Magnachip Semiconductor Corp (MX) 2012 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 Second Quarter 2012 Earnings Release. 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, Director of Investor Relations, you may begin your conference.

Thank you, Hope. Good afternoon, and thank you for joining us for MagnaChip's second 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 second quarter business including segment highlights, and Margaret will discuss the 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 revenue, target gross 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 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 second quarter business. Sang?

Thank you, Robert. I'm very pleased that we delivered second quarter revenue of $202.6 million and gross margin of 31%, above the midpoint of our guidance range and better than Street consensus. This revenue growth represents a 14.5% increase quarter over quarter, making MagnaChip one of the top performers in our industry this quarter. In addition, we are guiding strong growth for our third quarter revenue with a sequential increase of 9% at the midpoint.

With this solid performance, we are outperforming our industry peers in spite of macro weakness. This is possible because of our alignment with our strategic customers and high-growth markets, including the leading smartphone and tablet PC makers.

During last three years, we have made a solid progress shifting our customer base and refocusing our product portfolio. For example, our revenue from the top two smartphone, tablet PC makers has almost tripled in the first half of this year compared to the first half of 2010.

In total, we are shipping more than 100 different products to the top two smartphone and tablet makers. These products include those dedicated to smartphone and tablet applications, as well as many other applications and [sockets]. We produce them in our fab and ship them directly or indirectly under our own brand name or through our foundry customers.

We have a solid pipeline of orders and many new design-ins and wins from the broad base of customers, including top smartphone and tablet makers. Despite the macro uncertainties, demand remain strong, fab utilization remain high, which increased to over 90% during the second quarter. Looking ahead, we believe that strong momentum we saw from ramp up smartphone and tablet PCs during the second quarter will continue into third quarter in spite of global uncertainties.

Now, let me discuss the highlights of our three business segment. For our Power Solution segment, second quarter revenue was $33.7 million, up 33.4% sequentially and up 42% year over year. Our revenue quote is back on track as a result of customer penetration, market share gains, and we have tripled the number of our power customers and product offerings over the last 2 years.

We had a solid revenue increase in three key market areas -- Korea, China and Taiwan, with all three areas growing more than 30% quarter to quarter. For Korea, the major growth driver was from TV and mobile applications where we saw market share gains, an expansion of our PMIC drivers for LED TV backlighting. In China, we continue to gain market share in the industrial and TV markets. For Taiwan, our focus has been on computing applications.

Over the past year, our coverage of global notebook market with our power products has more than doubled to over 120 models. We have successfully established our power business in three Asian countries, which make up more than 55% of worldwide power semiconductor demand. We started this business with a power MOSFETs and are now expanding our portfolio into premium products, such as power management ICs, high-power modules, and other high-performance discrete products including super junction.

Because of our focused effort, in only 2 years we became the leading supplier of LED TV backlighting drivers in Korea and we are gaining strong momentum in China. Our new product development pipeline of power solutions shows that more than 70% of our projects are for premium power [project]. We expect these and other new power products will contribute to our continuous growth in the future.

The Dawin acquisition has been successfully concluded with the transfer of the products online to our Gumi products in site. This new product line has been making solid revenue contributions since the second quarter as we expected.

For our Display Solutions segment, revenue was $76.8 million for the second quarter, down 7.7% sequentially and down 7.2% year over year. The weakness in this segment has been due to relatively slow recovery of LCD panel market and particularly notebook applications, combined with the general weakness in Japan market. The market for the AMOLED TV is emerging and we have design win at a major Korean TV maker. This is expected to generate revenue in the third quarter.

Flexible smartphone displays, tablet PCs and new AMOLED opportunities are growth drivers for our display segment and we are working with one of our customers on design-in for new Microsoft tablet. Looking at the core of our Display business, shipment to LG Display and Samsung remained stable while our portfolio AMOLED products continue to grow.

And for our Semiconductor Manufacturing Service Foundry Segment, second quarter revenue was $91.3 million, up 34.6% sequentially and down 5.3% year over year. Starting from March of this year, we experienced a significant wafer loading increase due to the ramp-up of smartphone and tablet PC related products. Foundry revenue from these products has almost doubled in second quarter compared to the first quarter. We expect this trend will continue through the rest of the year.

However, we are starting to experience softer ordering patterns from non-smartphone and tablet PC customers due to macro uncertainties. Because of this recent trend, we are taking cautious approach in our foundry outlook for PCs, notebooks, and other consumer-related product.

Three years ago, we made a strategic decision in favor of high-growth, higher margin foundry applications, and I'm pleased to report that we have made a solid progress. For the first time, foundry revenue from US and Europe customers exceeded revenue from Asian customers outside of Korea in Q2. I expect that most of our foundry revenue growth in the second half will be coming from US and European customers involved in smartphone and tablet PC applications.

We continue to enhance our foundry technology during Q2 with a new 0.18 BCD high-voltage technology platform, targeted at DC-to-DC converters, power over Internet, LED drivers, audio amplifier and PMICs. We have also entered into a joint development agreement with Yield Microeletronic Corporation for multiple time programmable devices for embedded applications such as displays, PMIC and LED controllers.

Looking back over the past year, our mix shift to the value-added premium product has allowed us to triple the number of design wins targeted at high-growth, high-margin products. The growth we are seeing in our foundry business is a direct result of this strategic change.

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. Second quarter was a very good quarter for MagnaChip, revenue of $202.6 million was at the high-end of our guidance and a gross margin of 31% was above the top-end of our guidance range.

Revenue growth of 14.5% quarter over quarter was driven by strong demand from smartphone and tablet PC customers in our semiconductor manufacturing services, foundry segments, and also by the product and the customer base expansion within our power solutions segment.

Gross margin was up 280 basis points compared to the first quarter, primarily due to higher fab utilization from higher revenue. In May, we completed a successful secondary offering of 7 million shares. During the second quarter, we also repurchased 539,000 shares of our common stock for an aggregate total of $5 million under our common stock repurchase program announced in October 2011.

Now, turning to our statement of operations. Revenue for the second quarter was $202.6 million for an increase of 14.5% sequentially and a decrease of 0.5% year over year. Revenue by business segments for the second quarter was $33.7 million for power solutions, $91.3 million for semiconductor manufacturing services and a $76.8 million for display solutions.

Gross margin was $62.9 million or 31% as a percent of the revenue for the second quarter, compared to $49.9 million or 28.2% for the prior quarter. Total operating expense for the second quarter was $39.9 million, which included $1.2 million of secondary offering related expense. Excluding the secondary offering expense, total operating expense was $38.7 million or 19.1% of revenue, compared to $38 million or 21.5% for the prior quarter.

Operating income for the second quarter was $23 million or 11.4% of revenue, compared to $11.9 million or 6.7% of the revenue last quarter. Net interest expense was $5.6 million and aligned with last quarter. Debt net income for the second quarter was $4.3 million or $0.12 per diluted share. This compares to $15.3 million or $0.40 per diluted share for the first quarter of 2012.

GAAP net income was primarily impacted by foreign currency translation losses of $10.6 million in the current quarter, compared to translation gains of $11.1 million in the prior quarter.

Depreciation was $5.6 million and amortization was $2.3 million for the second quarter. Adjusted net income, a non-GAAP measurement for the second quarter was $17.9 million or $0.48 per diluted share, compared to $6.5 million or $0.17 per diluted share for the first quarter of 2012.

Turning to the balance sheet, total combined cash balance, cash and the cash equivalents plus restricted cash was $161 million at the end of the second quarter, compared to $160.6 million at the end of the first quarter. Cash provided from operations for the second quarter totaled approximately $26.7 million. This compares to $39.9 million for the prior quarter.

Accounts receivable net of reserves was $135.1 million, compared to $127.3 million last quarter. Days of sales outstanding was 61, down from 65 last quarter and within our target range of between 55 to 65 days. Net inventory was $75.4 million or 49 days of inventory, which is the same as last quarter and within our target range of 40 to 50 days. Capital expenditure was $22.3 million in the second quarter and $47.3 million year to date. We expect the total CapEx for 2012 will be approximately $60 million including maintenance CapEx.

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

Thank you, Margaret. Based on customer forecast booking activity and the wafer loading for our Q3 guidance, we expect total revenue will increase 7% to 11% sequentially to $217 million to $225 million, and gross margin to increase 100 to 200 basis points and be in the range of 32% to 33%.

So, Hope, this concludes our prepared remarks. We'll now open the call for questions.

(Operator Instructions)

Your first question comes from the line of C.J. Muse, Barclays.

Yes, good afternoon, or good morning. Thank you for taking my question. I guess first question on the foundry side, can you talk about I guess the breadth of customers there?

And, in particular, you had one customer that just reported earlier in the week that talked about an outlook for sustained growth into the Q4 timeframe. So I'm curious whether you're seeing the same dynamic or given that you're further up the food chain that perhaps the visibility is not as strong. We'd love to get your thoughts there.

Okay, C.J. By the way, it's a good afternoon. We're calling in from our California office. As I stated at the statement, smartphone and tablet PC related continue to be strong and that's our expectation in Q3 and, of course, beyond that.

Macro uncertainty -- particularly customer in Taiwan and Korea be more cautious. I think that all of those inputs roll into our Q3 guidance. So as far as MagnaChip is concerned, I think we still able to show strong growth in Q3 and beyond that, we're not doing any guidance, but we believe it's reasonably okay.

Okay, that's helpful. And as a follow up, can you talk about the impact of [In-Cell] shortages on your display business at two of your three top customers I believe that they're having some yield issues there so I'm curious how that has impacted your display business and how that, I guess, how you see that fixing itself over time?

Well I believe that softness is coming from notebook area and what you're talking about has a very small impact to us. Mainly when new products being introduced, when they ramp up it has more impact to us.

Very helpful. Thank you.

You're welcome, C.J.

Your next question comes from the line of Terence Whalen with Citi.

Hi, thanks for taking the question. This one is around utilization. It looks like utilization is running fairly high in the second quarter. Can you just give us an update on what you expect for third quarter utilization specifically?

And to the point of seasonality for some of your foundry customers, it seems like fourth quarter loadings could be down pretty meaningfully on the foundry side. How do you adjust to that at this point to limit the gross margin impact of that? Thanks.

Hi, Terence. We're looking at Q3 probably similar to Q2 in terms of utilization rate. Maybe wafer input slow down a little bit, but again that most of our revenue ramp up coming from smartphone and tablet PC and overlap with the new product introduction. So, our fab utilization is pretty healthy and then throughout third quarter.

And into the fourth quarter, we could probably expect the seasonal slowdown like you may be seeing in your -- at the initial fab loading or, sorry for the start. My question is how do you sort of balance that out with your foundry business to limit the negative impact on utilization? Thanks.

I said that in my statement we made a significant, significant shift in our customer base and product portfolio and typically if we are so much into consumer/consumer kind of foundry, obviously that is very true.

We expect a little soft year end, but we don't see it will impact heavily to us. But again, though, there are a lot of macro uncertainties and also when there will be Window 8 available and what -- even though inventory at the channel is a reasonable level and what is buyers prefer to do in terms of their purchase patterns.

So, all things that will impact the Q4 loading. And we need a few more weeks to give you better visibility. But overall, I don't see there is significant [down].

Okay. And then the follow-on question I had was on the Power Solutions business. Can you give us any sort of an indication on the mix change in that business? I assume PMIC is still a very small portion of that business. What other milestones can we look to over the next several quarters to understand how the mix of that business is improving? Thanks.

Well, one of the indication is more than 70% of power design pipeline for the new products are, so called, premium product including PMIC and the other high performance discrete. And I believe these strong pipelines going to lead into expansion of non-MOSFET business mostly starting from next year.

So that kind of really help us -- obviously revenue growth and margin improvement getting into 2013. As of today we're still increasing portion of PMIC revenue and -- in Korea and China, and our IGBT module performed well from our Dawin acquisition.

Okay, thanks. And, congratulations, on the results.

Thank you very much.

Thank you.

Your next question comes from the line of Nic Gaudois from UBS.

Yes. Sang, can you hear me?

Yes, I hear you, Nic.

Hi. Just a quick question, could you -- first, could you maybe give us a little bit more color on timing of on your side of generating revenues? You mentioned from flexible smartphone displayed driver ICs. Should we expect that to start happening in the current quarter, in Q3 or is that more Q4?

And as a follow-up question, maybe if you could just give us a little bit more color on how you see displays, foundries and power management revenues within your guidance for the revenues of plus 7% to plus 11% you accrued in Q3. Thank you.

Okay. I'm trying to answer one by one, and if I skip any of your questions, then repeat that at the end of my answer. The flexible display revenue will be very small in Q4. And we're looking at some small amount of AMOLED TV revenue Q3.

And what was the other question?

Give a more color on the segment revenue for Q3.

Okay. For the Q3 guidance, the foundry kind of grew quarter to quarter in high 20%. Power slightly up, it could do a lot better with the Window 8 announcement. Display solution flat to down, it all depends on again notebook market. And also Japan has been -- Japan market has been very slow.

But, again, though, throughout the quarter by quarter I still see that display solutions reasonably flat quarter by quarter, year by year too.

Did that answer your --

Okay, that's great. No, that's great. And just maybe as a quick follow up on actually the displays in Q2 and what you just mentioned on Q3, I mean is the [delta] purely non-Korean customers and -- or is it in the non-Korean customers and the notebook segment within your Korean customers? Thank you.

It is obviously non-Korean customer and plus the notebook market -- application market has been slow.

Yes, okay, that's clear. Thank you very much.

You're welcome.

Your next question comes from the line of Suji De Silva with ThinkEquity.

First of all, in terms of the third quarter, can you talk about the turns needed to hit the third quarter number and whether you've seen the orders in July weaken because of the macro, or are they coming as expected?

Suji, with that question, you were asking about turns during the quarter?

The turns needed for the third quarter, how much is booked?

We have a business mix model which -- foundry business plus our own brand. So book-to-bill ratio is not a really best way of telling you, but we have a very strong wafer loadings for the foundry business and our brand, we have a pretty reasonable good backlog as of today.

And then in the foundries, I'm just trying to understand how that diversifies as you grow your customer base. Are you seeing most of the growth for the next 12 months coming from volume ramp of the existing winds from new winds of the existing customers, or are you seeing new customers helping diversify the mix and foundry?

What I was referring to is for the last couple of years, we really shifted from so called consumer/consumer to smartphone and then tablet PC. And that business has continuously performed well and that's our expectation.

And did I answer your question?

Yes. I just want to understand if there are more customers helping to diversify that base.

Right. Obviously, there are more customers, probably end customers not going to change a whole lot, but, yes, we're adding more sales channel and bring more foundry customers.

Okay, that's helpful. Last question, in terms of power there was high growth here and then you're guiding lower growth. Is there inventory that's being digested in the PC chain here, or is this just weaker demand?

I think it's a weaker demand.

Okay, all right great. Thanks, guys.

You're welcome.

Your next question comes from the line of Jay Srivatsa, Chardan Capital.

Thank you so much. Sang, it appears with the Win 8 coming up that notebook demand could bounce back a little bit. How do you see that potentially impacting your display revenues and power to a certain extent as you look ahead beyond Q3?

Yes, frankly, our Q3 guidance is based on very conservative view and that including softness in the macro and as well as Window 8. There [are a lot] of -- the announcement, but we haven't seen any actual POs yet.

Okay, fair enough. In terms of power you mentioned that there might be some market share gains related to that in Q2. Can you highlight where you're seeing the market share gains? Is it in the MOSFET side, the PMIC, IGBT? Any color you give would be helpful.

Well, the market share mostly in power MOSFET area and it's in Korea for TV and mobile application, it's in China for the industry. And also we've been doing good in TV application. Taiwan is all computing. And all three countries which has significant market share gains into second quarter.

Okay. Last question on utilization, it looks like you're getting up there in terms of utilization of foundries. As your business continues to expand in that side, how do you hope to be able to account for additional capacity if need be?

I've been talking about shifting customer base and that relates to every sales price went up from 2010 to 2011 and I projected that trend continuing to 2012. So there is a lot of shifting going on and that shifting is again leading to higher every sales price for wafer and that's going to help us to grow into following years. Plus, that we've been adding 5% to 15% of capacity last 3 years and that will be continuously trend.

Okay. Thank you so much. Congratulations, on a good quarter.

You're welcome.

Thanks, Jay.

(Operator Instructions)

Your next question comes from the line of C.J. Muse, Barclays.

(Inaudible) for letting me back in the queue. Margaret, I had a question on the OpEx side, can you share what you expect overall OpEx will be for the quarter as well as what stock based expense will look like?

Okay. In terms of OpEx, this quarter was 19.1% excluding our $1.2 million secondary offering related. And third quarter due to a higher revenue. We expect the incomes of between a $38 million to a $43 million level depending on our R&D engineering projects.

And the stock comp -- stock compensation expense?

Our stock compensation is going to be the same as the second quarter.

Excellent. And I guess, lastly, just a little help on interest expense and tax rate.

In terms of expense, that will be the same and the tax rate -- and tax overall is going to be, for this year, is between $8 million to $12 million levels.

Perfect. Thank you.

You're welcome, C.J.

Thanks, C.J.

(Operator Instructions)

And there are no further questions at this time. I would now like to turn the call back over to management.

Thank you, Hope. Our next earnings release and conference call is scheduled for November 1st, 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.