Magnachip Semiconductor Corp (MX) 2011 Q2 法說會逐字稿

Good afternoon. My name is Hope, and I will be your conference operator today. At this time, I would like to welcome everyone to the MagnaChip Semiconductor's Q2 2011 Earnings Release 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. Pursel, you may begin your conference.

Thank you, Hope. Good afternoon and thank you for joining us for MagnaChip's Second Quarter 2011 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 this webcast will be archived on the Company 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 second quarter business, including segment highlights, and Margaret will discuss our Q2 financial results. Following Margaret's financial discussion, Sang will discuss our third 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 growth and operating margins, as well as cost savings for 2011 and beyond. Our forward-looking statements and our other statements that are not historical fact 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 the Sang Park for a review of our second quarter business. Sang?

Thank you, Robert. I'm very pleased with our second quarter sales performance. Not only we grow revenue 8% sequentially, but we expanded gross margin by 240 basis points, compared to Q1. We continue to perform strongly because of growth of our power business, and upside from Smartphone, game displays, and the continuous expansion of Samsung larger display sales. I am also very encouraged by traction of our new products, which has increased the design win activity for all product segments. This better positions us strategically for the growth in the coming years. Let me discuss highlights of our three diversified business segments.

For our power solution segments, revenue was $23.7 million, up 16.3% from last quarter, and up 97.2% from Q2 of last year. Our power segment continues to deliver strong double-digit revenue growth as we expand our market share with our current customers, and the addition of new customers by delivering new products. The key reason why our power solution segments is growing, in spite of weak market environment, is our strong design win activity. For example, we are now shipping LED drivers to Chinese TV maker, after successful expansion of our LED driver market share at Samsung TV during last two years.

We also had design wins for our low-voltage MOSFET for multiple applications with new Taiwan and China customers. Our recently released 650 volts, high-voltage MOSFET was also a design win at Samsung and at several China based TV power supply manufacturers.

The (inaudible) design-win activity comes not only from our existing products, but also from -- excuse me -- from our growing portfolio of new designs. During Q2, our new product development included a new generation of low-voltage of MOSFET released for the computing market, a 650-volt MOSFET released for the power supplies and adopters and four-terminal LED driver released for the use in LED pointers and compact TVs.

Our new business development activities created a strong pipeline of new design wins and design-ins, which included LED lighting module for a major Korean optical component manufacturer. A high-voltage MOSFET for leading smartphone charger, DC-to-DC converter for TVs and set top box, an LED driver for multiple displays, and AMOLED DC-to-DC converter.

Currently under development, we have our first high-voltage IGBT sample to be shipped in Q3, and ramp up production volume in Q4. We are getting many inquiries from customers in Korea and China. We expect this new product line may contribute sizeable revenue growth next year. Looking ahead, our design pipeline is very healthy and we continue to focus our power solution business on high-growth, high-margin opportunities.

For our display solution segment, revenue was $82.7 million for the second quarter, up 11.1% sequentially. This increase came from a slow, but steady, recovery in global display market, as well as from our new business that is ramping for the AMOLED displays, smartphone applications, game machines, and tablet and notebook PCs.

Our long history of being a primary supplier to major global LCD makers provides us display solution business with a very stable growth. We have a numerous design-in and design-wins for the new tablet products, three-dimensional TV models, a next generation of notebook and IT products. We continue to expand our business relationship with Samsung with our five new design wins for LCD and AMOLED displays. AMOLED displays are found in high-end smartphones, and gaming machines, which should be a steady-growth driver for our display business.

We are sole-source supplier for Japan's newest 3D game system, and have started supplying display drivers for another major Japanese game manufacturer. While we consider our display business to be very stable, we continue to be innovative, and have numerous products under development for the next generation of TVs, tablet PCs, smartphones, and gaming consoles at leading Japan and Korean customers.

And for our semiconductor manufacturing segment, which is a foundry, second quarter revenue was $96.5 million. This was up 4.5% from the first quarter. Design wins for the premium products continuously increase. This quarter, including our BCD technology which took up 18% of the total foundry design-wins, compared to 1% in Q2 of last year.

During the Q2, we added new high-voltage BCD process technology to our existing five BCD platform technologies. We introduced other new processes, including .35 micron automotive qualified process for the ELMOS, a major European automotive semiconductor company. And SOS, silicon-on-sapphire RF process, that is used for the smartphone and tablet PCs.

We also have new 700.5 micron process we developed for the growing LED-lighting market. While we did not experience any direct impact in Q2 from Japan earthquake, we are now seeing a slight inventory correction in our foundry customers, which may be due to the overbuild inventory because of Japan earthquake, among other reasons. The other major foundries also mention softness in their business this quarter.

While the short-term inventory correction will likely have impact on our third quarter foundry revenue, we remain very positive about our prospects for growth and margin expansion, once our customers are back on track. Now, let me turn the call over, Margaret, for our financial highlights. Margaret.

Thank you, Sang. Let me provide some financial highlights and a brief review of our statement of operations. During the second quarter, we continued our solid financial performance by generating strong operating cash flows of $48.3 million or 23.7% of our revenue, 240 basis points improvement to gross profit, while growing operating income for the second quarter to 12.6% operating revenue compared to 5.5% in the first quarter.

We are able to return shareholder value through our combination of careful operating expense control, manufacturing costs improvement, and a prudent balance sheet management. This allowed us to repurchase 35 million of our 250 million senior notes at the price that was immediately accretive to earnings during the quarter.

Now, turning to our statement of operations. Revenue for the second quarter of 2011 was $203.7 million, up 8.4% sequentially and up 4.6% compared to the second quarter of last year. Revenue for each of our three business segments was up sequentially for the second quarter. As Sang mentioned, power solutions was up 16.3% to $23.7 million, display solutions was up 11.1% to $82.7 million, and our semiconductor manufacturing services, or our foundry business, was up 4.5% to $96.5 million.

Gross profit was $66.2 million or 32.5% as a percent of revenue for the second quarter, up 240 basis points sequentially. We saw gross margin improvement in all three business segments, particularly, our power segment which grew to 23.6% in the second quarter, from 12.5% in the first quarter, due to improved product mix, higher volumes, and the cost reductions.

SG&A expense was $17.5 million or 8.6% as a percent of the revenue for the second quarter. And R&D expense was $20.6 million or 10.1% as a percent of the revenue. Operating income for the second quarter was $25.6 million or 12.6% of sales, compared to $10.4 million or 5.5% of sales in the first quarter.

Net interest expense for the second quarter was $6.4 million, a slight decrease as we purchased 35 million of our 250 million senior notes in May. Net income on a GAAP basis for the second quarter of 2011 was $31.6 million or $0.78 per diluted share, compared to $0.57 per diluted share for the first quarter. Adjusted net income on non-GAAP measurement for the second quarter of 2011 was $22.5 million or $0.56 per diluted share, compared to $0.40 per diluted share for the prior quarter.

Turning to the balance sheet, total available combined cash balances, cash and cash equivalent, plus short-term investment was $177.8 million at the end of the second quarter, compared to $194.2 million at the end of the first quarter. Excluding the cash used for the repurchase 35 million of our senior notes, our second quarter cash balance would have been $215.9 million.

Cash provided from operations totaled approximately $48.3 million. This compares to $19.2 million for the prior quarter. Accounts receivable net over reserves was $123.8 million, days over sales outstanding was 55 in the second quarter, compared to 63 days in the prior quarter.

Net inventory was $86.8 million or 57 days of inventory, slightly higher than our target range of 40 to 50 days, due to the purchase of additional buffer stock as a result of the Japan earthquake. Capital expenditures were approximately $20.3 million and are expected to be about between $40 million to $50 million for 2011.Now, let me turn the call over to Sang for our third quarter guideline. Sang.

Thank you, Margaret. Looking back at Q2, I was very pleased we gain a chip strong sequential, and the year-over-year revenue growth. We were able to grow revenue during the quarter because of our strong customer relationships and diversified business model.

Also, I think it is important to point out, we generate impressive cash flow each quarter. Our cash strategies are focused on growing the core business and enhancing shareholder's value. This includes option number one, investing in our business by adding manufacturing capacity to support profitable growth. Option number two, buying back our long-term debt when it makes sense. Option number three, for strategic acquisitions that grow our power solution business.

Looking ahead to Q3, our visibility is limited. When I listen to what other analog and mixed, you know, companies are saying, I agree that we are in soft patch, and that there is a general weakness for the consumer electronics. Also, global inventory has grown over past couple of quarters, and this is beginning to impact our customer, our foundry customers in particular.

However, our power and display businesses have good traction going into the third quarter. This should help offset some of the macro-weakness we are seeing in the global foundry business. So, based on our existing backlog, plus that our booking forecast, we expect the revenue for the third quarter to be in the range of $197 million to $207 million. We also anticipate gross margin will be impact by the soft foundry business.

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

(Operator Instructions)

Your first question comes from [Samir Kaluchev] with Barclays.

Samir, are you there?

Can you hear me?

We hear you now.

This is Samir calling in for CJ. It looks like there were some decent share gains in Q2 on the display side, and obviously, these should help going forward. I'm wondering, how does the display segment going forward look? You point to some potential growth there. Would it come from share gains alone, or there is some kind of growth you are making inorganically?

As we stated, we are maintaining our market share in LGP, and Samsung as an account will grow, replacing Japanese supplier. At the same time AMOLED is a great opportunity. We're expecting that business is going to grow into second half. And, also, we see upside for the smartphone, and upside for tablet PCs. So, that's the reason that going into second half, we're anticipating that business will continue for growth.

You don't see much impact from the inventory there, the inventory that everybody was talking about in the display supply chain?

Well, I like to remind you that we are the primary supplier of leading LCD makers, and obviously, this so-called overflow business coming from the weak demand, or inventory, usually happen to non-Korean supplier.

Okay. Great. And then my next question is more along the housekeeping side. You mentioned that GM would be impacted by the soft foundry business. Any color on the magnitude of the impact? Last quarter you specifically guided gross margin to improve 150 to 300 basis points. I'm just wondering, how much you think it will be impacted by lower foundry this quarter.

Well, you know, we have our still limited visibility. The biggest factor for gross margin is our [FAB] utilization rate. Obviously, we still have weeks to go for our FAB utilizations, but we're anticipating at the -- as our current forecast that we share, maybe about 2% to 3% gross margin lower than Q2.

Great. Thank you. And then, my last question is along the -- cough -- along uses of cash. You did a nice deal, that is pretty accretive, and really helping the numbers, so I wonder what's the plan going forward? Can we expect to see more of such purchases of other senior bonds outstanding?

Well, actually, it's not our choice. If someone come out with good offer, obviously, we will consider.

(inaudible - multiple speakers)

Okay. I'll get back in queue and ask follow-up later.

Our next question comes from Ross Seymore with Deutsche Bank.

A general question on the power side of things, just talk a little bit about what's driving that up sequentially. And then, generally, I know what the mid-point of your guidance range, but if you have to split it between the three segments, what sort of magnitude are we talking on the up for two of them and down for the third? Thank you.

Power, obviously, the -- we are expanding the market share with an existing customer, and also, we are introducing new product, and owning -- I mean gaining our new customer base. So, altogether, that helps us to grow Q2. And we looking at Q3, China market is strong and mostly industrial application, and some of consumer. And notebook market is still weak, and obviously, Korea TV market is coming back, but very slowly, but better than Q2. So, we not only done a good job on Q3, and we expect to grow in Q3 as well. And for the second questions, can you answer Margaret?

OK, for the incomes of the magnitude of? Compared to the second quarter, GSE is the one approximately 10% to 13% increase. Power is going to be in terms of dollar, approximately $27 million level. And foundry is the one which is going to go down approximately between 12% to 15% down.

Got you. So, you said that power is up to $27 million, total. So up from $24 million to $27 million and then you'd be down 12% to 15% sequentially --

Its a --

The XMS business?

So, I'd say its all between $27 million to $29 million.

Got you. As we think about the op ex and the interest expense going forward, what sort of adjustments are you making, given the operating - - the revenue expectations on the op ex side of things and how should we think about interest expense, given the refinance, and debt pay down you just accomplished?

Interest expense done on a quarterly base, around $6.2 million level, and OpEx in the second quarter was a little bit higher on both R&D and SG&A. So ongoing op ex is going to be the level between $34 million to $38 million level.

Great. That's it for me. Thank you.

Thank you, Margaret.

(Operator Instructions)

The next question comes from Nick Gaudois with UBS.

First question is a bit of housekeeping. Would you terribly mind giving us the gross profits by division for Q2, please? That would be great.

The 4 DSD was 29.9%, and PSD was 23.6%, and the foundry business was 36.4%.

Great. And when you think about the -- over the next quarter for gross margins, obviously, we would expect foundry revenues to have some impact on gross margins. How should we think about the three divisions, in terms --

Let me give me, excuse me, Amman, Nick, sorry. they all look alike, sorry. So, the -- just looking down on the third quarter, again, utilization is the big factor in packing our gross margin. So, as of today, we can't really give you any range. But I'll give you a trend. Power continuously improve. Display probably stay flat, or a little bit up. And obviously, foundry business will go down.

Okay. Let's --

Did I answer your question?

Yes, no, that's helpful. And just maybe if you could clarify where utilization rates actually were in Q2, and approximately, what you think you should [arrange] in Q3, please?

Our utilization? Utilization Q2, 88%, and obviously, Q3 will be lower. And, how much, I don't know. As of today, a gain that are -- we trying to increase the input to the wafers, and we hope that things will turn around much better in August. So, we don't -- we can tell you, Q3.

Where was it in July? This is a reference point.

July, July, well, Q2, was 88%.

88%, you said?

Yes, yes.

Will future --

And July is little bit lower. Not too much.

Okay. I'll come back in the queue for more. Thank you very much.

Okay, you're welcome.

(Operator Instructions)

Your next question comes from Terence Whalen with Citi.

Thank you for taking my question. This one relates to the display business. I was hoping to get an update on the transition of your display business from LG display toward Samsung. I know you are trying to increase your mix at Samsung. Perhaps, you can give us an update on how that is going, and if you could help by quanitifying what portion of Samsung's display business you might have and what that could be going forward? Thanks.

Well, I may want to make a correction. It's not really transitions. It's additional opportunity. We committed to LGD, we'll be continuously by fab, number one supplier to LGD, so we committed to LGD. Luckily, we are expanding our market share at Samsung. I believe the last year we did about 3%, 2% to 3%. This year we probably going to do 7% to 8% of their total purchase.

Okay. Terrific. And then another housecleaning question. If you could help with any 10% customers, if you have that data available. Thank you.

Yes -- customer that we now see total revenues at 10% above?

Yes, what he wants to know if the customer is above 10%.

We still do have one customer which is their sales is 10% or more of total our sales.

NGB is 14%. And that is the only customer bigger than 10%.

OK. Terrific. The last one if I could squeeze it in, is, a little bit longer term it sounds like saying utilization is a headwind to the foundry business. Just in the very near term, but on the same token, you've made some constructive comments about the mix of foundry improving, with some good gains in BCD. Can you give us sort of a longer-term update on how you see mix changing in the foundry business, and where those gross margins might be going, from the mid-thirties that you had in the second quarter, maybe looking out one to two years? Thanks.

Thanks for asking that question. I've been waiting for that question. So, let me give you sort of perspective of what I call short-term is the third quarter. And obviously, holiday season is coming, so we expecting some things may improve, but we remain to be seen from August. We are heavily into the consumer segment. So, that's one hope. And also, told you that there are many new developments, such as, we do silicon-on-sapphire, we do new automobile business, and more toward last earning call, we talked about [Imeld], and they are going to contribute heavily into Q4 and some Q3. So there is a lot of new additional development into foundry.

We've been really working on increasing our market share in US. And that is making a good progress. But now inventory corrections and mostly heavily into Asian foundry customers, and that has impact Q3. Just talking to the customers, and many of them have very slim inventories at their side. So, we think that any kind of upside, obviously, is going to help.

We remain to be very conservative to manage our business, but looking into, maybe, one quarter, two quarters later, and we pretty optimistic about foundry business as well. Obviously, BCD is doing great, but any new technology, any new customer takes, one and a half to two years. So, going into 2012, we got strong -- much stronger base, and any upturn in business, we'll come back with a much stronger performance. But, saying back, we keep saying that we have a mixed business model, which is a diverse model, and right now, power and displays are helping, but remember, a few quarters ago, and our foundries are helping display business.

So, we balancing this throughout different cycle of different business segment, and we continuously performing well, financially, and continuously generating good cash. And so, that is our business model. Short question, long answer.

You should be an analyst. Thanks for the input.

Thank you.

And your final question comes from Nick Gaudois with UBS.

A very quick follow up. You seem to have made a lot of progress in terms of BCD design win, if you look at the ratio you give us. If you look into 2012, as a base case, where do you think BCD could of your total revenues for the segment, and how should we think about how that could drive margin expansion due to a mix shift? Thank you.

This takes about one and a half and two years. So, we get design -in, which means we get database, and we complete the technology develop -- I mean we've already done the technology development, so what we're doing is, bring the sample to the customer, and they testing them, and they give a production mask, and we produce them. And then they do their qualification. The whole process takes about one and a half to two years. So maybe second half of '12, 2012, and beyond, would probably go 10% or higher, but first half will be minimum.

That makes sense. Thank you.

Your welcome.

You do have a question from Ross Seymore with Deutsche Bank.

Hi, Ross.

One other hopefully quick follow up. The duration of the inventory digestion on the foundry side, I know you said visibility is limited, but what's your best guess on how long it takes to adjust the inventory?

You know, there are two different inventory. One is, I mentioned, a particular situation, suppliers they overbuild inventory, because of Japanese earthquake. I think they are anticipating that they need to have extra inventory as a buffer. So, that probably need to be resolved. But some of inventory that we have seen, in particular US customer side, and it's a very reasonable level. They just don't want to increase any inventory because of macro concerns.

So, it's a sort of mix, Ross. We don't think there's a heavy inventory out there, but you may hear high number of inventory days, because July is very slow, June-July is a slow month. So, from the August, if the demand picks up, inventory days can come down. Rather than, I'm answering your question, Ross, you should answer that question, I believe.

I'm trying every single call.

Okay.

There are no more further questions at this time. I would now like to turn the call back over to Robert Pursel for closing remarks.

Thanks you, Hope. Our next earnings release and conference call is scheduled for October 26, 2011. So, please look for details for this, and other upcoming financial events on MagnaChips Investor Relations website. Thank you for joining us today.

This concludes today's conference call. You may now disconnect.