Magnachip Semiconductor Corp (MX) 2013 Q3 法說會逐字稿

Good afternoon. My name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to MagnaChip Semiconductor's second -- I'm sorry, third quarter 2013 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions).

Thank you. I would now like to turn the call over to Robert Pursel. Please go ahead, sir.

Thank you, Stephanie. Good afternoon and thank you for joining us for MagnaChip's third quarter 2013 earnings conference call.

A copy of the press release issued today is available on our Investor Relations Website. A 72-hour telephone replay will be available shortly after today's call, and this Webcast will be archived on the Company Website for one year. Access information is provided in today's Press Release.

Joining us today are Sang Park, MagnaChip Chairman and CEO, and Margaret Sakai, Executive Vice President and Chief Financial Officer. Sang will begin the call with an overview of our third quarter business highlights, and Margaret will discuss our financial results. Following Margaret's financial discussion, Sang will provide 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 2013 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 third quarter business. Sang?

Thank you, Robert. We delivered another quarter of solid result, the 11th consecutive quarter of meeting or exceeding our financial guidance. Revenue of $217.8 million was up 1.2% sequentially. And gross margin of 33% was same as last quarter.

We met our revenue and gross margin guidance through the combination of product and customer diversification and the successful launch of our new product line for our power solution division.

Our smartphone-related revenue grew quarter to quarter due to the expansion of AMOLED display driver in high-end smartphone and from an increase of sales to mid- to low-end smartphone customers.

Revenue from this mid- to low-end category increased by 150% quarter to quarter. And we are currently working with eight mid- to low-end smartphone makers.

Our power solutions segment continued to be a growth driver for us. In the third quarter, power represented 19% of total revenue, which is up from last quarter, 17%, and 15% from third quarter 2012.

Our newly introduced super junction MOSFET product grew to more than 10% of power revenue this quarter. And we have a strong pipeline of new design-ins.

In the display segment, our recently introduced sensor products are gaining traction with our four designs under customer evaluation. We expect to announce several design wins by the end of this year.

We expect our AMOLED revenue will be triple this year from the last year. And we believe it will continuously grow in 2014.

For our foundry segment, we have a strong pipeline of new products and the customers under development. We currently have 17 new projects in design-in phase with 35 more projects in the pipeline. Nearly half of these projects are targeting automotive, green energy, and industrial market.

Geographically, the majority of new engagements are coming from US and European foundry customers. And we expect to see these new projects start to contribute to revenue in the second half of next year.

The global TV and notebook market has been soft and will likely continue to be weak end of this year. Visibilities are still limited for high-end smartphone. However, we are addressing this by diversifying our product offerings and sales channels.

We expect to see normal seasonality pattern into 2014, and our growth path for next year is being executed on time.

Now, let me discuss the highlights of our three business segments. For power solutions, third quarter revenue was $41 million, up 13.9% sequentially and up 21% year over year. Super junction MOSFET revenue grew to just over 10% of power revenue in only two quarters. And LED lighting, PMIC revenue is continuously increasing.

We expect to grow our power business by expanding into new premium product lines, like our super junction, and by adding new customers.

In addition, we are expanding power management product offerings for mobile applications at several top-tier Korean and Chinese smartphone makers. These applications include LED backlight units and RF DC-DC products.

In our high-power modules, we are expanding into power supplies, motors, solar inverters, and plating applications. We are now a vendor to global leader of power supply product and have a design-in at one of the top three solar inverter manufacturers.

The cumulative number of design wins year to date for premium product has doubled compared to the last year, and we expect this momentum to continue.

Premium products are a major growth driver for the power solutions segment, and we expect they will make a significant contribution to revenue and gross margin expansion in 2014.

Now, for our display solutions segment, third quarter revenue was $73.2 million, up 6.2% sequentially and up 5.4% year over year.

AMOLED was the major contributor again this quarter, increasing almost 30% and offsetting softness in LCD TV, notebook and computing markets. We are strategically aligned with the market leaders in AMOLED product and have two new flagship design-ins this quarter.

We recently introduced our MXsensor family of intelligent sensors and have four design-ins already with six more products under development. We are actively marketing our intelligent sensors in Korea, China, and US and have already promoted our e-Compass and [smart-O] sensors to 22 smartphone and tablet makers.

In large panel applications, UHD and AMOLED TV will provide revenue growth opportunity in 2014. The leading TV manufacturers are beginning to expand our range of UHD and our LED product to include mid- to low-end models at the price they are affordable to the customers.

We have been targeting display product for the automotive [and foreman] applications and have a design win that is ramping up at a US carmaker. We're also expecting a design win at a German carmaker next quarter.

And for our foundry segment, third quarter revenue was $103.1 million, down 6.1% sequentially and down 12.6% year over year.

High-end smartphone and tablet PC demand remained slow in Q2 as a result of continued inventory correction by foundry customers. And we expect this trend will continue into early 2014.

However, we do have a positive momentum. For example, our Korean [purchaser] customers tripled their business as a result of expansion into mid- to low-end smartphones.

We will be ramping up production for the several new foundry customers, including a MEMS microphone customer in Q4. And we expect that a number of new customers will continue to grow through early 2014. More than half of these new foundry customers are US based, and we believe they will help us to grow our foundry revenue and improve our gross margin beginning in the second half of 2014.

We are continuously enhancing our foundry technology offerings by enhancing -- expanding our 0.18-micron embedded PCD process to include 12 to 30 volts capability in support of mobile applications, such as a low-noise power amplifier, PMICs, and DC-to-DC converters. This new process offers competitive cost to customers by minimizing mask layer and eliminating the epilayer.

In addition to our existing high-voltage 0.11-micron process for the display driver application, which has been in production for a couple of years, we introduced 0.13 mixed signal process technology for video switch IC customer. Also, 0.13 (inaudible) process for touch IC and MCU applications and 0.13 PCD process for PMIC applications are under development.

With these new offerings, we are one of the most complete analog and mixed signal foundry provider for 0.13-micron process technology.

Now, Margaret will discuss our financial highlights. Margaret?

Thank you, Sang. Let me provide some financial highlights and discuss key developments during the quarter.

Adjusted EPS, a non-GAAP measurement, was $0.76 per diluted share for the third quarter compared to $0.71 in the previous quarter. We have reported $2 of adjusted EPS year to date in 2013, a record for the Company. A reconciliation of the non-GAAP financial measures to GAAP measures can be found in today's Press Release.

In July, we completed a private offering of $225 million of new senior notes, and we paid all of our outstanding 2018 notes. As a result, we reduced our coupon to 6.625% and extended the maturity by three years to 2021.

During this quarter, we repurchased 1.2 million shares of our common stock for a total of $25 million under our common stock repurchase program announced in July of this year.

We also completed a successful secondary offering of 1.7 million shares, which reduced the ownership by our largest shareholder to below 12% of total outstanding shares. MagnaChip did not receive any proceeds from the offering.

Third quarter revenue of $217.8 million and a gross margin of 33% represented the 11th consecutive quarter we met or exceeded our guidance.

Now, turning to our statement of operations, revenue for the third quarter of $217.8 million represented a sequential increase of 1.2%.

Revenue by segment for the third quarter was $103.1 million for foundry services, $73.2 million for display solutions, and $41 million for power solutions. Revenue from premium products continued to increase for both display and power solutions.

Gross margin was $71.9 million or 33% of revenue for the third quarter. The gross margin was flat compared to the prior quarter because of lower fab utilization, which was offset by richer mix of premium products. We expect this trend to contribute positively to the gross margins going forward.

Total operating expenses were $41.3 million, which was flat compared to the second quarter, excluding $0.5 million expenses related to the secondary equity offering. Excluding these nonrecurring expenses, our operating expenses were 18.7% of revenue, which is in line with our target range.

Operating income was $30.6 million or 14.1% of our revenue for the third quarter. This compares to $30.2 million or 14% of revenue last quarter.

Net interest expense was $4.5 million, which was down from $5.9 million in the second quarter as a direct result of the senior notes refinancing completed in July.

Due to a tax refund in connection with a bond refinancing, we expect cash tax expenses of between $5 million to $7 million in 2013. We continue to expect annual cash tax expenses of between $5 million to $10 million in 2014. However, we expect full utilization of our LOD NOL balance by December 2014.

On a GAAP basis, net income for the third quarter was $46.7 million or $1.24 per diluted share. GAAP net income was impacted by a foreign currency gain of $43.4 million related to non-cash foreign currency translation for intercompany balances that were denominated in US dollars, as well as a $32.8 million loss on the retirement of old senior notes.

Turning to the balance sheet, total combined cash balance, cash, and cash equivalents was $158.3 million at the end of the third quarter compared to $192.6 million at the end of the second quarter. The lower cash balance partly reflects $25 million cash usage on share repurchases and $5 million incurred in connection with refinancing of senior notes.

Cash provided from operations for the third quarter totaled approximately $6 million compared to $11 million for the prior quarter due to increases in our accounts receivable balance during this quarter.

Our accounts receivable balance increased this quarter as we had a greater percentage of our sales fall later in the quarter and also as a result of increased sales to distributors who generally have a longer payment practice.

Capital expenditure was $60 million this quarter, and we expect it will be approximately $50 million level for the full year including maintenance CapEx. This $50 million CapEx for 2013 is $10 million lower than our original target of $60 million.

During the third quarter, we repurchased 1.2 million shares of common stock in the amount of $25 million, and we have $75 million remaining on the stock repurchase program authorized in July.

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

Thank you, Margaret. For our Q4 guidance, when we consider current billings and bookings, booking trend, as well as the market dynamics, we expect that our revenue will be in the range of $193 million to $203 million.

The December quarter is historically slow for the consumer market. And this quarter, it is slightly lower than typical seasonality due to the smartphone inventory correction.

This inventory correction caused a dip in our expected fab utilization for Q4. We currently expect our Q4 utilization to be in the low 80% range.

However, looking to our design pipeline and forecast from customers, we expect 2014 will be a growth year with the historical seasonality recovering in Q2. Based on this revenue level and our manufacturing utilization forecast, we anticipate gross margin will be in the range of 29% to 31%.

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

Certainly. (Operator Instructions). Your first question comes from Blayne Curtis with Barclays.

Yes, this is Chris Hemmelgarn on for Blayne Curtis. And thanks very much for taking my question. I guess, first, if you could just provide a little more color on what you're expecting from the individual segments into the fourth quarter, that would be really helpful.

Okay. We'll do that. For the DSD, display solution, it's flat to slightly down; and power solution, flat to slightly up; and our foundry, slightly down.

Thanks very much. I guess then, as my follow-up, are you still expecting the overall AMOLED market to double next year? Any changes to that -- your expectations there?

What market?

AMOLED.

The AMOLED market, sorry.

We definitely think that it's going to increase next year.

Do you still see -- I think you'd mentioned last time that you see it roughly doubling? Does that still hold?

I think that we grew quite nicely this year. In my statement, I said we -- our revenue tripled compared to the last year. So, we still think that it's going to grow next year.

Perfect. Thank you very much.

You're welcome.

Your next question comes from the line of Mehdi Hosseini with SIG.

Thanks for taking my question. Sang, you talked about the smartphone inventory correction. Some of your peers have also talked about inventory flush at one particular handset OEM. Can you please elaborate or share with us some more detail if this is more high-end or still some [extra] inventory in the China or a combination? Or any additional color you could provide would be great. And I have a follow-up.

Well, we do have inventory correction by foundry customer. And I believe that it will reverse near future. And this is not one customer. It's a number of customers. But, one of the customers goes to not only to high-end and also to many various products.

Would it be fair to say that it's one or two specific non-Chinese customers?

It is non-Chinese. We don't do any foundry for the Chinese customer.

Okay. And then when you look in --

-- And I'm pretty positive it is inventory correction. So --

I see. So, to that end, when we look into the first half of next year, if the inventory correction is over and maybe some of the new programs beginning to materialize in the first half and accelerate in the second half, how would you describe the seasonality, especially -- specifically on the Q1? And I know it's a little bit early. But, we're just trying to figure out to what extent Q1 could be positively impacted if inventory correction ends in Q4.

Typically, Q1 is a soft quarter for us since we heavily still in the consumer market. And what we expecting in Q1 is a little more -- little soft, like a historical, but not more than that. That's current expectations.

But, just looking at our design pipeline and just looking at forecasts from customer, and we need more sockets into smartphone and particularly mid- to low-end smartphones, and the non-smartphone applications we're making a good progress. That's one of the reasons that we believe starting from the Q4 of next year and revenue recovering and we will grow into 2014.

You mean Q2, not Q4, correct?

Yes, Q2. I'm sorry.

Okay. Thank you.

Thank you, Mehdi.

Your next question comes from Ross Seymore with Deutsche Bank.

Hi, thanks for letting me ask a question. First, just a clarification, Sang, on your answer to an earlier question about these segments, just to make sure that I kind of understand what the adjectives mean. It seems like, if the display and the power sides are flat, up or down a little bit, that the foundry side, to get to the midpoint of your range, has to be down somewhere in the 15% to 20% sequential range.

If that math is correct, that seems a little more than slightly. Is that -- first, is the math correct, and is that just purely that inventory dynamic you're talking about?

Well, I say that display solutions will be flat to slightly down. And the power is flat to slightly up. And foundry business is slightly down.

Okay. But, I guess just to make the math work, the slightly down seems -- I don't know what your definition of slightly is. But, it seems like it's down -- 15% to 20% seems more than slightly. Just -- I guess the question just is if that is -- if that math is somewhat correct, more so than harping on the math, it's more about the drivers of it. Could you get into a little bit about what those drivers are? Is it just the inventory dynamic?

For the foundry business, yes, it's strictly inventory dynamics. And as a matter of fact, the foundry business today, we have a very strong new design win pipelines and many of new customers in the pipe, pipeline. And this business looks good into future. It is time that we're going through inventory corrections.

And again, though, like -- we do have a little more visibility in foundry. But, we have less visibility in display solutions. Probably those are the two business unit slightly down. And power will be flat to slightly up, hopefully.

And then I guess one last clarification. When you were describing the foundry business in your prepared comments, you said it would return to growth in the second half of next year. And then later on, you said you expected kind of normal seasonality with what I would assume to be the sequential growth in foundry would actually begin in the second quarter.

When you were talking about returning to growth in the second half, is that year-over-year growth that you were referring to, or is the foundry business, by the comments you gave, likely to not return to either sequential or year-over-year growth into the second half?

Based on current -- the pipeline we have, we're anticipating that, year to year, we're going to grow our foundry business in second half.

Okay. And then just two quick housekeeping ones for Margaret. One, what are you expecting for OpEx in the fourth quarter and then interest expense in the fourth quarter as well? And then I'll go away. Thank you.

Okay. For the OpEx for the fourth quarter, we're expecting between $40 million to $42 million level in terms of dollars. And we're still targeting our total revenue 18% to 19%. And the fourth quarter, that interest expense is around (inaudible) the $4.2 million to $4.3 million level, depending on the numbers of days.

Great. Thank you.

You're welcome.

Thanks, Ross.

Your next question comes from Suji de Silva with Topeka.

Hello, Sang. Hello, Margaret. In terms of the gross margin, the drop here, is that primarily driven by utilization? And if so, what's the utilization now? And is mix a factor there at all?

Well, utilization for the Q3, we ended 89%. And as I say in my statement, Q4, currently, we project low 80%s. So, the gross margin is caused mostly by fab utilization and also, again, product mix. And in the foundry, we do more Asian customers foundry than US customers foundry in Q4.

Okay. That's very helpful. And then, Sang, looking ahead, the 35 projects you have in the foundry pipeline, how does that compare to the last few quarters, to understand how the pipeline's growing for you?

It's tough to compare quarter to quarter. But, about a year ago, that's at least about three times higher.

Great. All right. Thanks for the color, Sang.

Thank you, Suji.

Your next question comes from Rajvindra Gill with Needham & Company.

Yes, thanks for taking my questions. Just going back to the gross margins, can you provide any details outside of the utilization rate about the margins expanding on the power management side, given the ramp of premium products? And how should we look at the power gross margins going forward?

Quarter to quarter, our power margin is growing. Again, though, we don't disclose any percentage by any business unit. But, quarter to quarter, power is improving. And gross margin decline is caused by foundry business.

So, if this is a decline in foundry, which is higher margin and lower utilization, what are the drivers for margins to pick back up again in Q1 and Q2 and Q3? Because that's a significant drop off in gross margins sequentially in Q4.

It is the inventory correction, I believe. And that's one of the reasons that we believe that we'll be improving --

So, the foundry business --

-- as fab utilization gets higher.

So, do you think you'll get back to the Q3, Q2 levels or higher?

Our midterm, the business goal and model is not changing. We're confident with the product mix and product shift that we do, yes, we will rise.

Thank you very much.

You're welcome.

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

Thanks for taking my questions. A couple of questions, Sang. In terms of foundry customers, you mentioned 35 new projects. Maybe can you give us a little bit more detail? Are these new customers? And if so, how many new customers?

And then also, what segment are you making these products for? Is it, again, in the handset side, or is it diversified in other areas? Any color you can provide would be appreciated.

Well, it's about 70% US and Europe-based customers and over 40% automotive and energy and industrial; and, of course, that's including smartphone and tablets and other applications as well. But, that's the major change for us. Compared to a year ago, we have very little automotive. We have none in green energy and industrial. But, this looks good. So, that's one of the reasons that, for the long-term, the -- that our margin improvement and revenue growth for the foundry business, we're more confident.

Okay. Now, in terms of the sensor business, you said you expect some design wins by the end of the year. Can you give us a little bit more detail on -- are these specifically the Hall sensors or the temperature sensors, or is it a mix? And again, what is the end product that these sensors are going into?

Well, it goes into mid- to low-end. And some of them is high-end, too. It's a -- most demanding sensor product by customer now is e-Compass. And also, we're talking to many customers on the Hall sensor. But, we're confident we will have a design win and hopefully a little bit of revenue generating by year end from e-Compass.

Okay. Now, your power revenues, despite the weakness in the TV and PC business, seem to be growing. Is it a reflection of the product mix, or are you seeing strength in other segments that I didn't mention just now?

Is the power or display?

Power.

Power.

Power. Okay. Power business, sort of flat to flat, but new product, super junction MOSFET, which we introduced in second quarter, and within about two quarters, generating 10% of our power revenue. So, that's the growth.

Well, I'm sorry. Power, you were up almost $5 million quarter to quarter. So, that's pretty significant. It's not flat.

No, what I'm saying is excluding super junction MOSFET.

Okay. Okay.

It's slightly growing. But, the super junction MOSFET helped us to grow.

Okay. Last question --

-- That's -- sorry, I -- so, that's the sort of story of our power growth. We're introducing new family of power products. We did super junction MOSFET. And we're looking into and will introduce generation five MOSFET and also PMIC and high-power module. So, we have a line of new products and will help us to grow our power products continuously.

Okay. In terms of the TV business, what's your view for next year, Sang? It's been weak almost all year, but it appears there is 4K TVs and ultra-HD TVs coming out. What is the outlook for next year? And how do you see yourself participating in that?

Well, obviously, the TV market has been slow. We're anticipating the next year UHD TV, which used two to four times more driver IC, depending on size of panel. And that's going to help us to grow. And that's our anticipation.

Okay. Then my last question on the buyback, do you expect to continue the buyback this quarter, or are you taking a pause? Can you give us any color there?

As long as the justification on return calculates to our -- whatever the numbers, yes, we will.

Okay. Thank you. Good luck.

Thank you.

Your next question come from Nick Gaudois with UBS.

Yes, hi. Can you hear me?

Yes, we do, Nick.

Great. Okay. So, first question is just coming back to displays a little bit. Could you give us some color now on how much AMOLED and mobile are of total revenues? And once, you talked about the correction in smartphones. Obviously, we are -- the panel business is starting to see declining capacity utilization rates at your customers, at least one of your two major customers, maybe not the other one. And that correction probably will continue at least into Q1.

So, maybe help us understand a little bit how you can buffer that, and if you're buffering this, if effectively your mobile exposure is helping. And I've got two follow ups. Thank you.

Nick, we don't disclose the AMOLED revenue, either dollars or percentage, because it's a single customer. But, that business has been -- really helped us this year and balancing a weak TV and large panel business. So, we are continuously growing our mobile-related.

We were much less participating in this business last year. We are into flagship this year. And we expect that we're going to be in two flagship models next year. So, for us, this is continuously a growing market opportunity.

Okay. So, effectively, your -- when you refer to the two flagship design wins, that's for models coming out in Q1 and Q3, respectively, next year?

Again, we're not allowed to be [specifically in] models. But, they do have more than two models. So --

Got it. Okay. So, that's helpful. Secondly, could you then give us a bit more color on the power mix? So, you just elaborated that PMICs continue to increase in power. High-power basically is still small but kicking in. So, maybe if you could summarize what is now the percentage of revenues in power coming from power management ICs versus discrete and also high-power. Of course, I assume high-power is still reasonably small.

I think that we want to define as a premium product versus commodity product. And current premium product -- let me look it up, the numbers, real quick, percentage. Percentage is about 26%. It's the same as the last quarter. But, the next quarter, we think it's going to go up.

Okay. And that's for power, right, specifically? Okay. Thirdly, you were expecting earlier in the year a large communication IC fabless company to kick in as a foundry customer. Is this happening in Q4 in actual revenues, or is that more a driver for next year?

The -- again, though, we're not allowed to use any names. We're continuously negotiating. But, the project is well underway and we're getting their designs. And hopefully, we get to engage into revenue generating starting from early next year.

Okay. That's great. And last question, I guess, just coming back to your gross margins longer term, obviously, Sang, you've been in this business for a very long time. Inventory corrections are just a fact of life in the semis industry. So, to some extent, what you're guiding for in Q4 is kind of a normal trough level. You just [exit] to the peak level.

How is that not to some extent really finding a little bit your gross margin targets medium term? In other words, if it is not, would any [project trade] back to what you were considering to be a business model, basically being largely mix related, going forward?

Maybe let me try to answer the question. And if I haven't, then you can ask me again. Again, though, Q4 down on gross margin is strictly driven by inventory correction-related utilization and plus the customer mix.

Again, that we know their inventory is reasonably well positioned. So, we expect that it's going to recover sooner or later. And that's one of the reasons, plus that we have strong pipeline of other business opportunity. And we feel comfortable with maintaining our midterm business model for the gross margin.

I guess, if I was to push back a little on that, the -- you could say 33%-plus, 34% is peak cycle. That margin guidance you just provided is cycle trough. In the next two to three years, you will see or your customers will see at some point inventory corrections again. So, why will -- how are we going to diverge from this range basically long term?

Again, though, we have a new line of products, such as sensors and LED lightings. And these products give us the higher margin. Okay? And when we're looking at year (multiple speakers) -- I'm sorry.

Please go ahead.

Yes, so, we will continuously grow, improving our margin because of our so-called premium new product, and plus that we continuously expanding our customer base for foundry for the commodity product. And that's going to help us maintaining reasonable the utilization rate.

When you compare fourth quarter utilization us to even our competitors in the foundry sector, our utilization is still higher. The reason is our business -- mix business model. And we have very diversified customers and product base.

Got it. So, effectively, you're banking on further diversification on customers, especially for foundries. And then we [see the] mix for new parts, basically.

Yes.

Thank you very much.

Thank you, Nick.

Your next question comes from Terence Whalen with Citi.

Hi, good afternoon. Thanks for taking my question. The first question's a pretty straightforward question. What portion of sales were smartphone-related in the quarter?

It's around 40%.

And then, Sang, can you help us understand what amount of that -- I think you made a comment that the mid- to low-end grew about 150% sequentially. What portion of that 40% is mid- to low-end? And as you look at the business maybe two to three years out, how would you expect that that would evolve?

Well, that's somewhere around maybe 20% of the smartphone. How it's going to grow, actually, we think it's going to grow. This product coming from the existing -- this revenue coming from the existing product. But we do have a sensor. We do have a new family of products that we're going to introduce to the mid- to low-end. And I think that we're going to grow in that sector.

But, we will be selective and focused due to the margin challenge. And so -- but, we're anticipating it's going to grow.

Okay. Terrific. And then, if I could switch gears, I think that Margaret mentioned in her prepared comments that accounts receivable increased because distributor sales increased. Can you give us some insight into how much distributor sales increased and just remind us roughly as a percentage of sales how much distributors account for? Thanks.

This quarter, our sales to distributors compared to last year was around the 7% to 8%, the increase. And then total is a little bit higher of 30%.

But, third quarter, the linearity in sales is more toward into the end of the quarter, which is pushing out the account payable -- receivable, I'm sorry.

Receivable, yes.

And then so, that sort of adds to it.

Understood. Yes, we've seen that with a lot of other reports this quarter as well. The next question I had was just thinking about gross margin heading into the first half. It seems like we're in a phase with the foundry business where we're expecting declines sequentially perhaps into the first quarter and maybe even in second quarter. I assume that remains your highest gross margin business.

I guess my question is, are there enough other elements going on within the mix of power and within the mix of display to compensate for that, or are we in general to anticipate a fairly suppressed gross margin trajectory in the first half?

Well, good question, Terence. As you know, we are meeting or exceeding last 11 quarter's guidance. So, obviously, we do have a potential upside. But, it's not in our -- the announcement. It could happen. But, again, though, visibility into the market, still limited. And high-end phones, again, that -- whether it's going to help us remains to be seen.

So, we do have a lot of product -- new product opportunity. And hopefully, that's going to help us. But, according to the customer forecast and, obviously, utilization, we see it's improving after fourth quarter.

Okay. Okay. Terrific. And then my last question is a little bit of a longer-term-oriented question on the foundry business. You've obviously had pretty large trough-to-peak swings in foundry as you've signed on new customers and as those new customers supplied increasing dollar content into rapidly growing tier one platforms.

We're seeing tier one decelerate. I think you're calling it an inventory correction. I think there was an attempt to delineate how much of this pressure is also just now sort of intrinsic in the business of being connected to tier one.

I guess my question is, going forward, when you talk about the reacceleration in the foundry business, you're talking about a lot of the profile of that growth being auto, industrial, being US long-tailed customers.

I understand that's an effort to improve the gross margin of that business. But, does that also signify that you think that there's less of an opportunity with the fabless smartphone suppliers going forward? In other words, will the constitution of growth take a different shape in foundry as we see acceleration at some point in second half 2014?

Well, what we see is we like to and we're willing to continuously support smartphone-related demand. At the same time, we need to diversity into non-smartphone as well. And at this time and with the only pipeline we have, which is mostly on the development, we can't really divide what percentage coming from which market as of today. But, our intention is continually supporting both.

Okay. Terrific. Thanks. Best of luck.

Thank you, Terence.

Thank you.

Robert?

Your last question comes from the line of Mehdi Hosseini with SIG.

Just two quick follow ups. Sang, can you elaborate on the book to bill for Q3?

You mean Q4?

Q3 and Q4. How -- ?

The -- since that our business model is very mixed, there is not one single book-to-bill ratio that I can give to you. Foundry has its own. And our standard product has a different ratio. But, it's on track as of today.

On track meaning that is it parity or below parity? How -- ?

[Toward in] guidance.

Okay. And then just a quick follow up on the power solution. The mix has increased from 15% of the total revenue in 2012 to almost 18% in 2013. Do you see that mix reaching 20% in 2014, or would you expect it to exceed 20%?

Mehdi, we're anticipating it's going to grow. but, I'm reluctant to give you any specific guidance. But, definitely power going to grow next year.

Okay. Thank you.

Thank you.

At this time, we have reached the allotted time for questions. I'll turn it back over to management for closing remarks.

Thank you, Stephanie. Our next earnings release and conference call is scheduled for January 28th, 2014. So, please look for details of this and other upcoming financial events on MagnaChip's Investor Relation's Website at www.magnachip.com. Thank you for joining us today.

Thank you. This concludes today's conference. You may now disconnect.