Magnachip Semiconductor Corp (MX) 2011 Q3 法說會逐字稿

Good afternoon. My name is Angelina, and I will be your conference operator today. At this time, I would like to welcome everyone to the MagnaChip Semiconductor's Q3 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. I would now like to turn the conference over to Mr. Pursel, Director of Investor Relations. Please go ahead.

Thank you, Angelina. Good afternoon and thank you for joining us for MagnaChip's third 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 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 regarding our expectations for revenues, target growth 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 belief 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 review of our third quarter business. Sang?

Thank you, Robert. As you know, semiconductor market has been very challenging for several quarters now. Companies are seeing weaker demand because of macroeconomic issues and the global inventory correction. Visibility has become very limited. This makes having stronger customer relationship very important.

MagnaChip's blue-chip customer supply, leading-edge product for the high growth application such as tablets PCs, smartphones and AMOLED displays. As a result we were able to deliver Q3 revenue of $200.4 million, a decline of only 1.6% quarter-to-quarter and a gross margin of 30% both within our guidance range while many of our peers revised their forecast downward. We believe our mixed business model of selling our own standard product as well as providing foundry services play a key role in balancing market dynamics.

Let me discuss the highlight of our three diversified business segments. For our Display Solution segment, revenue was $91.8 million for the third quarter, up 10.9% sequentially and up 17.7% year-over-year. This increase came largely from AMOLED display driver for the products such Samsung's new smartphone Galaxy S2 LTE and a new smartphone model from other leading global mobile phone maker and AMOLED based game consoles and digital still cameras.

We also expanded our display driver shipment to Japanese smartphone makers. We maintain our market share at LG Display and Samsung for large display drivers based on our long and growing history of being a key Korean supplier. We are expanding our AMOLED design-ins and design wins to new applications such as tablets, smartphones, premium high-resolution mobile devices, which should be a steady growth for our AMOLED display business.

We also have a strong design in pipeline of large panel display drivers for the major TV and the computing application product, which we believe will help us to position as a major display IC supplier for the blue-chip leading LCD makers.

For our Power Solution segment, revenue was $26.4 million up 11% sequentially and up 48.1% year-over-year. This is the 11th consecutive quarter of revenue expansion for our Power segment as it passed the $100 million annual revenue run rate in Q3. The key reason our power solution segment has been able to grow despite the weak global economy has been our road map of new products and successful customer penetration. We have increased our new product portfolio by nearly 50% since September of last year and grown our customer base by nearly a third over the same period.

We launched four-channel LED driver for advanced LED monitors and TVs, and we introduced the new 30 volts low-voltage MOSFET for computing applications. The positive design-win activity comes not only from our existing products, but also from our growing portfolio of new designs. During the Q3 our new product development included SOI technology for AMOLED power management ICs and LED backlight device to be used in the next generation of LED TVs.

We delivered IGBT engineering samples to several Asian and Western customers. We also shipped pre-products and samples of AC LED lighting drivers to a leading Korean LED maker. We are also implementing advanced manufacturing technology. As an example, we recently started high-voltage MOSFET production in our eight-inch fab, a major technical achievement in analog semiconductor.

Looking ahead, our design pipeline is very healthy and we continue to focus our Power Solution business on high growth, high margin opportunities. And for our semiconductor manufacturing facilities, Foundry segment, third quarter revenue was $81.6 million down 15.4% sequentially. The demand for the tablets, smartphones and other mobile devices was up in the quarter while consumer product notebook and LCD TV were down.

We believe this trend will continue into Q4 with a recovery sometime in the first half of 2012. During Q3 we continued to enhance our technology by developing value-added manufacturing processes to meet the growing needs of our customers. For example, we completed the development of 0.35 BCD process with a copper-wire bonding. We integrated high-voltage EDMOS, RF inductor and EEPROM process using 0.18 micron mixed-signal process. We also developed aluminum redistribution layer for the wafer level chip scale production to reduce the packaging cost for our customer.

To enhance analog performance, we developed a three-dimension trench capacitor, tantalum nitride register and MIM shield and we rebuild 0.18 micro 60-volt BCD process, which reduced the chip size and improved power efficiency. We also completed development of 0.13 micron triple gate oxide process technology for mixed-signal applications.

While the short-term inventory correction will likely continue to have an impact on our near-term foundry, we remain positive about our prospect for the growth and margin expansion once our customers are back on track. Now, Margaret will discuss our financial highlights. Margaret?

Thank you, Sang. Let me provide some financial highlights and a brief overview of our statement of operations. During the third quarter, our strong cash liquidity allowed to us to repurchase an additional $11.3 million of our outstanding senior notes. This was accretive to earnings and reduced our senior debt balance to $203.7 million from the original $250 million.

On October 11th, we also announced that our board of directors approved a stock repurchase program of up to $35 million, which becomes effective October 27th for one year. Returning shareholder value is a priority for the Company and we continue to do so through a combination of effective working capital allocation, operating expense control, manufacturing cost improvements and a prudent balance sheet management.

Now turning to our statement of operations. Revenue for the third quarter of 2011 was $200.4 million and within our guidance range for a decrease of 1.6% sequentially and a decrease of 4.3% year-over-year. Revenue for two of our three business segments was up sequentially for the third quarter.

As Sang mentioned, Display Solutions was up 10.9% to $91.8 million. Power Solutions was up 11% to $26.4 million, while our semiconductor manufacturing services or our Foundry business was down 15.4% to $81.6 million due to soft market demand particularly in consumer applications.

Gross profit was at $60.1 million or 30% as a percent of revenue for the third quarter, down 250 basis points sequentially due to mix and a lower fab utilization. Total operating expenses for the third quarter was $36.9 million or 18.4% as a percent of revenue. This excludes $1.6 million of restructuring and impairment charges and declined compared to the $38.1 million operating expense for the prior quarter, excluding $2.5 million of impairment.

This decline was the result of lower R&D expenses in the quarter. Operating income for the third quarter was $21.6 million or 10.8% of sales compared to $25.6 million or 12.6% of sales in the second quarter. Net interest expense for the third quarter was $5.9 million, a slight decrease from last quarter because our senior debt balance is lower due to continued repurchase of senior debt.

On a GAAP basis, net loss for the third quarter of 2011 was $56 million or $1.43 per basic share compared to net income of $0.78 per diluted share for the second quarter. This net loss was primarily impacted by a non-cash foreign currency translation loss of $68.1 million due to the appreciation of the US dollar against the Korean won associated with intercompany balance. Adjusted net income or non-GAAP measurement for the third quarter of 2011 was $18.2 million or $0.46 per diluted share compared to $0.56 per diluted share for the prior quarter.

Turning to the balance sheet, total combined cash balance, cash and cash equivalents plus restricted cash was $168.7 million at the end of the third quarter compared to $177.8 million at the end of the second quarter. Including the cash used during the past two quarters for the repurchase of our senior notes, our third quarter cash balance would have been $219 million.

Cash provided from operations totaled approximately $18.7 million. This compares to $48.3 million for the prior quarter. Accounts receivable net of reserves was $124.2 million. Days sales outstanding was 56 in the third quarter compared to 55 days in the prior quarter. Net inventory was $69.8 million or 45 days of inventory within our target range of 40 to 50 days. Capital expenditures was approximately $16 million and is expected to be about $50 million for 2011. Now let me turn the call over to Sang for our fourth quarter guidance.

Thank you, Margaret. Looking back at Q3, I feel we made the right strategic decisions by continuing to invest in the business by developing the new product and introducing advanced manufacturing processes. This is the investment in the future growth of MagnaChip and will enhance shareholders value going forward.

Our purchase of senior notes over past two quarters has been positive to earnings and our announced common share repurchase program shows how confident we are in our strong financial position and the value of our Company. It's important to point out we have generated impressive cash flows each quarter and that cash strategies are focused on growing the business and enhancing shareholders value. I don't mind repeating this cash strategy which includes investing in our business by adding manufacturing capacity to support profitable growth, buying back our long term-debt and all common stock when it makes sense.

For the strategic acquisitions, they will grow our Power Solution business. Looking ahead to Q4, visibility once again is limited. We are in a soft patch that is a result of general consumer electronic weakness. Global inventories have expanded over the past few quarters and this is impacting customer ordering trends.

So based on our existing backlog plus limited visibility into bookings and forecast, we expect the revenue for the fourth quarter will be in the range of $176 million to $184 million. We anticipate this macro weakness will impact gross margin by approximately 150 to 250 basis point due to the lower fab utilization. Robert?

Angelina, this includes our prepared remarks. We will now open the call for questions.

(Operator Instructions)

The first question is from the line of Ross Seymore from Deutsche Bank.

Hi, guys. Nice job on the third quarter. Sang, as far as your fourth quarter guidance goes, any sort of color between your three segments in the $176 million to $184 million total revenue guide?

Ross, yes. To give you color as you requested, this business more likely flat and PFD down because of the inventory corrections at distributor. But our refill is increasing from third quarter to fourth quarter. SMS business down and we believe at fourth quarter would be the bottom.

Okay. And then what about on the OpEx side of things? The gross margin guidance is helpful, what are the plans on OpEx? And then, maybe one last follow-up, how should we think about the interest expense as we go forward, plans to repo more debt?

For the OpEx, it's going to be the same level. However, if the revenue reduced, as we know, we will do the very tight expense control. Regarding the interest expense ongoing, it will be the same level as of quarter three.

So, operating expense may be a little down. That's what Margaret said.

Okay. Thank you.

Thanks, Ross.

Our next question is from the line of Nick Gaudois from UBS.

Hi, guys. It's Nick Gaudois from UBS. Could you clarify first where your utilization rates were in Q3 and how do you see that panning out in Q4, please?

Utilization of Q3, 78% and Q4, we expect at this time 72%.

Yes. It's 7% to 8%.

Yes. 7% to 8% lower. Yes.

7% to 8% lower, you mean?

Lower than Q3, Nick.

Okay, Okay. Got it. And can you clarify your gross margins by divisions please in Q3?

The gross margin for the Q3, all three business segments reduced proportionally because of a low utilization rate. We don't want to give specific numbers because we have very concentrated customers for the Display Solutions.

Okay. So, you're not going to give that away going forward, is what you're saying?

Right.

Okay.

But obviously we provided a range at the beginning of the year and you can simply calculate it. We are within the range.

Okay. But I guess, what you said, it all proportionally came down. Would it have come down more so on the Foundry side considering -- as predicted by you three months ago, a division with a stronger revenue decline anyway.

Yes. We are within the range that we provided minus that whatever the impact by low fab utilization rate.

Okay. And how should we think about this in Q4? Based on your overall guidance, basically, of displays, flat, the others down, would display margins still come down because of pricing essentially or would they be closer to flat, basically?

It's a low utilization rate. As we said, we'll be 6% to 7% down from the third quarter and that has an impact to overall margins. I believe in -- and most of our business segment, and particularly Foundry, our average sales price goes up.

Okay. Okay, great. And last question. You said you think Q4 is potentially the bottom. Would that imply that we shouldn't see any seasonality down, you think, in Q1 for the non-Foundry business? I mean, typically the Foundry business would be a little bit different in terms of seasonality. But if I look back at this quarter, obviously -- of Q1 this year, you had Foundries down, others up, which is a bit atypical. So, it's a bit too early, I guess, to guide for Q1, but when you say that Q4 is the bottom, would you -- your initial thinking is actually Q1 could be flat to up, as you think?

We've been getting the running customer forecast for our foundry. And as of today, foundry customer forecast shows that loading to our fab is slightly increasing getting into second half of our fourth quarter. Obviously, that can change too. But that said, our fabless foundry customers, they're running at very low and efficient inventory level. I guess probably they have to start wafering some time soon.

Okay. Okay. That's great. Thank you very much.

Thank you, Nick.

(Operator Instructions)

Our next question is from the line of Terence Whalen from Citi.

Hi. Good afternoon. Thanks for taking the question. This is Terence Whalen with Citi. I believe that there was a comment that the sell-through for power would grow sequentially in the fourth quarter, but revenue would decline because of channel destocking. Can you help us understand what the dynamics in the third quarter were in terms of sell-through versus inventory change in the channel? And also, just comment in general on what level channel inventories are for the power business? Thanks.

We're selling about 75% of our power product through the distributors. And starting from the fourth quarter, and physically distributors and then tightening their inventory levels. And then, we believe this is a very healthy exercise too. Getting into next Q, we want to have a very healthy inventory at the sales channel, even though our growth rate is typically faster than our peers. So, we want to stock up a little bit more, but, obviously, distributors have their own policy. So, we are fully cooperating with our distributors, and that's the sort of thing that happens in Q4.

Okay. Terrific. And then this is a question pertaining to an earlier question asked. I believe you said, Sang, that you thought Display would be flat in the fourth quarter and that both Power and Foundry would decline. If I work in my model, it's a decline of around 15% for those businesses, I get to the midpoint of your guidance. Is that a reasonable assumption or do you have confidence that Power might decline less or more than Foundry? Thank you.

At this time, Terence, we say that there are very limited visibility. I think the Power, we are still going through the negotiation with customer and distributor. So we can only say at this time, we're down from third quarter to the fourth quarter.

Okay. Okay. Terrific. And then, I guess my next question would be, if I look at the margin progression for the Foundry business, it sounds like Foundry maybe seeing a -- close to a bottom quarter in the fourth quarter. Would you expect gross margin from the Foundry business to begin improving the same quarter that revenue begins improving, or would there somewhat of a one quarter delay because of how inventory is costed and then rotated through to COGS? Thanks.

Well, definitely one of the reasons that Foundry is down third quarter and we project down in fourth quarter, mostly it's consumer-related product. And these products typically are the ones at our low-cost fab. And obviously, that recover and definitely will have a great contribution to our margin.

Okay. Terrific. And then, if I could just throw in one more. The last one is on the Power business. Can you help us understand -- or looking into the first quarter, can you help us understand if things stabilize what normal seasonality would be across perhaps, across, the three businesses?

We're not providing any guidance beyond the fourth quarter. But obviously Q1 would be generally a slow quarter, and then Q2 usually picks up. I think that the seasonality probably will play the role in next year.

Okay. Terrific guys. I appreciate the insight. Thank you.

Thank you.

Thanks, Terence.

Our next question is from the line of Ross Seymore from Deutsche Bank.

Hi, guys. Thanks for letting me ask a follow-up, two questions. One, you talked about the handset portion and AMOLED part of your Display business. Can you just generally break out if Displays are about 45% of total revenues, how much of that is the AMOLED, or if you just want to say that it's phones versus everything else?

We have a very concentrated customer in that business. Probably it's not wise to give you the revenue numbers.

That's fair enough. And then, maybe a more general question that won't be customer specific. In downturns in the past, we've seen pricing behavior get aggressive at times like this. What are you seeing on the pricing front across your three businesses?

That is a great question. We say that our business model representing 10% to 15% price erosion year to year, overall for the Company, I think that we're maintaining that, the numbers. But, yes, there are a lot of pressure, some segments. And that's probably one of the reason that we decided we're going to minimize our inventory at the distributor for the Power.

That's it. Thank you.

You're welcome.

And our last question is coming from the line of Terence Whalen from Citi.

Yes. Thanks for the follow-up. Two questions. One is on inventory. You did a good job bringing on-hand inventory down quite a bit. What's your expectation for your on-hand inventory going forward over the next couple of quarters?

We're expecting at least fourth quarter inventory level will be flat or a little bit lower than third quarter. Our target inventory days are between 40 to 50 days so we expect within that range.

Okay. Thanks, Margaret. And then, this other question might also be directed to you. I believe you said that you expect to just spend $50 million in capital expenditures for 2012; is that correct? And can you also just sort of help us understand roughly how that divides in terms of expansion capacity versus other programs that you're doing? Thank you.

Total CapEx amount for this year is, yes, correct, $50 million.

And about $10 million for maintenance and rest of CapEx is in either expansion of fab capacity or adding a back end capacity.

And just to be clear that $50 million number was for 2011, is that correct, or 2012?

2011.

And 2012, we are projecting $50 million, five, zero.

Five, zero, again, roughly level and, I guess, where is that CapEx level? I'm trying to understand what a general level of ongoing CapEx to model going forward is.

Yes, as I say about $10 million for the maintenance CapEx and others for the fab and backend.

Okay. Terrific. That's very helpful. Thank you.

Thank you, Terence.

Operator, that'd be our last call. I have some closing remarks here. Thank you all for joining us on this conference call. Our next earnings releasing and conference call is scheduled for February 1, 2012. So, please look for details for this and other upcoming financial events on MagnaChip's Investor Relations website at www.magnachip.com. Thank you for joining us today.

This concludes today's conference call, you may now disconnect.