MagnaChip Semiconductor's (MX) CEO YJ Kim on Q4 2015 Results - Earnings Call Transcript

| About: MagnaChip Semiconductor (MX)

MagnaChip Semiconductor Corp. (NYSE:MX)

Q4, 2105 Earnings Conference Call

February 17, 2016 5:00 PM ET

Executives

Robert Pursel – Director of Investor Relations

YJ Kim – Chief Executive Officer

Jonathan Kim – Chief Financial Officer

Analysts

Operator

Good day, ladies and gentlemen, and welcome to the MagnaChip Semiconductor’s Fourth Quarter 2015 Earnings Call. At this time all participants in a listen-only mode. Later we will have a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder this conference call is being recorded.

I would now like to turn the call over to your host for today’s conference, Mr. Robert Pursel. Sir, you may begin.

Robert Pursel

Thank you for joining us to discuss MagnaChip’s financial results for the fourth quarter and full year ended December 31, 2015. The fourth quarter earnings release we filed today and other releases can be found on the company’s Investor Relations website. A 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 discuss the company’s overall business strategy as well as financial guidance for the first quarter of 2016. 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 fourth quarter earnings release available on our website under the Investor Relations tab at www.magnachip.com.

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

YJ Kim

Thank you, Robert, and good afternoon to everyone on our Q4 earnings conference call. We came in at the high end of our revenue guidance and beat our gross margin forecast in Q4 despite a choppy macro environment. The improvement in our financial performance stands primarily from three factors. One, we saw an unexpected surge in demand for AMOLED display driver ICs in the back half of Q4 primarily from smartphone makers. Two, we achieved higher than planned factory utilization in our 8 inch fabs, as a result of strong AMOLED demand. And our 6 inch fab ran at full capacity in order to fulfill last time orders for end-of-life products.

Three, we were highly disciplined with our cost controls and we reduced spending across the board by $13 million in Q4 and by a total of over $50 million for the year. Our CFO, Jonathan Kim will share more details about how we far exceeded our 2015 cost reduction goal later in the call.

Turning to our Q4 2015 financial results, we reported revenue of $152 million, a 1.3% decline compared to $154 million for the third quarter of 2015, and down 9.1% compared to $168 million for the fourth quarter of 2014. Standard Products Group revenue was $86 million in the fourth quarter and Foundry Services Group revenue $66 million.

Looking back on 2015 as a whole, we made substantial progress towards meeting our commitment to rebuild our business and turn the company around. We focus our priorities around a set of core initiatives, streamline the organization from top to bottom and strengthen our product portfolio to better suit the requirements of key customers in gross market. We exited 2015 on some of footing when we enter the year. And we now have a growing sense of confidence that we are well positioned to benefit in 2016 from the many business related changes we made over the last 12 months.

Now let me turn to the fourth quarter financial results and commentary for each of our two business segments beginning with the Standard Products Group. The Standard Products Group revenue in the fourth quarter totaled $86 million, up 5% from the third quarter of 2015, and down 2% year-over-year. The gross profit for the Standard Products Group was 17.2% in the fourth quarter down from 19.1% in the previous quarter.

Revenue for the Display Solutions portion of the Standard Products Group was $54 million in Q4 2015, up 12% sequentially, and down 3% year-over-year. The increase in revenue was due primarily to a surge in smartphone related AMOLED demand and holiday sales for TV. Revenue for Power Solutions in the fourth quarter of 2015 was $33 million, down 5% sequentially, and down 2% year-over-year.

We continue to focus on premium power products which accounted for 33% of our total Power Solutions revenue in the fourth quarter or about flat from 34% in Q3 and up from 30% from the same period last year. Revenue for our AMOLED display products from the smartphone market was up 9% in Q4 from Q3 following a 47% increase from Q3 over Q2. AMOLED revenue from the smartphone market was up 37% in Q4, compared to the fourth quarter a year ago. For 2015, AMOLED revenue from smartphone increased 24% compared to 2014.

As a leader in the display driver ICs market, we have a deep understanding of where the market is headed and we are convinced that the industry is in the midst of making a major shift towards adapting AMOLED technology. Global suppliers of display panels for mobile devices and premium screens for the large TVs are showing a clear preference for AMOLED technology because of its many significant advantages.

We believe we have a leg-up on the competition in the AMOLED display driver ICs market. We have a deep experience and unrivaled expertise in analog and mixed-signal design as it pertains to AMOLED. And we also bring our differentiated fab process and specialized packaging know-how to the production of AMOLED display driver ICs. Last month, we announced that we shipped over 160 million AMOLED units since 2007 and we now expect to see significant growth in our shipments in 2016, especially in China.

Speaking of China, China has been cited frequently during the recent earnings season as a cause of weakness for semiconductor companies. We have a different view, we see China as a new growth opportunity for our foundry and AMOLED business and expanding our presence there from a small base.

In March, we will host our third Foundry Technology Symposium in China in just the last five months. We continue to broaden our reach and wage our brand awareness to customers in this key market.

Now turning to the Foundry Service Group results. Foundry revenue in the fourth quarter was $66 million, down 8% sequentially, and down 17% year-over-year. The gross profit in the foundry business was 22.7% in the fourth quarter, down from 26.1% in the previous quarter. While foundry underperformed in 2015, we are now beginning to see traction from new products. This contributed to our overall fab utilization in Q4, 2015 which was in the mid-70%, up from the high-60% range in Q3, 2015. On encouraging data point is that, we believe revenue from our 8 inch fab lines will begin a gradual recovery beginning in Q1 of 2016 and gain momentum through the remainder of the year.

One reason for our cautious optimism is a database tape-out in 2015 increased 20% over 2014. It is difficult to predict the timing and revenue potential of database tape-outs, but we are encouraged in part, because the overwhelming majority of 2015 tape-outs of four applications, we’ve targeted from new customers in those markets.

In addition, we have started foundry production with new fabless semiconductor customers that are global players in their market segment. In addition to the increasing the number of tape-outs, our overall business outlook has been benefited from continued robust demand for our AMOLED display driver ICs. AMOLED technology is being adopted by customers in the smartphone market, the premium OLED TV segment and in virtual reality headsets. We believe the broad adoption of AMOLED technology can provide a tailwind for MagnaChip in 2016.

Let me conclude my opening remarks by saying that, I am cautiously optimistic about our business prospects, but also mindful of the significant challenge that continue to confront us in 2016. These issues reflect more about where we have been as a company rather than where we are headed. But we are committed as ever to tackle the challenges and restore investor confidence.

Now, I turn the call over to Jonathan to review the financials. Jonathan?

Jonathan Kim

Thank you, YJ, and good afternoon, everyone. MagnaChip reported on a GAAP basis revenue of $152 million and gross profit of 19.6% for the quarter ended December 31, 2015. On a sequential basis, revenue declined 1%, and declined 9% year-over-year. As YJ mentioned, our fourth quarter revenue of $152 million was at the high end of the revenue guidance we provided in October, as a result of the growing adoption of our AMOLED display driver ICs by companies in China. While our core agents’ foundry business remained somewhat muted in the fourth quarter, our pipeline of new projects continues to grow. Based on recent customer acceptance of successful production file runs, we expect some of these new products will began generating revenue in the second half of 2016.

Gross profit was $30 million or 19.6% of revenue for the fourth quarter compared to 22.5% for the third quarter. As you may recall, third quarter gross profit benefit from a one-time reserve adjustment of approximately $3.6 million. When you exclude this adjustment or just the gross profit was 20.1%. Fourth quarter gross profit exceeded our guidance range primarily due to a surge of higher margin AMOLED products today in the quarter. Manufacturing labor costs also came in lower than expected in Q4 as we encouraged our factory workers to take advantage of the holidays to take time off, reducing our vacation of pool requirement.

As an update on our 6 inch fab, in December of 2014 we announced our intention to shut down our 6 inch fab. Fab closures scheduled for the end of February and although the fab equipment will need to go through a decommissioning process to be sold, we already received the deposit for the full value of the equipment from a potential buyer.

The 6 inch fab had been operating nearly full capacity during 2015 in order to accommodate our customer’s end-of-life requirements for 6 inch products. However, this was an unusual circumstance and actual global demand for 6 inch wafers has been on a steady decline over the last several years. In fact, our book of 6 inch business was largely based on legacy and low margin products. As part of our cost optimization program, it became apparent that we cannot sustain this production line going forward and continue to provide shareholder value to our investors.

We will feel revenue impact from the closure of our 6 inch fab in Q1, but it was profit that we’ll begin to extend with our mainstream and more profitable 8 inch business. While we did see a spike in demand during 2015 as a result of last time buy or end-of-life products, holding the obsolete 6 inch fab will allow us to focus on gross markets, and customer severed by our 8 inch capacity.

Turning to costs. As you know, we lost a comprehensive cost review last year with a goal to reduce normalized spending by more than $40 million for calendar 2015. In fact, we achieved cost savings of over $50 million in 2015 with $13 million in the fourth quarter alone. These savings were achieved by reducing our manufacturing overhead expenses, enhancing operating efficiencies, and reducing our non-essential and discretionary spending, companywide.

I’d like to emphasize that our focus on spending reduction is an ongoing process. We plan to further reduce spending in 2016 and we’ll continue to identify cost savings opportunities in all areas of our operations. Fab utilization for the fourth quarter rose to the mid-70% range from the high-60% range in Q3 with all three fabs showing an improvement. The surge in demand for AMOLED products, as well as end-of-life orders for 6 inch wafers helped contribute to this increase. For Q1 which is typically our seasonal low point of the year, we expect utilization to temporarily get to the little low-70% range.

However, if we take the 6 inch fab out of the equation, fab utilization will actually be closer to mid-70% on a normalized 8 inch to 8 inch comparison. Our current factory loading schedule suggests that fab utilization is at or near projected lows for the year, and we therefore anticipate that it will steadily increase throughout the balance of 2016.

Total operating expense for the fourth quarter was $38 million, down from $43 million or $40 million on a normalized basis. In the third quarter of 2015, normalized operating expenses mainly adjust for restatement, legal, and non-cash equity based compensation charges. During Q4, we executed a cancellation of accrued interest of [indiscernible] company debt, which provided a tax benefit of approximately $17 million. This is a non-cash item for the period and we excluded it from our adjusted EBITDA.

On a GAAP basis, net income for the fourth quarter was $23 million, for an earnings of $0.66 per diluted share. Adjusted net income a non-GAAP measure was $5 million, while adjusted EBITDA also a non-GAAP measure was a negative $1 million.

Turning to the balance sheet, cash and cash equivalents totaled $91 million at the end of fourth quarter, compared to $69 million at the end of Q3. This increase was primarily due to the following events in Q4. A prepaid deposit of $10 million secured from our customers related to end-of-life products, produced in our 6 inch fab, and a receipt of approximately $8 million from the potential buyer of appointments.

Capital expenditure was $2 million in the fourth quarter and $6 million for the full year 2015. We are currently evaluating our capital expenditure plan, but we anticipate our 2016 requirements to be about $20 million.

Inventory at the end the fourth quarter was $58 million or flat with Q3 and down from $75 million at the end of the same period last year. This reflects our continued focus on managing working capital. Accounts receivable was $63 million at the end of Q4 slightly higher than $58 million in Q3, but lower than $73 million at the end of 2014. We continue to be aggressive in our credit and collections activity. And our day sales outstanding for the fourth quarter was a very healthy 38 days.

Now let me turn the call back to YJ for his closing comments and first quarter financial guidance. YJ?

YJ Kim

Thank you, Jonathan. Here’s how I see our business shaping up in 2016. We still face headwinds particular in Q1, which is typically our seasonally weakest period, but the overall tone of business has stabilized. We usually don’t offer financial guidance or try to quantify key business metrics for more than one quarter. However, on a qualitative basis, we currently believe that the business outlook beyond Q1 is beginning to look more favorable as the foundry pipeline – business pipeline fills, new designs ramp up on our 8 inch lines and our AMOLED products continue to ramp up.

The steps we’ve taken to streamline the company, reduce spending, strengthening our product portfolio and change our go-to market strategy, all have set the foundation for what we now believe is a gradual recovery in our business over the course of 2016.

Our current factory loading schedule suggests that fab capacity utilization is at or near projected low for the year, and anticipate it will steadily increase throughout the balance of 2016. We also believe revenue from our 8 inch fab lines hit the bottom in Q4 2015, and we now expect revenue from our 8 inch fab to begin a gradual recovery beginning in Q1 and to gain momentum through the remainder of the year.

When you take everything into consideration, we now anticipate total revenue will begin to increase sequentially in Q2 and continue the trends through the remainder of the year.

On our Q3 earnings call last October, I made a comment that manager was making step by step progress and he’s heading in the right direction. Those words are true today as when I said them back in October of last year. The make over of manager this far from complete but our 12 months schedule plan in 2015 has laid the foundation for what we see as a gradual recovery in our business beginning in Q2.

Turning now to our forward-looking guidance, we anticipate revenue in the first quarter typically our seasonally weakest period will be in the range of $141 million to $147 million. This would represent a sequential decline of between 3% to 7% despite a sequential loss of more than $10 million in revenue from our 6 inch fab, which will close at the end of February. And gross profit will be in the range of 21% to 24%.

I will now turn the call over to Robert. Robert?

Robert Pursel

Thank you, YJ. So, Bridget this concludes our prepared remarks. Before we open the call for the Q&A I’d like to say that questions regarding strategic alternatives and the strategic review process cannot be addressed beyond the language provided at the end of our Q4 earnings release. With that being said I will now open the call for questions.

Question-and-Answer Session

Operator

Robert Pursel

So Bridget it looks like we don’t have anybody in the Q&A queue. So let’s conclude our fourth quarter earnings conference call. Please look for details of our future events on MagnaChip’s Investor Relations website, and thank you for joining us today.

Operator

Ladies and gentlemen, thank you for participation in today’s conference. This does conclude the program, and you may all disconnect. Everyone have a great day.

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