Magnachip Semiconductor Corp (MX) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2017 MagnaChip Semiconductor Corporation earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference is being recorded.

I would like to introduce your host for today's conference, Bruce Entin, Investor Relations. You may begin.

Thank you for joining us to discuss MagnaChip's financial results for the third quarter ended September 30, 2017. The third quarter earnings release that we filed today after the stock market closed and other releases can be found on the company's Investor Relations website.

The telephone replay of today's call will be available shortly after the completion of the call, and the webcast will be archived on our website for one year. Access information is provided in the earnings press release.

Joining me today are YJ Kim, MagnaChip's Chief Executive Officer, and Jonathan Kim, our Chief Financial Officer. YJ will begin the call with a discussion of the company's recent operating performance. Following YJ, Jonathan will provide an overview of our financial results. YJ will then briefly provides a recap as well as provide financial guidance for the fourth quarter of 2017. There will be a question and answer session following today's prepared remarks.

During the course of this conference call, we may make forward-looking statements about MagnaChip's business outlook and expectations. 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 our SEC filings.

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, but are intended to illustrate an alternative measure of MagnaChip's operating performance that may be useful. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in our third quarter earnings release available on our website under the Investor Relations tab at www.magnachip.com.

I'd now like to turn the call over to YJ Kim. YJ?

Thank you, Bruce, and good afternoon to everyone on our Q3 2017 conference call.

We ended up with a strong financial performance in Q3. Revenue increased sequentially for the first 3 quarters. Gross profit margin, operating income, and adjusted EBITDA in Q3 all were at their highest levels in more than 4 years.

Revenue of $176.7 million declined year-over-year by 8.1% from $192.3 million, but increased 6% quarter-to-quarter and was at the higher end of the guidance range. The sequential improvement in revenue was driven primarily by double digit gains in both the power and display business lines. A key takeaway is that growth resumed in our OLED business in Q3. More on this later in the call.

Gross profit margin of 28.5% in Q3 came in above the midpoint of the guidance range and compared to 28% in Q2 '17 and 20.4% in the third quarter a year ago. Foundry gross margin topped 30% in Q3. Operating income of $15.5 million, or 8.8% of revenue, was up nearly 60% from $9.7 million or 5.8% in the second quarter of this year, and compared with operating income of $0.6 million or 0.3% in the same period a year ago. Adjusted EBITDA came in at $24.7 million or 14% in Q3, up 22% sequentially from $20.3 million or 12.2% in Q2 '17. And it more than doubled from the $10 million or 5.2% reported in Q3 last year.

We achieved these improved financial results in Q3 despite a lingering slowdown in the China smartphone market and an August power outage that caused us to scrap wafers and briefly halt production in our larger fab. Back in August, we estimated that the incident had the potential to impact Q3 revenue by up to $3 million and gross profit by up to $1.5 million, but we made a full recovery within the quarter. I'd like to take a moment to thank publicly everyone in the factory for rising to the challenge and for keeping MagnaChip on track in Q3.

When we reported our 2016 financial results back in February, we said our top priority in '17 would be focused on overall profitability. We identified gross profit and adjusted EBITDA as key financial indicators and asked you to watch this space. We believe our financial results in Q3 and for the first 9 months of the year are evidence so far that MagnaChip is meeting its commitment to achieve profitability.

Let's take gross profit, for example. Gross profit increased sequentially in each of the first three quarters of 2017, bringing the 9 month total to $138.5 million, or $28.4 million more than we earned in the first three quarters of 2016. In our foundry business, the cumulative gross profit for the first 9 months of 2017 actually is slightly higher than the gross profit total for all of 2016.

Adjusted EBITDA also has shown dramatic improvement. Through the first three quarter of 2017, the cumulative total for adjusted EBITDA was $58.1 million, or 43% higher than the total for all of 2016.

Now let's do a deep dive on the financial results and operating performance in our 2 operating segments, beginning with the foundry. Foundry revenue in Q3 was $80.4 million, down 1.4% from $81.5 million in Q2 and up 8.9% from $73.9 million in the third quarter of 2016. The combined foundry revenue in Q2 and Q3 reflected the normal business patterns. Gross profit margin was 30.3%, an increase of nearly 7 percentage points from 23.5% in the third quarter of 2016, while gross profit margin in Q2 '17 was 28.7%.

Fab utilization in Q3 remained in the low to mid 90% range, and we continued to benefit from our improved profit mix, reduction in manufacturing headcount, and a strong pipeline of business from foundry customers serving multiple end markets. Foundry revenue from new products, which is one indicator of pipeline strength, increased 16% in the first nine months of 2017 as compared to the same period in 2016. And those new products accounted for 20% of total foundry revenue in Q3.

And finally this data point; our BCD and E2PROM process offering continue to be a foundry growth driver, as revenue from this analog-based technology increased a cumulative 80% through the first three quarters of this year as compared to the first nine months of 2016.

Since the foundry pipeline is an important gauge for future business, we continually look for ways to backfill it by attracting new foundry customers or by securing additional projects from existing customers. As part of these efforts, we conduct foundry technology symposiums around the world to showcase our specialized analog and mixed signal process expertise and customized manufacturing capabilities. So far this year, we have held foundry symposium events in Silicon Valley and in Taiwan, where last week we had a record turnout of 170 attendees from the customers and partners.

Now turning to our standard products group, which includes our power and display standard product business lines, revenue in the standard products group was $96.2 million in Q3, down 18.7% from Q3 a year ago, due primarily to previously disclosed softness in our OLED business. However, SPG revenue in Q3 increased 13.1% sequentially from $85.1 million in Q2 of this year due to an improved revenue performance by both the power and display business, including the OLED business.

Gross profit in the standard products group was $25.9 million in Q3, an increase of 19% from $21.7 million in Q3 a year ago, and an increase of 12% from $23.1 million in Q2 '17. Gross profit margin benefitted from a better product mix, an increase in fab utilization, and a planned reduction in the workforce earlier in the year.

That's the big financial picture in the standard products group. Here is the business breakdown and details, beginning with the power products. We have transformed our power business from top to bottom. We've invested in the development of premium products, killed weak margin performance, streamlined the organization, and installed new R&D top management. The results have recently begun to show.

Power revenue in Q3 hit $39 million, up 10.4% from Q2 '17 and up 16% year-over-year. We don't break out gross profit margin for the power business, but last quarter we disclosed that gross profit had improved nearly 10 percentage points over the last two years. I can tell you that a richer product mix contributed to even further gross profit improvement in Q3.

The main growth drivers in Q3 in the power business stem from demand for power MOSFETs based on superjunction switching technology used in LCD TVs from Korea and China, as well as for industrial applications including LED lighting, power supplies, and power tools. Demand for battery MOSFETs was solid for smartphone applications and our IGBT power offerings were also in demand for e-bikes and other industrial motor control applications. Superjunction MOSFET hit double digit dollar revenue per quarter for the first time in company history.

Now turning to the display standard products business, revenue in the display business in Q3 was $57.2 million, a decline of 32.4% from $84.7 million in Q3 of 2016, stemming from a decline in the OLED business due to previously disclosed product timing issues and a slowdown in the China smartphone market.

However, revenue in the display business in Q3 increased sequentially by 15% due to a resumption of growth in our OLED display business and continued strong demand of LCD display drivers for large panel UHD TVs. Notably, revenue for the non-OLED display drivers increased for the second straight quarter. And our display driver ICs currently are designed into 32 models of UHD TVs, primarily from Korean and Chinese TV manufacturers.

Let's turn now to OLED. As a background, we disclosed our forecast earlier this year, which indicated that our OLED business would bottom in the second quarter of 2017 and resume revenue growth in the third quarter. As it turns out, that's exactly what happened.

Revenue from OLED display driver ICs increased 15.6% sequentially in Q3 as we commenced volume production of new 110 nanometer design wins as well as new 35 and 40 nanometer design wins to meet customer demand. The new 55 and 40 nanometer OLED display driver ICs allow for bezel-less smartphones, ultra wide aspect ratios like 19 by 9 or 19.5 by 9, and high resolution screens ranging from full HD Plus to wide QHD Plus resolutions.

OLED revenue in Q3 totaled $17.6 million as compared with $15.2 million in Q2 '17, and represented 31% of the total display business in Q3. OLED revenue growth in the third quarter likely was constrained in part by the delay of certain product launches by Chinese smartphone makers that apparently were waiting until now to evaluate the features of a flagship OLED smartphone that just recently went on sale from a leading global brand. We believe this now clears the way in the coming months for the Chinese smartphone makers to introduce new midrange and high-end smartphone models in China and elsewhere.

The smartphone market may have been slower earlier this year, but we've been busy preparing for the eventual recovery, especially in the China market. We have introduced 4 new advanced OLED display driver ICs so far this year, including a second 40 nanometer display driver IC that we sampled a few weeks ago. So now we have two 40 nanometer and two 55 nanometer versions of different feature sets that allow for flexible and/or bezel-less smartphones with ultra wide aspect ratios and screen resolutions ranging from full HD Plus to W-QHD Plus.

So far this year, we have secured design wins for about a dozen different smartphone models from multiple leading smartphone makers, and we commenced volume production late in the third quarter on 40 and 55 nanometer drivers as well as our 110 nanometer OLED driver in order to begin to meet customer demand on the latest new smartphone models. A second generation 55 nanometer flexible bezel-less display driver is expected to begin production in Q1 2018. The second 40 nanometer bezel-less display driver we just sampled a few weeks ago is expected to begin production in the first half of 2018.

We currently expect to generate modest sequential growth in our OLED business in the current fourth quarter due primarily to the slow pace of new smartphone introductions in the second half of this year. This was due to a plan by many smartphone makers to delay their product to be more competitive with the latest phone from a global brand.

Now that the global brand has introduced its flagship OLED model, we would expect to see a broader pick up in new smartphone launches in China beginning as soon as later this year and into the first quarter of 2018. We have already seen one major smartphone maker in China that has already launched a high-end OLED smartphone using one of our new driver ICs.

We are setting our sights higher for 2018 and continue to expect our OLED business to once again substantially exceed the industry rate of growth in 2018. Based on our current visibility and insight about multiple smartphone introductions that are in the works for the first quarter and beyond, we believe we have the potential to generate OLED revenue that will ramp in 2018 and exceed 50% growth, or clearly exceed $100 million for 2018.

Now let's talk about the competitive environment. There is a lot of noise in the market about potential OLED competition. But as it stands right now, we are the only non-captive supplier of OLED display driver ICs to the top 2 OLED panel makers in the world, period. Competing against the internal suppliers within these Korean panel makers has sharpened our engineering and manufacturing skills and fine-tuned our understanding and development of the latest IP to meet demanding OLED panel requirements.

We have said this before. It's worth repeating. We've been in the OLED business for 10 years and have deep experience in this space. We have unique IP, about 50 novel design and process technology patents related to OLED, and strong relationships with the world's top two AMOLED panel makers that have manufacturing leads estimated in years and overwhelming market share. Finally, we operate in a country that views OLED IP as a national treasure.

We take it as a given that at some point somewhere down the road there will be OLED newcomers, but we have a wide lead and we are not standing still. We already are working on next generation 32 and 28 nanometer display driver ICs that could well be introduced in late 2018 or in 2019, and our broad power and display product portfolios and specialized foundry services help us expand our footprint and deepen our relationship with customers all along the smartphone food chain in China and elsewhere.

Now I'll turn the call over to Jonathan to review our financials, and then I will come back to sum up and provide financial guidance. Jonathan?

Thank you, YJ, and welcome to everyone on the call. YJ provided a detailed view of our business and financial performance in Q3, so I'll provide context around our financial results for the first nine months of 2017 and provide commentary on the below the line P&L items and balance sheet highlights for the third quarter.

Let's start with how our hybrid business model worked to our financial advantage in the first nine months of 2017 by balancing out our revenues and helping MagnaChip avoid a downdraft in our cumulative financial results. Revenue for the first nine months of 2017 was $505.1 million, down $2.4 million or 0.5% as compared to $507.5 million in the first nine months of 2016.

This relatively flat year-over-year performance was achieved despite a $45.5 million decline in revenue from our standard products group during the same period, stemming from weakness in our display business and also a slowdown in the China smartphone market. However, that $45.5 million revenue decline was offset in large part by a $43.3 million increase in revenue from the foundry services group during the same timeframe.

The offsets from our 2 operating segments help explain how total cumulative revenue was flat in the first nine months of 2017 versus 2016, while beneath the surface revenues from the different business lines were moving in opposite directions, and it helps to explain that benefit of having a diversified and balanced standard product portfolio and a foundry service business as well. The 2 operating segments account for essentially all of the revenue for MagnaChip.

For the first nine months of 2017, our foundry services group represented 47.4% of total revenue for the company, up from 38.7% of revenue for the first nine months of 2016. In comparison, our standard products group, which includes the display and power business lines, represented 52.6% of revenue, down from 61.3% in the first three quarters of 2016. Our top 10 largest customers accounted for 59% of revenue in the first three quarters of 2017, down from 65% in the same period a year ago.

Turning to gross profit, YJ discussed the progress we've made in generating gross profit dollars in Q3, and the same can be said of the progress we made for gross profit margin over the first three quarters of the year. Over the first nine months of 2017, total gross profit margin increased to 27.4% compared to 21.7% for the same period of 2016. The increase in total gross profit margin can be tracked back primarily to a 52.5% increase in gross profit dollars from our foundry services group.

Gross profit margin in the foundry services group was 29.2% over the first three quarters of 2017, up nearly 6 percentage points from 23.4% in the same period a year ago. Gross profit margin in the standard products group was 25.8% over the first three quarters of 2017, up approximately 5 percentage points from 20.9% in the same period of 2016.

As a side note, gross profit margin in the OLED display driver IC business once again was higher than the corporate average in Q3 as well as for the first three quarters of 2017.

Gross profit margin in both the standard products group and the foundry services group benefitted from a richer product mix, an increase in fab utilization, and a favorable impact from the reduction in headcount that occurred in the first half of 2017. As a reminder, the headcount reduction is expected to generate annual cost savings of approximately $24 million, with expected payback period of less than 1.5 years.

Now turning to adjusted EBITDA, another key financial indicator for MagnaChip, YJ mentioned that adjusted EBITDA more than doubled in Q3 this year as compared to Q3 a year ago, and the same can be said for the nine month period. For the first three quarters of 2017, adjusted EBITDA was $58.1 million or more than twice the adjusted EBITDA of $26.6 million in the first nine months of 2016.

Now turning back to the P&L, selling, general, and administrative expenses were $17.3 million or 9.8% of revenue for Q3 as compared to $20.1 million or 10.4% of revenue for Q3 a year ago. The decrease was primarily attributable to a decrease in salary expense as a result of our headcount reduction. SG&A was also lower than otherwise would be expected due to an adjustment of certain accruals related to performance-based compensation expense, estimated based on our latest financial assumptions for 2017.

Research and development expenses were $17.6 million or 9.9% of revenue in Q3 as compared to $18.4 million or 9.6% during the same period in 2016. The decrease of $0.9 million or 4.8% was primarily attributable to a decrease in salary expense as a result of our headcount reduction of non-key R&D personnel. We continue to believe that R&D expense would likely rise in 2018 as we continue to invest in new initiatives, including new OLED products to fuel profitable growth in the future.

Net foreign currency loss for the third quarter was $3.7 million compared to a net foreign currency gain of $33.2 million for the first -- for the third quarter of 2016. A substantial portion of our net foreign currency gain or loss is non-cash translation gain or loss associated with the intercompany long term loans to our Korean subsidiary, which is denominated in U.S. dollars and is affected by changes in the exchange rate between the Korean won and the U.S. dollar.

Operating income increased by $14.9 million in Q3 to $15.5 million compared to $0.6 million in Q3 2016. The increase in operating income resulted from an $11.2 million increase in gross profit, a $2.8 million decrease in SG&A expenses, and a $0.9 million decrease in R&D expenses.

Net income on a GAAP basis for the third quarter was $5.6 million or $0.16 per basic share and $0.15 per diluted share, as compared with net income of $29.9 million or $0.86 per basic share and $0.85 per diluted share in the third quarter of 2016 and compared with a net loss of $8.1 million or $0.24 per basic share in the second quarter of 2017.

The decrease in our net income year-over-year on a GAAP basis is primarily due to the net foreign currency changes, which is primarily comprised of non-cash translation associated with our intercompany long term loans.

There were 34.1 million basic weighted average number of shares outstanding and 45.5 million diluted weighted average number of shares outstanding. The difference between earnings per basic share and diluted share primarily relates to the dilutive effect of including the company's exchangeable notes as if they were converted into shares at the beginning of the period.

Adjusted net income, a non-GAAP financial measure, for the third quarter of 2017 totaled $11.4 million or $0.33 per basic share and $0.28 per diluted share, as compared with adjusted net loss of $1.3 million or $0.04 per basic share in the third quarter of 2016, and compared with adjusted net income of $7.8 million, or $0.23 per basic share and $0.21 per diluted share in the second quarter of 2017.

Turning to the balance sheet, cash and cash equivalents totaled $128.4 million at the end of the third quarter, a decrease of $3.1 million from $131.5 million at the end of the second quarter of 2017.

Inventories; we continued to tightly manage inventories in Q3 in a way to produce sufficient levels of inventories needed to support the growth of the business, and also to preserve working capital. Inventories at the end of Q3 were $57.2 million as compared with $72.1 million at the end of the third quarter of 2016 and $58.1 million at the end of second quarter of 2017.

Accounts receivable was $86 million at the end of Q3 as compared with $66 million at the end of Q3 2016 and $76 million at the end of Q2 2017. The year-over-year increase in accounts receivable reflects a deliberate and strategic financial decision to significantly limit the practice of offering discounts to customers in exchange for early payments. The change in practice was made possible by the substantial increase in our cash position from year-ago levels.

Capital expenditures in Q3 were $8.5 million as compared to $5.4 million in Q2 2017 and $5.5 million in Q3 2016. Capital expenditures through the first nine months of 2017 were $19.3 million, an increase of $7.9 million or 69.8% from $11.3 million for the first nine months of 2016. The increase was mainly due to equipment purchased to support demand from our customers.

Based on our current estimates, we now anticipate 2017 capital expenditures will be up to approximately $32 million, an increase of approximately $2 million from a previously disclosed forecast. Management intends to install additional fab equipment to be able to satisfy product demand in future periods from a particular new foundry customer, which is a good example of how we continually look for ways to backfill our foundry pipeline, as noted by YJ earlier.

In summary, we've managed the business to enhance profitability and to invest in initiatives to fuel profitable revenue growth in the future. We've made good progress so far, but this effort is an open-ended goal, not a project or a campaign with an end date.

With that, I'll turn the call back to YJ. YJ?

Thank you, Jonathan. As we enter the home stretch of 2017, we feel very good about the progress we've made so far this year on the financial and the operation fronts. Our key financial indicators have moved in the right direction, as gross margin and adjusted EBITDA in Q3 were at the highest levels in more than 4 years.

We have executed well in our 3 business lines in Q3. We breathed new life in our power standard products business and made progress on both the top and bottom lines. Our fab utilization, which was only in the low to mid 60% range two years ago, today is hovering in the low to mid 90% range. Tape-outs are up, and the long term pipeline is getting strong.

Our non-OLED display business has grown for two straight quarters, and we now are designed into nearly 3 dozen UHD TV models. The OLED business is coming back, slowly at first, but there is little doubt about the direction it is heading.

Smartphone makers hit the pause button in recent months so their new product launches would coincide with the leading global brand, whose flagship model has just now hit the market. We weathered that slowdown, and we are in a really good position to capitalize on what we see as the coming recovery.

It is becoming clear to us that OLED is becoming the de facto standard display panel in midrange and high-end smartphones. We have introduced 4 state of the art OLED display driver ICs, and already secured about a dozen design wins for OLED smartphones in China, Korea, and elsewhere. A few have been introduced and others should appear in Q1. We believe our smartphone design footprint will significantly grow from current levels in 2018.

We continue to innovate with new display driver ICs for our product roadmap. We are far along in the development of next generation 32 and 28 nanometer OLED display driver ICs, with even more advanced features that will debut either in late 2018 or in 2019. As the only non-captive supplier of OLED display driver ICs, we have a wide lead in the market for OLED display driver ICs, and we don't intend to take our foot off the product development gas pedal.

Based on our OLED design wins and our current visibility, we believe our growth will regain momentum as China smartphone makers begin to unveil various dazzling new models in Q1. As a result of our new product and design wins, deep relationship with the top two panel makers, we are confident that MagnaChip will grow faster than the OLED panel industry in 2018. And we currently anticipate that we have the potential to generate OLED revenue that will exceed 50% growth, or clearly exceed $100 million in 2018, based on the design wins we have in-house or in the pipeline.

The third quarter is a typically seasonal revenue peak for MagnaChip, and this 2017 is following our seasonal norms. While a timing shift will push several new OLED smartphones into Q1 2018, we still expect a slight uptick in our OLED business in Q4. Power likely will be flattish and the non-OLED display and foundry business will likely drift lower, consistent with Q4 seasonal patterns.

Looking ahead, there are many ways to grow our business over time and across the board, and we have set ourselves up nicely to do just that. With that, let's turn now to our forward-looking guidance.

For the fourth quarter of 2017, MagnaChip anticipates revenue to be in the range of $171 million to $177 million, flattish or down sequentially 0.6% at the midpoint of the projected range due to typical seasonal factors. The guidance for the fourth quarter compares with revenue of $176.7 million in the third quarter of 2017 and $180.5 million in the fourth quarter of 2016; gross profit margin to be in the range of 27% to 29%, despite an increase in raw silicon wafer prices, as compared to 28.5% in the third quarter of 2017 and 25.5% in the fourth quarter of 2016.

Now I will turn the call back to Bruce. Bruce?

Thank you, YJ. So Glenda, this concludes our prepared remarks. We'd now like to open the call for questions.

Thank you. (Operator Instructions) And our first question comes from the line of Rajvindra Gill from Needham. Your line is now open.

Yes, thank you and congrats on steady progress, good progress across all fronts. Just a question on the gross margin. So the foundry gross margins have done very well the last several quarters, and that's clearly due to higher utilization rates and also, I would imagine, part of the cost restructuring initiative. How do we think about the foundry gross margins going forward since it drove -- has been driving a tremendous amount of the increase in gross profit? Are we going to see more margins, a higher favorable mix shift in foundry? How do we think about the foundry gross margin specifically going forward?

Sure. And when we think about profitability and gross margin, there are many components, and we have to be doing many things right all at the same time to maintain or grow profitability. And as you know, we've already done some significant actions to improve profitability. And as you mentioned, we looked at our product portfolio, brought in some new customers. We're securing also new opportunities.

And so there are significant actions that we've done on the revenue side as well as the cost side. As you know, we've done a recent headcount reduction. So these are kind of activities that we have consistently and successfully executed up until this point. But I think it's important to know that we're not stopping here and we will continue to look for these kinds of activities with a focus on profitability.

Okay. And you had mentioned that the OLED gross margin is higher than corporate average. So as OLED is going to increase 50% year-over-year, based on what your forecast is saying, we should start to see a favorable mix shift and the impact of that on gross margins going into next year. Is that fair to assume, that the OLED will be also a gross margin driver next year in addition to revenue?

Well, right. So when we have the better product mix, obviously that has a positive impact to our gross margin. But there are also some -- there could be some headwinds. And we did mention the overall wafer pricing sort of going up, and that's what we've been seeing out in the market.

So we're continuing to closely monitor the situation, and we'll obviously address that issue to make sure that it has minimal impact. And also on the non-OLED side, LCD pricing has also been decreasing. So these are some of the things that I've also talked about earlier with regards to profitability, that there are many moving parts and we will be addressing these items. And again, our focus is on profitability.

Sure. And last question for me, YJ. So a lot of excitement around OLED for you guys, but you kind of mentioned in Q4 some sequential growth. Now that the new phone has come out from the top OEM -- I wish we had a better sense of when the production is going to be. When are we going to -- I would expect maybe that the Q4 OLED number might be -- would have been higher given that the Chinese OEMs I think have a good sense of the timing. So I was wondering if you can just talk to that issue real quick.

Yes. So I think that product launch from that global brand, I think where everyone was expecting it to be September and roll it out September, but as we know that it's just shipping this week, which is November, about two months later. So that has a kind of shift to the whole value chain, food chain who wanted to sync and actually see and see the reaction. I think everyone saw that.

And that global phone had key features, I'm sure which you're aware of, including the ultra wide aspect ratio including the notch design and the AMOLED and bezel-less and so forth. So our chip that we taped out in 40 and 55 had all these features, and our customers -- and customers are maybe trying to be more competitive. And that has shifted many of the product launch into Q1 '18.

But as we said, we have about a dozen design wins that we know and in the pipeline. So we feel confident that we can exceed 50% growth next year as well as clearly exceed $100 million revenue for OLED next year.

Okay, very good. Thank you.

Thank you. And our next question comes from the line of Suji Desilva from Roth Capital. Your line is now open.

Hi YJ. Hey Jonathan. Congrats on the progress here on the adjusted EBITDA and all the metrics. Look, in the OLED business, can you talk about the -- updated us on the progress of your second customer and when the timing of that customer ramping would be versus your primary customer?

Are you talking the panel customer?

Correct.

So as I said today in the transcript, that the -- all of our 110, 55, and 40 nanometer have begun production in Q3. So all my two panel makers have gone to production.

Okay, great; appreciate that update. And then as we look ahead at the 55 and 40 nanometer ramps, is that -- are those parts -- are we seeing the majority of the customers kind of moving towards these new features, or is it just a handful and some are sticking with the more traditional rigid form factors? What's the kind of mix you're going to see in OLED as that ramps up in '18?

That's a very good question. So a lot of people I think divided based on rigid and flexible, but our view is different. We call rigid, which is traditional rigid, and then there's a bezel-less rigid and then there is a flexible and bezel-less, okay? All our chip does either bezel-less or flexible bezel-less. So we are more progressive and more sexy to the end customer.

So we don't -- we are not shipping the -- our state of art drivers enable all these features with ultra wide aspect ratio and at least bezel-less design so that it doesn't look like rigid. So that's the -- our key benefits.

Okay. So you're more flexible for the customer, it sounds like. So that's a --.

From the end user perspective, even the rigid will look like -- more like flexible. And that's why we call bezel-less rigid, and we just call it bezel-less.

Okay, got it.

It requires a different packaging technology.

Got it, okay. And then --.

So we are one of the leaders in that, yes.

Okay, sorry. And then also outside of OLED, the power business started to grow again. Should we expect that business to kind of resume a growth trajectory or are you still kind of pruning that portfolio?

We continue doing what we're doing. We are doing the portfolio optimization. We are pushing hard to make the premium portion of the business grow. So that's what we'll continue doing. We are making steady progress, and you saw the progress we have made the last 24 months with the 10 percentage points in gross margin up. And we continue making steady progress.

Okay. And then lastly for Jonathan, the restructuring cost benefits, is there still impact from that flowing through in the early 2018 timeframe, or has that impact largely been comprehended in the numbers? Thanks.

Yes. So thank you for the question, Suji. The full effect of the cost savings in connection with the headcount reduction is being reflected in Q3. And of course, we will continue to benefit from the headcount reduction that we completed.

Okay. Again, nice job on the progress guys. Thanks.

Thank you.

Thank you. (Operator Instructions) And our next question comes from the line of Amanda Scarnati from Citi. Your line is now open.

Hi, thanks for taking the question. Just kind of continuing on the OLED trajectory, what were the percentage of sales for OLED this quarter versus last quarter?

Yes. Thank you. So the OLED accounted for 31% of the display this quarter in Q3, and last quarter was also 31%. But the actual number is $17.6 million, and last quarter was around $15 million. So we grow about 15% or so, 15.6% from Q2.

Okay. And then as we expect to see more Chinese smartphones coming out early next year and strong growth in OLED to hit that $100 million potential target, do you expect to see that percentage of sales of the display business grow, or should we also see continued strong growth in other areas of the display business?

We are only guiding the outlook of the OLED at the moment because OLED has been a very key focus for a lot the investors. So right now we feel very good about the OLED pipeline. And so based on the designs and the competitiveness, we are sharing the OLED outlook despite we're not in Q4 guidance yet.

Sure. And the next question I had was on CapEx. I just wanted to make sure that I heard that comment correctly, that it's estimated to be about $32 million for 2017. And if that's the correct number, it seems like quite a big step up from last year. Can you talk about what's going on there and how those expectations changed since last quarter?

Right. So yes, you did hear right. And the previous estimate that we made was about $30 million. We added approximately $2 million to that budget, and it's in connection with a new foundry customer that we brought in. And here's a good example of the foundry services group bringing in new customers to backfill our pipeline, as YJ mentioned in his prepared remarks.

With respect to the CapEx and how we should be looking at it, we've historically trended about 4% to 5% of revenue in CapEx. And I think also this year is in line with that range. And so when we look at CapEx, we are very careful about how we spend CapEx. Every dollar that we put into equipment, we want to make sure that the equipment is fully utilized. And also at the same time, obviously we try to be smart about how we use our CapEx to make sure that we're meeting the demands of our customers.

Okay. And then is there any gross margin benefit left from the restructuring and the employee severance, or is that pretty much all taken out at this point?

Yes. So as mentioned earlier, Q3 does reflect the full benefits of the headcount reduction.

Okay, great. That's all I had. Thank you.

Thank you. And I'm showing no further questions over the phone lines at this time. I would like to turn the call back over to Bruce Entin for closing remarks.

Okay. Thank you, Glenda. So this concludes our third quarter earnings conference call. Please look for details of our future events on MagnaChip's Investor Relations website. Thank you for joining us today.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone have a great day.