Magnachip Semiconductor Corp (MX) 2011 Q4 法說會逐字稿

Good afternoon. My name is Cantra and I will be your conference operator today. At this time I would like to welcome everyone to the MagnaChip Semiconductor Q4 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)

I would now like to turn the call over to your host, Mr. Robert Pursel. Sir, you may begin your conference.

Thank you Cantra. Good afternoon and thank you for joining us for MagnaChip's Fourth Quarter 2011 Earnings Conference Call. A copy of the press release issued today is available on our Investor Relations website. A seventy-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 fourth-quarter business, including segment highlights, and Margaret will discuss our Q4 financial results. Following Margaret's financial discussion, Sang will discuss our first-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 2012 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 review of our fourth-quarter business. Sang.

Thank you, Robert. I am very pleased that, for the fourth consecutive quarter, we again met our quarterly revenue guidance in what has been a challenging year for the semiconductor industry. We delivered fourth-quarter revenue of $180.8 million, and gross margin of 28.5%, about the mid-point of our guidance range, and slightly better than street consensus. Our successful track record is a result of outstanding relationship with our major blue-chip customers, and growing list of design wins targeted at high-growth and high-margin applications. Smartphones, tablet PCs, AMOLED displays, and Ultrabooks, are some examples of growth driver for MagnaChip in 2012, as well as our rapidly expanding customer base and new product introductions for the power solutions segment.

In addition, the acquisition of Darwin Electronics will strengthen our competitive position in the fast growing IGBT power module business. The acquisition is expected to represent about 10% of our power solution revenue on an annual basis, after that acquisition is completed. The acquisition accelerated by a couple of years our entering to high-margin products, and provides MagnaChip diversification into industrial and commercial markets.

Looking ahead, we believe there are clear indications that the first quarter of 2012 could be the bottom of our revenue downturn based on strength of orders for the new products coming from our smartphone and tablet PC customers.

Let me discuss the highlights of our three business segments. For our display solutions segment, revenue was $90.0 million for the fourth quarter, down 1.9% sequentially, and up 27.6% year-over-year. For the full year, display revenue grew 10.8% in 2011. This was driven by strength of our customer relationship, growth of tablet PC demand, and new technology such as AMOLET. AMOLET will be a growth driver for our display business in 2012, as our design pipeline expands.

Products such as smartphones and tablets from Samsung and other leading manufacturers are now using AMOLET for better display performance and lower power consumption. We expect TVs will begin using AMOLET display this year. Also, our display solution is being designed in for a Ultrabook at a major notebook maker in Korea. Our market share at LG Display and Samsung remains solid. We have a strong design pipeline of large panel display drivers for the major TV and computing products.

For our power solutions segments, revenue was $22.0 million, down 16.4% sequentially, and up 19.8% year-over-year. For the full year, power revenue grew 61.6% in 2011, because of expanding base of design wins for the LED drivers and MOSFETs, as well as our successful customer penetration and market share gains.

Looking back at 2011, we increased our new product portfolio by nearly 50%, and grew our customer base by nearly 30% during the year. We became a major supplier for LED backlight driver for the leading Korean TV maker. Also, we have expanded to low-voltage MOSFETs for the computing applications, and high-voltage MOSFETs for use in LCD TVs, and monitors.

We delivered IGBT engineering samples to several Asian and Western customers, shipped pre-products and samples of HD-LED lighting drivers, and also implemented advanced eight inch high-voltage MOSFET production, a major technical achievement in NR LOB semiconductor.

Last quarter we ramped a hybrid LED driver that was packaged with a PMIC and a MOSFET to the leading TV maker in Korea. We are also expanding our market share of LED drivers to leading Chinese TV makers. We had a MOSFET design wins for Samsung Galaxy II Smartphones, and other smartphones. We are shipping our high-voltage MOSFET for LED lamps to the leading LED lighting manufacturer in Korea.

Looking ahead, with the acquisition of Darwin Electronics, we will expand our fast-growing power solutions business into a commercial and industrial segments. Darwin's high-power module will enable MagnaChip to compete quickly and effectively in the high-growth IGBT market with our broader portfolio of power solutions for our customers.

And for our semiconductor manufacturing service, foundry segment. Fourth-quarter revenue was $60.0 million, down 16.7% sequentially, and down 30.1% year-over-year. As we expected, demand for the consumer product notebooks, and HDTVs were down this quarter. [Two one] is a historically a weak quarter due to seasonality for foundry. But, we believe our first quarter will be flat from fourth quarter, driven by ramping up demand for the new tablet PC and smartphones.

During 2011, the number of design wins we booked for the smartphones and tablet PCs were up three times compared to 2010. Our customer base for these applications increased from five to ten customers from Q1 of 2011 to Q4 of 2011. We expect smartphone and tablet PC related wafer loading for our foundry business will be triple this year, compared to the last year, based on recent forecasts from customers.

During this market downturn in Q4, we continue to enhance our technology and customer mix, by expanding options of 0.18 micron technology product, and by introducing two new BCD and non-volatile memory processes. We also are increasing our design win activity with our customers selling the smartphones, tablet PC, 3-D TV, and Ultrabook makers, with the products such as audio CODEC, multi-touch sensor, RF switch, and the micro-controller.

While we are cautious about applications such as consumer TV and notebooks, we remain positive about our overall foundry prospects for 2012, because of strong demand related to smartphones and tablet PCs. We expect our foundry business will grow in 2012. Now, Margaret will discuss our financial highlights. Margaret.

Thank you, Sang. Let me provide some financial highlights and a brief review of our statement of operations. During the fourth quarter, our strong cash liquidity allowed us to purchase 1.53 million shares of common stock for an obligate of 11.8 million in our common stock repurchase program we announced in October 2011. This was accretive to earning per common share in the fourth quarter, as well as going forward.

Returning shareholder value is a priority for the Company, and we continue to [dissort] through a combination of effective working capital allocation, operating expense control, manufacturing costs improvements, and prudent balance sheet management.

Now, turning to our statement of operations. Revenue for the fourth quarter was $180.8 million and meeting our guidance range for a decrease of 9.8% sequentially, and a decrease of 3.2% year-over-year. For the full year 2011, revenue was $772.8 million, compared to $770.4 million for 2010, an increase of 0.3%. Revenue for each of our three business segments was down sequentially for the fourth quarter, which we anticipated.

As Sang mentioned, display solutions was down 1.9% to $90.0 million. Power solutions was down 16.4% to $22.0 million, and semiconductor manufacturing services, or our foundry business, was down 16.7% to $68.0 million, due to a continued soft market demand, particularly in consumer applications.

Gross profit was $51.5 million, or 28.5% as a percent of revenue for the fourth quarter, down 150 basis points sequentially, due to mix a lower [Fab] utilization, but at the high-end of our guidance range as a result of prudent cost control and asset management. For the full year, gross profit was $234.3 million, or 30.3% of revenue, compared to $243.6 million, or 31.6% for 2010.

Total operating expense for the fourth quarter was $36.3 million or 20.1% as a percent of revenue. This was a [flat] reduction from the $36.9 million, excluding $1.6 million of restructuring and impairment charges in the third quarter, as a result of both lower R & D, and SG&A related expenses in the quarter. For the full year, operating expense, including non-recurring charges, was $145.1 million, or 18.8% of revenue, compared to $150.2 million, or 19.5% for 2010.

Operating income for the fourth quarter was $15.3 million, or 8.4% of revenue, compared to $21.6 million or 10.8% in the third quarter. For the full year, operating income was $72.9 million, or 9.4% of revenue, compared to $91.4 million, or 11.9% for 2010.

Net interest expense for the fourth quarter was $5.6 million, a slight decrease from $5.9 million last quarter because of our lower average senior debt balance as a result of our prior quarter senior debt repurchases. For the full year 2011, net interest expense was $25.0 million, compared to $22.9 million for 2010.

GAAP net income for the fourth quarter of 2011 totaled $23.7 million, or $0.61 per diluted share. This compares to net loss of $56.0 million or $1.43 per diluted share for the third quarter of 2011. For the full year 2011, net income was $21.8 million or $0.55 per diluted share compared to $74.1 million or $1.89 per diluted share for 2010. GAAP Net income for 2011 was impacted primarily by a foreign currency loss of $11.6 million compared to a foreign currency gain of $14.7 million for 2010, as well as a special expense for IPO incentive payments of $12.1 million made in 2011. The net foreign currency exposure was primarily related to non-cash translation gains or losses for intercompany balances that were denominated in US Dollars.

Depreciation and amortization was $8.9 million for the fourth quarter, $4.2 million less than the third quarter and $51.2 million for the full year. The lower depreciation was due to a combination of certain equipment depreciation schedules being extended, and the end of the depreciation life of certain assets in the fourth quarter. The extended depreciation schedules were driven by the excellent success we have had in expanding the useful life and equipment utilization within the growing power business. Fourth quarter was the first quarter with a full impact of the new extended life on depreciation. We expect to continue to benefit from this lower depreciation going forward.

Adjusted net income on non-GAAP measurement for the fourth quarter of 2011 totaled $10.0 million or $0.26 per diluted share, compared to $18.2 million, or $0.46 per diluted share for the third quarter of 2011. For the full year 2011, adjusted net income was $66.4 million, or $1.67 per diluted share, compared to $89.2 million, or $2.28 per diluted share for 2010.

Turning to the balance sheet, total combined cash balance, cash, and cash equivalent plus restricted cash was $168.9 million at the end of the fourth quarter, compared to $168.7 million at the end of the third quarter. Including the $11.8 million cash used to repurchase the 1.53 million shares during the fourth quarter, and the 50.3 million pre-purchased our senior notes in the two prior quarters, our fourth quarter cash balance would have been $231 million putting us [up] in a net positive cash position.

Cash provided from operations for the fourth quarter totaled approximately $18.3 million. This compares to $18.7 million for the prior quarter. For the full year 2011, cash from operations was $104.5 million, and the free cash flow was $55.6 million.

Account receivables net over reserves was $125.9 million, days over sales outstanding was 64 in the fourth quarter in our target of 55 days to 65 days. Net inventory was $62.8 million or 45 days of inventory, within our target range of 40 days to 50 days, and a reduction from $69.8 million at the end of the third quarter. Capital expenditure was $5.4 million in the fourth quarter, and $48.9 million for the full year 2011. Now let me turn the call over to Sang for our first guidance.

Thank you, Margaret. Looking back at Q4, and on the whole entire year, we made some very strategic decisions to invest and grow the business by -- number one, targeting design wins of smartphones tablet PCs, and umber two, shifting our product portfolio and customer mix, and number three, acquiring adjacent technologies.

As an example, design wins for the smartphone and tablet PCs tripled in 2011 versus 2010. We shifted our product portfolio and customer mix by growing our power solutions business from 7% of 2010 revenue to 12% of 2011 revenue.

The Darwin acquisition also demonstrates our continued focus on capital allocation and commitment to return shareholder value to our investors. Our repurchase of share and senior notes over the past several quarters has been positive to earnings and show how constant we are in our strong financial position.

As we look ahead, visibilities are still limited but improving. We believe there are clear indications that first quarter could be our bottom. We project our power solution revenue will grow in Q4, while our foundry business remains flat come Q4. Our display solution revenue will be lower in Q1 due to seasonality.

So, looking at our Q1 guidance, based on our existing backlog, and booking forecast, we expect the revenue for the first quarter will be in the range of $171 million to $180 million. As a result, we anticipate gross margin to be in the range of 27.5% to 28.5%.

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

(Operator Instructions)

And your first question is from Nick Gaudois.

Yes. Let's see a bit less struggle here. Nick Gaudois from UBS. Good morning. Just wanted to start getting a bit of clarity on what the divisions should do in Q1. I think, Sang, you mentioned displays down q over q. How should we look at this in terms of range versus the other business lines. Thank you.

Display solutions will be down in Q1 and we're looking at about 7% to 10% down.

And for the other businesses will be both up physically, sequentially, to offset that?

Foundry business flat to slightly up, and power business will grow.

Okay. And just on the displays down q over q. Obviously, that comes after a quarter which would qualify was better than underlying market trends, right, in Q4 --

Yes.

Should have got you customers. So, at the same time, we obviously are expecting, as you said, strong shipments of, strong procurement shall we say, for [short] tablet and smartphone customers, due to new product launches. So, how should we look at the two sides of the equation, and I know, in fact, for one more in here, as your [last] panel side, it does so seeing a troth in utilization rates.

Typically, for the display makers, Q1 is soft, because people building up the strong inventory for holidays, and also right after there was Chinese New Year. So, that's why we shipped the very sizable volume in Q4, and I think that Q4 to Q1 is reasonably acceptable considering seasonality. I was talking about tablets and smartphones. Obviously, some of our Q1 number display solutions will go into tablet PC, but significant upside we see starting from Q2 for the foundry side.

Okay. Right. So, understood. Just to link, perhaps, for foundry side, when you basically said, I think, in your prepared remarks, you see effectively for that a significant increase in what is coming from a tablet and smartphone side, could you, maybe, give us a bit more color? Is that primarily the addition of one customer on the touch controller side, or is there more to it?

During my statement, I say number of customer increase from five, Q1 of 2011, to ten of 2011. And some of them are very significant customers. And about going back two years ago, three years ago, because of financial crisis, we didn't have the good design win opportunity. But now we did in 2011. So we're getting back major supplier of smartphones and tablet PCs, and coming back and ramping up their product in our fab.

And, again though, getting into 2012, we expecting we're going to add more customers too, and they are not only audio CODEC, also multi-touch finger sensor, and micro-controllers, and also RF switch, that has been really big plus for us, and that's Peregrine in San Diego, and they're winning more design wins, and we ramping up their volume, which is silicon-on-sapphire in our fab.

That's great. Thank you, very much.

You're welcome, Nick.

Thanks, Nick.

And your next question is from Ross Seymore.

Hi, everyone. First of all, congrats on executing during a very challenging time. Sang, the foundry side of things, I just want to make sure I heard you right. You start the year flat to slightly up. You just went through a good list of reasons why that would occur. In your prepared comments, I thought I heard you say that you believe the business would grow this year in 2012. Were you referring to for the full year-over-year, you expect that SMS segment to be up?

Yes, it is for the full year. And as I said in my statement, foundry wafers related to smartphones and tablet PC will be tripled compared to last year. And ramping up started Q1 very little volume, and with sound volume in second quarter, and second half of the year will be our full ramp up.

You answered a little bit of my follow-up question right there. But if I think about the seasonality, if those end products have to be shipped for holiday seasons around the world in the second half, is that something that the strongest seasonal ramps in that SMS segment, therefore, happen in the second and third quarters, or because of the new design wins, it will also bleed into the fourth quarter, being somewhere where you would expect growth to continue?

Well, Ross, obviously seasonality is a part of it, but this is more of new design wins, and this is more of, like a Peregrine, we've never done it before. We did a very little in 2010, so this is a significant ramp up, and they goes to, I say old platform of smartphones. And also, Cirrus Logic business picking up for us. And other smartphone and tablet PC volume ramping up. You may consider this as it relate to end makers new product introduction schedule.

Great. And then just a couple other more housekeeping issues. Utilization in the fourth quarter, and what you expect it to be in the first quarter?

Fourth quarter same as the third quarter, so about 78%. But, we had a couple of fabs close one week, so 78% was our spending numbers. And looking at first quarter, it could be flat or little bit down.

And then finally, on the OpEx side of things in your guidance, I might have missed it, but if you could talk, Margaret, what you expect OpEx to do as we go into the first quarter of the year, please?

Between $36 million to $38 million [led] off for the first quarter.

What about rest of the year?

Rest of the year, depending on the revenue, but on the second half we expect a little bit higher along with some revenue pick up.

But the percentage to the revenue [will]?

Between 18% to 19% range.

Okay. Got you. So in the second quarter, second half comes up, but the first half probably stays relatively flat to what you're talking about at that kind of upper thirties range?

Yes, correct.

Great. And then the last one, really quickly tax rate, how should we think about that for the quarter and for the full year?

Still the same as [we start] last year. We are expecting tax expenses between $8 million to $10 million for full year. We do still have NOL we can utilize.

Great. Congrats again, thank you.

Thank you, Ross.

Your next question is from Terence Whalen from Citi.

Thank you for taking my question. I was hoping to drill into the statement that you made about the tripling in the foundry revenue related to smartphone and tablet. Can you help us understand the magnitude of that, perhaps, if you were to give us in rough numbers in understanding how large that business may have been as a portion of foundry in 2011?

Terence, in my statement, we don't expect that full recovery of foundry business from the consumer and other applications yet. I didn't say in revenue, I say wafers to be used in the smartphones and tablet PC were tripled. Maybe that representing, maybe it's wide-range of forecast now, because we now working on next year, I mean, this year our business plan will be reviewed by both in couple weeks, and obviously then we can communicate. But we're looking at maybe 20% or higher growth for the foundry business from 2010.

Okay. Terrific. And then, the second question is regarding the power management business. It sounds like you've tapped acquisition in order to accelerate your entry into IGTB. I was perhaps trying to understand going forward, how you view building that business between either organic development or additional acquisitions. Thank you.

We have no immediate target for next acquisitions, but always we're looking at it. The beauty of this Darwin acquisition is giving us the capability, and giving us the key resource. We're getting into this power module real quickly, and with existing revenue and customer base, so we can quickly benefit out of it. And what's the next, we will continuously study.

Okay. Great. And then another tradeoff question, if I could, regarding how you view using cash to buy back stock going forward versus retiring debt? How do you sort of balance that and make the decision to do one over the other? Thank you.

Sang Park. Well, we do have board approval for this stock repurchase, and we have a still comfortable level of cash. So whenever business justify, I think that we will continue doing so.

Terrific. Thank you.

You're welcome.

(Operator Instructions)

Your next question is from C.J. Muse from Barclays Capital.

Hi, this is Olga Levinzon calling in for C.J. A couple of questions. On the display side, it seems like your key customers in Korea guided to, well, relatively flat shipments in the March quarter. Can you talk about where the discrepancy is coming from between your guide for display and how they viewed it? And then for the full year on the display side, do you expect your revenue growth to essentially align to underlying unit growth primarily from these key customers, or are there any technology migrations that would drive you to either under or over perform? Thank you.

The display you know has a very complicated supply chain. So, usually, not align with our revenue and our customer revenue. And, again this is our projections, and why I believed they had enough inventory of our product, and building up the product for the Q1, and obviously, we will continue to be shipping to meet their requirement, but obviously, you can't really align our revenue to their revenue. We don't have 100% market share. I wish we do. What was your second question?

For the full year outlook for display, I guess, could you provide a range as to how you view it similar to how you discussed the foundry business, and should we expect it to, the growth there, to fairly align with underlying unit growth in the market? Or would there be out performance driven by the switch to more LED backlighting and/or AMOLED?

Yes, that's a good question. Our AMOLED business will grow, but overall, display solutions very stable, maybe flat year-to-year. That's we're projecting today.

Yes. Got it. And then, specifically, on the foundry side, do you expect your -- I guess on the capacity side, how much do you expect that to grow this coming year?

You mean our capacity? Or --

Yes.

We told you that we're growing 9% to 15% our capacity every year, and that's what we're planning to do this year again.

Got it. Thank you.

You're welcome.

(Operator Instructions). Your next question is from J.D. Abouchar: from GRT Capital.

: Quick question. Do you have a CapEx budget number for this year?

Typically, we use $50 million, but because of significant requirement for the smartphones and tablet PC, we may use a little bit more. We haven't decided, again though, board has to approve in couple of weeks.

: But roughly $50 million.

Could be slightly higher.

Right. And then could you talk a little bit about the gross margin profile of the power business as you grow revenues there, and maybe, and then gross margins overall?

A couple [quarters] ago and we decide not closing gross margin by each business unit, and because of particular display solution has very constant trade number of customers. But -- (cough) power business gross margin is continuously improving, but since that the revenue didn't grow in Q4, gross margin improved, but not to extent of our percentage projections. I think end of this year we're looking at 30% or higher for the power business gross margin.

: Great. Thank you very much.

You're welcome, J.D.

You have a follow up question from Terence Whalen from Citi.

Thanks for taking the follow up. This one also is in relation to gross margin. It seems like gross margin has dipped below levels that were witnessed in sort of the middle part of 2010. I assume part of that is because of sort of the weaker foundry loading. In addition to loading, I was wondering if you could update us on the mix of foundry, and whether you've made progress in securing additional wins in the higher-margin type of foundry business for the higher-margin processes. Thank you.

Welcome back, Terence. Yes. In previous calls and previous meetings, we mention about we shifting our customer mix, and that is well progressing into this year. And we expect that we will have more revenue from US and European customers. And that's exactly what we told you last time.

Great. Thank you.

You're welcome, Terence.

And there are no further questions at this time.

Thank you, Cantra. So are next earnings release and conference call is scheduled for April 30, 2012. 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.