Magnachip Semiconductor Corp (MX) 2012 Q3 法說會逐字稿

Good afternoon. My name is [Vanessa], and I will be your conference operator today. At this time, I would like to welcome everyone to the MagnaChip Semiconductor's Third Quarter 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).

If you would like to withdraw your question, press the pound key. Thank you. I will now like to turn the call over to Mr. Robert Pursel, please go ahead, sir.

Thank you, Vanessa. Good afternoon and thank you for joining us for MagnaChip's Third Quarter 2012 Earnings Conference Call. A copy of the press release issues 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's 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 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 fact, 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 a most directly comparable GAAP measures can be seen in today's press release.

I would now like to turn the call over to Sang Park, for a review of our third quarter of business. Sang?

Thank you, Robert. I'm very pleased that we delivered third quarter revenue of $221.9 million and record gross margin of $76.4 million, or 34.5% of revenue. This is the seventh consecutive quarter that we have met or exceeded our financial guidance.

Q3 revenue grew 9.5% sequentially, making MagnaChip one of the top performer in our industry again, this quarter. We saw a strong demand from smartphone and tablet PC customers which are continuing in spite of growing macro weakness. This smartphone and tablet PC demand is well diversified with MagnaChip supplying about 50 unit products to 26 different customers.

Our Q3 revenue increased 10.7%, from the same quarter last year, which reflects our successful alignment shift to new fast growing markets and customers.

Looking ahead at fourth quarter, our revenue guidance mid point of 21% year-over-year growth will put us at the top end of semi conductor group once again, continuing our strong operating performance. We are achieving these results during the period of weak demand from markets such as our computing and consumer electronics due to global economic uncertainties. We expect potential upside when these non-mobile application customers return back to normalized demand in the future.

In addition to strong revenue growth, our Q3 gross margin was up 350 basis point, sequentially, and up 630 basis point since Q1 2012 due to higher fab utilization, and improved product mix shift. We project that our product mix and customer portfolio shift will continue to enhance our gross margin going forward given similar fab utilization rate. Looking ahead, we are confident that our mid term business model can be achieved as we have projected.

Now, let me discuss the highlights of our three business segments. For our power solution segment, third quarter revenue was $33.8 million, up less than 1% sequentially, but up 28.4% year-over-year. While computing related demand going through macro slowdown, we are seeing growth in mobile application, as well as our industrial business especially in Korea and China with our high power modules.

In spite of soft demand in computing sector in Taiwan, we are gaining market share as we broaden our product offerings. In Korea, our power solutions market share continued to expand driven by design ins, and design wins at Samsung and LG for LED TV backlighting solutions.

We have also expanded our customer base in China with a new hybrid LED driver that combines with a high voltage MOSFET, an LED driver into one package reducing the IC footprint by as much as 50%. The total number of power product we now offer has increased 90% from this time last year.

In mobile applications, we are ramping battery and charger, design wins with a discrete MOSFET for use with a new AMOLED smartphones. We are also expanding our product portfolio from discrete MOSFETS with a new design wins of higher margin premium product such as the DC-DC converters for AMOLED displays.

Our new product development pipeline shows that approximately 80% of our projects are for premium power products such as your power management IC and power modules and super junction MOSFET, up from 70% last quarter. This is 130% increase from where we were this time last year.

We delivered the first working sample of our super junction MOSFET to customers, and expect that it will contribute to revenue starting next year. We expect these, and other new power product will contribute to our future growth.

For our display solution segment, revenue was $69.4 million for the third quarter, down 9.6% sequentially, and down 24.4% year-over-year. The weakness in this segment has been due to relatively slow computing LCD panel market and the general market weakness in Japan. As a part of our plan product shift strategy to higher margin products, we are gradually decreasing some of our low margin driver business.

In spite of general slow down in the large panel LCD display segment, our new design activities in AMOLED market have quickly expanded. We have a design wins at major Korean maker for their new AMOLED smartphones and design-ins for next flagship smartphone. The number of AMOLED project is up 200% from where it was in Q3 of last year.

Looking at core of our display business, our relationship with LG display and Samsung, have continued to be -- remain strong.

And for our semiconductor manufacturing service segment. Third quarter revenue was $118 million, up 29.2% sequentially, and up 44.6% year-over-year. Beginning in March of this year, we experienced a significant wafer loading increase due to ramping up of smartphone and tablet PC related application with a more than 30 products being shipped.

Foundry revenue from our US and Europe customers exceeded more than half of our overall foundry business this quarter. This geography has grown largely as a result of the expanding base of smartphone and tablet related applications and we expect this demand will continue to be strong in Q4.

The design-in pipeline for new smartphone and tablet PC applications continue to grow with a 70% increase in 2012 compared to same period last year. We expect this design activity will contribute to the revenue growth in 2013. Also our customer pipeline for the premium product such as [EEPROM] bcd has been very strong with the number of new customers increasing by approximately 1.5 times this quarter compared to the Q3 of last year.

We are continuously expanding our technology offerings to meet ongoing needs of our customers for better analog technology performance. These enhanced technologies including our new offering of 0.13 micron low noise mixed signal process. This new process enhance the operation of high quality audio products for the smartphone applications.

We are also offering MTP, multi time programming solution in 0.35 micron bcd, supporting advanced power management IC which require multi programming and analog trimming for the next generation mobile applications.

During the quarter, we also announced enhanced 0.18 micron embedded EEPROM process that integrates 20 volts, high voltage transistor option to improve SNR, signal-to-noise ratio performance for touch control ICs. We believe that our foundry business is well positioned for the continued growth.

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. Third quarter was a very good quarter for MagnaChip. Revenue of $221.9 million was above the middle point of our guidance range and a gross margin of 34.5% was 150 basis points higher than the top end of our guidance.

Revenue growth was 9.5% quarter-over-quarter. This was driven by our semiconductor manufacturing services foundry segments, due to a combination of our continued effort to improve product mix with a higher [ASP] products, and our targeted shift to US and the European fabless and the fab like customers.

Gross margin of $76.4 million was the highest in our history, and the gross margin of 34.5% of revenue was 350 basis points higher than the prior quarter. The major factors for our record gross margin were, 90% factory loading imports, the current and the prior quarter, significant product ramp of premium and higher ASP products which was a result of our strong pipeline of new design-ins and our ongoing lean manufacturing cost management.

GAAP net income for the third quarter was $48.4 million or $1.30 per diluted share while non-GAAP or adjusted earning per share was $30.4 million or $0.81. Our adjusted earning per share this quarter improved as a result of a higher gross margin and our lower operating expense to revenue ratio. During the third quarter, we repurchased 444,000 shares of our common stocks for an aggregate total of $6 million under our common stock repurchase program initially announced in October 2011.

Now, turning to our statement of operations. Revenue for the third quarter was $221.9 million for an increase of 9.5% sequentially, and an increase of 10.7% year-over-year. Revenue by business segment for the third quarter was $118 million for foundry services, $69.4 million for display solutions, and $33.8 million for power solutions.

Our foundry services segment delivered the highest quarterly revenue in our history. Gross margin reached $76.4 million this quarter, the highest dollar amount in the Company's history. Gross margin was up 350 basis points compared to the prior quarter, and represented 34.5% as a percent of revenue. Total operating expense for the third quarter was $40.9 million or 18.4% of revenue compared to 19.7% of revenue for the prior quarter.

Operating income was $35.6 million or 16% of the revenue compared to 11.4% of our revenue for the prior quarter. Net interest expense was $5.7 million in line with last quarter. GAAP net income for the third quarter was $48.4 million or $1.30 per diluted share. This compares to $4.3 million or $0.12 per diluted share for the second quarter. GAAP net income was primarily impacted by foreign currency translation gain of $21.8 million in the current quarter compared to translation losses of $10.6 million in the prior quarter.

Depreciation was $6.3 million and amortization was $2.2 million for the third quarter. Adjusted net income, a non-GAAP measurement, for the third quarter was $30.4 million or $0.81 per diluted share compared to $17.9 million or $0.48 per diluted share for the second quarter of 2012.

Turning to the balance sheet. Total combined cash balance, cash and cash equivalents plus restricted cash was $165.8 million at the end of the third quarter compared to $161 million at the end of the second quarter. Cash provided from operations for the third quarter, totaled approximately $23 million, this compares to $26.7 million for the prior quarter. Accounts receivables net of reserves was $148.5 million compared to $135.1 million last quarter.

Days of sales outstanding was 62 up from 61 last quarter, and within our target range of between 55 to 65 days. Net inventory was $75 million, or 47 days of inventory which was down from 49 last quarter, and again, within our target range of 40 to 50 days.

Capital expenditure was $10.2 million in the third quarter and $57.5 million year-to-date. We expect total CapEx for this year will be in the range of $60 million to $65 million which includes maintenance CapEx.

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

Thank you, Margaret. For our Q4 guidance, we look at customer forecast, current booking activity, and backlog, we expect our revenue will be in the range of $213 million to $222 million. Based on this revenue level and our current wafer loading, we anticipate our gross margin will be in the range of 33.5% to 34.5%.

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

(Operator Instructions). Your first question comes from the line of Terence Whalen from Citigroup.

A couple of questions. Perhaps if I start off with regard to a question regarding the loading and seasonality comment you made. Obviously in the foundry business, given that it's tied to very large distinct product cycles, that could be a lumpy business, I was wondering if you could help us understand your expectations for normal seasonality of that business heading into the first quarter.

It seems to me that foundry may be holding up a little bit stronger than I had personally expected for the fourth quarter.

So again, wanting to understand the shape of that business into the first quarter, do you have any view on where perhaps revenue or loadings could go into first quarter which I would assume would be a seasonal low for that business. Thanks.

Okay, Terence. Obviously we don't provide guidance for the Q1, but definitely, we can give you the status of what's going on on wafer loadings. Smartphone and tablet related foundry business continues to, strong. Non-mobile application is a little soft. So I expect throughout the Q4, and foundry related loading will be slightly down, but probably better than our historical seasonality.

Okay, terrific. The second question I had was on gross margin, specifically around your comments around display. Sang, I think you said that AMOLED related revenue was up obviously significantly year on year, yet on the other hand, you're attempting to de-emphasize some portions of commodity display.

As you go through that process and perhaps de-emphasize display, is it possible that actually gross margin improves in that business heading into 2013 despite having lower revenue levels? Thank you.

It's not only display as a whole. Obviously, a couple of product that we're providing wafer service and has been one of the lowest margin product, and that's the one with the mutual agreement with the customer, we're slowly decreasing. So definitely, year 2013, providing the same wafer fab utilization rate, I expect gross margin will improve.

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

I guess first question on gross margin. A great number here, and a very nice guide. I'm just curious, it looks like foundry is running ahead kind of the peak number you're talking about around 41% and I'm curious, is there something structurally changed there other than running a very high utilization meaning is there customer concentration issues here? Is there other benefits that we should be thinking about that's structurally shifted the gross margin for your foundry business incrementally higher from where you were targeting just 12 months ago?

CJ this is exactly what we've been talking about for last year quarters as we shift in customer portfolio, as we shift in our product and gross margin will improve and will give you enough to head up.

And this revenue from foundry, it's not one or two customers. It's about 27, 26 customers and with more than 50 products, almost 50 products. And so it's a very well diversified, of course that Cirros Logic is one of the largest customer, but overall, we're into mixed signal of foundry business; at the same time touch is ramping up, and also the RF switch business we do with Peregrine, is a very, very strong growth. All those add up to a very well diversified and healthy foundry business.

That's helpful. And I know you guys don't guide to March, but I guess, the natural question here is, what kind of visibility do you have today and based on that, how do you plan to manage your loadings into November, December?

November, December is historically, it's a slow month. And I'm sure that we see some of that trend because of non-mobile application demand. But still our smartphone and tablet related demand is continuously strong.

Thank you.

You're welcome.

Thanks, CJ.

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

Hello, do you hear me?

Yes.

Great. Thank you. A couple of questions again related to display, well actually, what I was wondering is, when I look at your revenues, obviously you had an expected slow down, is that due solely to this product pruning you talked about adds to the fact that your largest Japanese customer is clearly struggling, or did we see any changes in your estimated market share on the tablet display side basically for one of your Korean customers?

And I got a couple of follow-ups, thank you.

Are you talking about display in general or you're talking about our customers?

I'm talking about the display segment in general for you basically. So minus 9.6% Q-over-Q, you've got, related to the pruning you talked about plus Japan specifically, or are there any changes in your market share into tablet, PCs, of course, one of your Korean customers. Thank you.

Obviously, our display customers their -- have a reasonably good quarter. And TV market is so-so, and notebook related is really not strong, that's where we're hurting our revenue. And the tablet business is strong. We don't do a whole lot of tablet-smart related business with those two Korean customers. That's one of the reasons that our revenue is a little bit declining, but yes, we are very strongly involved in AMOLED and that's going to continuously help, that's going to help us next quarter too.

Did that answer your question?

Yes, pretty much. I think that makes sense. Now you led me to my follow up actually, or my first follow up. Going to have one after. But the -- on the AMOLED side, do I take the comment you just made as an indication you would expect your AMOLED business to be up sequentially into the fourth quarter?

Yes.

Okay, great.

And also I can answer your question about Japan, obviously you just have to see that Japan market is declining continuously, and we don't have a significant revenue anymore from our Japan market. We do have some, but it's getting smaller. So that's another reason that's impacting our overall revenue for our display side.

Okay. I guess we should take this as de-risking which is, if anything positive. And my last question is going back to your gross margin performance and once again congratulations on that, as you said, that is coming to fruition [also laying] of the plan a while back. Are we seeing at this point the power gross margin crossing over with displays considering the trajectory you laid out. So I understand foundry is a big part of this gross margin performance, but do we see now the power segment being higher gross margin even [than] displays? Thank you.

Actually, this quarter, Q3, our power gross margin is not as strong as we anticipated. One of the reason is, because we're expanding this high power, the module business, and I believe that will produce some good profit in the future.

We do have a lot of the related cost goes to initial, the business, that we're getting into this market. So therefore, I think that as power margin are achieving what we project, it's definitely going to help our company-wide gross margin as well.

Okay, great and congrats again on the gross margin performance.

Thank you and thanks for calling early in the morning.

No worries.

(Operator Instructions). Your next question comes from the line of Jay Srivatsa from Chardan Capital Markets.

Hey -- what you see the product mix to be in terms of the three segments for the next quarter?

Are you talking about revenue, Jay?

I mean which segment do you expect to be up, which down, just give us a little bit of color on how the mix will be.

I got it. Our display business will be flat or slightly up. And our power business will be flat or slightly down. I emphasize slightly. And our foundry business, will be flat or maybe slightly down. So that's one of the reason that we have pretty reasonably strong guidance into Q4.

Okay. In terms of the power business, I know things got a little weak in the notebook side, but in terms of just the competitive landscape, are you sensing that you're gaining some market share in the business, or do you feel that the price pressure is pretty aggressive there that it's pre-empting any market share gains?

Actually, month-to-month and quarter-to-quarter our resale increased with means that obviously, we're winning more market share and it is the distributors taking very conservative positions. And that's one of the reason that we think that Q3, Q4, a little slow down but expect that a strong Q1 getting back to and inventory gets to a minimum level.

Real growth driver for the power is coming from non-MOSFET business, such as TV backlighting and our high power modules and we just ship [junctions] for example and customer give us a very positive feedback. All these we'll call non-MOSFET and premium product and will lead us to additional growth next year and eventually, that's going to help us gross margin as well.

Okay, can you give us some update on how the IGBT stuff is doing following the acquisition? Are you seeing any meaningful contributions from that, or do you expect it to be a little further out?

If you're talking about IGBT module, or I call high power module, the acquisition we have done, Dawin, contributing around 10% of power. I think that that business really has a real good potential getting into so called global customers. So we're expecting next year will be a good growth.

Okay. On the -- foundry side, I know Samsung and the fruit company are both launching a lot of new product heading towards Christmas. I guess I'm trying to reconcile where you see the foundry flatness or slowdown potentially? I mean it looks like they seem to be launching new products towards the Christmas season which would indicate to us that there is potentially some ramp up in some of that business.

Where is the slowdown coming from?

Well you know, we have a limited visibility, obviously. The whole supply chain from us to Samsung maybe about five months, through the layers, and therefore whatever business in five months from now, and we still see a strong wafer loading. So probably customers looking as a healthy business, in a couple of quarters.

Okay. Looking ahead to 2013, as you know, the overall semiconduct -- industry, specially the manufacturing in device has been very weak and yet, you seem to be delivering pretty good numbers, what are some of the risks as you look at the business into 2013 and how do you hope to alleviate some of that as you look ahead to some of the strategies as you execute into 2013?

Obviously, you know, our strategy is -- we go and bring new product to the customers, and broadening our product portfolio, and aligning with high growth market and customers that's been exactly we're doing. I think we will be okay next year.

Okay. Good quarter, and good guidance.

Thank you, Jay.

There are no further audio questions at this time. I will now hand the call back to the presenter, Mr. Pursel for closing remarks.

Thank you, Vanessa. Our next earnings release and conference call is scheduled for January 30, 2013. 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 does concludes today's conference call. You may now disconnect.