Magnachip Semiconductor Corp (MX) 2011 Q1 法說會逐字稿

Good afternoon, my name is Michelle and I will be your conference operator today. At this time I would like to welcome everyone to the MagnaChip Semiconductor Q1 2011 Earnings Release conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer session.

(Operator Instructions)

Mr. Robert Pursel, you may begin your conference.

Thank you, Michelle. Good morning from Korea and thank you for joining us for MagnaChip's First Quarter 2011 Earning 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 in 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, Executive Vice President and Chief Financial Officer.

Sang will begin the call with an overview of our first quarter business including segment highlights. And Margaret will discuss our Q1 financial results. Following Margaret's financial discussion Sang will discuss our second 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 regarding our expectations for revenues, target gross and operating margins, as well as cost savings for 2011 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 described in the safe harbor discussion found in 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 in 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 March quarter had a positive sales momentum. As most of you know, the first quarter is a seasonally weak quarter for consumer electronics. However we had our revenue growth in Q1 because of the design wins from last year and products such as Smartphones, Tablet PCs, and 3Ds. These are the consumer goods that market research firms expect to grow this year.

The earthquake and tsunami in Japan left uncertainty in global semiconductor markets. However MagnaChip is diversified enough that we minimize the potential risk of supply chain from this tragic disaster.

There was no impact in Q1 on the revenue side. We anticipate minimal impact in Q2 with our upside and downside opportunities compensating each other. Now let me go into detail of our three business segments. For our semiconductor manufacturing which is a foundry segment. First quarter revenue was $92.3 million. This was down 5.1% from fourth quarter but actually better than we expected.

We started volume production of automobile application (inaudible) product and SOS, silicon-on-sapphire for mobile application. We began mass production of 0.18 micro mixed signal products this quarter. Also we experienced a moderate level of recovery from inventory corrections in the second half of last year.

Our new engagement with the leading cut sensor IC maker is on track and we'll start mass production in Q2. We had our first design wind for 0.18 micron BCD product for TV application and started mass production of 0.35 micron BCD product for the Power-over-Ethernet application.

Enhancement to our technology offerings continued including our copper wire bonding solution which helps customers by saving on gold packaging cost. We added various memory options in our offering which including [E-Fuse] and multi-time programmable or MTP. Also we released 700 volts, ultra high voltage process for AC to DC conversion and initiated 0.18 micron 50 volts BCD process development for automobile application.

For our display solution segment, revenue was $74.5 million for the first quarter, up 5.5% sequentially. This increase came from new business ramping up for the Samsung Notebook application and LG Smartphone application.

The global display market is still recovering from worldwide slowdown from last quarter. We expect moderate recovery beginning Q2 of this year; with our long history working with a major global LCD makers, our display solution business shows stable revenue generating quarter after quarter.

New tablet PC products, new 3D TV models and new notebook products may drive stronger demand in the second half of this year. We are sole source for new 3D system and that began shipment last month. We also had new (inaudible) design wins and expect to ship our products starting from the Q2.

Now for our power solution segment, revenue was $20.4 million up 10.9% from last quarter and up 126% from Q1 of last year. The power business is our newest segment. We began the power business in 2008 to serve to our existing Korean partners. Today we have expanded into China and Taiwan, and developed the global partnerships as well, our power product including low and high voltage MOSFETs for PC, notebook and mobile phones.

We are also supporting a LED TV backlight applications. During the quarter we expanded our low voltage MOSFET into new Taiwan notebook ODMs and gained the momentum in the battery protection market with a major Japanese customer.

We continue to penetrate the TV market as well as enter into new market such as industrial lighting market with our high voltage MOSFET. We see further growth coming from power management ICs as we move up the food chain.

We became a major supplier for TV backlighting and LED drivers at Samsung and we are expanding to other major makers in Korea and China. We had a design-in of a highly efficient and cost effective power management IC to key LED lighting application in Korea.

In January we launched our power solution design center in Cupertino California to expand our technology expertise. Looking ahead, our design pipeline is very healthy as we focus on high growth and high margin products. Now let me turn the call over to Margaret for our financial highlights. Margaret?

Thank you, Sang. Let me provide some details of our statement of operations. Revenue for the first quarter was $187.9 million, an increase of 4.7% compared to $179.5 million in the year ago quarter and 0.6% increase compared to $186.8 million in the fourth quarter of last year. This increase is primarily due to the accelerated sales growth of our power solutions product.

Revenue by segment for the quarter was $92.3 million for semiconductor manufacturing services, $74.5 million for display solutions, $20.4 million for power solutions and $0.8 million for other revenue. Revenue by geography was 84% from Asia while the Americas represented 14% and Europe represented 2% of total revenue. Revenue by end to market for the quarter was 41% from consumer, 37% from computing and 22% from wireless.

For the first quarter we had the one customer greater than 10% and the top ten customers represented a 61% of total revenue. Gross profit was $56.5 million or 30.1% as a percent of revenue compared to 27.5% for the same quarter last year and 32.3% for the fourth quarter of 2010. SG&A expense was $15.4 million or 8.2% as percent of revenue compared to 10% for the same quarter last year and 8.9% for the fourth quarter.

R&D expense was $18.5 million or 9.9% as a percent of revenue compared to 11.4% for the year ago period and 10.3% for the fourth quarter. This quarter R&D expense was lower due to a reschedule of a research project into the next quarter.

We expect our operating expenses to increase in the range of $2 million to $4 million in the second quarter. Net interest expense for the first quarter was $7.1 million compared to $2 million in the first quarter of last year and $7 million for the fourth quarter. The increase from the first quarter of 2010 was from the result of the senior bonds we issued in April of last year.

Net income on a GAAP basis for the first quarter of 2011 was $22.5 million or $0.57 per diluted share. Depreciation and amortization for the first quarter was $13.9 million. This compares to $15.5 million in the year ago quarter and $14.1 million for the prior quarter.

Adjusted net income on non-GAAP measurements for the first quarter of 2011 was $15.7 million or $0.40 per diluted share. Our first quarter diluted share count was 39.6 million shares, which we expect to increase by about one million shares for the second quarter as a result of the additional number of basic shares added to our outstanding share count from our recent IPO.

Turning to the balance sheet total available combined cash and cash equivalent balance was $194.2 million at the end of the first quarter, an increase of $22 million from the end of the prior quarter. Cash provided from operations totaled approximately $19.2 million. This compares to $14.9 million for the year ago quarter and $24.8 million for the prior quarter.

Account receivables net of the reserves was $131 million. Days of sales outstanding were at 63 in the current quarter compared to 58 days in the prior quarter. The increase in the days is primarily related to our higher revenue level as well as a stronger shipment in the month of March.

Net inventory was $73.9 million with inventory days within our target range at 51 compared to $68.4 million or 49 days at the end of the December 2010. Capital expenditure was approximately $6.9 million and are expected to be about [$40 million] to [$50 million] for 2011. During the first quarter we successfully completed a $133 million initial public offering. Now let me turn the call over to Sang for our second quarter guidelines. Sang?

Thank you, Margaret. Looking back at Q1, I was very pleased we achieved sequential and year-over-year revenue growth. The first quarter is a typically weak quarter for us. However, we delivered a solid financial result and are positioned to continue this performance.

For the second quarter, I continue to be pleased about our revenue opportunities. Based on our backlog and booking forecast, we anticipate revenue will increase 5% to 9% and gross profit as a percent of revenue will increase 1.5% to 3% basis points compared to the first quarter.

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

(Operator Instructions)

And we have a question from the line of [Nick Gadios] from UBS.

Yes. Good morning. This is Nick Gadios from UBS. My first question would be on your (inaudible) revenues where basically we saw sequential growth despite the fact that we saw volumes down Q-over-Q at your customers in area terms announced. And also if I look at [Novatech], for instance, their revenue is down 4%.

So, maybe, if you could clarify what drove the revenue increase and how you looked at this into Q2 and maybe give us a bit more color by segments and whether, you know, new design wins were a key driver. (inaudible). Thank you.

Okay, thank you, Nick. As I stated in my script, we had our sequential revenue up because of our revenue from Samsung notebook applications and LG smartphone applications, which was sort of a new design win we made last year. And that helped us to -- revenue going up.

Great. And into the second quarter, your -- you elaborated that we'll continue with new (inaudible) design wins, that's right. So how much is the -- what kind of revenue, your revenue guidance should we see (inaudible) side being within range, above or below and how much of that will be (inaudible) design wins? Thank you.

You know, it's a -- mobile business is very unpredictable as you know. We had a design win and so I'm pretty sure the revenue is going to up within our business projection, but we can't really get down to the detail on the exact amount because we're talking multiple customers.

Okay. Thank you. And a follow-up question is on the cost side, OpEx were lower than expected, maybe, you know, if you could give a bit more color on how you see OpEx into Q2 and for the rest of year in terms of production for SG&A and R&D? Thank you.

Okay. OpEx for the first quarter was lower primarily due to the reschedule of our research project in the second quarter along with that. And then we expect our second quarter operating expense will be increased in the range of $2 million to $4 million.

Which is in line with our business plan.

Yes.

Great. And on the -- for the rest of the year for R&D, Margaret, how should we look at this, just a gradual progression for R&D or, you know, pretty much within range?

(Inaudible) we are pretty much within the range.

Okay. And on the SG&A side?

SG&A is the same. Overall, you know, again, OpEx is going to be going back to the normal range, which we expect, you know, is a $2 million to $4 million increase from the first quarter.

That was for total [FX]. Okay. Got you. Okay. Thank you very much.

You're welcome.

Thank you, Nick.

(Operator Instructions)

And we do have a question from the line of Tim Luke from Barclays Capital.

Thank you so much. With respect to the revenue growth for the calendar second quarter, the degree of sequential revenue growth seems somewhat more subdued than you might have thought a few weeks ago. Can you give us a sense of where you may have seen a somewhat lower revenue expectation and what segments that may result from? And, also, give us some sense as to what disruption you may or may not have seen associated with Japan. Thank you so much.

Okay, Tim, as I say, the Japan-related revenue impact is a minimum into Q2 as well. As the industry doesn't have a clear visibility into Q2, our foundry customer has been very conservative in terms of allotting. That's where this slowdown in our revenue projection, but yet I told you that we will be doing a 5% to 9%. Is that right -- 5% to 9%?

Yes.

And we will be -- we will be performing at that projection. That's -- that's our guess now.

Which of the foundries and markets are slightly slow? Does it relate principally to handsets or other areas?

It's more of notebooks. Our consumer sector is still strong. The customer and -- and the mobile -- I'm sorry -- the notebook industry applications have been slow.

Yes. It's very helpful. As we think about the second half of the calendar year, do you think that the rate of growth is likely to be more sequentially sort of in line with what you may have outlined for June? Or how are you feeling about the bar for September and December? And what gross margin progression do you think people should be looking at?

In terms of looking into the second half, obviously, our industry doesn't have a clear visibility yet. But most of experts are projecting still 6% to 8% growth. And remember that we grew 38% versus the industry 32% with our strong pipeline of design wins and new customer extensions. And I'm confident that we will outgrow industry average and we will have more clear visibility within probably the month end to -- into second half in terms of revenue. Our growth margin -- providing that we will hit our revenue target -- and I think that we will achieve what we told the investors during the road show.

Obviously, the gross margin for the calendar second quarter is slightly lower than you previously thought. Does that just reflect the revenue? Does it? Or maybe you could give us some color on utilization?

But, again, that we gave a range at this time, and so we will see how we're going to end up. I am confident that we will -- we will get very close to it. But it is due to revenue. We gave you a range of the revenue and that has sort of an impact to the growth margin as well.

Lastly, it looks like you have some good design wins and power. Perhaps you could talk about some of the areas that you are seeing those design wins. Thank you.

We got various products now. We have -- (inaudible) obviously that it's a -- we're offering about 100 products. And so a lot of our strong design wins in [Taiwan], notebook, as well as TV applications.

And as I say, we have a very strong growth in -- with the battery protection application as well. So those are the [master] areas. [KMIC] we had a strong design win in Samsung TV and we are extending to the notebook [LED] drivers. That's a good sign. And, also, we're looking into industrial application, including LED lightings. So there are a lot of strong design win opportunities.

If I can just ask one last thing -- in Japan, you said that there was no issue there really. But given the -- the display customers such as Sharp and Hitachi, why is there no impact there? I mean, obviously, it's good for you that there seems to be a modest impact and that's encouraging, but could you just give some color there on how you see demand either changing or not changing and how you see it in the supply chain? Thank you.

Okay. That's a good question. As I say, there are upside and downside. Obviously, the upside is some of our customers closed their -- or momentarily they stopped their operation. And we got upside in some of our foundry business.

We got upside. And then because of our design wins and with our mobile display and also the game machine and -- and -- performs well. So those are the upside. The downside is obviously Sharp. They closed extensively during the Golden Week of their factory and that had some impact to our revenue. So all those upside and downside, we're about -- come out even.

Thank you so much. Good luck. Very good luck. Thanks.

Thank you.

And we have a question from the line of [Terrance Wayland] from Citi.

Hi. Good afternoon. Thanks for taking the question. This question also relates to third and fourth quarter revenue assumptions. So I think if I look at the mid-point of guidance for the June quarter, it's about $201 million or roughly $9 million under the forecast that were projected in January at the analysts' day. Is it also reasonable to step down the $230 million and $220 million assumptions in the September and December quarter if I say $6 million or $8 million? Thank you.

Terrance, we'd give you guidance for the second quarter and we will release our guidance for the third quarter at the second quarter earning release. Just looking at the whole industry, obviously, the first half is a little softer. And people are still expecting the second half will be as they'd planned or maybe a little bit stronger. And that's the position we will still keep.

Okay. So if I were to say factor in the $230 million number in the third quarter that you had -- that you had shared in January, then that would be a sequential growth of 15% in the September quarter? Is that a little aggressive or -- or is $230 million, the number that you shared in January, still a reasonable estimate as of third quarter?

Terrance, I've just told you that I'm giving a guidance for the second quarter and, three months from now, I'll give you the guidance for the third quarter. And, obviously, you know, you -- you're more than welcome to talk to, you know, Margaret and -- and -- off the line and then -- and -- but, right now, we're giving you the second quarter guidance.

Okay. And then my second question is on gross margin, with regard to segment growth margin targets. If I -- if I look at the segment gross margin targets, I think you're kind of near your -- the top end of your display gross margin targets.

Can you talk about the potential to perhaps increase your longer-term gross margin targets for the display business and comment on what factors might need to happen in order to continue to push gross margin up there? Thank you.

Well, as I say before, [display] gross margin stayed between 25% to 28%. And that's where we expect to be. And our foundry, the growth margin I expect is going to continuously improve because of product mixed. And, hopefully, in the second half we have a much stronger demand.

Power, we're doing a lot of cost reduction improvement which is being implemented now, so, again, that end up production of fourth quarter 30%, which right now is much below, but I'm confident we're going to increase our growth margin.

So by more of business portfolio shift into 50 and -- the power and then foundry, and I -- I think in the company will improve our growth margin continuously. And we've seen that even foundry, we do more shifting to value-added are the product mix. And that's going to help our growth margin.

Okay. And then the last question perhaps -- I know that you released these -- or these numbers in your quarterly release -- do you have available gross margin by business segment for the first quarter? I noticed -- why was that 26% last quarter, power at 10% and -- and foundry roughly 40%?

Yes, we'll release a '10 Q and we'll have the numbers available. But you want to know the number now or are you going to wait until you see '10 Q?

Yes. I mean, if you have them handy, I would -- I would love to enter them into the model. Otherwise, I think --

All right.

It's foundry at 36.1% and the display solution 26.6%, and PST 12.5%.

Great. Thank you and best of luck.

Thank you.

Thank you.

Actually we don't need the luck.

And we have a question from the line of Arun Seshadri from Credit Suisse.

Hello. Thanks for taking my question. Could you remind us again what your seasonal expenses are on the cost of goods sold line for Q1. Gross margin looked like it would have -- it was down a little bit more than what it made sense purely from the change it makes from Q4 to Q1?

Margaret, are you looking at numbers?

Yes. The (inaudible) cost -- the gross margin for the first quarter is at 30.1%. So it was around the 69% of the COGS. The main reason is the first quarter manufacturing cost is higher because the product we sold, produced in fourth quarter of last year which is primarily loading rate, FAB utilization was lower.

Okay. Okay.

And also, we had a number of holidays and we had a factory close down yearend. That has impact to the cost of goods.

Okay. So that's relatively pretty comparable versus Q1 of last year then. Correct?

Oh, yes. We're up 2.5%, right?

Yeah, we're up from that.

Okay. Was there any pull forward effect on -- are you factoring in any pull forward effect on Q2 from supply disruptions? Meaning, would Q2 have been, you know, lower at all based on any supply disruptions that obviously we're seeing?

As I say, that we don't have any supply chain risk due to the Japan disaster.

Okay. And then finally what do you consider normal seasonality at this point for Q2 to Q4?

Typically, usually our business picks in Q3. And what appears to be a lot of indication, maybe Q3 and Q4 are continuous strong. That's our projection at this time.

But you're not able to give us any additional color in terms of what would be on a normal basis like what percentages -- ?

As I say, that I will probably have guidance three months later about Q3.

Okay, fair enough. Thank you.

And we have a question from the line of Nicholas Gadius from UBS.

Yes. Hi again. Just two quick questions. First one, could you update us a little bit on your CapEx plans for 2011 and any plans increasing capacity, if you could quantify this. And secondly, going back to your process fallout during the part of the business where you're clearly proceeding through the diversification, particularly towards [BCD] you talked about before, and which ones do you see has the higher margins and are still getting more traction from customers will be helpful. Thank you.

First question, Margaret --

For CapEx, we are expecting between $40 million to $50 million for fall 2011.

And what was your second question? Can you repeat it, please?

Yes. So before going there, so $40 million to $50 million CapEx and that equates in what kind of capacity increase with --

It is $40 million to $50 million.

$40 million to $50 million?

Yeah.

And capacity would be in what range in terms of increase?

We end up [139,000], we dipped to [138,000]. Yeah, [138,000] [ANC] equivalent per month capacity. And where we'll be, we're projecting we're going to end up 144,000 ANC equivalent per month this year with that CapEx.

[144,000] year over year. Okay, and the second question was you're on track (inaudible) your processes have been at the front of your business, in particular, BCD. Where do you see traction from customers picking up within the 0.5 micron to 0.18 micron, et cetera, and where are you the most hopeful in terms of this process when driving revenues in 2011? Thank you.

Well, BCD are 0.35 and our new 0.18, both are very well sold out to many potential customers, particularly 0.38 is getting well designed into and then by many new customers. So we're expecting probably at the beginning 0.35 micron BCD and some 0.18 and also getting design win as well.

Like what you say, this is going to produce the revenue in 2011.

Okay, thanks.

Did I answer your question?

It helps. Thank you very much.

Okay. Thank you, Nick.

(Operator Instructions)

We have a question from the line of [William Pullman] from Brencourt.

Hi, guys. And I just had a quick question with respect to the cash of about $195 million. Just curious as to what you're thinking you might do with that cash going forward in 2011 and maybe 2012.

Well, obviously we want to make sure we have a sufficient catch on balance. So our target is at $200 million. And beyond that, obviously we need to reevaluate it at the situation at that time and we have no plan to release that cash at this time.

Okay. And then just as it relates to gross margins and I think this is something that people have touched on. Could you just talk us through your utilization rate right now at Q1 and kind of where you see that trend at the end of the year?

Q1 utilization was 90% and we are expecting higher in the second quarter.

Thank you. Okay, thanks.

You're welcome.

And there are no more questions at this time.

Thank you, Michelle. Our next earnings release and conference call is scheduled for July 27, 2011. So please look for details for this event as well as other news on Magnachip's website, at www.magnachip.com. This concludes our conference call. Thank you for joining us today.

This does conclude today's conference call. You may now disconnect.