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Edited Transcript of MX.N earnings conference call or presentation 17-Feb-21 10:00pm GMT

·34 min read

Q4 2020 MagnaChip Semiconductor Corp Earnings Call Feb 18, 2021 (Thomson StreetEvents) -- Edited Transcript of MagnaChip Semiconductor Corp earnings conference call or presentation Wednesday, February 17, 2021 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Shin Young Park MagnaChip Semiconductor Corporation - CAO * So-Yeon Jeong MagnaChip Semiconductor Corporation - Head of IR * Young-Joon Kim MagnaChip Semiconductor Corporation - CEO & Director * Young-Soo Woo MagnaChip Semiconductor Corporation - CFO ================================================================================ Conference Call Participants ================================================================================ * Atif Malik Citigroup Inc., Research Division - Director & Semiconductor Capital Equipment and Specialty Semiconductor Analyst * Jonathan Doherty Lopez The Vertical Trading Group, LLC, Research Division - Research Analyst * Rajvindra S. Gill Needham & Company, LLC, Research Division - Senior Analyst * Suji Desilva ROTH Capital Partners, LLC, Research Division - MD & Senior Research Analyst * Zhihua Yang Oppenheimer & Co. Inc., Research Division - Associate ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by, and welcome to the Fourth Quarter 2020 MagnaChip Semiconductor Earnings Conference Call. (Operator Instructions) I would now like to hand the conference to your speaker today, So-Yeon Jeong. Please go ahead, ma'am. -------------------------------------------------------------------------------- So-Yeon Jeong, MagnaChip Semiconductor Corporation - Head of IR [2] -------------------------------------------------------------------------------- Thank you. Hello, everyone. Thank you for joining us to discuss MagnaChip's Financial Results for the Fourth Quarter ended December 31, 2020. The fourth quarter earnings release that was filed today after the stock market closed can be found on the company's Investor Relations website. A telephone replay after today's call will be available shortly after the completion of the call and the website will be archived on our website for 1 year. Access information is provided in the earnings press release. Joining me today are YJ Kim, MagnaChip's Chief Executive Officer; and Young Woo, our Chief Financial Officer. YJ will discuss the company's recent and annual operating performance and business review, and Young will review financial results for the quarter and the year and provide guidance for the first quarter of 2021. There will be a Q&A session following the prepared remarks. During the course of the 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 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 at www.magnachip.com. I now will turn the call over to YJ Kim. YJ? -------------------------------------------------------------------------------- Young-Joon Kim, MagnaChip Semiconductor Corporation - CEO & Director [3] -------------------------------------------------------------------------------- Hello, everyone. Thank you for joining our call today. MagnaChip's Q4 results exceeded our expectations, capping off one of the most challenging years for any of us. During Q4, demand for MagnaChip's product remained robust, driven by a strong ramp in 5G. More importantly, we were able to secure more supplies from foundry partners for OLED products as well as from our internal Fab 3 for the power products. We achieved $142.9 million in revenue and $0.40 in non-GAAP EPS. The revenue increased 14.5% sequentially and 15.9% year-over-year, and it surpassed the midpoint of our Q4 2020 guidance by approximately $11 million. There's no doubt that 2020 has presented its share of unique challenges, such as the COVID-19 pandemic, unstable global economy and geopolitical uncertainties. Nevertheless, for MagnaChip, 2020 was a remarkable year of structural transformation. Among the highlights are: one, our adjusted operating income and adjusted EBITDA increased 36.7% and 29.3% from 2019, respectively. The revenue decreased 2.6% year-over-year due mainly to our exit from the non-auto LCD business. If we compare apple-to-apples, our 2020 revenue grew to 0.7%. GAAP gross profit margin of 25.3% represented a 290 basis point increase from 2019 as we improve the product mix. We successfully closed the sale of our foundry business and Fab 4 for the total cash proceeds of $350.6 million, and we used $227.4 million to fully redeem the 6.625% senior notes due 2021. This action significantly strengthened our balance sheet. Our stockholders' equity turned positive to reach $345.6 million at the end of 2020 versus a negative $15 million in 2019. We laid out 2020 through 2023 strategic initiatives and key metrics under MX 3.0 and launched a new brand identity, underscoring our fresh start as a pure-play standard products company. It is with my profound gratitude for the dedication and tenacity of every MagnaChip team member that I share the extraordinary accomplishments in 2020. Now let's move to a detailed review of our product business, starting with the OLED business. During Q4, our OLED DDIC revenue of $80.4 million set a new historic quarterly record. It surpassed the previous revenue high of $78.3 million recorded in Q3 of 2019, representing a 19% sequential increase and a 19.4% increase year-over-year. For 2020, despite the 8% decline in global smartphone shipments, our OLED revenue grew 6.5% year-over-year to reach a new high of $284.6 million, making the third consecutive year of achieving record revenue. Let me address a couple of highlights for Q4 as well as fiscal 2020. First, the momentum in 5G smartphones, especially with High Frame Rate, HFR, OLED DDIC grew stronger in Q4. We were awarded 8 new design wins in Q4, and all of them were 5G and HFR models. This revenue from 5G smartphones accounted for about 20% of the total OLED revenue in first half 2020, 40% in Q3, and it reached approximately 70% in Q4, representing over 40% of our total 2020 OLED revenue. Second, the demand for our products in a key model launched by Korean smartphone OEM continued to increase in Q4. This key model boast the flagship features at a desirable price point and has been gaining solid ground. In addition, the strong design momentum with smartphone OEMs based in China during Q3 drove a healthy revenue growth in Q4. During the fourth quarter, 12 new smartphone models with our chips were launched. We are encouraged by the continued adoption of our distinctive solution by multiple end customers worldwide. In reviewing the OLED business in 2020, our outstanding performance is a testament to the laser-focused execution of the innovative product road maps. As a case point, our OLED design activities hit new records in 2020. We secured a 38 new OLED design wins in 2020 to reach 54 cumulative design wins compared to 21 new design wins and 34 cumulative design wins in 2019. In 2020, about 60% of this 54 cumulative design wins were derived from the 5G and HFR smartphone model. 2020 was also marked as a year of rebuilding a solid foundation and strengthening product lineups to accelerate OLED penetration into other applications. Although we can't comment on our customers' specific plans, I can tell you that our engineering team has been very busy throughout the year, engaging with the customer to develop new products in emerging technologies and applications such as OLED TV, micro LED TV and OLED automotive. I'm happy to report you each product is moving well and as planned. I look forward to updating you in the key milestones of these projects in the future. Now let's turn to the Power business. Power revenue in Q4 2020 came in at $46.9 million, up 0.4% sequentially and up 23.9% year-over-year. Q4 Power revenue outperformed our expected growth of 15% to 20% year-over-year due to the strong demand of our premium products, including Power IC. For the whole year of 2020, our Power revenue in 2020 was $166.5 million. It was down 5.6% year-over-year. Our Power revenue was significantly impacted by COVID-19 during the first half 2020, but it demonstrates an impressive resilience in the second half of 2020, despite the capacity handicap caused by the power outage at our Fab 3. In fact, our second half 2020 revenue was an all-time half year high since we started our Power business in 2007. Now let me highlight key takeaways for our Power business for Q4 as well as 2020. For Q4 2020, our Power IC products continue to deliver healthy growth, driven by series of design wins in a wide range of TV models and computing applications. Power IC revenue crossed the $10 million annual revenue threshold in 2020. And it is expected to grow over 35% in 2021. Power IC is one of the premium product families that carries a high gross profit margin, and we will continue to strive to expand this product group by targeting adjacent application and new customers. We have 3 key design wins, our power IC products, 2 from laptop and 1 from SSD-related applications. In reviewing the Power business in 2020, we started to reestablish Fab 3, our 8-inch Fab 4 power discrete semiconductors. While Fab 3 capacity will gradually increase from 2021 as we install new tools, we plan to add about 40% incremental capacity for our standard product -- standard power product by the end of 2020 compared to the 2020 level. Owning a dedicated power discrete fab also plays a critical role in supporting automotive customers. Underpinned by the sharpened R&D focus and go-to-market strategy, our Power business introduced a series of new product families that are gaining good initial traction. The total number of new products released in 2020 more than doubled the total number of 2019. And the business pipeline of these new products is expanding. Demand for our power products remain strong, and our Fab 3 is running at full capacity. Before I conclude the business review, let me take a few minutes to comment on the demand and supply situation. According to OMDIA market research, the overall OLED smartphone shipment in Q1 2021 will be down 17% from Q4 2020, as Q1 being seasonally low. Against this backdrop, the demand for our OLED products is still relatively strong. As it is well publicized, the overall semiconductor demand started to increase from the second half of last year, which caused supply constraints, especially with our 28-nanometer external foundry partners. While we are leaving some demand in Q1 unmet due to supply constraints, we are working closely with our strategic customer and our foundry partners to address supply constraints. And we expect the supply situation to improve later in the quarter. As we look at our current quarter, the demand at most of our end markets remains very healthy against the typically low season. As we improve our supply situation, we expect to continue executing our pure-play product strategy. In closing, we are proud of our solid performance in Q4 and the strategy that the Board and management set out in early 2019 has positioned the company for long-term success. During the last year, we entered MX 3.0, an exciting new chapter for growth with a sharpened focus as a pure-play standard products company, renewed energy and a clear mission of empowering our customers. On the MX 3.0, we set long-term financial targets that we would like to achieve by 2023. While we also recognize the past will not always be a straight line, the exciting opportunity ahead of us only reinforce our confidence in our growth outlook towards 2023. Lastly, we plan to host an Analyst Day on April 20, 2021. Our Board is committed to maximizing shareholder value and is evaluating various options, including a holistic review of our capital allocation strategy, our target liquidity position and our ongoing distribution framework. We recognize that the company may currently have excess liquidity. We plan to address, among other things, a comprehensive plan for our near-term capital allocation, our liquidity, leverage policy and our ongoing shareholder distribution on or before the upcoming Analyst Day. Now I will turn the call over to Dr. Woo and come back for the Q&A session. -------------------------------------------------------------------------------- Young-Soo Woo, MagnaChip Semiconductor Corporation - CFO [4] -------------------------------------------------------------------------------- Thank you, YJ, and a warm welcome to everyone on the call. Let's start with key financial metrics for the fiscal 2020 and Q4. The revenue in 2020 was $507.1 million, down 2.6% from 2019. The slight decrease was due primarily to the exit of non-auto LCD business despite the recovery from the COVID-19 and 5G smartphone growth in the later part of 2020. Display business was $299.1 million, down 3.1% from 2019. As a reference point, the normal LCD revenue accounted for approximately $34.5 million in 2019 and $7.9 million in 2020. Our 2020 OLED revenue set another all-time record in terms of annual revenue, representing outstanding growth 3 years in a row. Turning now to Power business. Revenue of $166.5 million was down 5.6% from 2019, due primarily to the impact from COVID-19 in the first half of 2020 and Fab 3 power outage in Q3. For the year, we made great improvement in profitability in 2020. The gross profit margin improved 290 basis points year-over-year and adjusted operating income margin increased to 8.2% from 5.8% in 2019. Adjusted EBITDA represented 10.4% of total revenue in 2020 compared to 7.9% in 2019. Our non-GAAP diluted earnings per share from continuing operations was $0.73 in 2020, up from $0.25 in 2019. Now turning to Q4 results. Total revenue in Q4 was $142.9 million, up 14.5% from Q3 and up 15.9% from Q4 a year ago. Revenue from the Standard Product Business was $129.6 million, up 11.4% from Q3 and up 14.4% from the same quarter a year ago. Both sequential and year-over-year increase was driven mainly by strong demand in our OLED product, especially for 5G and HFR OLED DDIC. Display revenue in Q4 was $82.7 million, up 18.9% from Q3 and up 9.6% year-over-year. Adjusting for the non-auto LCD business, it was up nearly 20% year-over-year. Power revenue in Q4 was $46.9 million, up 0.4% sequentially and up 23.9% year-over-year. The significant increase year-over-year was due to higher demand for premium power products, such as high-end MOSFET, primarily for TV and industrial applications, and our Power IC product. Gross profit margin in Q4 was 26.9% or 400 basis points from Q3. As a reminder, gross profit margin in Q3 was negatively impacted by 3 percentage points due to 2 unusual items in connection with the delayed recovery from the power outage of Fab 3 and the displays excess inventory charge related to the U.S. government export restrictions to Huawei. Our gross profit margin also expanded 220 basis points from Q4 a year ago, due primarily to product mix improvement. Turning now to operating expenses. Operating expenses, including $4.4 million onetime termination charges related to the voluntary resignation program in Q4, were $29.3 million or 20.5% of total revenue as compared to 20.3% in Q3 and 20.1% for the same quarter a year ago. SG&A in Q4 was $12.6 million as compared to $12.9 million in Q3 and $13.8 million in Q4 last year. R&D in Q4 was $11.6 million as compared to $12.5 million in Q3 and 11-point -- $11 million in Q4 last year. Stock compensation charges included in operating expenses were $1.9 million in Q4; $2 million in Q3; and $4.1 million, Q4 2019. Adjusted operating income in Q4 was $15.4 million, up from $8.8 million in Q3 and up from $10.1 million in Q4 a year ago. Adjusted EBITDA in Q4 was $18.6 million, up from $11.7 million in Q3 and up from $12.8 million in Q4 a year ago. Net income in Q4 was $66.6 million as compared with $273 million in Q3 and $23.4 million in Q4 a year ago. As we noted during the last earnings call, the sharp increase in Q3 was due to the recognition of gain on sale of the Foundry Services business and Fab 4. Year-over-year increase in net income was due to the recognition of income tax benefit of $47.1 million in Q4, primarily from recognizing differences between GAAP and cash tax expenses of $43.9 million. We were able to recognize such benefit based on the historical trend of taxable income in recent years and our increased confidence in forecasted taxable income based on growth opportunities, as a pure-play product company after the sale of Foundry Service Group business and Fab 4. Our GAAP diluted earnings per share in Q4 was $1.45 as compared with $5.89 in Q3 and $0.54 in Q4 a year ago. Our non-GAAP diluted earnings per share from continuing operations in Q4 was $0.40, up from $0.14 in Q3 and up from $0.17 in Q4 last year. The difference between our GAAP and non-GAAP EPS was primarily due to the elimination of the onetime recognition of differences between GAAP and cash tax expense of $43.9 million, and the elimination of noncash foreign currency gain of $13.3 million. There were 47.1 million diluted weighted average number of shares outstanding in Q4. Now moving to the balance sheet. Cash was $279.9 million at end of Q4. This compares to $542.1 million at the end of Q3 and $151.7 million at the end of 2019. In Q4, we used $227.4 million to fully redeem the 6.625% senior notes due 2021 and pay the withholding tax of $20.5 million as we explained during the last earnings call. Accounts receivable net totaled $64.4 million an increase of 11.5% from Q3. Our days sales outstanding for Q4 was 41 days. Inventories net totaled $39 million, an increase of 16.1% from Q3. Our average days in inventory for Q4 was 34 days. CapEx was $19.7 million in Q4. CapEx of $36.1 million in 2020 included approximately $20 million of onetime investment, which is in line with the previously disclosed CapEx plan. The $20 million also included certain onetime spending to ensure the safe management of our Fab 3, which is connected to employee health in executing the recovery plans from the power outage in Fab 3 during the second half 2020. Now let me give you a brief update on the voluntary regulation program. The total cash cost of $8.8 million have been fully paid, including statutory severance and the termination benefit. The program is expected to result in estimated annual cost savings of approximately $4.2 million, which will help our plan to reduce our adjusted OpEx level below 18% of revenue by 2023. Now moving to the first quarter guidance. The COVID-19 global pandemic is not behind us and continues to reduce our forward visibility. While actual results may vary, MagnaChip currently anticipate for Q1 2021 revenue to be in the range of $119 million to $124 million, including about $10 million of the transitional Fab 3 Foundry Services. Gross profit margin to be in the range of 25% to 27%. With that, I will turn the call over to So-Yeon. Thank you. -------------------------------------------------------------------------------- So-Yeon Jeong, MagnaChip Semiconductor Corporation - Head of IR [5] -------------------------------------------------------------------------------- Thank you, YJ. Thank you, Young. So operator, this concludes our prepared remarks, and we'll now open the call for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question will from the line of Suji Desilva from ROTH Capital. -------------------------------------------------------------------------------- Suji Desilva, ROTH Capital Partners, LLC, Research Division - MD & Senior Research Analyst [2] -------------------------------------------------------------------------------- Congratulations to a very strong end to 2020 and all the progress here. So I'm trying to understand -- yes. I'm trying to understand your guidance, the impact of the visibility, obviously, and uncertainty versus the manufacturing constraints. Can you give a sense of which segments are perhaps being impacted more by the manufacturing constraints? Is it OLED or Power? And perhaps some of the steps you're taking, YJ, specifically to address these? Would be helpful because you sound more optimistic about how soon versus others in terms of the constraints. -------------------------------------------------------------------------------- Young-Joon Kim, MagnaChip Semiconductor Corporation - CEO & Director [3] -------------------------------------------------------------------------------- Yes. So a very good question. So as you are aware, the -- there's a global foundry supply constraints for all nodes that started in second half last year. The serious supply situation is continuing to Q1, as you know. And we manufacture all the OLED using external 12-inch fab. And we -- on the 28-nanometer node, where we are a leader in the market, there is a more pent-up demand on the OLED as well as CMOS image sensor, 5G RFIC and IoT. And one of the IDM also tap into foundry capacity, given the supply constraints even in the in-house manufacturing. So there is some constraints on the 28-nanometer node, along with every other node you see. Some of the demand -- and we see more demand than what we can supply in the Q1, as we said. So some of this demand can be carried over. Some of them also disappear. Some of the smartphone has a short-term cycle. Now in terms of, particularly to your question, we do see more shortage in the OLED. And we do see about $10 million more of demand than what we can ship at the moment. So -- but we do see that the supply situation for this quarter to get better towards the end of the quarter. But again, we only guide 1 quarter at a time, and that is the best picture we can show you. And the other thing is that unlike the LCD product where we have a generic device selling multiple panel customers, our device is a custom ASIC OLED. So that means that we actually have a real demand that we're trying to sell the same chip to multiple panel customers. Therefore, we are really working closely with our strategic customer and our foundry partners to address the supply constraints, and we expect the supply situation to improve later in the quarter. -------------------------------------------------------------------------------- Suji Desilva, ROTH Capital Partners, LLC, Research Division - MD & Senior Research Analyst [4] -------------------------------------------------------------------------------- Okay. That's a very helpful color, YJ. And then my follow-up question is about the gross margin. If I adjust for the Fab 3 service arrangement, it seems like you're approaching 30%, if I did my math correct. Can you talk about the drivers of further expansion in gross margin, just to understand, and level set the expectation we can have here? -------------------------------------------------------------------------------- Shin Young Park, MagnaChip Semiconductor Corporation - CAO [5] -------------------------------------------------------------------------------- Suji, this is Shin Young, the Chief Accounting Officer of MagnaChip. I mean the gross margin can vary quarter-by-quarter. So this particular quarter may look like we've achieved our longer-term target already, but I mean, it can vary depending on the product mix and et cetera. So we'll continue to strive our -- to continue to achieve the long term target of the 30% by 2023, as YJ mentioned before. -------------------------------------------------------------------------------- Young-Joon Kim, MagnaChip Semiconductor Corporation - CEO & Director [6] -------------------------------------------------------------------------------- Yes. And it's also product mix, and you see good product like Power IC that's coming in, which has a high gross margin. So we've continued executing and we're also putting additional capacity gradually. So all these, and we're going to have a new generation of the -- all the products by 2022, as we explained. So all that should help towards the gross margin. -------------------------------------------------------------------------------- Operator [7] -------------------------------------------------------------------------------- And our next question will come from the line of Raji Gill from Needham. -------------------------------------------------------------------------------- Rajvindra S. Gill, Needham & Company, LLC, Research Division - Senior Analyst [8] -------------------------------------------------------------------------------- Congrats as well. YJ, the OLED revenue was really great in Q4 in terms of sequential growth as well as kind of the year-on-year growth. You talked about that 5G represents about 70% of the OLED revenue in Q4, and now it's going to be about 40% for all of 2020. Wondering how you're thinking about the ramp as we go throughout the year. A lot of the folks in the supply chain, the 5G smartphone supply chain, pretty much have all said that there's going to be -- the market is going to double for 5G smartphones from 2020 and going up to about 500 million smartphones. And then there's recent reports that it's actually increasing to 550 million phones. So I'm wondering, given the fact that your new OLED DDICs are so tied to the new 5G phones. How are you guys thinking about that business this year? And then I'll have a follow-up. -------------------------------------------------------------------------------- Young-Joon Kim, MagnaChip Semiconductor Corporation - CEO & Director [9] -------------------------------------------------------------------------------- Raj, thank you. A very good question, valid question. But as you know, we only comment our results 1 quarter at a time. But you're correct. We see the 5G smartphone more than doubling. And if you look at even the fourth quarter results, about 70% of revenue were from 5G with a HFR feature. So I can confirm that the demand is very strong. And as I said before, our product is a custom ASIC. I mean we -- it's -- each product is targeted for each panel customer. So it's not like something like you can ship to multiple people, and there's no double booking and so forth. So I can tell you, yes, demand is very strong. And therefore, we are working very closely with our key customer and the partner -- the foundry partners to address the demand. And unfortunately, there is supply constraints. And as I said, we expect the supply constraints to get better towards the end of the quarter. -------------------------------------------------------------------------------- Rajvindra S. Gill, Needham & Company, LLC, Research Division - Senior Analyst [10] -------------------------------------------------------------------------------- And on the power side, a reversal in terms of the year-over-year growth post Q1 of last year, is up about 24% year-over-year in Q4. And so as we go into 2021, what are the kind of the key drivers for that business, specifically in 2021? And how is that -- how are those drivers going to be different, say, from 2020? Or are they just kind of a continuation of what you're seeing in the kind of the power premium IC market? -------------------------------------------------------------------------------- Young-Joon Kim, MagnaChip Semiconductor Corporation - CEO & Director [11] -------------------------------------------------------------------------------- Sure. So if you look at my remarks, in second half of last year, we started to see tremendous pickup as well as execution. And we're actually seeing in every of our product, whether it's the mass fab to Power IC to Super Junction and IGBT, and Power IC, particularly had a really strong growth starting second half as we penetrate a new computing application on solid state drive. And now we added to the computing segment and additional into the other IC and as you know, the IT is hot these days. So -- and we are confidently expect to grow more than 35% on the Power IC this year. But we also see all strong cylinders in all of our product line, and that's why we are gradually putting -- increasing the capacity in our Fab 3 and that the capacity expansion will continue and will add about 40% on power capacity by end of 2022. So to meet up the market demand, that's what we are doing. And by 2022, we will have a complete new refresh cycle of Super Junction, battery pack and the IGBT. So we look forward to having much robust and competitive product in the power line to grow the market as well as keep up demand with our customers. -------------------------------------------------------------------------------- Rajvindra S. Gill, Needham & Company, LLC, Research Division - Senior Analyst [12] -------------------------------------------------------------------------------- And just one last housekeeping question. The foundry -- sorry, the transitional services revenue kind of jumped from $8.5 million to $13 million in Q4. And I think you're talking about $10 million in Q1. Is it volatile like that? Or is it going to be in this kind of $9 million to $10 million range for modeling purposes? -------------------------------------------------------------------------------- Young-Joon Kim, MagnaChip Semiconductor Corporation - CEO & Director [13] -------------------------------------------------------------------------------- So that's a very good question. So if you recall, we had a power outage in end of July towards -- and it wasn't completely healed until the early part of October, right? So what happened during that time was that the -- some of the backend that was going -- did not go out in Q3, started to go out Q4. So we actually studied a lot of wafer starts. About 80% was there, but the -- some of the backend was not able to shift due to power outage. And so that will release. And that's why you see quite a jump from about $9 million to $13 million in the fourth quarter. But we expect the foundry transitional service to be around $10 million a quarter. -------------------------------------------------------------------------------- Operator [14] -------------------------------------------------------------------------------- And our next question will come from the line of Martin Yang from Oppenheimer. -------------------------------------------------------------------------------- Zhihua Yang, Oppenheimer & Co. Inc., Research Division - Associate [15] -------------------------------------------------------------------------------- My first is on your emerging products like OLED TVs, micro LED TVs and Power IC. Can you maybe talk about the potential different customer relationships you will be addressed with the new products? And is there any margin benefit from those emerging products? -------------------------------------------------------------------------------- Young-Joon Kim, MagnaChip Semiconductor Corporation - CEO & Director [16] -------------------------------------------------------------------------------- Very, very good question, Mike. So all those 3 products you mentioned have higher than corporate gross margin. So I'm very excited about the work we are doing there. Obviously, Power IC, as I said, we are getting into new application and adjacent applications. So we are getting a lot of momentum in IT, whether it's solid state to the laptops to other IT and also continue expanding on the TV, Power IC market. So that's why you're going to see huge growth this year on the Power IC, even though it's a small revenue, but we just crossed the $10 million revenue threshold in last year. In terms of the OLED TV and Micro OLED TV, again, the Micro LED TV is some -- it's a very complicated and very -- putting the latest, greatest OLED technology as well as Power IC technology in 1 chip. So we can't talk too much specific about the timing because it's really tied to some of our key customers, but we are seeing progress there. But again, those are more niche product, really targeted for high end. But it's a very nice margin. And if money is no object, you should buy the Micro LED TV and the high end. And then OLED TV, yes, we are expecting to start the production in second half. And we think that by end of the year, we'll generate some meaningful revenue. So we are all excited about all these progress we're making in other emerging applications. -------------------------------------------------------------------------------- Zhihua Yang, Oppenheimer & Co. Inc., Research Division - Associate [17] -------------------------------------------------------------------------------- That's great. A follow-up question on Power IC. So can you maybe help us understand, so within the Power Solutions, how will, for instance, a 10% gain on Power IC as the total Power Solutions help grow the margins for the Power Solutions segment? Can -- any comments you can help us understand the margin benefit from Power IC for Power Solutions Group would be helpful. -------------------------------------------------------------------------------- Young-Joon Kim, MagnaChip Semiconductor Corporation - CEO & Director [18] -------------------------------------------------------------------------------- Yes. Thanks, Martin, for asking. But if you look at any fabless Power IC maker, in fact, the Power IC is a fabless model for us now. We make that in the Fab 4 that we sold. But any Power IC market, you should be looking at about 40% margin, right? That's the -- any fabless model for Power IC should be. So that's the hint I can give you. And so obviously, we'll try to do better, but that's what it is. -------------------------------------------------------------------------------- Operator [19] -------------------------------------------------------------------------------- Our next question will come from the line of Atif Malik from Citi. -------------------------------------------------------------------------------- Atif Malik, Citigroup Inc., Research Division - Director & Semiconductor Capital Equipment and Specialty Semiconductor Analyst [20] -------------------------------------------------------------------------------- And good job on the results. YJ, a quick clarification on the earlier responses on the supply constraints. The 10 million, I assume that's a unit number, the unmet demand in Q1, the 10 million. Do you expect an impact in second quarter if supply is going to be resolved by the end of this quarter? -------------------------------------------------------------------------------- Young-Joon Kim, MagnaChip Semiconductor Corporation - CEO & Director [21] -------------------------------------------------------------------------------- It's a very good question. So it's a $10 million not unit. So what we're saying in Q1, the -- we have excess $10 million worse of the demand on OLED. And your second question is how that usually happens is that -- well, usually, what happens is that the -- even last Q4, we had more demand than supply. So some of them carried over to Q1, but some of -- actually, more than half actually disappears because the smartphone demand is -- what do you call -- it's a cycle is what -- 6 to 9 months cycle. So you have to try to address that, unfortunately. But I think the point is that our chip is a custom ASIC. So it's not like you're going to be replaced by someone else. It's as the -- so we don't see any double booking like other places out there. So it's showing very healthy demand in the end customer market. -------------------------------------------------------------------------------- Atif Malik, Citigroup Inc., Research Division - Director & Semiconductor Capital Equipment and Specialty Semiconductor Analyst [22] -------------------------------------------------------------------------------- Great. And just going back to Raji's question about the display outlook for the full year. If 5G units are supposed to go from 250 last year to 500 and the OLED adoption continues to grow and the handset grow in unit, and do we get back on that OLED growth trajectory that we were in prior to COVID? -------------------------------------------------------------------------------- Young-Joon Kim, MagnaChip Semiconductor Corporation - CEO & Director [23] -------------------------------------------------------------------------------- So again, I think if you look at the market perspective, you're correct. The 5G transition is happening. Already in Q4 last year, 70% of OLED revenue was 5G and HFR. So we see continued strong demand. And so again, we are working very closely with my customer, a very key customer and the foundry partners to work on the supply constraints. And we expect to make progress starting later in the quarter. -------------------------------------------------------------------------------- Operator [24] -------------------------------------------------------------------------------- And our next question will come from the line of Jon Lopez from Vertical Group. -------------------------------------------------------------------------------- Jonathan Doherty Lopez, The Vertical Trading Group, LLC, Research Division - Research Analyst [25] -------------------------------------------------------------------------------- I had 3 questions. I'm hoping I could just do them one at a time. The first one is coming back to the OLED side, I'm wondering, can you -- I guess, my question is this, has the capacity situation in calendar Q1 -- has that affected your design engagements at all? In other words, are customers perhaps more reticent to design your parts, higher end parts, given the -- perhaps the inability to get access to them? Or is that unchanged, akin to what it was in 2020? -------------------------------------------------------------------------------- Young-Joon Kim, MagnaChip Semiconductor Corporation - CEO & Director [26] -------------------------------------------------------------------------------- Well, if you look at the trend you saw in 2020, our design win pipeline is stronger than ever. We had 38 design win with cumulative 54. That number increased drastically from 2019. So -- and we are seeing new product taped out every months or quarter. So the design momentum continues. And each OLED product address it anywhere between 4 to 6 different variants of the panels. So we continue to see the demand as well as the needs. It's just the -- unfortunately, we cannot meet the demand due to supply constraints. But the product that we are doing is showing very good demand and healthy situation from the -- all end market. -------------------------------------------------------------------------------- Jonathan Doherty Lopez, The Vertical Trading Group, LLC, Research Division - Research Analyst [27] -------------------------------------------------------------------------------- That's great. Very helpful. My second one, on the Power business, if I remember correctly, you guys had gotten channel inventories, perhaps a bit below where you wanted them in late 2020. Can you update us on that? Have you made any progress on that front? Just state of affairs on the Power channel inventory would be great. -------------------------------------------------------------------------------- Young-Joon Kim, MagnaChip Semiconductor Corporation - CEO & Director [28] -------------------------------------------------------------------------------- Yes. Very good question. So in Q3, we said that our inventory level channel was less than a month. That's very, very low, by the way, right? So normally, we like to see about 2 months. And so we are still working towards that. If you look at our peers in power, their channel inventories is up to 6 months. But we try to make about 2 months normal inventory. But we're not quite there yet. So we'll continue to work on that, and we are continue cranking out our Fab 3 as well as the Fab 4, we still manufacture some of the Power products. So that is the current situation. -------------------------------------------------------------------------------- Jonathan Doherty Lopez, The Vertical Trading Group, LLC, Research Division - Research Analyst [29] -------------------------------------------------------------------------------- Okay. Great. My third one on the Power side, you had made some comments in the prepared remarks about Power IC, and I didn't quite catch them. I think you mentioned that it crossed $10 million in quarterly contribution and the expectation was that portion would grow, I think you said, 30%, 35% perhaps in 2021. Would you mind just spending a second and correcting wherever I'm wrong in that recollection? -------------------------------------------------------------------------------- Young-Joon Kim, MagnaChip Semiconductor Corporation - CEO & Director [30] -------------------------------------------------------------------------------- Sure. So to correctly phrase it. So it's actually -- we crossed the $10 million annual revenue threshold in 2020. And we expect to grow bigger than 35% this year. So you're going to see issues, double-digit -- high double-digit growth on Power IC this year. And the point is that Power IC was relatively small, but we now first crossed the $10 million annual revenue last year. -------------------------------------------------------------------------------- Jonathan Doherty Lopez, The Vertical Trading Group, LLC, Research Division - Research Analyst [31] -------------------------------------------------------------------------------- Got you. Okay. I'm sorry, I have one last one. I apologize, I'm speaking extra and then -- to make it 4. The -- can you speak for a second on the automotive engagement? I know you guys have been progressing there for several months now. I guess my question is given the state of affairs in automotive semiconductor supply demand now, is that affecting your engagement either positively or negatively, i.e., is that causing that customer to rethink supply chain decisions? Or is it bringing more customers to engage with you? Just any thoughts you have around those dynamics, please. -------------------------------------------------------------------------------- Young-Joon Kim, MagnaChip Semiconductor Corporation - CEO & Director [32] -------------------------------------------------------------------------------- Yes. It's a very good question. So I think the current situation as you know, it doesn't hurt. I mean the automotive and also especially electric vehicle is going to continue to grow. So I think that we're in a good place. We end the 10,000 hour call. We expect to start preproduction second half. And I think we'll start to revenue in automotive for that power discrete device for the electric vehicle usage. So given the supply constraints, there will be, hopefully and should be, more demand for new partners in that kind of devices. So we are fortunate to have our own Fab 3 that can service the automotive makers. So we are excited about the order future in the midterm and long term. -------------------------------------------------------------------------------- Operator [33] -------------------------------------------------------------------------------- Thank you. And I'm not showing any further questions at this time. I'd like to turn the call back over to So-Yeon for any closing remarks. -------------------------------------------------------------------------------- So-Yeon Jeong, MagnaChip Semiconductor Corporation - Head of IR [34] -------------------------------------------------------------------------------- Thank you. This concludes our fourth quarter 2020 earnings conference call. Please look for details of our future events on MagnaChip's Investor Relations website. Thank you for joining us today. Goodbye. -------------------------------------------------------------------------------- Operator [35] -------------------------------------------------------------------------------- Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.