $194.7 million in the second quarter of 2008. This is a decrease of 9.6% from the prior quarter. Most of this decrease reflects the impact on the Display Solutions and the Semiconductor Manufacturing Services business with a lower volume due to a reduction of inventory levels in the supply chain as a result of the uncertain economic environment.

Revenue by segment for the quarter was $76.3 million for Display Solutions, $18.4 million for Imaging Solutions, $77.3 million for Semiconductor Manufacturing Services, $2.9 million for Power Solutions and $1.1 million in other revenue. Revenue by geography was 47% from Korea, 27% from Great China, 10% from Japan and 16% from the rest of the world. Revenue by end market for the quarter was 24% from computing, 17% from wireless, 14% from consumer and 45% from wafer foundry. Our wafer foundry business is further broken down as 16% from computing, 14% from wireless, 62% from consumer and 8% from industrial.

In the third quarter we had one customer greater than 10% and the top 10 customers represented a 59.4% of total revenue.

Gross margin was $40.5 million or 23% of revenue for the quarter ended 28 September 2008 compared to $49.2 million or 25.2% of revenue in the prior quarter. The decrease was primarily due to lower sales.

Operating expenses were $79.7 million or 45.3% of revenue in the current quarter. This included a $26.3 million impairment charges for closing our Imaging Solutions business segment.

Excluding impairment charges, operating expenses were $53.4 million or 30.4% of revenue, compared to $58.5 million or 30.1% of revenue in the second quarter.

R&D expense in the third quarter was $32.2 million or 18.3% of revenue compared to $35.5 million or 18.2% of revenue in the prior quarter.

We had an operating loss of $39.2 million during the quarter. Excluding the impairment charges, the operating loss was $12.9 million compared to an operating loss of $9.4 million in the second quarter.

Net interest expense for the third quarter was $15.6 million compared to $15.8 million in the prior quarter.

Net loss for the three months ended 28 September 2008 was $139.8 million. Excluding impairment charges, the loss was $113.5 million compared to a loss of $59.6 million in the prior quarter. The net loss results were inevitably impacted by a foreign currency loss of $81.6 million in the current quarter compared to a foreign currency loss of $31.1 million in the prior quarter.

Net loss includes other non-operating expense which is comprised of the net effect of currency gains and the losses during the period. Most of these currency effects are non-cash impact on outstanding intercompany debt.

Depreciation and amortization expense was $20.9 million, or approximately 11.9% of revenue in the third quarter.

EBITDA for the third quarter was $8 million compared to $11.3 million in the prior quarter. While EBITDA is now defined by generally accepted accounting principles, it is commonly used to measure our Company's ability to service debt. Our calculation of EBITDA excludes the charges related to impairment and restructuring.

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 third quarter.

Headcount as of 28 September 2008 was 3,620. Capital expenditures for the third quarter were $4.7 million versus $40 million in the same quarter last year. We entered into operating (inaudible) of $14.5 million during the third quarter for equipment to be used in manufacturing.

Total available cash and cash equivalents were $23.9 million as of the end of the third quarter. Accounts payable days were 84, approximately flat from the prior quarter. Inventory days of supply were 40. Net inventory was $59.8 million compared to $63.5 million in the prior quarter.

Accounts receivable, net of reserves, was $140.4 million at quarter end. Our accounts receivable debts over sales outstanding were 73 in the current quarter, compared to 70 days in the prior quarter.

Now, let me turn the call over to Bob.

Thank you, Margaret. Effective 6 October, 2008, we closed our Imaging Solutions business segment to strengthen our financial performance and allow for continued investment in strategic growth areas. In connection with this we reduced our global workforce by approximately 200 employees located primarily in the United States and South Korea. We expect to complete the final activities associated with the closure by the end of the second quarter 2009. We anticipate recording a total of $41.5 million in total restructuring and impairment charges related to one-time employee termination benefits and impaired assets, as well as the costs associated with the closing of the facilities and contract terminations associated with this business.

Of this amount, approximately $27.6 million related to non-cash charges, and approximately $13.9 million relates to cash expenditures expected to be realized over the next four fiscal quarters.

As a result of this closure we expect cost savings, including reduction in research and development and capital expenditures, of approximately $50 million in fiscal year 2009 as compared to 2008.

As a result of this closure, our revenue gains for the fourth quarter is reduced for revenue that would have come from this segment. This is approximately equivalent to an 11% reduction in fourth quarter revenue. We have unprecedented lack of visibility to end consumer demand, additionally, we have seen key customers and the consumer supply chain in general act to significantly reduce inventory levels. As a result, the Company now estimates revenue in the fourth quarter, excluding the impact from CMOS Image Sensors will decline 6% to 8% from the third quarter. In total the reduction is estimated to be 16% to 18% from the third quarter.

The Company has retained Miller Buckfire as a financial adviser to assist in evaluating options to improve the Company's financial condition. We will be suspending future guidance going forward.

In the question and answer period we would ask that you limit your questions to those regarding clarification of the third quarter financial results. Thank you.

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

Thank you. We will now be conducting a question and answer session. (Operator Instructions).

Our first question is from Mr. Eric Reubel with MTR Securities, please proceed with your questions.

Gentlemen, thanks for taking my question. Bob, on the Q4 guidance, just to clarify, revenue will decline between 16% to 18% sequentially?

Yes, that includes the elimination of ISD from the revenue, yes.

(Operator Instructions).

Our next question is from Mr. [Philip Armstrong] with [ARBC Capital Market]. Please proceed with your question.

Sorry, could you just give me the EBITDA number again?

$8 million.

(Operator Instructions).

Well, operator, if there's no more questions in the queue, we would like to thank everyone for their participation on the conference call.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Thank you.