Magnachip Semiconductor Corporation (MX) Q4 2022 Earnings Call Transcript

Magnachip Semiconductor Corporation (NYSE:MX) Q4 2022 Earnings Conference Call February 16, 2023 5:00 PM ET

Company Participants

Yujia Zhai – The Blueshirt Group

YJ Kim – Chief Executive Officer

Shinyoung Park – Chief Financial Officer

Conference Call Participants

Martin Yang – Oppenheimer

Nick Doyle – Needham

Operator

Good day and welcome to Magnachip's Fourth Quarter 2022 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Instructions will be given at that time. As a reminder this call is being recorded.

I would now like to turn the call over to Yujia Zhai, IR representative for Magnachip. You may begin.

Yujia Zhai

Good afternoon everyone. Thank you for joining us to discuss Magnachip's financial results for the fourth quarter ended December 31, 2022. The fourth quarter earnings release that was just issued today after the stock market closed can be found on the Company's Investor Relations website. The webcast replay of today’s call will be archived on our website shortly afterwards. Joining me today are YJ Kim, Magnachip’s Chief Executive Officer; and Shinyoung Park, our Chief Financial Officer. YJ will discuss the Company’s recent operating performance and business overview, and Shinyoung will review financial results for the quarter and provide guidance for the first quarter of 2023. There will be a Q&A session following the 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 statement found in our SEC filings. During the call we also will 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 Investors Relations section at www.magnachip.com.

I now will turn the call over to YJ Kim. YJ?

YJ Kim

Hello everyone, thank you for joining us today and welcome to Magnachip’s Q4 2022 earnings call. I will begin today’s call with a summary of our Q4 results as well as our performance for the full year 2022. After that, I will provide a detailed update on each of our business segments before turning the call over to Shinyoung to go over our financials in more detail and provide guidance for Q1 2023. Starting with Q4 results. Revenue was $61 million, near the high-end of our guidance range. Nevertheless, Q4 revenue was lower by 44.7% year-over-year and 14.3% sequentially. Gross profit margin was 26.4%, within our guidance range.

By business line, Display revenue was $7.6 million and Power revenue was $46.3 million. As we indicated last quarter, these results were primarily driven by severe wafer shortages in our OLED business, which prevented our new designs at our leading Korean panel customer to hit new key product launch windows in the second half of 2022. Our OLED business was also impacted by weak consumer demand in China and globally, which led to an inventory correction by Android smartphone OEMs. In our Power business, the record momentum we set in the first half of the year slowed down significantly in Q4 as macro conditions and consumer demand deteriorated, leading to inventory builds across a number of our end markets.

Looking back at the full year, total revenue was $337.7 million and gross profit margin was 30.0%, down 28.8% and 240 basis points year-over-year, respectively. By business line, our Display business solely contributed to the significant year-over-year decline as revenue was only $71.4 million compared to $205.3 million in 2021. Our Power business revenue in 2022 was $230.5 million, up 1.2% year-over-year from $227.8 million. It goes without saying that 2022 was a very difficult year on many fronts, particularly for our Display business. However, we stayed focused and executed on what we could control and achieved key milestones in 2022 that we believe sets the foundation for a solid recovery in 2023.

In our Display business, we successfully won a new Tier 1 panel customer outside of Korea, which marked the expansion of our OLED business into international markets. We are currently working with this customer on two OLED DDIC design projects and I am happy to report today that our first chip was successfully qualified by this customer in December and we will begin shipping towards the end of Q1 2023. Further, our second OLED driver IC project with this customer successfully taped out in November are in-house and we are ahead of schedule to deliver the first sample in this month and production is expected to begin in the second half of 2023. This second chip offers significant performance and feature improvements over our first chip and alternative products. We are extremely excited about this new chip and multiple prospective smartphone makers are already showing interest for their new smartphones.

We also strengthened our global supply chain by qualifying two additional 28 nanometer foundries, one of which was in strategic partnership with our new OLED customer. In total, we now have three 28 nanometer 12- inch OLED foundries qualified and we anticipated these foundries to increase our wafer allocation by 2 to 4x over the next few years compared to our 2022 levels. Going forward, wafer supply should not be a constraint on OLED segment revenue. At our leading South Korean panel customer, in Q4, we completed qualification of our first OLED chip for an automotive center display and we will begin shipping this quarter. We expect this to be used by a leading European luxury auto manufacturer.

In addition, we taped out a new high-end smartphone driver IC during Q4 and that is expected to begin production in the second half 2023. In our Power Solutions business, 2022 was a record year and was stronger fundamentally than what our Q4 revenue trend indicates. In 2022, we were awarded a record 209 design-in wins across our entire Power Solutions product portfolio, more than double the number of designs awarded in 2021 and 2020. It was also a record year for revenue from our Premium products, which grew 10% year-over-year and represented a record 55.9% of Power Solutions’ revenue, up from 51.5% in 2021. This strength helped overall Power ASPs over 2021 and 2020 levels.

Revenue from our Super Junction MOSFETs and IGBT products also set record highs in 2022. IGBT strength was most notable, with revenue growing 52% year-over-year thanks to extremely strong demand from solar inverter manufacturers. We expect this area of our business to continue to remain strong going forward, thanks to the transformative clean energy policies globally to combat climate changes. In 2022, we remained focused on R&D and introduced many innovative performance power products across a wide range of applications from smartphones, automotive, solar, consumer products and industrial. In Q4, we unveiled our first power management chip optimized for OLED IT applications.

The newly-designed sub-PMIC provides a variable voltage control that enables automated custom refresh rates based on the frame rate. This greatly improves power consumption and enables a smooth and comfortable viewing experience for games and videos. Further, in our Power Solution’s Automotive business, in Q4, we introduced our eighth generation 150V MXT MOSFET for optimized for Light Electric Vehicles’ motor controllers and battery management systems. This MOSFET improves the drain to source resistance by over 28%, improves heat dissipation, and can operate in extreme temperatures between minus 55 Celsius to up to 175 Celsius, making it suitable to be used in a wide range of xEV applications. Our Automotive business saw significant momentum in 2022 and is exiting the year with multiple design-ins projects for leading Asian automakers and is expect to start contributing revenue in 2023.

In summary, while 2022 presented many challenges, particularly during the latter half of the year, we remain optimistic about the future. Our OLED business is poised for recovery in 2023, with the revenue projected to increase significantly in the second half as we ramp shipments of our four design-in projects with our two leading panel making customers. We continue to expect the first half of 2023 to be impacted by elevated inventory levels and a very weak macro environment, but the reopening of China is a very welcome development and should lead to an improvement in the economy and consumer demand, which will help both our businesses.

For our Power Solutions business, we expect to maintain the momentum of design wins and premium tier product mix. However, it's important to note that our Power business is not immune to the broader economic downturn, which impacts consumer-related applications, and we expect the first half of 2023 to also be challenging. We believe that this will largely be due to macro factors rather than anything specific to fundamentals as the data points, I just highlighted are a testament to the competitiveness of our power products. Q1 is also typically our seasonally slowest quarter following holiday shipments and is impacted by slow activity around Chinese New Year. Looking forward, as channel inventories are consumed and the broader economy recovers, we expect to see a rebound in Power revenue.

In closing, despite a very challenging 2022, and an anticipated challenging 2023, our team remains committed to: One, introducing new competitive power products and accelerating next-generation products, especially in new applications such as automotive; two, continuing our successful sales momentum or design wins in Power to drive business with current and new customers, which will improve our Fab 3 utilization as well as margins; three, accelerate next-generation OLED driver IC for our customers domestically and internationally to hit the volume production by second half 2023; four, expand our OLED products for international markets to solidify foundation for future growth in 2024; five, we have initiated a voluntary resignation program, where we expect 4% to 5% of employees may apply for this program with our choice to accept or reject the applicants; and finally, I have voluntarily taken a 10% reduction in my salary for 2023, and rest of the senior management team are also deferring a portion of their base salary until we execute on our commitments.

Now I will turn the call over to Shin Young to go over Q4 results and give our Q1 guidance. Shin Young?

Shinyoung Park

Thank you, YJ, and welcome to everyone on the call. Let's start with key financial metrics for Q4.

Total revenue in Q4 was $61 million, down 14.3% sequentially and down 44.7% year-over-year. Revenue from the Standard Products business was $53.8 million, down 14.2% from Q3 and down 45.9% year-over-year.

As YJ already mentioned, both the sequential and year-over-year decreases were mainly attributable to the supply constraints for wafers in our OLED business and slow demand for Chinese and Korean top-tier smartphone models as a result of the global downturn in the smartphone market.

Revenue from our Power business was $46.3 million, down 18% sequentially and down 20.5% year-over-year. The sequential decline accelerated from last quarter, driven by deteriorating consumer demand for TV, smartphones, e-bike and computing applications.

Gross profit margin in Q4 was 26.4%, down from 35% in Q4 2021, but up from 24.2% in Q3 2022. The lower gross profit margin year-over-year was mainly due to unfavorable mix from lower Display revenue as well as lower utilization rate of our Fab 3. The 220 basis point sequential improvement was primarily due to the absence of material inventory reserves or write-offs during the quarter.

As a reminder, we recorded a $3.3 million scrap charge in Q3 related to demand weakness as a result of elevated smartphone inventories. Looking forward, we have reduced production at our Fab 3 in response to industry-wide slowdown and inventory correction. As a result, our Q1 2023 gross profit margin will be further impacted by lower utilization as well as higher manufacturing input costs such as electricity and wages. We expect gross profit margin to recover as volume and utilization improves in the second half.

Turning now to operating expenses, Q4 SG&A was $12.6 million as compared to $11.4 million in Q3 2022 and $13.3 million in Q4 last year. Q4 R&D was $13.7 million as compared to $13.3 million in Q3 2022 and $12.2 million in Q4 last year. Stock compensation charges, including operating expenses, were $1.5 million in Q4 compared to $0.8 million in Q3 and $1.6 million in Q4 2021. Note that our Q3 SG&A was lower due to adjustments in Q3 to reduce then year-to-date accruals related to performance-based stock compensation.

Q4 operating loss was $10.1 million. This compares to an operating loss of $10 million in Q3 and an operating income of $63.9 million in Q4 2021. As a reminder, our Q4 2021 operating income benefited from $49.4 million of net termination fees related to our merger deal with Wise Road that was terminated in December 2021.

On a non-GAAP basis, Q4 adjusted operating loss was $8.6 million compared to adjusted operating loss of $6.6 million in Q3 and adjusted operating income of $14.4 million in Q4 last year.

Q4 adjusted EBITDA was negative $4.8 million. This compares to negative $3 million in Q3 and a positive $18.1 million in Q4 a year ago.

For the full year 2022, we recognized a tax expense of $5.2 million, due mainly to realized foreign currency gains recognized at our operating entity in Korea as a result of FX volatility during the year and a decrease in the Korean subsidiary's deferred tax assets as a result of a change in corporate income tax rates, which was announced in December 2022.

Net income in Q4 was $3 million as compared with a net loss of $17.2 million in Q3 and a net income of $53.6 million in Q4 a year ago.

Our GAAP diluted earnings per share in Q4 was $0.07 as compared with a loss per share of $0.38 in Q3 and earnings per share of $1.12 in Q4 last year.

Our non-GAAP diluted loss per share in Q4 was $0.36. This compares with non-GAAP diluted earnings per share of $0.02 in Q3 and $0.29 in Q4 last year.

Our diluted shares outstanding for the quarter were about 44.1 million shares, which reflects shares repurchased as part of our expanded share repurchase program that we announced in mid-September. We continue to exercise the buyback that was authorized by the Board.

Moving to the balance sheet, our cash balance at the end of Q4 was $225.5 million, down from $250.8 million at the end of Q3. The primary cash outflows in Q4 was planned CapEx of $11.6 million, $8.9 million spent on stock buybacks and $7.9 million of annual contribution of statutory severance to certain external deposit accounts to comply with the local labor rules.

We expect to continue to draw down on our cash, driven primarily by continuation of our buyback program and an LTA prepayment to secure wafers at our leading foundry partner and normal CapEx. Based on our forecast, we anticipate our cash may reach as low as $160 million during 2023 if we execute the LTA.

Net accounts receivable at the end of the quarter totaled $35.4 million, a decrease of 3.8% from Q3. Our days sales outstanding for Q4 was 53 days, and 47 days in Q3.

Inventories net totaled $39.9 million compared to $37.3 million in Q3. Our average days inventory for Q4 was 82 days and 64 days for Q3. Higher average days in inventory for Q4 compared to Q3 was due mainly to a lower cost of sales, which decreased about 17% quarter-over-quarter.

Regarding our CapEx plan, as I mentioned earlier, Q4 CapEx was $11.6 million. And for the full year 2022, we spent $23.4 million, in line with our previous estimate of $23.5 million that we provided last quarter. For 2023, we now anticipate CapEx to be approximately $10 million, which is nearly 60% lower from the 2022 level.

In regard to our capital structure, in Q4 we repurchased approximately $9 million worth of stock or approximately 900,000 shares and continue to be active in the market with approximately $37 million remaining in our buyback program at the end of Q4. We ended the year with $225.5 million cash and zero debt. This solid balance sheet allows us to confidently navigate any further economic downturns that may arise during this period of uncertainty.

Before moving to the first quarter guidance, I would like to note that we just commenced a voluntary resignation program and expect to complete it by the end of the first quarter. Due to the voluntary nature of this program, we are unable to provide an exact amount of the related financial impact at this time. However, under the assumption that about 4-5% of our employees apply for this program, we expect to have annual cost savings up to $3 million with the total cash cost of approximately $8.5 million to $12 million, about 35% to 40% of which relates to statutory severance.

Now moving to our first quarter guidance, while actual results may vary, for Q1, Magnachip currently expects: revenue to be in the range of $55 million to $59 million, including about $5 million of Transitional Fab 3 Foundry Services. Gross profit margin to be in the range of 21% to 23%.

Thank you and now I will turn the call back over to YJ for closing remarks.

YJ Kim

Thank you, Shinyoung. Before we begin Q&A, I'd like close today by thanking all of our shareholders for their continued support during these challenging times. I’d also like to reiterate my earlier comments about our recovery plan for 2023 and beyond.

We remain firmly committed to setting the business back on a solid foundation of growth this year and will execute it by: one, introducing new competitive power products and accelerating next generation products, especially in new applications such as automotive. Two, continuing our successful sales momentum of design wins in power to drive business with current and new customers, which will improve our Fab 3 utilization as well as margins. Three, accelerate next generation OLED, DDICs for our customers domestically and internationally to hit the volume production by second half 2023. And finally, we will further expand new OLED products for international markets to solidify foundation for future growth in 2024.

With that I'll turn the call back to over to Yujia.

Yujia Zhai

Thanks YJ. So that concludes the prepared remarks section of this earnings call.

Operator, please begin the Q&A session.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] I'm not showing any questions at this time. I'd like to turn the call back over to Yujia Zhai for closing remarks.

Yujia Zhai

Operator, can you just screen again for questions? I did see some of our covering analysts on the line.

Operator

[Operator Instructions] Thank you. And our first question comes from Martin Yang with Oppenheimer. Your line is open.

Martin Yang

Hi. Thanks for taking my question and good morning. I would like to maybe ask your expectations for key customer ramp in 2023. Has the current challenges in the near-term affect your outlook for the key customer ramp? And – yes, that's my first question.

YJ Kim

Hey Martin, thank you. So I'm assuming that you're asking for our new international customer and the ramp for the OLED. So yes, so we said that the first chip has been qualified last December, and we expect the initial production to begin towards the end of this quarter. We just got our second chip for this customer in-house, and we expect to ship within this month. And so that's ahead of schedule, and we expect that to go to production towards second half. So the first chip is targeted for the full HD+. Second chip is full HD+ and beyond. But second chip has much robust capabilities, which we'll talk about once the chip start shipping. So with those, we expect the majority of the shipments, and the big curve to come on second half of this year.

Martin Yang

Got it. And is there any way for you to quantify the number of designs or just overall missed opportunities for OLED. Do you see capacity constraints? So when I say missed opportunities or missed designs, these are things you would have realized in calendar 2023?

YJ Kim

Well, so we don't report the smartphone vendor design wins, but the – we expect to disclose more of that once the smartphones start to introduce their new product lines. And so I think it's more towards the second half heavily, we are shipping some volumes based on the current design wins and current products. And so that's the curve you should look at.

Martin Yang

Got it. Last question from me is do you expect to see any lingering effect on your 2024, meaning any design activities that will result in 2024 shipments are being disrupted?

YJ Kim

We are shipping new products as we speak. So we believe that revenue will hit in second half as well as early 2024, and we will be working on new products to hit the samples in second half this year that should go into 2024 in addition to some of the products that we'll be shipping in second half this year.

Martin Yang

Got it. I've no more questions. Thank you, YJ.

YJ Kim

Thank you.

Operator

Thank you. Our next question comes from Raji Gill with Needham. Your line is open.

Nick Doyle

Hi, Nick Doyle on for Raji Gill. I just had a question about auto. How do we think about the auto opportunity in calendar 2023 and then hopefully 2024? Could you be a little more specific on the opportunities with the design wins that you talked about on the call earlier? Thanks.

YJ Kim

Sure. Thank you. So in the automotive, this year is, I would say is an embryonic stage year for us in both OLED and Power. We start shipping the first OLED automotive parts this quarter. And we also expect to ship Power this quarter as well. And we had several design-ins going in to last year-end, and we expect about four to five automotive power to ship this year. The revenue is not huge. But what's nice about automotive is it's a long design cycle, even in OLED, maybe five years, and the ASP and margin typically much better than the regular smartphone usage. So we are going to work on incrementally adding these automotive opportunities, and I think that's going to be gradual over the next few years.

Nick Doyle

Thank you. And then are you really focusing just on the Asian market here? Or are you also trying to expand internationally in auto as well?

YJ Kim

Obviously, Asia is close to our home coverage. So – but like OLED, the major automakers are of course Europe and Asia for our market. On the Power side, it's more in Asian automakers. So that's how we're going to start out, and we'll try to cover globally with the success of our design wins.

Nick Doyle

Thank you.

Operator

Thank you. There are no further questions at this time. I'd like to turn the call back over to Yujia for closing remarks.

Yujia Zhai

Thanks operator. This concludes our Q4 earnings conference call. Please look for details for our future events on Magnachip's Investor Relations website. Thank you, and take care, everyone.

Operator

This concludes the program. You may now disconnect. Everyone, have a great day.