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Edited Transcript of MX.N earnings conference call or presentation 30-Oct-18 9:00pm GMT

Q3 2018 MagnaChip Semiconductor Corp Earnings Call

Nov 6, 2018 (Thomson StreetEvents) -- Edited Transcript of MagnaChip Semiconductor Corp earnings conference call or presentation Tuesday, October 30, 2018 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bruce Entin

MagnaChip Semiconductor Corporation - Director of IR - United States

* Jonathan W. Kim

MagnaChip Semiconductor Corporation - CFO, CAO & Executive VP

* Young-Joon Kim

MagnaChip Semiconductor Corporation - CEO & Director

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Conference Call Participants

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* Atif Malik

Citigroup Inc, Research Division - VP and Semiconductor Capital Equipment & Specialty Semiconductor Analyst

* Rajvindra S. Gill

Needham & Company, LLC, Research Division - Senior Analyst of Microcontrollers, Analog & Mixed Signal, Consumer IC & Multi-Market

* Sujeeva Desilva

Roth Capital Partners, LLC, Research Division - Senior Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Q3 2018 MagnaChip Semiconductor Corporation Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would like to introduce your host for today's conference, Mr. Bruce Entin, Head of Investor Relations. Sir, please go ahead.

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Bruce Entin, MagnaChip Semiconductor Corporation - Director of IR - United States [2]

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Thank you for joining us to discuss MagnaChip's financial results for the third quarter ended September 30, 2018. The third quarter earnings release that we filed today after the stock market closed and other releases can be found on the company's Investor Relations website. The telephone replay of today's call will be available shortly after the completion of the call and the webcast will be archived on our website for one year. Access information is provided in the earnings press release.

Joining me today are YJ Kim, MagnaChip's Chief Executive Officer; and Jonathan Kim, our Chief Financial Officer. YJ will begin the call with a discussion of the company's recent operating performance. Jonathan will provide an overview of our Q3 financial results. And YJ will provide a brief recap as well as provide financial guidance for the fourth quarter of 2018. There will be a question-and-answer session following today's prepared remarks.

During the course of this conference call, we may make forward-looking statements about MagnaChip's business outlook and expectations. Our forward-looking statements and all other statements that are not historical facts reflect our beliefs and predictions as of today and, therefore, are subject to risks and uncertainties as described in the safe harbor discussion found in our SEC filings.

During the call, we will also discuss non-GAAP financial measures. The non-GAAP measures are not prepared in accordance with generally accepted accounting principles, but are intended to illustrate an alternative measure of MagnaChip's operating performance that may be useful. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in our third quarter earnings release available on our website under the Investor Relations tab at www.magnachip.com.

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

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Young-Joon Kim, MagnaChip Semiconductor Corporation - CEO & Director [3]

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Welcome to everyone on the Q3 conference call. Let's go directly into Q3 results. As a housekeeping note, all numbers and references to financial results reflect as-reported results unless otherwise noted.

Total revenue of $206 million topped the midpoint of our guidance range and was at the highest level since the fourth quarter of 2012. Revenue increased 16.6% from a year ago driven by double-digit revenue growth in Display and Power. Q3 revenue grew 3.2% from Q2, which was unusually strong and ended $12 million above the high end of the guidance.

We've stated before that improving profitability is our number-one goal and we continued to show overall improvement in Q3. Gross profit dollars, operating income and adjusted EBITDA all increased by double digits year-over-year, and operating income and adjusted EBITDA grew by double-digit percentages sequentially as well. All those metrics hit their highest levels since Q4 2012.

Gross margin in our Standard Products Group set a record in Q3. Gross margin in Foundry declined primarily because the increase in Foundry revenue was not high enough to offset the reduction in lower-margin LCD business that we strategically decided not to pursue as well an anticipated decline in our legacy 110-nanometer OLED display driver business. As a result of these factors, fab utilization declined. Jonathan will provide more details shortly.

Let's turn now to a summary of our 3 businesses, beginning with Power. Power revenue hit an all-time high of nearly $45 million in Q3. Power margin was higher than the corporate average in Q3 as compared to single digits as recently as 3 years ago. We've transformed the Power business over the last 3 years. We've improved the product mix and portfolio, increased revenue and expanded gross profit margin. The results speak for themselves.

Power product mix was improved dramatically as a result of a thorough portfolio optimization. Premium products accounted for 45% of total Power revenue in Q3 as compared to 39% in Q3 2017 and 35% as recently as 18 months ago. Premium products include IGBTs, power ICs and Super Junction MOSFETs and typically are deployed in a wide range of products including industrial and lighting applications. And electric vehicles represent a new and potentially nice market for our next-generation premium devices. We have sampled our next-generation premium power product for a key automotive application and if it passes 10,000-hour qualifications we expect it to contribute a decent portion of revenue in 3 to 4 years.

We have other power products that also drive high volumes and carry attractive margins. Battery Protection FETs is an example where we have a very large market share at a leading smartphone brand. Another is a power IC based on product targeted to digital signage applications. This 36-channel micro-LED drive IC is now in volume production.

Increasingly, we are moving towards designing platform solutions where customers can use a portfolio of MagnaChip products. In a smartphone, for instance, our battery FET and DC-to-DC power converter can work seamlessly alongside our OLED display driver, and we are working with leading smartphone makers on the sub-PMIC to go along with it.

To sum up, our Power business has benefitted from a tight supply environment across the industry, but we've also helped create our own success with an optimized product catalog and richer product mix and portfolio under the oversight of new engineering management. As a result of strong demand, our channel inventories have been running consistently lean this year so we've increased wafer starts for our power products by converting low-margin LCD capacity in our internal fabs. As a result, we've been able to raise average selling prices selectively on certain products due to product shortages and allocation.

Now, let's turn to the Display business, beginning with OLED display driver ICs. OLED revenue was $58.3 million in Q3, up 232% from the same period a year ago, and accounted for 75% of the total Display business. OLED revenue was the second highest in our history, topped only by the $62.2 million we just achieved last quarter. For the first 9 months of this year, OLED revenue totaled nearly $155 million, putting us in a position to easily surpass our previous record of $161 million in OLED revenue in 2016.

During Q3, we won 6 new OLED designs for smartphone makers in Asia. We also taped out and sampled a fourth 40-nanometer OLED driver IC. Both our third-generation and fourth 40-nanometer drivers enabled 21-by-9 screen aspect ratio and full HD-plus-plus resolution. This helped drive new design wins in Q3 and we expect those drivers to contribute revenues starting this quarter. Our net total of OLED design wins now stands at 36, which includes the addition of all new designs as well as those we subtract when a smartphone model has been phased out. As anticipated, 6 OLED smartphones using our drivers were launched in Q3, giving us a total of 29 since Q3 2017.

We are excited about the broad market acceptance of our current lineup of leading-edge OLED display drivers, but we believe the best is yet to come. Based on where we see the market going, we believe we are still in the early stages of multi-adoption cycle for OLED. Market research firm, IHS, recently forecast a 1.9 CAGR for total worldwide smartphones between 2017 and 2022. However, OLED smartphones are expected to represent 52% of 1.6 billion units in 2022, up from 24% in 2017. Flexible OLED smartphone units are anticipated to rack up a 30% CAGR during the same time frame. We've already shipped well over 400 million OLED display drivers since 2007.

Despite our many advantages, OLED product cycle change rapidly. That's why we continually refresh our product line and push the OLED envelope. Our upcoming 28-nanometer OLED display driver is a good example. Back in September, we successfully taped out a test strip to prove out the 28-nanometer process and anticipate we'll tapeout a full chip on schedule in Q4 with customer samples to follow in Q1. This timetable is consistent with what we said on past calls.

Based on our knowledge of the market and industry players, we believe our 28-nanometer OLED driver will have the best cost efficiency, the most advanced OLED display capabilities and the very lowest power consumption. High-resolution and high CPU workloads with embedded artificial intelligence create heat, which lowers system performance, drains the battery and shortens the device life. Whoever can solve the power issue will have a competitive advantage, and this is where MagnaChip's power advantage will come into play.

Our current OLED lineup of drivers competes for low-end smartphones and mid-range smartphones with premium features. Our flexible 28-nanometer driver will have compelling technical features and best-in-class power to compete for design wins in high-end OLED smartphones including foldables. As a reminder, there is only one smartphone panel technology that enables foldables and that's flexible OLED. LCD panels are not flexible and cannot be bent so they are not a viable solution for foldable or rollable devices.

We believe foldables are the future of smartphones and the future may be closer than what you think. Samsung's CEO of Mobile has gone on record to say that its foldable smartphone could come as soon as 2019 after years of work in R&D labs. Over the last 6 years, 276 patents related to foldable panels were applied for in Korea by Samsung and others with 210 patents filed in the last 3 years alone. As a result, Korean panel and smartphone makers are well-positioned to be the leaders in this emerging market. According to IHS, the market for foldables is expected to grow rapidly from 1.4 million units in 2019 to 23 million units for all applications between 2019 and 2022. That forecast implies a 155% CAGR in unit shipments and translates to 138% CAGR in display revenue or $2.7 billion in 2022.

To sum up on OLED, we have 6 OLED drivers in production, 36 net design wins and 29 smartphones in production. Looking ahead, foldables will have larger and multiple screens and may require more than one OLED driver. Hence, it will be crucial to have lowest power consuming drivers. This is where our 28-nanometer OLED driver family will shine over the competition by delivering the lowest power.

Now let's talk briefly about the non-OLED portion of the Display business, which accounted for 25% of Display in Q3. We began a portfolio optimization effort and redirected that business towards higher-margin opportunities including automotive applications. In Q2, we won 2 designs for an automotive centered stack display, which is the car's infotainment or navigation console. In Q3, we began volume production and shipments on these parts and we are continuing to ramp production this quarter. Our long-term goal is to further develop capabilities in automotive where we believe the display requirements will evolve over time and require OLED drivers.

Now turning to Foundry. Foundry revenue was $83.9 million in Q3, up 4.3% from the same quarter a year ago, however down 5.8% year-over-year as an adjusted basis. Our Foundry revenue has fallen short of the growth needed and that we anticipated earlier this year to offset the planned exit in the low-margin portion of the LCD business. We are also now experiencing typical seasonal patterns in our Foundry business in Q4 and we have begun to see an inventory correction from certain foundry customers reflecting current macro trends.

New product revenue in Q3 represented almost 20% of total Foundry business. New database tapeouts, one indicator of long-term business trends, increased over 40% in Q3 from Q2 for products related to BCD, EEPROM and mixed-signal technologies. Nevertheless, we are not satisfied with current Foundry results and are evaluating all options to maximize Foundry revenue and improve profit margins.

With that, I will turn the call over to Jonathan. I will return afterwards to wrap up and provide our business outlook and financial guidance for the fourth quarter. Jonathan?

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Jonathan W. Kim, MagnaChip Semiconductor Corporation - CFO, CAO & Executive VP [4]

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Thank you, YJ, and welcome to everyone on the call. Our financial performance in Q3 and year-to-date demonstrated our firm commitment to improved profitability over time.

Let's review the numbers. Gross profit dollars, operating income and adjusted EBITDA all increased by double-digit percentages in Q3 from year-ago levels and all were at their highest levels in 6 years. That was despite headwinds from lower fab utilization, continued wafer price increases and increase in labor costs.

Gross profit dollars of $55.7 million and operating income of $18.3 million increased 10.8% and 17.9% respectively from year-ago levels. We believe gross margin dollars is a key financial metric worth monitoring because revenue growth can drive fall-through to operating income, adjusted EBITDA and cash flows from operations. And that is exactly what happened in Q3 as well as in Q1 and Q2 of this year.

As YJ mentioned earlier, revenue of $206 million increased 16.6% from Q3 a year ago. Partly as a result, the incremental fall-through from gross profit to operating income in Q3 was $18.3 million as gross margin dollars grew faster than operating expenses. As a comparison, the fall-through to operating margin was $13.9 million in Q2 and $7.4 million in Q1 of this year. Adjusted EBITDA in Q3 was $27.9 million, or 13.5% of revenue, an increase of 12.8% as compared to Q3 a year ago. This closely watched metric totaled $66.9 million for the first 9 months of 2018, up 15.1% from the first 9 months of 2017.

Let's review the details in each of our business lines. As a reminder, the results we discuss are historical numbers on an as-reported basis and reflect year-over-year results unless otherwise noted. Please refer to our published financial tables for the as-adjusted historical numbers.

Let's begin the review with our top line. Revenue in the Standard Products Group, or SPG, was $122 million, up 26.8% from Q3 a year ago. The SPG segment accounted for 59% of total revenue in Q3 as compared to 54% a year ago due to double-digit growth in revenue from both Power and Display business lines.

With the Standard Products Group, revenue of Display products totaled $77.6 million, up 35.5% from the same period a year ago. OLED revenue, which accounted for 75% of the total Display business, was $58.3 million, up 232% from Q3 2017, due to strong demand from smartphone makers in Asia. The non-OLED portion of the Display business represented $19.3 million, down 51.4% from $39.7 million in the same period a year ago. The decline was the result of a strategic decision to not pursue unattractive low-margin LCD business and to reclassify a portion of the non-OLED business as Foundry Services.

Revenue in the Power business accounted for 36% of the Standard Products Group as compared to 41% a year ago. Revenue, as YJ noted, grew by double digits to $44.5 million due to a strong market demand environment and an increase in revenue from premium products.

Gross profit margin in SPG was a record at 28.8% and gross profit dollars totaled $35.2 million, an increase of 36% from $25.9 million in Q3 a year ago. With regards to Power, gross margin has been on an upward trajectory for the past 3 years. And with regards to OLED, the gross margin for display drivers once again exceeded the corporate average and product mix also improved.

The Foundry Services Group accounted for 41% of revenue in Q3 as compared to 46% of revenue in the same period a year ago. Foundry revenue was $83.9 million in Q3, up 4.3% from Q3 a year ago, but down 5.8% as an adjusted basis. Foundry gross margin was 25.4% in Q3 as compared to 30.3% a year ago and 29.6% on an adjusted basis. Gross profit dollars in Foundry were $20.4 million in Q3 as compared to $24.4 million a year ago.

Fab utilization declined to the high-80% range in Q3 from the low- to mid-90% range in Q3 last year, which contributed to a decline in Foundry gross margin. Other contributing factors were continued price increases for raw wafers and increased labor cost. To address the wafer price increase issue, we've entered supply agreement -- entered into supply agreements and made prepayments to wafer providers and, from time to time, we've opportunistically added wafers to buffer stock inventory.

Turning now to operating expenses in Q3. SG&A was $18.6 million, or 9% of revenue, as compared to $17.3 million, or 9.8%, in Q3 a year ago. The increase was primarily related to increased labor cost including a stock-based compensation program that includes performance-based incentive designed to better align performance with shareholder value over time. R&D was $18.9 million, or 9.2% of revenue, as compared to $17.6 million, or 9.9%, in Q3 a year ago. The increase of $1.4 million, or 7.8%, was due primarily to development activities for the new OLED products.

Turning now to the balance sheet. Cash was $133.5 million at the end of Q3 2018 as compared to $131.7 million in Q2 2018 and $128.4 million in Q3 2017. Accounts receivable totaled $103.2 million, an increase of 21% from $85.6 million in Q2. The increase was related to the timing of payments from certain customers. Inventories in Q3 were $71.5 million, an increase of 24% from Q2, primarily to meet customer demand for certain products and also to secure adequate wafer supply at attractive prices. Accounts payable increased in connection with the increase in inventories in Q3.

Capital spending totaled $7.4 million in Q3. We currently expect our capital expenditures in 2018 to be approximately $39 million or $35 million on a normalized basis that excludes the $4.3 million that was fully financed by a third party related to a water facility arrangement that was disclosed previously in Q2. Our capital expenditures in 2017 were $32.7 million.

In summary, key financial metrics moved in the right direction in Q3 despite headwinds, and we continue to stay focused on improving profitability. With that, I'll turn the call back to YJ. YJ?

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Young-Joon Kim, MagnaChip Semiconductor Corporation - CEO & Director [5]

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Thank you, Jonathan. When we reported Q2 results in July, we projected that OLED revenue would total approximately $120 million for Q2 and Q3 combined. In fact, it came in at $120.5 million giving us nearly $155 million in OLED revenue through the first 9 months of the year. When we close the books on 2018, we'll report a record year for OLED revenues despite an anticipated seasonal slowdown. OLED revenue in Q4 this year is expected to be the highest ever the company has achieved for the fourth quarter. Looking ahead to 2019, we remain confident about our prospects assuming that current market trends hold steady in the Asia smartphone market.

Our Power product business, likewise, had strong results in Q3 and year-to-date and the longer-term outlook is positive. We've transformed the Power business from top to bottom and accelerated the pace of new product introduction to stay at the forefront of changing market requirements. Power is at the heart of so much of what we do because power is such an important factor in the display and foundry businesses.

Foundry revenue growth was dampened by what looks like the early signs of an inventory correction and a softening in the wafer demand. Our Foundry typical is affected by the seasonal patterns and therefore Foundry revenue is expected to be about flattish in Q4.

Longer term, secular trends in power, display and analog have the potential to be growth catalysts for MagnaChip despite industry cycles and seasonal patterns. We see good opportunities ahead for MagnaChip, which is why we are pleased to announce that we formed a newly created position of Chief of Strategic Planning and hired a 33-year semiconductor veteran, [JK Minh], to lead it. Mr. Minh has held senior executive roles at Samsung Semiconductor, Samsung Electronics, Samsung Display and SK Telecom. He has led new business planning teams, R&D operations and negotiated higher-profile strategic alliances, joint venture agreements and modern acquisition activities.

With that, let's turn now to our forward-looking guidance. For Q4 2018, MagnaChip anticipates revenue in this typical soft seasonal fourth quarter to be in the range of $174 million to $184 million, down sequentially 13.1% at the midpoint of the projected range. The guidance for the fourth quarter compares with $206 million in the third quarter of 2018 and $174.6 million in the fourth quarter of 2017. The revenue guidance reflects an inventory correction from certain foundry customers consistent with current macro trends. Gross profit margin to be in the range of 25% to 27%. This compares to 27.1% in the third quarter of 2018 and to 28.3% in the fourth quarter of 2017.

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

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Bruce Entin, MagnaChip Semiconductor Corporation - Director of IR - United States [6]

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Sujeeva Desilva with Roth Capital.

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Sujeeva Desilva, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [2]

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Congratulations on the strong cash flow growth here. So on the trough, the downturn here, and the potential trough, can you talk about the margin in utilization trough level potential here? And what would happen to kind of EBITDA generation through a down cycle as you manage through that?

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Jonathan W. Kim, MagnaChip Semiconductor Corporation - CFO, CAO & Executive VP [3]

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So related to the utilization, the anticipated growth in Foundry was not at the sort of the higher level that we expected. And so when we discussed the Foundry business, we talked about the trajectory in connection with us looking at the low-margin LCD business and walking away from some of that as well as anticipating the back-filling of the 110-nanometer production moving out of our foundry.

So unfortunately, given the current situation, the way that we see Foundry business is, although going into [Q4] (corrected by company after the call), it will be sort of flattish, it is not going as fast as anticipated therefore it's impacting our utilization. And so when you look at utilization, of course it does impact all of our business lines, but primarily Foundry, given that there is a higher portion of the fixed cost in the Foundry business. So again, going into Q4, the utilization in connection with the Foundry revenues not being as high as we expected will impact utilization and that will also impact gross margin.

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Young-Joon Kim, MagnaChip Semiconductor Corporation - CEO & Director [4]

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Which is reflected in our current guidance for Q4, Sujeeva.

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Sujeeva Desilva, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [5]

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Okay, great. Fair enough. And then switching to the Display business, OLED here. You talked about 6 smartphone launches in 3Q '18. What does the near-term pipeline show for launches? Is there a period where there's a transition from the -- towards the newer 28-nanometer products where the launches would pause? Or would it be a steady set of launches, even perhaps accelerating in the next several quarters? Any color on the trajectory would be helpful.

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Young-Joon Kim, MagnaChip Semiconductor Corporation - CEO & Director [6]

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Thanks for the very good question. So, so far, we have 36 design wins starting [Q7] of '17 with the new products. And what we are very excited about is the quality of the new design wins we are getting. So I think it's important to see the results you're going to see through the market and the product launches with the quality as well as quantity. And I think the 28-nanometer will give us a very good portfolio of very leading-edge products, whether it's high-end flexible to even mid-range flexible or non-flexible with the lowest power. So I think that's going to be very good to have for the next year of design cycles.

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Sujeeva Desilva, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [7]

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Okay. And YJ, kind of following up on that. With the newer products and form factors, perhaps flexible, should we expect your blended ASP for OLED to have uplift and track up? Or would it trend kind of flattish through the product cycle with the new products replacing out the old ones?

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Young-Joon Kim, MagnaChip Semiconductor Corporation - CEO & Director [8]

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I think the best way to look at it is the trend-wise, not looking at just near term, but the OLED and the market trend, the market is, as I said earlier today, that the IHS expects the OLED to have more than 52% market share by 2022. So that's the trend there. The smartphone is moving from LCD to OLED.

Second, the other trend is that the more is going through the flexible OLED. So if you look at that trend over the next few years, that should have advantages ASP blend. Now quarter-to-quarter, it really depends on the product introduction and the mix. So it could have some up and downs along the quarter. But the trend-wise, it should be upwards.

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Sujeeva Desilva, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [9]

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Okay. And then my last question, guys, I mean I think in the prepared remarks you talked about Foundry and potentially evaluating options for that. I was hoping you could elaborate on that comment particularly that you've just hired a very senior executive for a strategy role. I'd be curious to hear any color there.

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Young-Joon Kim, MagnaChip Semiconductor Corporation - CEO & Director [10]

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Yes. So what we will do is make sure that we're going to fill the fab. We will have the best efficiency in the fab on the Foundry business and we will be looking to everywhere to increase shareholder value. And that's what we're going to do. And I think that this new person will bring a lot of experience, creativity, where he helped create Samsung Semiconductor especially non-memory business to be much rich, and we want to bring that kind of road map to the MagnaChip because we see a lot of good opportunities ahead.

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Operator [11]

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And our next question comes from the line of Atif Malik with Citi.

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Atif Malik, Citigroup Inc, Research Division - VP and Semiconductor Capital Equipment & Specialty Semiconductor Analyst [12]

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A question for Jonathan on the procurement of the wafers. We're starting to hear that the market for wafers could start to ease up in terms of pricing. Can you just provide an update on what you see in the market and your expectation into next year?

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Jonathan W. Kim, MagnaChip Semiconductor Corporation - CFO, CAO & Executive VP [13]

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Yes. So currently we do still see for the raw wafers pricing continuing to trend upward. But given the current environment, I mean I think we'll need to continue to monitor that. And then from our side, we do still engage in the long-term agreements, which we think is beneficial for us because we do see the pricing that we get as more attractive than what's out in the market. So we do see it, at least currently, trending up, but I think we'll need to continue to monitor it in light of the current market conditions.

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Atif Malik, Citigroup Inc, Research Division - VP and Semiconductor Capital Equipment & Specialty Semiconductor Analyst [14]

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Okay. Then for YJ. YJ, can you just talk about the pricing premium of flexible over rigid and then rigid versus LCD?

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Young-Joon Kim, MagnaChip Semiconductor Corporation - CEO & Director [15]

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Yes. So there is no really fixed answer, but let me try to give some ranges and some qualitative stuff. So if you want to compare apples to apples, so you want to have the flexible on the same resolution as well as the rigid, then the premiums tends to be about range of 2x or more. Now you go to -- but today a lot of flexible OLED screen is found in the really high end. So that's like QHD-plus. And then you're talking more than 3x premium. So that's the kind of the framework.

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Atif Malik, Citigroup Inc, Research Division - VP and Semiconductor Capital Equipment & Specialty Semiconductor Analyst [16]

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Okay. Then lastly, can you just talk about the China smartphone market? We have been hearing things have been a little bit soft. But I mean you guys have a (inaudible) cycle in terms of OLED. But just the health of Chinese smartphones this year.

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Young-Joon Kim, MagnaChip Semiconductor Corporation - CEO & Director [17]

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Yes. So I mean we see and we hear from the same market data as you do. And according to that, it seems like the China smartphone market is soft. However, if you look at what's happening is that the -- you have more exposure to that if you are selling every bit of LCD to everybody over there. But we are only selling into the OLED products. So I think so far we have not seen the effect of that as the market is trying to move towards the flexible as well as the OLED on the premium phones in China.

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Operator [18]

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(Operator Instructions) Our next question comes from the line of Raji Gill with Needham and Company.

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Rajvindra S. Gill, Needham & Company, LLC, Research Division - Senior Analyst of Microcontrollers, Analog & Mixed Signal, Consumer IC & Multi-Market [19]

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Congrats as well on the OLED traction. YJ, I was wondering if you could elaborate further on the inventory correction in Foundry. You cited some kind of macro softness that's obviously been happening across a lot of the semiconductor companies. Particularly, they've been citing weakness in China consumer products and China industrial. I was wondering if you could kind of provide a perspective from your view on China. And did the tariffs have any impact on your products in terms of, at least indirectly, in terms of end demand?

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Young-Joon Kim, MagnaChip Semiconductor Corporation - CEO & Director [20]

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Yes, Raj. So very good question. So obviously we are looking at the worldwide situation very carefully. We're also looking at some watch on the China. I think the Foundry, because that business have more than 75% of revenue outside Korea so it tends to have more the global trend, and it seems like there is some softness or some caution by the market. Therefore, it has some effect on some of the customers trying to do some inventory correction due to the cautiousness for the market. But we have not been directly exposed as a company to the trade war or to the global thing, but I think the Foundry nature, business being exposed to more of a worldwide customers, that may have more of being cautious on that segment for us.

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Rajvindra S. Gill, Needham & Company, LLC, Research Division - Senior Analyst of Microcontrollers, Analog & Mixed Signal, Consumer IC & Multi-Market [21]

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And when do you think we'll be over with the inventory correction in the Foundry business?

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Young-Joon Kim, MagnaChip Semiconductor Corporation - CEO & Director [22]

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If you really look at the market, I mean I think even 2 months ago I don't think people had predicted that this is happening. So again, I think we have a decent visibility to Q4, a very good visibility to Q4 and some to another quarter out. So again, I think we have to wait to see how the global, the market turns out and see. But as far as our road map and the design pipeline is concerned, I think all 3 businesses are doing well and we'll have to continue to watch out, and also, as I said earlier, that we will do our best to maximize the fab filling in the Foundry also with any opportunistic manner to fill the fab.

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Rajvindra S. Gill, Needham & Company, LLC, Research Division - Senior Analyst of Microcontrollers, Analog & Mixed Signal, Consumer IC & Multi-Market [23]

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And Jonathan, could you talk about the lead times and the channel inventory?

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Jonathan W. Kim, MagnaChip Semiconductor Corporation - CFO, CAO & Executive VP [24]

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Yes. So I think what you are alluding to is the Power channel inventory, as in the Power business we use distributors to sell. And that continues to look lean, which I think is a healthy sign. And so that's certainly a good sign for us and we're going to continue to work hard to, on the Power side as we've done in the past, continue to product portfolio optimization so that we can maximize profitability.

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Rajvindra S. Gill, Needham & Company, LLC, Research Division - Senior Analyst of Microcontrollers, Analog & Mixed Signal, Consumer IC & Multi-Market [25]

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Great. And last question. The Power business, YJ, has grown a lot. I think last year it grew 14%, I believe, and this year it could grow another 10%, 12%, 13%, something in that range. Could you kind of characterize the growth drivers in that particular segment? And how should we think about it next year?

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Young-Joon Kim, MagnaChip Semiconductor Corporation - CEO & Director [26]

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So let's clarify your comment and question right there. So you're talking about the growth in the premium products of the Power? Is that what it was, Raj?

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Rajvindra S. Gill, Needham & Company, LLC, Research Division - Senior Analyst of Microcontrollers, Analog & Mixed Signal, Consumer IC & Multi-Market [27]

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Yes.

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Young-Joon Kim, MagnaChip Semiconductor Corporation - CEO & Director [28]

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Yes, yes. So if you look at my earlier remark, currently the premium products in Power is 45%. That has grown from about 35% 18 months ago. So we are continuing to develop and accelerating the pace of new-generation products on the IGBT, Super Junction and the Power ICs. Some of the new Power IC include the 36-channel, the micro-LED drivers. And we are continuing to bring out the next-generation battery protection FET, which is the -- even though we don't classify that as a premium product, but it is the same type of higher-margin premium part. So we are really focused on a product like that as well as increasing more content penetration in the industrial as well as automotive.

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Operator [29]

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And I'm showing no further questions at this time and I'd like to turn the conference back over to Bruce Entin for any closing remarks.

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Bruce Entin, MagnaChip Semiconductor Corporation - Director of IR - United States [30]

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Okay. This concludes our third quarter 2018 earnings conference call. Please look for details of our future events on MagnaChip's Investor Relations website. Thanks for joining us today.

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Operator [31]

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