Magnachip Semiconductor Corp (MX) 2012 Q1 法說會逐字稿

Good evening. My name is Latasha, and I will be your conference operator today. At this time I would like to welcome everyone to the MagnaChip Semiconductor's Q1 2012 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. Robert Pursel, you may begin, sir.

Thank you Latasha. Good afternoon, and thank you for joining us for MagnaChip's First Quarter 2012 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 first quarter business, including segment highlights, and Margaret will discuss the Q1 financial results. Following Margaret's financial discussion, Sang will discuss our second quarter guidance, after which we'll 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 first quarter business. Sang?

Thank you, Robert. I'm very pleased that since going public in March 2011, we have met our revenue and gross margin guidance each quarter for five consecutive quarters in what has been very challenging period within industry. We delivered first quarter revenue of $177 million and gross margin of 28.2%, above the mid-point of our guidance range, and slightly better than street consensus.

Looking ahead, we believe that first quarter was the bottom of our revenue downturn. We began to see renewed customer order strength during the quarter, and our wafer loading exceeded 90% in March. I'm optimistic that this is the trend that will continue into the second half of this year. This strong demand mainly came from smartphone and tablet PC application customers, we had our design wins during 2011. In anticipation of the growing demand, we have expanded our fab capacity for this technology requirement during Q1 of this year.

Now, let me discuss the highlights of our three business segments. For our power solution segment, first quarter revenue was $25.3 million, up 14.6% sequentially, and up 23.7% year-over-year. Power revenue growth is back on track this quarter after a slight pause in Q4 because of channel inventory correction.

We've been expanding our LED TV driver IC portfolio, and captured new design wins at Samsung and LG TV. Our success has also expanded to China and Japan with our design wins at the local TV makers there. We also had a design wins for monitors and all-in-one PCs.

The global notebook market is recovering, and we have a ramp of new design wins at Taiwan ODM and OEMs. Our market penetration has now extended to all top OEMs of notebooks and ultrabooks. Our success with IGBT has generated recent design-ins for welding, solar inverter, and new UPS applications in Asia and Europe. With the completed acquisition of Dawin, we will now be able to target industrial and commercial opportunity with IC TV modules as well.

As smartphones continue to grow rapidly our power opportunity are expanding to PMIC, such as AMOLED drivers, and VCM, which is a voice coil motor, drivers, as well as DC-to-DC converters.

The pipeline of the new designs is very strong. We now have seen a two to three-times increase in number of design projects for more premium power products. As an example, PMICs, and IGBTs now represent over 50% of our ongoing design project. I'm very excited by the momentum of our power solution segment.

For our display solution segment, revenue was $83.2 million for the first quarter, down 7.6% sequentially, and up 11.8% year-over-year. The weakness in this segment has been due to typical Q1 seasonality. However, we are seeing positive signs coming from the design-ins of AMOLED display driver for next generation of Samsung smartphones.

Another emerging market is developing for AMOLED TVs, where we have our design-ins at two major Korean TV makers. Tablet PCs and flexible smartphone displays are also new AMOLED opportunities.

We are expanding display solution application into the automotive market where we have introduced our source display driver IC for automotive display at a major Japanese LCD maker.

Looking at the core of our display business, our market share at LG Display remains solid, and we are gaining share at Samsung for both large and mobile display panels.

And for our semiconductor manufacturing service foundry segment, the first quarter revenue was $67.9 million, flat sequentially, and down 26.4% year-over-year. Demand for the consumer electronic related product continued to be soft this quarter due to the overall weak macro conditions and inventory correction. Q1 always also tend to be a weak quarter for the foundry due to seasonality. However, we are experiencing significant wafer loading increase, starting from March of this year, due to the ramp of smartphone and tablet PC related products.

We expect this demand will continue into the rest of the year. Also, we see moderate recovery of demand from other applications based on our customer's latest forecast. We remain very positive about our foundry prospect, and believe we will outperform the industry average.

Looking ahead, our development pipeline looks strong with our continuous design-in and design wins of smartphones and tablet PC application products, and our premium BCD and EEPROM product. This will enable us to execute our plan of shifting our customers and product mix for profitable growth.

We continued to enhance our foundry technology during Q1, and unveiled a 0.13um Triple Gate Oxide CMOS process, and we added high-voltage processes to 0.18um EEPROM which will improve noise sensitivity for our touch sense IC customers. We offer a full line up of non-volatile memory IP for advanced audio, LED, and touch-sensing applications.

Now, Margaret will discuss our financial highlights. Margaret?

Thank you, Sang. Let me provide some financial highlights and brief overview of our statement of operations. During the first quarter, our strong cash liquidity allowed us to repurchase 1,045,000 shares of our common stock for an aggregate total of $11.9 million under our common stock repurchase program announced in October 2011. Stock repurchases are accretive to earnings for the current quarter and going forward.

We also completed the acquisition of Darwin in the first quarter, which is very synergistic for our power business growth. Profitable growth and returning shareholder value is a priority for the Company.

Now turning to our statement of operations -- revenue for the first quarter was $177 million, for a decrease of 2.1% sequentially, and a decrease of 5.8% year-over-year. As Sang mentioned, revenue for our three business segments compared to the prior quarter was -- power solutions was up 14.6% to $25.3 million; semiconductor manufacturing services was down 0.2% to $67.9 million; and display solutions was down 7.6% to $83.2 million.

Gross profit was $49.9 million, or 28.2% as a percent of the revenue for the first quarter, down 30 basis points sequentially, but at the top end of our guidance range. Total operating expense for the first quarter was $38 million or 21.5% as a percent of revenue. This was a slight increase compared to the $36.3 million in the prior quarter as a result of higher R&D due to increased foundry services related project, and the higher SG&A expenses related to the Darwin acquisition in the quarter.

Operating income for the first quarter was $11.9 million or 6.7% of the revenue, compared to $15.3 million or 8.4% in the fourth quarter. Net interest expense for the first quarter was $5.6 million, in line with last quarter.

On a GAAP basis, net income for the first quarter of 2012 was $15.3 million or $0.40 per diluted share. This compares to net income of $23.7 million or $0.61 per diluted share for the fourth quarter of 2011. GAAP net income was primarily impacted by foreign currency translation gains of $11.1 million in the current quarter, compared to $16.8 million in the prior quarter.

Depreciation and amortization was $7.5 million for the first quarter, compared to $8.9 million for the fourth quarter. Adjusted net income, a non-GAAP measurement, for the first quarter of 2012 was $6.5 million, or $0.17 per diluted share, compared to $10 million, or $0.26 per diluted share for the fourth quarter of 2011.

Turning to the balance sheet, total combined cash balance, cash, and cash equivalents, plus restricted cash was $160.6 million at the end of the first quarter, compared to $168.9 million at the end of the fourth quarter. Cash provided from operations for the first quarter totaled approximately $39.9 million. This compares to $18.3 million for the prior quarter.

Account receivables net of reserves was $127.3 million, compared to $125.9 million in the last quarter. Days of sales outstanding was 65 in the first quarter which was within our target range of 55 to 65 days. Net inventory was $68.1 million or 49 days of inventory within our target range of 40 to 50 days.

Capital expenditure was $24.9 million in the first quarter, and our target range for the full year is expected to be between $50 million to $60 million, including $5 million to $10 million maintenance CapEx.

Now, let me turn the call over to Sang for our second quarter guidance.

Thank you, Margaret. Based on customer forecast, booking activity and wafer loading, for our Q2 guidance we expect total revenue will increase 11% to 15% sequentially, which is $197 million to $203 million. And the gross margin to increase and be in the range of 29.5% to 30.5%. We project our Q2 power solution and foundry service revenue will grow 25% to 30% sequentially, while display solution will remain flat.

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

(Operator Instructions)

Please hold for the first question. And your first question comes from Ross Seymore.

Congrats, on a strong quarter and guide. A couple questions on the guidance for your revenue, what do you expect the power business to do?

Our power business and foundry will grow between 25% to 30%.

And a little data color behind that. Do you expect that that's share gains, is it just typical seasonality, how should we think about what's driving that significant growth?

Yes, it's a good question, Ross. So, we did a lot of study and analysis, and made sure that I have a strong confidence of sharing that our Q2 guidance with market, and the conclusion is we've done a lot of design wins last year, and that rolled into model expansion, which is share gains with an existing customer. And at the same time, we've been working with the TV makers, and then obviously, our LED [tech] lighting driving is really ramping up. So, that contributes too.

And in Taiwan, a lot of design win have done, and with our new intel chipset, and then ramping up at ODMs and OEMs, we believe that driving our demand.

Okay, then switching over to the margin side of things, what are your expectations given that strong top line growth for your OpEx in the second quarter, and generally, how should we think of OpEx growth relative to our assumed revenue growth for the remainder of this year? Thank you.

Second quarter our OpEx will be just a little bit higher depending on the number of R&D projects. And so, in honesty if we do see more, in honesty, R&D projects, it will be higher.

What we see this coming second half, therefore, we do a lot of development project to be completed in second quarter.

And on a pro forma basis -- well, pro forma GAAP if you're kind of in the 35 to 38 range are we talking a couple of million dollars? Or, any sort of magnitude you could provide on with the OpEx side would be helpful.

It will be between, in terms of a dollar unit, between $38 million to $40 million (inaudible).

Last question, just to clarify, that is pro forma, or versus the roughly 38 that was the full GAAP number in 1Q?

The full GAAP number.

Great. Congrats, again. Thank you.

Thank you, Ross.

And your next question comes from C. J. Muse.

Hello. Thank you for taking my question. I guess first question, curious if you're hearing or seeing anything in terms of 28 nanometer shortages, and that impacting end products that would include products that you're [foundering]. So put another way, on the smartphone side, are you seeing any potential for shortages, and that could delay a foundry ramp for you guys?

So far, C. J., none. Obviously, we have nothing to do with that technology, but [how] impacting our -- the requirement, we haven't seen any change in forecast last few weeks. So, as long as we concern, we not. But remember, though, we one of the tail end of food chain, so they need to build up the product in the channel to prepare for their ramp up.

Right, that's helpful. And in terms of factory loadings, you suggest a nice pick up in the month of March. How long does it take from wafer start to final packaged good for your foundry business on average?

The foundry, we don't do any packaging. But our display driver and our power takes about three months, including packaging, and foundry typically two months, and now maybe week longer as factory gets full.

That's very helpful. And then I guess a longer term question, and the last question, how do you think about capital structure over the longer term? It looks like you are going to generate significant cash in the coming quarters, and would love to hear your thoughts on how you think about debt, repurchase of shares, and even, potentially, a dividend.?

We stated in every earning call the way we're going to use our cash is expanding the manufacturing capacity, number one. And number two, buying back our bond, or our stock. And number three, any M&A opportunity that -- which makes sense. And that's our plan and nothing changed.

Okay. Very helpful. Thank you.

Thank you, C. J.

And your next question come from Terence Whalen.

Good afternoon. Thanks for taking my question. So, the first question relates to the display business. You guided display flat. What are some of the factors contributing to that flat outlook? And then also a little bit longer term in display, I've read recently about increased outsourcing from the Koreans to the Taiwanese for televisions and other display modules. Can you just comment on that longer term secular trend as well? Thank you.

Terence, obviously, we're not able to make any comment about our customer business trend, and insight to it. But, typically, what we see is various minimum growth throughout the first half, and then ramping up in second half. That's how we understand display business that we're hearing from our customers.

And your second question, again there we have no visibility. We have no [add] knowledge, and I think that what we see is continued strong performance by our blue chip customers.

Okay, thank you, Sang. And then the second question I had was on gross margin. It seems like we're making incremental improvement back up here. I was hoping to understand, what are some of the main factors that will influence gross margin in the third and fourth quarter? Is it product mix across the three businesses? Is it just simply volume growth, or any other factors, whether it be cost reductions at the manufacturing site? Thank you.

Okay. [Usually notice] the factors -- first one, is the -- fab utilization rate, and also it is the product mix even among the three -- our divisions. And last one is the ongoing of cost control.

[Simply it is] translating into January, February, were underutilized, and starting from March, it looked good. So, we anticipating even stronger margin improvement beyond second quarter.

Okay, terrific, Sang. And then, on that same topic, I think earlier C. J. eluded to the potential consideration of a push or a delay in some of the end builds of product because of 28-nanometer bottlenecks.

Are you anticipating that some customers may have perhaps started their foundry starts expecting earlier consumption of their product than what they expect now? In other words, do you see risk that by the third quarter the loadings may come laid off as the customers may pre-build inventory to the actual end-product build.

What we -- as I mentioned earlier, typical our -- the manufacturing cycle time is two to three months, so anything we started today will contribute to third quarter. And we will not started any wafers until we receive non-cancelable PO for the power -- I mean, for the foundry business. Therefore, we are constant on Q3, if that's your questions - and again that we don't see any change of forecast from our customer. And they're just starting to build up their food chain, and because of this implication. I (inaudible) focused on our business, not industry [ship].

Okay, terrific. I'll re-queue. Thank you.

Your welcome.

And the next question comes from Suji DeSilva.

Hello, Sang. Hello, Margaret. First question is on the power business. The PMIC and IGBTs are driving half the design wins. Is it feasible for that to become over time half the revenues, or is that too high a target, and if so, what would be the gross margin implications there?

PMIC development, first of all, it takes time, and second, as I mentioned, significant part of them is related to smartphones. And obviously, some phones may be successful in their market, so at this time, linking the design win directly to the revenue is a pretty risk. But, I want you notice that the trend is very strong, and with less than few percent of total in the design pipeline, now 50%, that's where we're gaining momentum, because customer trust us.

Design-in means we receive the customer spec, so unless otherwise they see some constants at MagnaChip they will not give us the opportunity. So, this is a very exciting for us. And now, it's sort of how we executed, and how we deliver this opportunity to the revenue dollars.

Very good. And accretive to gross margins, I presume.

Yes.

Yes.

Yes, that's right. Yes, yes, yes.

And on the foundry side, the growth there you're expecting -- can you help us disaggregate that, between revenue per wafer as you got a higher value project versus just capacity growth, higher wafer [out] or utilization impact?

We started this foundry business a few years ago, and we're heavily supporting our Taiwan customers. But since I personally got involved last two to three years, we've been focused more on US and European customers, and we're making a lot of success. So, the first of all this is a newer technology and we have opportunity to get higher price per wafers. And obviously, that's a link to better margins. It took long time to make this happen, and we are now ramping up those opportunity, and into mass production.

Thank you.

Did I answer your question on (inaudible)?

Yes, you did. Thank you.

And your next question comes from Nick Gaudois.

Hi, it's Nicolas Gaudois, UBS. First question is on the capacity growth and utilization rate. You commented earlier on about utilization rates started recovering. Where were you on average in Q1, and where do you think you are currently? How much capacity you're adding, and what does this do to your CapEx forecast, which if I remember was just above $50 million for a full year? And I've got a couple of follow ups. Thank you.

Okay. First of all, Nick, thank you for calling all the way from Hong Kong. I know it's early morning, so I appreciate it. I mentioned about expansion of capacity. Obviously, we are extremely careful about just expanding our capacity. What I meant was expansion of technology and fab capacity for smartphone and tablet related ramp up. So, that's the 0.11 to 0.18 capacity.

2010 used to be 32,000 per month 8-inch equivalent, actually it's all 8-inch, and ending 2011, 42,000 per month. And as of today we're almost 55,000, and we're going to be by end of next month, 57,000 per month. So, it's not really expanding the whole capacity. We expecting whole capacity for the half fab will be increased by 6,000 8-inch equivalent per month capacity, but we are expanding this key area, where we need to make the product and customer shift.

Great. So, 6,000 more from 57,000 at the end of [April] basically?

Yes.

Okay. So, CapEx with that will stay around $50 million, or is it a little bit more this year?

Margaret.

For this year, we are expecting between $50 million to $60 million CapEx which include $5 million to $10 million maintenance CapEx.

Okay. Great. And in terms of utilization rates, where were you on average in Q1, and where are you right now? Where are you anticipate Q2 to be?

Utilization.

Oh, utilization. Utilization for Q4, we announced 78%, and Q1 is 81%, and we expect a lot higher in Q2.

Okay. Great. Perfect. Just going back to products a little bit. When you talked about Ivy Bridge wins on the power side, could you, maybe, be a little bit clearer on what do you think would be average silicon content in typical Ivy Bridge-based PCs you see ramping up pretty much now and what -- and whether the wins have been more focused on power management versus LED drivers?

There will be a great, tough calculations. We working with our ODMs and OEMs. And obviously, we know how many parts goes into each notebook, but it's a -- that's a tough calculation, and plus that, maybe, that's too specific numbers that maybe we have a problem to share.

Okay. Fair enough. I tried. Last question going back to displays being somewhat flat in the quarter, could you explain why you would not necessarily see just yet the positive impact I guess of refresh of products from a key customer in terms of AMOLED-based devices, and also maybe some restocking on the larger panel side? or effectively, I know you think this restocking is already behind you, and therefore, you wouldn't expect (inaudible) issue?

Typically, our display solutions, we're very seasonally they're strong on third quarter and fourth quarter, and typically a slow first and second quarter. And again though], we provide guidance based on our customer forecast, and that's the number we see. How they're linked to the total overall LCD market is not easy to do. And AMOLED is heavily into smart -- heavily into phone -- smartphones, so it depends on which model we're going to win, which model is taking off in the markets.

So, from quarter-to-quarter there will be ramp up, ramp down, ramp up, ramp down. So, you really need to look year-to-year business of our AMOLED, and I definitely think that it's going to growing.

Thanks. Thank you. And, congrats, again on very consistent execution.

Thanks for calling all the way to Hong Kong.

Thanks, Nick.

(Operator Instructions)

And your next question comes from Jay Srivatsa.

Thanks for taking my question. Sang, on the power management side, can you address how you've been able to get into the PMIC, meaning what percentage of your revenues is now PMIC versus the MOSFET, and how do you see that progressing for the rest of the year?

Just a second. What's the percentage of this quarter? The next quarter -- this next quarter, which is Q2 - right -- will be somewhere around between 15% to 20%, and the revenue contributions, and we expect that it is going to continuously grow.

How we get into the power management, I think that, Jay, we explain to you, we entered this market with a MOSFET, and with the [constants] were gaining from the customer, they give us the design opportunity. So, most of them is a customer asking -- can you do this? Can you do that? So, we do have some engineering expertise, and so we're on line with what we can provide, and we had our design-ins.

Again, though, this is not the product you will see revenue this year, probably second half, late second half or next year. But we are very optimistic because even if we we win half of them that leading into significant improvement our revenue growth.

All right. Switching to the display side, I know that there's been a lot of ramp up in large panel display, especially in China leading to their May holidays, but yet you seem to be guiding to roughly a flat quarter for display. So, can you try -- can help understand, are you just seeing that ramp up not being as strong as you envision in the past, or has a lot of the activity already in Q1.

First of all, we don't want to do -- LCD business in China, and you know why. And we understand there are stronger demand, but because of duty the non-Chinese manufacturer bring their LCD into the country they have to pay the tax. And so, I don't know that's the reason we have our flat forecast. But, obviously, this is a strategic business, and we love to support our strategic customers, but do I want to grow large-panel display driver business? I say that many times we're taking very conservative position on it.

Okay. Last question just reaching back to the power side. I know it's a very competitive space, a lot of large players in that market. Are you seeing a lot of price pressure as you get into the PMIC side, and are you seeing a lot of price pressure in the MOSFET space as you continue to play in that market?

Obviously, you're the new player, you have to pay whatever the entry cost, and even with entry cost with our cost structure, and also we're not a fabless company, therefore, our margin is much better than our MOSFET business.

Okay. One last question. In the past you've talked about how your mid-term goals for gross margins could be the range of 35% to 38%. Are you still feeling pretty good about that? Do you expect any change in terms of timing, of being able to achieve that?

That's the number Margaret, our CFO, came up with and I respect her conservativeness. And so, it's a business model should be something we are very confident to achieve. So, yes, we're going to maintain that number for some time.

Thank you much.

Your welcome.

Thanks, Jay.

And your last question comes from Terence Whalen.

Thank you. Just a couple quick follow ups. The first follow up is regarding, actually, very similar to the prior question. It seems like even by the third quarter you could be approaching a revenue number close to $230 million, which is near that billion annualized target.

My question is, are we to expect if you approach something, maybe, near $250 million a couple quarters later, that you would be at the bottom end of that gross margin range? Or, are there other factors that have to develop in terms of the constitution of the product mix to even get you to that low end of that 35% range at $250 million revenue? Thank you.

Terence, good try. But we only provide quarterly guidance. I think that all those indications we laid out, you guys need to figure it out, and where were going in terms of revenue growth and gross margin, and we love to give you our review and comment.

Okay. It was worth a try, Sang. But the other one is a very simple follow up. It's regarding some of the language that I believe Margaret spoke about regarding CapEx. I believe she said 2012 CapEx would be $50 million to $60 million, including $10 million maintenance. I believe last quarter you said $60 million. Not to read too finely into it, but have you changed your thinking on CapEx, and perhaps become a little bit more conservative on CapEx for this year? Thank you.

What we are saying is $50 million to $60 million as you know our management on the CapEx is on demand. So, that is the reason and it's still $50 million to $60 million.

Probably were not going to exceed $60 million, but we will get very close to $60 million. I mean, demand is so strong, and we have to be ready. So, we've spent significant portion of that CapEx already.

And then, Sang, my last one would be regarding 2013 CapEx just for purposes of modeling our cash flow statements. What would be a reasonable capital plan for 2013? And when do you make decisions about 2013? How far ahead of time in terms of your equipment purchases? Thank you.

Well, this is the beginning of ramp up. I don't know where all these customer heading to, and there were a lot of questions during the call related to a specific end users. But, as you know, we are strongly supporting Android as well as IOS platform customers.

So, altogether, we have no clear visibility how quickly and how far they're going to go up. But I'm very confident that I can do a lot of customer shift, and product shift, making room for new business, which is more stable, better margin, and without just expanding our capacity.

So, we're going to go back and do a lot of study, how carefully, and we will use the CapEx, and then increasing our capacity. So, as of today, I support 100% Margaret. I will stay $50 million to $60 million into 2013. If there is any change, we'll let you know [and early] enough. But my gut feeling is maybe that should be enough.

Okay. I appreciate the insight. Thank you.

Your welcome.

Thanks, Terence.

Operator. And we have not further questions at this time, sir.

Thank you, Latasha. So, in closing, I'd like to say that our next earnings release and conference call is scheduled for August 2, 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.

That concludes today's call. You may now disconnect.