Magnachip Semiconductor Corp (MX) 2010 Q3 法說會逐字稿

Good afternoon. My name is Chanel and I will be your Conference Operator today. At this time, I would like to welcome everyone to the MagnaChip Semiconductor's Third Quarter 2010 Earnings Conference Call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

(Operator Instructions)

Thank you. Mr. Robert Pursel, you may begin your conference.

Thank you, Chanel. Good morning and thank you for joining us for MagnaChip's third quarter 2010 earnings conference call. A copy of the press release issued today is available on our investor relations website.

A 72-hour telephone replay will be available shortly after today's call and the webcast will be archived on the company's website for one year. Access information is provided in today's press release.

Joining us today are Sang Park, MagnaChip Chairman and CEO and Margaret Sakai, Senior Vice President and Chief Financial Officer. Sang will begin the call with an overview of our third quarter business, including segment highlights. And Margaret will discuss our Q3 financial results.

Following Margaret's financial discussion, Sang will discuss our fourth quarter guidance after which we will open the call for questions.

During the course of this conference call, we may make forward-looking statements about MagnaChip's business outlook, including statements about our expectations for revenues, target growth and operating margins as well as cost savings for 2010 and beyond.

Our forward-looking statements and all other statements that are not historical facts reflect our beliefs and predictions as of today and therefore are subject to risks and uncertainties as discussed in the Safe Harbor discussion found on today's press release.

During the call, we will also discuss non-GAAP financial measures. The non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found on today's press release.

I would now like to turn the call over to Sang Park for a business overview and our segment highlights. Sang?

Thank you, Robert. Our September quarter revenue was up nearly 8% sequentially and was within guidance range we set in July. This is the sixth consecutive quarter that we have grown our revenues.

Our strategy of focusing on high growth analog and mixed signal market with our display and Power products and foundry service has been driving this growth.

While industry announcement indicates some uncertainties about global semiconductor market recovery, management continues to be well positioned for profitable growth with our new and innovative products and services.

Now let me go into the details of a discussion of our business segments. For our semiconductor manufacturing service segment, third quarter revenues were $113.2 million, up 11.4% sequentially. The record third quarter reflects the confidence our customers have in the value and quality of MagnaChip's semiconductor manufacturing services.

For 2010, MagnaChip has been awarded the Best Supplier of the Year Award from AATI and the Pericom in US, GMT in Taiwan and Abov in Korea.

These are just a few of many customers who have contributed to the success of MagnaChip's foundry services.

During the third quarter, MagnaChip signed an agreement to provide foundry services for a leading US non-volatile memory and a microcontroller company. Our recently introduced 0.13, 0.18 micron mixed signal technology is providing a new product road map and improved gross margin expansion.

Also our new 0.18, 0.35 micron BCD process with a deep trench isolation is allowing us to reach new customers and products such as LED drivers, DC to DC converters and power on Ethernet. As a result of our strong development pipeline, we are able to provide specialized foundry services to some of the bigger names in microcontrollers, automotive and other non-volatile memory markets.

Turning to our Display Solutions segment, revenue was $78 million for the third quarter, down 3.2% sequentially. Globally, the TV, notebook and display markets were impacted by worldwide slowdown in unit shipments during the quarter. Industry analysts expect this pull back to continue into the fourth quarter as major OEMs continue to work down their measures in their inventories.

However, there were some positive signs coming from China recently, where sales of display-related products, such as TVs and notebooks, were up during their Golden Week.

Also our customers have indicated Q4 could be the lowest point for their display product sales. We feel comfortable that global inventory correction for the display-related product will be completed by the end of this year.

While we have continued to maintain our position at LG display, other significant growth opportunities are coming from new design wins in Samsung and Sharp for our larger display driver ICs. We are also seeing strong traction at Samsung mobile for AMOLED design wins.

Looking ahead, we continue to see growth drivers coming from TVs, notebooks, tablets and gaming displays. Nintendo has pushed out the launch of their three-dimension gaming console to February. This is just one of the several new opportunities we have included in our win column for 2011.

Now turning to our Power Solutions segment. Total revenues were $17.8 million for the third quarter, up 47.8% sequentially. Year-to-date revenues for 2010 were $38.8 million, compared to $6.4 million for the first three quarters of 2009. We began Power business by leveraging our strong Korean relationships.

We are now pleased to say that we have diversified geographically into China and Taiwan, which represent 35% and 24% of our Power sales in Q3, respectively. We have developed a strong global partnership, including top-tier ODM notebook makers in Taiwan.

Our third quarter growth was driven by low and high voltage MOSFETs designed into PC notebooks and mobile phone applications, as well as the TV LED backlighting. Our design wins at a major Japanese OEM for handset battery protection applications has been gaining momentum. We are also experiencing growth coming from power management ICs.

The successful launch of tablet PCs has opened a new opportunity for MagnaChip's Power Solution designs and we are poised to leverage our expertise as tablet market expands.

Looking ahead, we see our design pipeline to be robust and are focused on high-growth, high-margin products to be a strong value proposition for MagnaChip.

Now let me turn to Margaret for third quarter financial highlights. Margaret?

Thank you, Sang. Let me provide some details of our statement of operations.

Revenue for the third quarter was $209.4 million, a 7.6% increase compared to $194.7 million in the second quarter of this year and on increase of 33.7% compared to the year ago quarter. This increase is primarily due to continued strong demand from our semiconductor manufacturing services and accelerated sales growth in Power Solutions.

Revenue by segment for the quarter was $113.2 million for Semiconductor Manufacturing Services, $78 million for Display Solutions, $17.8 million for Power Solutions and $0.5 million for other revenue.

Revenue by geography was 86% from Asia, while the Americas represented a 12% as Europe represented 2% of total revenues. Revenue by end-market for the quarter was 40% from consumer, 35% from computing and 25% from wireless.

For the third quarter, we had one customer greater than 10% and the top ten customers represented a 63% of total revenue. Gross profit was $69.3 million, or 33.1% as a percent of revenue, the same as last quarter. SG&A expense was $16.2 million, $0.2 million more than the second quarter and $1 million less than the same quarter last year.

R&D expense was $23.1 million, $2.6 million more than the second quarter and a $5.4 million more than the year ago period, due to increased R&D project related spending. Operating income was $29.6 million for the third quarter, compared to $27.8 million for the second quarter and $17.3 million for year-ago quarter.

Net interest expense for the third quarter was $7.3 million, compared to a $6.6 million in the prior quarter. The increase in interest expense was due to a full quarter of interest that's now being booked, which is related to the $250 million higher bond we issued in April.

Net income on a GAAP basis for the third quarter of 2010 was $61.5 million. This compares to a net loss of $30.7 million for the second quarter of 2010 and a net income of $62.4 million for the year-ago quarter.

Net income for the third quarter was impacted primarily by a foreign currency gain of $41.4 million, compared to a foreign currency loss of $28.3 million in the prior quarter. The foreign currency exposure is related to a non-cash translation gains or losses for inter-company borrowings that are denominated in US dollars.

Depreciation and amortization for the third quarter was $14.3 million. This compares to $14.5 million for the second quarter and $12.4 million in the year-ago quarter.

Adjusted net income, a non-GAAP measurement, for the third quarter of 2010 was $26.2 million, compared to $25.7 million for the second quarter of 2010 and on adjusted net income of $20.4 million for the year-ago quarter. Adjusted net income for the 12 months ended September 2010 was $92 million.

Adjusted EBITDA, also a non-GAAP measurement, for the third quarter of 2010 was $45.7 million, compared to $43.8 million for the second quarter of 2010 and the $34.5 million of the third quarter of 2009. Adjusted EBITDA for the 12 months ended September 2010 was $150.8 million.

Headcount at the end of the third quarter was approximately 3,200, which was even with the second quarter.

Turning to the balance sheet, total available cash and cash equivalents was $161.4 million at the end of the third quarter, an increase of $20.1 million from the end of the second quarter. Cash provided from operations totaled approximately $30.7 million. This compares to $36 million for the second quarter and $4.6 million for the year-ago quarter.

Accounts receivable, net of reserves, was $136.9 million. Days sales outstanding was 59 in the current quarter, compared to 55 days in the second quarter. The increase in days of sales is primarily related to our higher revenue level as well as a stronger shipment in the month of September.

Net inventory was $65 million with inventory days at 42, the same as the second quarter. Accounts payable days were 47 days compared to 49 days. Capital expenditures were approximately $9.4 million and are expected to be around $47 million for 2010.

Now let me turn the call over to Sang for our fourth quarter guidance. Sang?

Thank you, Margaret. I'm very pleased that we achieved another quarter of sequential revenue growth during what is becoming a very challenging environment. We delivered solid financial results and are well positioned to continue to deliver strong revenue performance.

One of our unique advantages comes from our flexible operating model of being able to respond to the market by mixing and balancing our internal fab loading between foundry services and the standard products.

Therefore, consistent with the recent customer inventory leveling, the company anticipates fourth quarter 2010 revenue will decrease 10% to 13% on a sequential basis.

However, we are confident this is a short-term correction and the company will be on track to resume normal seasonal trends and a solid growth path for 2011.

So, Operator, this concludes our prepared remarks. We will now open the call for questions.

(Operator Instructions). Your first question comes from the line of Tim Luke with Barclays.

Hi, guys. This is Sameer Sameer Kalucha calling in from Tim. Can you hear me okay?

Yes.

Okay. So, great. The question I had was, on the balance model that you talked about in allocating foundry capacity to product lines, I was just wondering how is the factory utilization looking this quarter? And then what are the trends that you see going into 4Q? And are you still seeing signs of foundry tightness and capacity? Or do you see that kind of like easing out into remainder of the year? And looking at maybe 2010 and beyond?

Okay, Tim. Utilization at Q3, 100%. You can easily assume. Fourth quarter, we're anticipating around 90%.

Foundry demand sharply dropped starting from the second half of September. And we see from the utilization and also it's going back to average demand, but through the September and October, I will say it's a soft month.

Okay. And then on the -- the next thing was on the display business. In terms of how are the design wins and how does the momentum look getting into Q4 and how -- what kind of design wins are we looking into Q4? And then how does it kind of -- how does the growth trajectory look, going forward? If you could provide some color on that?

Okay. For the large display, the qualification cycle time, it varies from six months to one year and we are anticipating, starting from second half of Q4 and getting into the Q1, we'll see some ramp up at Samsung. Large display. So that's going to give us the upside.

And for the mobile, the cycle time is much longer, which you usually see six months to a year, or sometimes even longer. And we see a significant increase starting from the second half of next year.

And maybe, I don't know, if I have more time, but maybe similar for Power Products in terms of how did those trend in 4Q? What's your outlook there?

The 4Q is obviously many customers are looking into inventory adjustments. But our projection into Q4 for the Power, we are able to maintain our position. And another strong growth, getting into 2011.

Great. Thank you.

You're welcome.

Your next question comes from the line of Doug Freedman with Gleacher.

Hi, Doug. You there?

All right. Let's try again. Hi, Sang. Congrats on the strong results. Are you able to comment how long it will take some of your new foundry customers to ramp up and what your expectations are there?

There are two categories of foundry customers and one category, they don't have to go through very lengthy [gale] customers qualifications, then we're anticipating about a year.

But customers with the -- their customers also require qualification, it takes about two years. So we lined up very good pipelines, but actual ramp up, probably starting from second quarter of next year.

Okay. And in your prepared remarks, you commented that you were feeling comfortable that things were sort of bottoming. Can you talk about what you're seeing that makes you feel that way? Any sort of color that you can offer, what your customers are telling you about their inventory levels and when they're going to be back to building demand or maybe ramping production? Anything you can offer on the color side would be helpful.

Sure, Doug. The reason for the softness in fourth quarter is many of our customers, they end up with an excess inventory because there were component shortages in the second half of first quarter and second quarter and with that anticipating of strong growth, and obviously they were able to build up, again, that very strong excess of inventories.

And right now, the customers are adjusting those. And some of the customers, and including Korean customers, never experienced a shortage in their lifetime of buyers, because there were no shortages in the last five years, at least. So this was a sort of panic mode and they really have the inventory.

And guess what? They got so much inventory and now going through the adjustment. That's one of the reasons that we see that our foundry forecast is down, starting from the second half of September. And that being well adjusted into September and October and throughout the fourth quarter, but with the average sales, I think that they, again, are starting to look at ramping up, getting into next year and if the holiday sales is much stronger than expected, then I guess we'll be having an exciting first quarter.

All right. Great. Thank you.

You're welcome.

(Operator Instructions). Your next question comes from the line of Terence Whalen of Citi.

Hi. This is Bin asking for Terence. Thanks for taking my question. So my first question is can you give us some color on the margin, gross margin, dynamics between the three divisions, Display, Power and the foundry? And how do you expect, going forward, for the next one or two quarters?

Terence, I -- we explained DSD gross margins between 25% to 30% during the road show and third quarter we end up 29%. So we did a good job. And also our foundry, we told you 35% to 40% and we end 39.2%, we did good.

Power, as I say, it's -- we -- right now, talking about margin doesn't make any sense. The reason for that is we have to build up some components and available for the customer next quarter and so it's a long manufacturing cycle time.

So we probably will give you much better numbers when we get up to maybe about $100 million for annual rate. Then we're looking at about 30% and 30% to 32%. Right now it's much lower.

Okay. That's very helpful. My next question is a follow-up to the customers' inventory digestion. So based on your experience with customers, how long you're -- does the customer consume the excess inventory?

Well, some customers, I can't really name it, stop buying any components throughout July and August and September, some part of September. And during those three months, they cleaned up quite a bit of excess inventory. And that's -- we -- at the end of the food chain, that's why this impact happened to us in the fourth quarter.

Now they resumed purchasing as usual, so that's one of the reasons that we're confident inventory correction is already done and we see, after the fact, impact. And that's why I'm comfortable saying that things will get back to their normal seasonality.

Okay. I see. If I may, just one more quick question. What's the typical seasonality for display business in the first quarter? And how do you expect this coming first quarter following the trough in 4Q?

Our first quarter, right now we have very little visibility. But indications show that it's probably staying at the fourth quarter or maybe slightly down. That's my conservative view. But again, though, probably I need a few months to get better visibility into Q1. Typically, Q1, in consumer products, in semiconductor markets, is down about 10% from the Q4.

Got it. That's very helpful. Thanks a lot.

You're welcome.

Your next question comes from the line of Sukhi Nagesh with DB Advisors.

Hi. This is Sukhi Nagesh, Deutsche Bank. Hi, Sang. Hi, Margaret. Thanks for taking the call. A couple of questions here, if I may.

Can you -- I know you guys -- you provided guidance for the December quarter of down 10% to down 13%. Can you maybe rank order your three different segments in terms of what you expect in terms of -- for the fourth quarter?

We don't really segmentize into business segments. But I'll give you color. The biggest drop we see on foundry. The reason is, as I say, our fabless customers are going through inventory adjustments and that's the impact to us.

And the Power, we don't see much of an impact and display, we're looking at some down from third quarter.

Got it. Okay. And on the Power side, if I were to stick to that, you saw pretty strong growth there for 47%. As you move forward into next year, are you -- what should we be looking for in terms of your revenue run rate on a quarterly basis?

Obviously you've talked about gaining share, making inroads in China and Taiwan, leveraging your Korean relationship. How should we look at that, especially as we enter into next year?

Well we're looking at minimum doubling of our revenue next year. Hopefully more. And based on our design pipeline and sales opportunities, you have those numbers anyway.

And we're pretty confident that we are able to build up good expectations in the market when our customers suffered because of shortage earlier this year and we provide them with a wonderful service and quick response and some of our customers and they're shifting 100% business to us.

And so that's one of the indications and plus that we got new design win opportunities on the MOSFETs, low voltage and high voltage as well as some of the PMIC. That's going to be driving us into a very solid growth next year.

Got it. One last question, if I may. Your operating expense seems like it rose a little bit more than expected in the third quarter. Can you kind of walk us through why that was the case and what we should be looking for in terms of your operating expenses and our quarterly run rate moving forward? Thank you.

You noticed the operating expenses in the third quarter was higher than in second quarter. The prime reason is due to the more R&D activities and project-related spending. And also ongoing from now on, operating expenses around the 38 to 40 unit level is ongoing that we expect.

Thank you.

So over time, as revenues grow operating expense percentage is declining over time. We have very good control under Margaret and that's one of the probably core concepts of management.

And there are no further audio questions at this time.

Thank you, Chanel. Well, our next earnings release and conference call is scheduled for February 3rd, 2011. So please look for details for this event as well as other related news on MagnaChip's website. This concludes our conference call. Thank you for joining us today.

Thank you.