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MagnaChip Semiconductor Corporation (NYSE:MX)

Citi Global Technology Conference Call

September 4, 2013 2:20 PM ET

Executives

Brent Rowe – Executive Vice President-Worldwide Sales

Margaret Sakai – Executive Vice President and Chief Financial Officer

Analysts

Atif Malik – Citigroup Global Markets Inc.

Atif Malik – Citigroup Global Markets Inc.

To welcome Margaret Sakai, CFO of MagnaChip and Brent Rowe, Executive Vice President, Worldwide Sales and also Robert Pursel from Investor Relations. Margaret and Brent are going to give a brief presentation, and then we’ll have a fire-side chat after that. Margaret?

Brent Rowe

Thank you, Atif. I appreciate the introduction. I’ll give you just kind of an overview on MagnaChip. MagnaChip is analog and mixed-signal company. So if you go to the right side. If you look at, as we have effectively three divisions and through our power, our foundry and our display solutions divisions, we support either indirectly or directly some of the largest global leaders in the smartphones, LED TVs, tablets, notebook PCs as well as other electronics. We also think our broad exposure to the end markets has allowed us to be a stable revenue generator, in addition to providing us with some opportunities for year-over-year growth.

As you guys know, the consumer electronics market, which is a big area that we play in, because it changes very quickly and most recently had some very large killer applications that came out. We think this ability to change quickly and adapt is one of the strengths and a core competitive advantage for MagnaChip. So if you look at that there’s an example, our business at the top two smartphone and tablet players has grown from about 19% of our total revenue in 2010 to about 46% at the end of 2012, and more importantly, it’s pretty nicely diversified.

So that’s across the 105 different unique products as well as the 30 unique customers. So we think our ability to adapt and move quickly to changes in the market are pretty good. We have very strong relationships blue-chip customers. another thing that we think is an advantage is being Asia-based where most of the world’s consumer electronics are built and wherein Korea gives us some advantages both culturally and geographically.

Another thing that I think as a big advantage is our mixed business model, which a lot of people are still trying to understand where we have very flexible manufacturing capabilities. we think we can produce all of our products in our three wafer fabs, because they share a common technology platform. This really gives us an opinion a cost advantage over our competition as well as sets us up for growth and rapid ramps on new products.

So we think because of these factors, we’ve succeeded very well in the smartphone and tablet market, but we’re not stopping there. So if you look at the screen, you’ll see that we’re entering new markets for future growth, primarily we’ve been in the industrial, the energy harvesting and automotive segments.

So if you look at this next slide, for the last four years from 2009, our revenue grew 14% annually on average and compared to the industry in total, which grew at about 9%. We think we did this one, because of our Power Solutions Division and the second one is because of our alignment to fast-growing markets: the smartphones and tablets.

We started our power business about four years ago, and quickly grew it to $125 million of revenue or about 15% of our total 2012 sales. As it became clear that the smartphone and tablet market was beginning to be the new killer application, we shifted very rapidly to this, so that from 2010 to 2012, our revenue grew 340%, smartphones and tablets in particular, went from about 7% of our total sales to about 28% of our total sales. and more importantly, again, it was very diversified. So we went from about 15 products to 79 products at the end of 2012 and our customers went from about 10 customers to 26 unique customers.

We think that the smartphone market continues to expand by focusing on the mid-to-low end smartphone offerings and even in this area now, we’ve got seven different OEM phone makers across nine of their models with various products targeted inside the mid-to-low end smartphones and we’re continuing to grow this on a regular basis.

Another thing that goes on in the industry is ASPs tend to decline every year and semiconductor companies often respond to this by increasing their CapEx. So they can get more revenue. For us, if you look at our last three years, our average revenue per wafer has grown 6%, and we’ve done this by a combination of market and customer shift, as well as product shift. So we think that that allows us to continue to grow – continue to grow and stay within our CapEx budget of about $60 million a year.

So I’ll talk a little bit about power. Again, power just in the last three years, we went from $13 million to $125 million. Our strategy for power is really a focus on now growing account penetration, targeting emerging markets, as well as a premium product development focus.

So in 2008, you’ll see, we started with Samsung and we grew nicely there. but we also expanded our global account penetration into LG, Compal, Quanta and China guys like TCL and Hisense and Haier, and now we’re expanding into some of the global industrial guys such as Emerson and Delta.

Not only we expanded our customer pipeline, but also our target applications have expanded. So we started in the TV market and in the notebook market and now we’ve moved to mobile, lighting and industrial applications. And along with the market expansion, we’ve also executed a new product development programs to enhance the breadth of our product portfolio.

So if you look at one of our new products we just introduced called Super Junction, we released that in Q1 of this year. And we think that that will generate significant revenue in the third quarter of this year. We initially entered the market with MOSFETs inside the power area and we quickly expanded that to power management ICs, power modules, high-power discrete as well as our Super Junction products and because of the quick product development execution that we achieved, we actually grew the number of products by 33 times from 2008 to 2012.

Display Solutions, is another – one of our divisions. so here, our strategy is very simple. It’s been a focus on customers and a focus on emerging markets. So we really focus on the top two panel makers who are LG and Samsung, grown about 51% of the market, which were some linearities as well as our geographic proximity, really has helped us develop some long-term relationships. Display Solutions, historically, has been a very stable revenue generator for us and it’s provided a nice bridge for our standard products into both LG and Samsung.

So even though, as you look at the market, the overall display, panel market is relatively stable or flat. We now have some nice growth engines inside the display group, and the first of which is our AMOLED business, and that’s targeted for smartphones and tablets, were designed now into the main platforms of the number one smartphone maker. They’re expanding their capacity as they move into next year. So we think as they expand their capacity and our expansion in the models, we’ll continue to grow as well. Our other area of growth is in the UHD or OLED TV market, which we see just really starting to develop.

We think these can drive additional upsides into next year, because there’s two to four times as many of our drivers and controllers inside a TV, as there is in a standard full HD TV. And then the last thing, we introduced a new family called sensor ICs. These we did at the request of our number one customer and we’ve already out – been out sampling customers in Korea, China, Taiwan and the U.S.

If I look at the last division, which is our foundry services division, we think if you look at it even and what has arguably been a weak macroenvironment, our foundry services division grew 15% and outperformed the total semiconductor market, which declined 2% in 2012. We outgrew our direct foundry peers who grew at about 11%. So the first question we get asked is, how do we do it? One, we did it by focusing on the fast-growing smartphone and tablet PC market. I think the team did a great job executing there. They grew the business over three times from 2011 to 2012.

And the other thing is, they diversified as a lot broader, so it’s across 16 customers and 45 different products, targeted primarily in three applications, one was the touch sensor IC, the other one was audio ICs and the third one was RF switch. We think that by continuing to enhance our customer mix shift where we’re moving from Asia to the U.S. and European customers that will continue to drive an increase in revenue per wafer. Our revenue in the U.S. and Europe has gone from about 33% to about 48% of our total revenue in 2012. This has really helped us to expand, as I said, not only revenue per wafer, but gross margin, and we expect to continue to add new customers this year, and expand our presence in the U.S. and Europe.

Given, I think that’s very nice as we’ve identified some specific vertical markets that we think will be emerging growth drivers for us, one includes Biometric ICs for smartphones, the next one’s LED lighting as well as energy harvesting for green applications, in addition to continuing to expand our automotive applications.

So with that I’ll introduce Margaret Sakai, our Executive Vice President and CFO.

Margaret Sakai

Thank you, Brent. Since 2009, we had margin improvement by growing the revenues, maintaining our high fab utilization rate and also managing our strict cost control. For revenue in 2012, our revenue was increased by 6%, compared to 2011, which was higher than overall, then it declined 2% under the slow economic market.

For gross margin, the increase in the revenue contributed to a higher gross margin, 32.2% gross margin for 2012 was the highest annual gross margin magnitude ever achieved and also it was 190 basis points higher than 2011. Our gross margin improvement results of the combination of our mixed business model, expansion on our product and market, and also maintaining higher than industry average of fab utilization rate and also very strict cost control. For OpEx, we have been carefully managing our corporate – operating expenses doing this across our period and we would like to continue to do same way.

Going forward, we expect our total operating expenses between 18% and 19% of our total revenue. In 2012, our total operating expenses excluding $3.3 million one-time charge was 18.8% of our total revenue, which was the same as in 2011 despite our revenue increase of 6% in 2012.

Our continued focus on the execution on our growth and the margin improvement relative to study, cash from operations and the free cash flows. For cash from operations, we generated $121 million, cash from operations in 2012, which was a 16% higher than 2011. In each of 2010, 2011 and 2012, we generated at least $100 million in cash from operations.

Even in 2009, as everybody remember when the global economic environment was severely impacted, we were still able to generate a free cash flow by carefully managing our CapEx on our demand basis. We expect a CapEx of around a $60 million for 2013 this year and for the future.

For free cash flow, we believe our free cash flow of about $60 million in 2012 even at the 20 – $62 million CapEx. We generated more than an average of $55 million of free cash flow each year for three – 30 years. We grew our cash balance in each of the last three years, and we expect to continue the cash generation.

The refinancing transaction completed in July, which was lowered at a coupon rate of our senior notes to a 6.625% from 10.5%, will further boost our future cash flow. Therefore, we feel very comfortable with our $100 million stock repurchase program announced in July.

This is a slide to summarize our mid-term business model with anticipated revenue growth and normal fab utilization. Mid-term for us is about three years and we are targeting our gross margin between 35% to 38% of revenue, we will maintain our operating expenses at 18% to 19% of our revenue or lower. We also expect our CapEx, it’s going to be between $55 million to $65 million each year, which is including maintenance CapEx of $5 million to $10 million.

So in summary, we believe that we are able to deliver 1% to 2% our gross margin improvement every year with our top alignment sales increase between 5% to 15% each year, assuming our normal fab utilization.

So I’m going to wrap up our presentation with that.

Atif Malik – Citigroup Global Markets Inc.

Thanks, Margaret. Brent and Margaret, we’re asking a couple of questions to all, and allow them especially some of the other companies at the conference, and I’ll kick off with those questions. In terms of end demand, are you seeing an acceleration or deceleration in end demand over the next six months and if you can talk about the end markets PC, mobile, industrial, what trends are you seeing in those markets?

Brent Rowe

So for the end markets, some of our major markets are TVs, which is still relatively weak, but some nice potential upside things with ultra-high definition TVs and OLED TVs. In the computing world, still I think like everybody has seen pretty weak, everybody is hoping Windows 8.1 gets something. but I think no books are still questioning whether they found the bottom. Inside the mobile world, I think everybody knows about the high-end in the mixed hit and the impact in inventory adjustments to it. So we see all those about the same.

Atif Malik – Citigroup Global Markets Inc.

Okay. And in terms of regions, are you noticing any particular strength or weakness in any regions that’s surprising you to the up or the downside?

Brent Rowe

No, I mean we don’t give Q4 visibility issue or forecast as you know, visibility is still – in my opinion, is still limited, channels are still pretty conservative. So mostly everybody is doing about what we expected, China is not growing maybe quite as fast as, we had hoped, but still growing.

Atif Malik – Citigroup Global Markets Inc.

Got it, let’s talk about the foundry services business, there’s a group of investors that – they think that the smartphones are getting saturated particularly in the developed markets, but the emerging markets are still growing. So as we think about smartphone growth, moving from high-end smartphones to mid-end – to low-end smartphones, can you talk about in terms of your both direct and indirect dollar opportunity? How should we think about your content moving from a high-end smartphone to mid-end to low-end smartphone?

Brent Rowe

So at the high-end level, everybody has seen that has slowed down in growth, but beyond we still see growth there, and we see an increase in socket positions or building material positions as well as share gains. So for us, we think we are okay as that goes forward, and we’ll still see growth. In the mid to low-end, we do have a mix across OEMs and products now. So we will continue to focus on that. That for us we look at for premium products and make sure that when we do go into those markets, there are things that will drive margins and can be appropriate business models.

Atif Malik – Citigroup Global Markets Inc.

Okay. Can you also talk about the design win momentum on the tablet, what were you seeing in the tablet market?

Brent Rowe

Well, patents overall, I think like most things, what we are pretty excited about is we’ve seen the slowdown in the high-end, but we still see growth and we see market share and socket gains. But as you move into tablets or smartphones, what we like this year versus last year at the same time, is we have multiple growth drivers in each division, whereas last year we had one. So we’ve got AMOLED inside our display which goes in both tablets and smartphones right. We introduced sensors and expect to take our first bookings on sensors. And the first two products we did were e-Compass, electronic compass and smart Hall sensor. So those again, both going to tablets and smartphones.

If you go into our power, we expect that to continue to grow in double-digit rates and we’ve expanded our position there with things like LED backlighting, power management ICs as well as panel power. So a lot of things there we think will continue to grow in smartphones and tablets. And then in foundry, we’ve continued to see growth in both things like our focus area is, as I told you on the presentation were really RF switches as well as audio amplifiers, and then touchscreen, touch sensors.

And if you look at our switches, we just introduced a process we call RF SOI, which helps us expand in both tablets and smartphones as they move to LTE. and then it expands our customer base as well as enabling one of our customers to compete both at the high-end and the low-end. So if you look at us for moving into energy harvesting, another area we talked about which again will apply in both those areas. So for us, we see growth moving into the future; it’s across all three divisions whereas before we would talk about just power as our growth engine.

Atif Malik – Citigroup Global Markets Inc.

Focusing on the mobility subject, Samsung is a media customer partner from MagnaChip for both directly and indirectly, and you talked about the inventory correction, the industry has seen for Galaxy S4 phones. And where are we in terms of the inventory correction process? Should we expect that you can move the wafers to their other products fairly quickly, or how do we see kind of the duration of this inventory correction?

Brent Rowe

I think, we are probably the same as most people. I don’t think the inventory corrections can prove – retain yet and we talked about it in our earnings release that we did see the high-end smartphone impact. We don’t forecast Q4 and our visibility still kind of limited there, but we did see the impact.

Atif Malik – Citigroup Global Markets Inc.

Can we talk more about your sensor product strategy, is that a response to one particular OEM or I heard you guys are getting from China – Chinese customers now. So can you just talk about the total opportunity for the sensor and again what’s the strategy behind the sensors?

Brent Rowe

So we got in, because we were requested to buy one of our top customers who is the number one guy in smartphones, but on top of that, the first four sensor areas we’re going into have about $300 million SAM. So for us, we think it’s a nice growth opportunity. And then there’s a bunch of derivative markets like industrial markets and things like that that we can go into as it progresses.

Atif Malik – Citigroup Global Markets Inc.

And then what is the differentiation that MagnaChip can bring it to the table as opposed to other guys like Maxim revenue since their end products for awhile?

Brent Rowe

Well, I think if you look at it in awhile, we think we’ll do pretty well. One obviously, is relationship; we have some great relationships with some of the top guys there. Two, the first compass we are doing is the e-Compass and there the reason why we are asking is, because the number one guy doing Hall effect, e-Compass is based in Japan and they were worried about supply. Three, we have some real differentiation and how we’re approaching things like the smart Hall sensor, which adds used cases to the phone or the tablet, so that the customer can differentiate his end products. So we think those kind of things help us grow, and then four, to compete against Maxim and adjust your sensor. We used to do image sensors. We are pretty comfortable going into that market. We think we’ve got the technologies and the capabilities to do it and then we also have the relationship and the cost structure to compete with anybody.

Atif Malik – Citigroup Global Markets Inc.

Okay. Can we talk about your efforts in diversifying, expanding foundry customer base outside U.S. and European customers?

Brent Rowe

Outside of the U.S. and European customers.

Atif Malik – Citigroup Global Markets Inc.

Yes.

Brent Rowe

Well, our focus has really been to expand U.S. and European customers. We went from about 33% in 2011 U.S. and Europe base to about 48% at the end of 2012. And we think that continues with some of the new vertical markets we’re doing industrial, energy harvesting, automotive, LED lighting is an example, we had two very large guys that are coming and using our LED lighting process technologies.

Atif Malik – Citigroup Global Markets Inc.

Okay. And then moving onto the Power Solutions group, you have seen a pretty significant growth of about 32% compound annual growth rate since 2009 in Power Solutions. Can you talk about the steps you are taking to further grow this business? What’s the strategy around new premium products versus the simple MOSFETs?

Brent Rowe

Well as I said, I mean our strategy, really is focusing on global accounts, I mean global customers and we – I think we’ve been executing pretty well. Second part of it is, expanding the breadth of our portfolio. so if you look at us, we’ve got 33 times more parts, since the end of 2012 than we had in 2008. And then the third one kind of goes to your question, we’ve been really focused on premium products, so about 70% of our development right now is in premium products, which drive a higher ASP and a higher margin in the company average. So for us, as we execute on that, I think it will be nice growth, as well as very profitable.

Atif Malik – Citigroup Global Markets Inc.

And how should we think about the percentage of these premium products catered towards the auto market?

Brent Rowe

The auto market is something that we’re interested in power. I would say we’re further and some of the other areas, some of our display technologies actually go into the automotive market now through Sharp. In the foundry services, you probably saw an announcement; we just got approved at ACQ100, which is one of the key automotive standards for one of our automotive guys.

In Power, it’s been really more of an industrial focus. and I think there like, we just recently came out with new version of AC direct-drive LED lighting. So things like growing LED lighting, growing inverter motors, solar inverter power and things like that has been really focused.

Atif Malik – Citigroup Global Markets Inc.

Moving onto the Display Solutions group, the sales have been kind of down last two quarters, but you expected Q3 to be up in Display kind of driven sales. Can you talk about what’s driving that outlook and how sustainable annual LED TV demand is for you guys?

Brent Rowe

Well, we’ve been doing two things and I kind of hope everybody understood from the presentation. one, we’ve been doing a product mix and our customer mix shift, and it’s what’s been driving our revenue per wafer growth of about 6% for the last three years. In the Display area, we were purposely downplaying some areas that were lower margins, and we took some of that out, we’ve been replacing that with AMOLED, as well as now sensors. So our intent is to take two very large growth drivers that are also higher than the company average margin, higher than the revenue per wafer and it helps us grow even without adding cap while increasing our gross margin at the same time.

Atif Malik – Citigroup Global Markets Inc.

And Margaret, you’ve kept the CapEx quite disciplined, do you have sufficient capacity to grow over the next two to three years?

Margaret Sakai

Our strategy for our annual CapEx is going to stick – it’s around $60 million over the year including some maintenance CapEx. We believe that it’s just to force our growth strategy and in terms of the technology 0.11 or 0.18, we are ready than anybody else, compared to our peers and if so that as to we need to support that of course, and do not give us $60 million per year, it’s a CapEx.

Atif Malik – Citigroup Global Markets Inc.

And then to the target models, you shared the gross margin range of 35% to 38%. how should we think about the utilization levels bracketed around that range of…?

Margaret Sakai

It is what – what we are seeing is above – we are seeing is normal fab utilization, which is above 85% in level.

Atif Malik – Citigroup Global Markets Inc.

Okay. And what is the mix assumption behind that range gross margin in terms of your three businesses?

Margaret Sakai

Actually, we do not have a specific mix ranges, we expect to, is that top line to increase between 5% to 15% based on the wafer, is the increased wafer. Revenue per wafer increased on the foundry business with the volume lies a little bit flat or right down. And meanwhile, the Power Solutions and the DSP business same as the revenue per wafer increased along with the volume increase. So if we execute that way and then we are able to achieve that.

Atif Malik – Citigroup Global Markets Inc.

Okay. Let me pause here and see if there’s questions are being triggered.

Question-and-Answer Session

Unidentified Analyst

In terms of the power, in fact, that gives us sort of corporate margins could be. What the gross margins look like in Display compared to corporate. Could you share with us what the power gross margins look like compared to corporate or you have been more granular than that?

Margaret Sakai

We are not disclosing Asia business unit, the gross margin, the main reason is that we do have a very consensus, our rate is that – customer base is like – for DSPs we do have two big customers, then they – when we disclosed our gross margin and they just shape the brand then Brent and me are making a lot of money. so in terms of the gross margin, it’s among the three divisions, right now, our foundry is the highest and followed by GST and the power is the lowest.

Unidentified Analyst

Would you envision, staying that way is the lowest, so the five divisions, lower than corporate average power which compared to some of the other people, power and some percent more parts that’s up pretty low margin?

Brent Rowe

So, no, we don’t. So we started in commodity space with discrete, and we didn’t really have the critical math to give that kind of cost of scale that’s needed. We’ve been moving in to premium products, which are significantly higher margin. So if you look at what we’re very excited about that it’s not just power going now, it’s power – premium power, where a 70% of our R&D now is in premium products and those are higher than the company gross margin. And then the other division same thing, the growth things that I told you about are all higher than the company gross margins.

Margaret Sakai

Yeah. From the finance viewpoint that we expected that that power gross margin is going to be close to the corp debt level, it’s about by the end of this year or our first quarter of next year as far as the execution brand.

Unidentified Analyst

Okay. So that’s my last question, compared to the people that you’re competing for stock against, is there any reason that you should have structurally lower gross margins in them once you get the business of the scale.

Brent Rowe

Just on an apples-to-apples, we’re structurally lowering cost. So the real issue is on that…

Unidentified Analyst

Are you really having restocking basis actually at higher gross margins and…

Brent Rowe

Yeah. Most of the competitors that you’re probably referring have exited some of the initial areas that we’ve started in. So they already did a mixed shift that we’re staring to make the move on now. For example, our Super Junction, which will be significant impact to our revenue this quarter, is very nice margin.

Atif Malik – Citigroup Global Markets Inc.

Next question?

Unidentified Analyst

And if you could just maybe – take you back in on that goal, what is the Super Junction product?

Brent Rowe

So Super Junction is used like for instance, we saw it in the chargers and adapters that come out with the smartphones and tablets. So it’s a very high efficient, very dense power solution. It goes into UPS applications, solar inverting applications, motors, quite a few high-voltage applications. So most of our premium product again, is above the company average.

Unidentified Analyst

Under this list, I think can we just kind of jump into the AMOLEDs given that the growth driver you talked about of the revenue you are showing on the chart here in 2012 and maybe even better for 2013, is there any AMOLED revenue today that you’re getting?

Brent Rowe

Yeah. AMOLEDs are pretty big percentage of our Display business.

Unidentified Analyst

Okay.

Brent Rowe

So we’re now in majority of the main models with the number one guy in smartphones and we were one model previous years, one to two, now we’re expanding across most of their portfolios moving to next year, and they’re expanding their cap.

Unidentified Analyst

So is your design win in that situation add Samsung display – Samsung display or…

Brent Rowe

Yeah.

Unidentified Analyst

That’s the actual OEM that would design…

Brent Rowe

We trend afterwards both, but our billing and shipping goes to Samsung display.

Unidentified Analyst

Okay. And so what do you typically get for smartphone in terms of content?

Brent Rowe

Well, we don’t get dollar content but in AMOLED, it’s dollars – not 10%.

Unidentified Analyst

And then historically, they’ve had a big captive in-house solution for AMOLED drivers, right?

Brent Rowe

Sure. There’s only two guys. They own 95% plus of the world to AMOLED market.

Unidentified Analyst

Right.

Brent Rowe

Right. Technologically, in the manufacturing cost of yield basis, they’re way ahead of everybody else. So they really don’t want to let anybody in, but a local trade besides their internal guys, or the ideal guy we’ve been there quite a few years now with them, then they don’t want to let some of their internal secrets out. And lucky for us, it’s a very fast-growing market and one that they’re continuing to expand capacity in.

Unidentified Analyst

So would you venture or guess at what share you have or to buy their LED market?

Brent Rowe

It’s in the low teens with opportunity to grow, I think an ideal procurement guy would probably try to get somewhere in the 70 to 30 split?

Unidentified Analyst

Okay. How quick do you think that would take?

Brent Rowe

We’ve grown very rapidly. So I think we went from one model to two models to just about every model as we move into next year. It’s not just market share gain; it’s also the fact that they’re having capacity. So as they grow, we’ll grow just with that.

Unidentified Analyst

Okay. And then on the sensor ICs that you put into the Display business, can you kind of frame similarly how big that is for you today with that?

Brent Rowe

The first four areas we’re doing, I told that we introduced and are sampling now our three-axis electronic compass and a smart Hall sensor, but also just your sensors, and temperature and humidity sensors, and those first four products have a SAM not a TAM of about $300 million.

Unidentified Analyst

But none of them are getting revenue today or…

Brent Rowe

Our first – we expect our first bookings by the end of this year. So we only started literally sampling, we have a custom solution we’re dealing with one of those guys, but other than the custom solution we really only just started sampling this last quarter.

Unidentified Analyst

And the customers, the –

Brent Rowe

The number one guy that recommended we do it.

Unidentified Analyst

And the type of ASPs and gross margins relative to the rest of the portfolio?

Brent Rowe

ASPs are – they vary from 10% to [indiscernible], but it’s really a revenue per wafer margin for us. So they’re honestly some of the highest revenue per wafer and highest margin products in the company.

Unidentified Analyst

Just maybe to dig into the compass, because there obviously is, one large player today in the market. Second source has been needed for a long time and was this something that you did at the request of the customer of yours or…

Brent Rowe

We honestly started it back in 2011 because we had to develop a lot of our own IP, right. And the advantage of being a guy that owns his own fab as you can develop the sensor part of the IP. But you know as an example on our temperature, humidity, sensor. The way that a humidity sensor works is that just a capacitor that absorbs water, and by the amount of water and there are the capacitance changes and you can relate that to humidity. The problem with that it is, we have to pass reliability test where some of the tests, put it in the temperature chamber and the humidity chamber. And so having your own technology and your own fab if you’ll be able to develop the IP and run through a bunch of iterations and pass not only performance but reliability is key. So one of the reasons why he likes to have a guy who owns his fab, who happens to be right next to him, develop these things and bring him in.

Atif Malik – Citigroup Global Markets Inc.

Question.

Unidentified Analyst

Just on the foundry side, one of things you showed on the chart was 11% to 35% last year from smartphone and tablet, customers that kind of have been priced and then outside of that, the business was down pretty sharply.

Brent Rowe

But we’ve been – we have been working on a mixed shift. So both display and foundries – in display or in foundry, we’ve told you that we’ve been working very hard on the mixed shift from Asian base to U.S. and Europe. We do it specifically, because the U.S. and Europe guys use our most advanced technology. so we can get a higher revenue per wafer, subsequently, better margin and better utilization of our asset base.

Unidentified Analyst

Okay. So that’s targeted and then the big junk maybe squashing this way. Are there any 10% customers within the foundry business?

Brent Rowe

10%, I think obviously, Cirrus Logic has been one of our guys, is below 10%. so most of them, I think are below 10%…

Margaret Sakai

Yeah.

Brent Rowe

I mean that’s a very well diversified…

Margaret Sakai

Yeah, very well diversified.

Brent Rowe

Yeah. I think some of things people telling they didn’t understand when they looked at it. And we tell you the top two guys in smartphones and tablets when you include all other products, TVs and everything, it’s over a 100 product and over 30 customers. So it’s pretty well diversified.

Atif Malik – Citigroup Global Markets Inc.

We’re almost out of time. And Margaret and Brent, thanks for coming to the Citi Conference.

Brent Rowe

Thanks, Atif.

Margaret Sakai

Thank you.

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Source: MagnaChip Semiconductor's Management Presents at Citi Global Technology Conference (Transcript)
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