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Executives

Robert Pursel - IR

Sang Park - CEO

Margaret Sakai - EVP and CFO

Analysts

Terence Whalen - Citigroup

Ross Seymore - Deutsche Bank

Raji Gill - Needham & Co.

Blayne Curtis - Barclays Capital

Jay Srivatsa - Chardan Capital

Magnachip Semiconductor Corp (MX) Q1 2013 Earnings Call April 30, 2013 6:00 PM ET

Operator

Good evening. My name is Mathew and I'll be your conference operator today. At this time I would like to welcome everyone to the MagnaChip Semiconductor's Q1 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 will now turn the call over to you host, Mr. Robert Pursel. Mr. Pursel, you may begin

Robert Pursel

Thank you, Mathew. Good afternoon and thank you, or good evening, and thank you for joining us for MagnaChip's first 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 first quarter business highlights and Margaret will discuss our financial results. Following Margaret's financial discussion, Sang will provide our second quarter guidance, after which we'll open the call for questions.

During the course of this conference call, we may make forward-looking statements about MagnaChip's business outlook, including statements regarding our expectations for 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 first quarter business. Sang?

Sang Park

Thank you, Robert. Looking at the quarter revenue of $205.3 million was down 5.9% sequentially, but up 16% year-over-year. Gross margin of 32%, was down 210 basis points, compared to the last quarter but up 380 basis points, compared to the Q1 of last year. We increased the revenue and margin expansion compared to the same quarter of 2012 because of product mix and customer shift we have made. It has enabled us to better align ourselves with the growing market.

The March quarter has been typically weak quarter for us due to the post-holiday consumers spending slowdown; however, in addition to the normal seasonality, we also experienced lower than anticipated demand from the Smartphone market. Despite these obstacles, we were again able to achieve our financial guidance for the ninth consecutive quarter.

We have transformed our business over last two years by aligning with fast growing market. Our diversified customer base and product portfolio allowed us to adjust quickly to the dynamic business environment. We believe the macro-environment is gradually improving and new product introductions scheduled from leading Smartphone makers are in the pipeline.

To continue our revenue growth and margin expansion, we are introducing a number of strategic initiatives, targeted at new and existing customers. This includes creation of totally new product line of sensor ICs with our display solution division. The first product we plan to deliver include a smartphone sensor IC and the compact solution for the mobile applications.

These new products are under development and in response to request we have been receiving from our customers. The new products we will be introducing fit very well within our existing technical expertise and capabilities. They will be included in our display solution divisions and will be managed using existing resources and budget.

Looking ahead challenges still remain and visibility is somewhat limited; however, we remain optimistic that macro-environment is starting to improve and that our business will return to the normal seasonal growth beginning in the second quarter.

Now, let me discuss the highlights of our three business segments. For power solutions, firs quarter revenue was $30.2 million, up 5.5% sequentially and up 19.5% year-over-year. For the first quarter power management IC products revenue grew approximately 30%, compared to the prior quarter and we presented over 30% of total power segment revenue this quarter. Power management IC are expanding premium product category within our power solution segment and was 16% of power revenue in the first quarter of 2012.

As we anticipated, the notebook and PC market continue to be weak through the first quarter. However we are seeing demand from Korean and Chinese customers beginning to pick up in the second quarter.

Looking ahead, our roadmap of new product will drive revenue growth and margin expansion in the power segment. Premium product will become a larger part of product portfolio, as we invest more resources to develop a strong design pipeline. For example our power management ICs now covered a broad range of applications, including 3D, smartphones, LED lighting, tablet PCs, solid state drive and set top boxes.

We are ramping up new LED backlight unit driver at two leading Korean TV manufactures and revenue from this IC has increased 50% quarter-over-quarter. We also have penetrated Chinese TV market with a design win at a major Chinese OEM, in addition to our existing designs at two other top Chinese TV makers.

Varied (ph) perfection is another target obligations to our power products. We have super-junction design win at our leading Korean Smartphone OEM, for power adapters used toward their flagship smartphone models.

Our super-junction designs are also finding their way into LED TV and LCD TV, as well as high voltage power supply products and retail LED lighting products. We are also expending our LED lighting products into China.

For display solutions, first quarter revenue was $70.3 million up 3.4% sequentially and down 15.5% year-over-year as LCD depended market remains generally weak. The bright spot for us is that we continue to be the supplier of choice for display IC at a major Korean smartphone and tablet PC manufacturer and our AMOLED revenue is expanding their in there as well.

A part of the future generation of this business will acquire very fine geometry on advanced 12 inch wafer manufacturing equipment. So we are working with outside foundry providers to support this requirement.

With our designed expertise, strong customer relationship and access to external foundry process technology, we can continue our success as the leading Korean OEM while managing our CapEx to the current level.

In addition to our display solutions for large for factor high definition TV and ultra-high definition applications, as well as smaller display for AMOLED Smartphone and car navigation system, they also provide solutions for medium sized product, such as the popular tablet PC's and monitors for the computing applications.

We now have a design win for the seven different models of tablet PC's at two leading Korean customers and we simply capture or design win for a timing control to be used in Mexican variation Microsoft based tablet.

As I mentioned earlier, we are expanding display solution division by introducing new product category, we are calling sensor IC's. Our first sensor will introduce products such as the smart hole (ph) sensor IC and our E compass which will be used for mobile applications.

We are working closely with our end customer who has been requesting these new products. We expect that our sensor IC shipment will expand and contribute to the revenue growth over the next few years with an improved margin. I also want to say that we have no plan to develop our own touch sensing controller IC and for our foundry segment.

First quarter revenue was $104.1 million down 7.6% sequentially, but up 53.5% year-over-year. Our Q1 revenue reflected typical seasonality as well as some channel inventory correction, which we believe is a short term.

Compared to the same period last year, we have driven our product and customer shift focused on larger and more diversified markets. Our 53% growth compared to the same period last year demonstrates we have made a successful product and customer transition and reduced our expose to some lower-end consumer applications.

Our non-Asia customer base now represents nearly half of our foundry segment revenue, as we target the high growth and higher margin markets. We have continued to expand our marketing activities in U.S. and expect to announce a number of new customers in very near future.

In order to accomplish this we have broadened our mixed signal and BCD process technologies. We are also focusing on emerging market, such as green energy solutions for LED lighting, and energy harvesting.

To support this new opportunities in green energy applications, we have developed or are developing technology offerings as follows. First, 0.18 80 volts BCD, newly developed BCD technology targeting for smart power of management IC, power over Internet, LED drivers and high power audio AMP.

Second, 0.35 700 volts ultra-high voltage. With this technology, customers can achieve lower switching loss and multiple functions by integrating 700 volts, 20-40 volts DMOS and dual gate CMOS for smart energy application such as AC to DC and LED lighting.

Third, low power consumption mixed signal process for emerging and energy harvesting market. This technology can meet low power consumption requirement of the energy harvesting IC by utilizing newly developed low VT and low leakage consumers with a suppressed parity (ph) bi-polar gains.

In addition to green anodes, we are actively engaged with three new U.S. and European customers for automotive opportunities. In Asia we have numerous design wins with several touch IC customers for the new notebook applications and mid to low and smartphones utilizing our nonvolatile memory technology. Each new application will strengthen our future foundry business with a more diversified market to serve.

Now Margaret will discuss our financial highlights. Margaret?

Margaret Sakai

Thank you Sang. Let me provide some financial highlights and a brief review of our statement of operation. Q1 revenue up $205.3 million and a gross margin over 32% represented the ninth consecutive quarter we met or exceeded our financial guidance.

Q1 revenue was seasonally down 5.9% from last quarter, which is less of a decline compared to our historical first quarter net down turn. It was up 16% year-over-year, driven by expansion of products and markets along with our ongoing customer shift.

Gross margin also improved 380 basis points, compared to Q1 of last year as a result of the combination of product mix improvements and higher fab utilization. Over the last year, we have delivered higher than industry average, flat utilization rates while managing strict cost control and a careful capital expenditure.

Adjusted Earning Per Share of $0.53 per diluted share for the first quarter, our non GAAP measurement was more than three times compared to the $0.17 per diluted share in the same quarter of the prior year. A reconciliation of the non GAAP financial measures to GAAP measures can be found in today's Press Release.

In February we completed a successful secondary offering of 5.8 million shares. We did not receive any proceeds from the sale of shares that incurred certain expenses. More recently Standard and Poors upgraded its long term corporate credit and debt ratings on MagnaChip, reflecting their confidence in the company and the management.

In the first quarter we repurchased 376,000 shares and a total of 4.3 million shares since the beginning of our commencement of this program. The total dollar amount of repurchases since we initiate our buyback is $45.9 million.

Now turning to our Statement of Operations. Revenue for the first quarter $205.3 million, a decrease of 5.9% sequentially and an increase of 16% year-over-year. Revenue by business segment for the first quarter was $104.1 million for semiconductor manufacturing services, $70.3 million for display solutions, and $30.2 million for power solutions. Gross margin of $65.7 million or 32% for the first quarter was down slightly from the prior quarter, primarily due to the lower fab utilization rate, resulting in lower revenue compared to the prior quarter.

Total operating expense for Q1 was $39.7 million, excluding $2.4 million non-recurring charges and $0.7 million related to our February secondary offering. It was $0.9 million higher than prior quarter, primarily due to more R&D projects. Over the $2.4 million of non-recurring charges in this quarter, $1.8 million was related to downsizing of our six inch fab due to decreased demand related to a six inch wafer product.

Operating income was $22.9 million or 11.2% of revenue for the first quarter. Excluding the one-time restructuring and impairment charges, operating income would have been $25.4 million, over 12.4% of revenue this quarter. Net interest expense was $5.8 million for the first quarter and consistent with last quarter.

On a GAAP basis net loss for the first quarter was $7.4 million or $0.21 per diluted share. GAAP net loss was primarily impacted by foreign currency loss of $22.6 million, related to non-cash foreign currency translation for intercompany balances that was denominated in U.S. dollars. Depreciation was $6.4 million and amortization was $2.1 million for Q1, in line with the prior quarter.

Turning to the balance sheet, total combined cash balance, cash and cash equivalents plus restricted cash was $183 million at the end of the first quarter, compared to $182.4 million at the end of the fourth quarter 2012.

Cash provided from operations for the first quarter totaled approximately $37.5 million, compared to $31.5 million for the prior quarter. Capital expenditure was $33.1 million this quarter and our target for the full year is approximately $60 million.

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

Sang Park

Thank you, Margaret. For the Q2 guidance, when we consider the macro-environment, current visibility and business seasonality we expect that our revenue will be in the range of $210 million to $220 million. Based on this revenue level and our wafer loading forecast, we anticipate our gross margin will be in the range of 32% to 34%.

Robert Pursel

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

Question-and-Answer Session

Operator

(Operator Instructions). And your first question comes from the line of Terence Whalen

Terence Whalen

Congratulations on great result in that choppy environment. So Sang, this first question has to do with how the quarter progressed and whether there any inflexions in the quarter or you perhaps saw wafer loading in your foundry business scale back and conversely whether you’ve seen acceleration in the later part of the quarter. I just wanted to understand as the quarter progressed, how the demand profile changed? Thank you.

Sang Park

Thank you, Terence, you mean second quarter? The first quarter or second quarter?

Terence Whalen

So, I was trying to understand in the quarter that we just experienced in first quarter, as we progressed whether there were points where you saw maybe demand turned down slightly in the foundry business, or conversely where you began to see things accelerate. I just wanted to understand sort of on a monthly basis how the demand profile materialized through the quarter? Thank you.

Sang Park

I’ve got it. Obviously first couple of months was very slow and starting to pick it up at the end of Q1 and overall utilization rate in the mid 80% and which is higher than 2012 first quarter. But again though, throughout the year and long term visibility is still somehow limited but we believe that Q2 will be stronger than Q1.

Terence Whalen

Okay, thank you. And then the follow up question I had was regarding your announcement around that sensor technology being added within the display business, can you just elaborate a little bit more specifically on what the function is of this sensors and perhaps give us an understanding of your view of what the market size of that opportunity is or perhaps what portion of the overall display business might that sensor business grow into.

Sang Park

Obviously, we’ve just started this is the first announcement related to sensor but as we see as a next revolution for the Smartphone and tablet PC improvement is improving the human interface, including gesture, including the movement and humidity.

So all of these things that are we decide to get involved and again that with the customer request and so we start with so called hole (ph) sensor that’s a magnetic sensor that will let the smartphone covers and the market is not big but it’s a good starting point and also we have our samples available for the E comm, parts maybe not for the high end smartphone but maybe to the mid to low end, we can start with there are number of customers that are very interesting and that’s the beginning of our sensor product.

Obviously, our display driver business is very stable but we’re looking for the growth engine for the display solution and this new product will contribute to the growth of display solutions for the years to come.

Terence Whalen

One, last one then for Margaret, a question. If we could just get an update on where the net operating loss carried forward stands just for our understanding of the valuation in that line item, regarding NOL tax loss carried forward.

Margaret Sakai

What do you mean; the NOL carried forward?

Terence Whalen - Citigroup

Yes Margaret thanks.

Margaret Sakai

So, it's around the 200; it’s the 79 million by the end of the 2012.

Operator

Your next question comes from the line of Ross Seymore.

Ross Seymore - Deutsche Bank

In your press release Sang in your comments you have mentioned that this smartphone business was a bit of a headwind and weaker than expected in the quarter. Can you give us any color on how is that proceeding; what sort of impact do you expect that to have in your second quarter and if you believe the second half can return to normal seasonality in that business?

Sang Park

Obviously that's a slowdown carry-out to first quarter and second quarter. Again, since the results’ really diversified and we are able to come up with a guidance very similar to strict consensus. But yes, there was an impact.

Ross Seymore - Deutsche Bank

And for the second quarter guidance, is that what you are saying that there is still some impact and if so would you expect that to turn around and be a tail wind for the company in the third quarter in the normal seasonally?

Sang Park

As I mentioned to Terence, from the Q3, we believe the situation were improved, by first looking at our wafer loading.

Ross Seymore - Deutsche Bank

Then the second question is on the OpEx side; Margaret any color you could provide on OpEx in the second quarter specifically and then general trends as we look into the back half of the year and how OpEx should trend either on an absolute dollar basis or relative to sales?

Margaret Sakai

Our acquisition of our OpEx is in terms of dollar amount is between 39 million to 43 million each quarter. And, again, that our target is between 80% to 90% of the revenue.

Ross Seymore - Deutsche Bank

Got you and then my last question on; I think you have said Margaret CapEx for the full year will be around 60 million. It looked like you spend roughly of that in the first quarter alone. Did I hear that 60 million full year target correct? And if so what was the spike in CapEx for in the first quarter?

Margaret Sakai

Our this year CapEx is there in a week 60 million level for the full year. And then as you noticed, we usually spend a significant amount of portion in the first quarter every year in order to support the second and third quarter it is the trend and R&D.

Sang Park

We definitely, we made an investment to support our AMOLED business only in the first quarter.

Operator

And your next question comes from the line of Raji Gill.

Raji Gill - Needham & Co.

The foundry business, Sang could you kind of characterize how that business kind of progresses in the second half? You have gone through the inventory correction at your tough foundry customer Q1 and then also affected Q2. Are you seeing re-ordering of wafer starts, are you seeing kind of the re-building going on with that particular foundry customer? And along those lines…

Sang Park

Our foundry business throughout the year will be very stable whether we are going to have offside or not is number of our new customers and new (obligations) that we will be working with. Obviously some of them can kick it in third quarter and, or fourth quarter, but from the existing customers we are anticipating throughout the year we will be very stable again wafer loadings.

Raji Gill - Needham & Co.

Okay and the expanding customer base on the foundry side could you talk a little bit about which customers which segments are you seeing the increased customers in that business?

Sang Park

It is mostly in mixed signal and (PC deal) which is the power management and also automotive and some of energy area including LED lightings and energy harvesting. So it is really the variety of obligation where there are a number of customers while as I can’t give you names yet it is in the design importers and we typically release after we complete the design win.

Raji Gill - Needham & Co.

The mix of the premium products in the power management segment, you said 16% of power revenues are now premium. If you could just remind me what was that last quarter and a year ago quarter. And I was wondering if you had any thoughts with expansion acquiring Fujitsu's analog business and also picking up some of the power management IC business with that acquisition.

Sang Park

You know, we define, we define premium product for the power including power management IC and the super junctions and few other products. And just PMIC alone, that's power management alone, it's at 31% Q1 of this year compared to 16% of year ago. So you can see there is a significant progress. We're anticipating that our MOSFET business which is our commodity business stayed flat this year compared to the last year and all the growth we're anticipating will be coming from the premium product.

Raji that's as a percentage of power not as a percentage of total revenue.

Raji Gill - Needham & Co.

Right 31% of power is premium. And where you say, I know you're shifting away from kind of consumer electronics and legacy products on the premium side, moving more to the smartphone and tablet and who do you think you're gaining share vis a vis, who.

Sang Park

Overall company-wide definitely we are slowly coming out of low end consumer application to Smartphone and tablet PC. For the years to come we anticipated it will be automotive and energy product, energy related application and some of industrial, we do have a lot of activities there but meanwhile we're still committed to the lot of high end customer, which is our LCD and notebook and hope some of those markets kind of turn around. So either we are going to grow through the new applications and new markets and new products or if the market recover and obviously that is another opportunity for the growth and upside for us.

Raji Gill - Needham & Co.

Very good, Sang, and just one question for Margaret, on the gross margin side are we expecting kind of continued growth margin improvement given the mix shift and some of the cost reductions that you just talked about, you know 100 basis points per quarter type of thing or you know may be talking about the gross margin expansion throughout the year. Thank you very much.

Margaret Sakai

You know that we are expecting it to be between 1% to 2%, a gross margin improvement every year based on the revenue growth and then our strategy execution; really it’s normalized the fab utilization which is above 85%.

Operator

(Operator Instructions) Your next question comes from the line of Blayne Curtis

Blayne Curtis - Barclays Capital

I apologize if this is already asked. As you are looking at the June quarter, where do you see, what segments you see the strongest and are all up?

Sang Park

We see that power going to grow and going back to again that historical growth, and foundry will be stronger than Q1. And display solutions, we believe flat to slightly up. The visibility is still limited for the display solution business. Our AMOLED is definitely doing well. But TV market and notebook market is continuously weak. So that remains to be seen.

Blayne Curtis - Barclays Capital

Thanks for that, and you mentioned that you are experiencing some Smartphone weakness, and I was curious and we actually have seen some strength in the Smartphone end-market, particularly Samsung. If you could just talk about, was those comments about the market or and do you think you’re participating with the market and why do you think you are seeing weakness while others are seeing strength?

Sang Park

You know Smartphone market obviously there are two distinctively strong leaders. But within the leaders they have so many different products. Even Samsung high-end and mid-to-low end and obviously sometimes high-end is stronger, sometimes mid to low end is stronger, and it’s all mixed. So we anticipated our all segment strong, but it didn’t turn out to be that was the case. But again though, our wafer loading now, these are much healthier and I believe that short term inventory correction is over.

Blayne Curtis - Barclays Capital

Thank you and once again I apologize if it’s already asked but what is your utilization in today and where did that go? Thanks.

Sang Park

It was first quarter of mid 80% and we anticipating little higher in second quarter.

Operator

And your next question comes from the line of Terence Whalen.

Terence Whalen - Citigroup

Thank you for taking my follow-up question. The first one is just to understand in general, obviously we’ve seen a slow start to the year from notebook PC, I wanted to just understand wherein your business you’re seeing that materialized and whether you expect any seasonal acceleration from PC as we had into the third quarter? Thank you.

Sang Park

Typically, historically, that ramping up start to happen in second quarter because of holidays and preparing for some of our back to school but as of today we don’t see any strong demand in the notebook segment.

Terence Whalen - Citigroup

Thank you and then the follow-up question I had is, you did a very nice job buying back stock this quarter, I believe you’ve said you have about 46 million of your current authorization. Can you just remind us how in generally you’re thinking about buying back stock in terms of what’s the top patterns in terms of timing any other sort of valuation thresholds that you think about as you buy back stock? Thank you.

Sang Park

Obviously we do have authorization from the Board but that is a good topic to be discussed at the board meeting coming next week in the New York. I anticipate it; there will be very active discussions, Terence.

Terence Whalen - Citigroup

Okay and then my last one is just on a little bit more clarity on provision for income tax. How should we expect to see that trend over the next several quarters? Thanks.

Margaret Sakai

See that we do have (rebook) the default tax assets, however, that you know excluding that it’s a cash tax expenses will be within the $10 million to $15 million for 2013.

Terence Whalen - Citigroup

Okay similar change there. Thank you and look forward to seeing you next week. Thanks.

Operator

And your next question comes from the line of Jay Srivatsa.

Jay Srivatsa - Chardan Capital

In terms of the visibility, Sang you mentioned it’s limited. Can you highlight, are you seeing any changes in the pattern and the typical long term pattern of Q1 being soft picking up in Q2, peaking in Q3 and kind of dropping off in Q4. Are you seeing any change into that kind of curve or is it more near term visibly that’s being limited.

Sang Park

As I say it limited visibility that mostly we see throughout the year. I expect that it’s going back to the typical and historical seasonality which is our weak first quarter and starting to ramping up second and picking third but it’s all related to many different new product into those and that our end customers. So, what we see, as I say as we’re getting close to next quarter where it’ll be more heavily discussed.

Jay Srivatsa - Chardan Capital

Okay. In terms of China, lot of the strength in this Smartphone segment appears to be emanating from China, can you talk to us about what are your efforts in that market and how do you hope to take advantage of what’s happening there?

Sang Park

I think directly and indirectly we are supporting that market and part of them and again through the foundry and through our own product and one of the reason that we doing our (inaudible) is differently mid to lower end Smartphone makers either in Korea or China. So, we get involved but again I think that our revenue from that market is still limited.

Jay Srivatsa - Chardan Capital

And then going back to the power segment you mentioned the PMIC segments is been growing nicely to almost 30% of your power revenues. Where do you see that going as you exit the year? Do you see that that is probably the segment that you see the most growth in or the entry barrier is pretty high in terms of displacing incumbent solutions in that market?

Sang Park

As I say in my statement, our power management IC started from TV application, now in early via lighting but also at the same time; now we have a design in for Smartphone's and set top box and solid state drive and many other applications.

So, I anticipating this will be one of the strong growth drivers over years.

Jay Srivatsa - Chardan Capital

All right turning to the foundry side, one of your customer Cirrus Logic has recently seen some fall-off in demand emanating from their largest customer. How do you hope to kind of balance that out, are you expecting to be able to add more foundry customers as the year goes by or if you could highlight any strategies in preventing any kind of follow-up in your own foundry business that would be appreciated.

Sang Park

We don’t disclose anything specific to the customer and particularly that customer is our long term, very strategic and we are very loyal to that customer. But I just see our first quarter result, we met the guidance and then the second quarter looks good, isn’t it Jay. So we managed a situation again, I would diversify the customers and the market we served here.

Operator

There are no further questions at this time. Robert I will turn it back over to you for any closing remarks.

Robert Pursel

MagnaChip will be presenting us the 41st Annual JP Morgan Global Technology meeting and telecom conference in Boston on May 15th. This is then will be webcast live and archived for replay for 90 days. Also, our next earnings release and conference calls scheduled for July 30th. So, please look for these details and other upcoming financial events on MagnaChip investor's relation website at www.magnachip.com. Thank you for joining us today.

Operator

This does conclude today's conference call. You may now disconnect.

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