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

Q2 2018 MagnaChip Semiconductor Corp Earnings Call

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

TEXT version of Transcript

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Corporate Participants

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* Bruce Entin

* 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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* 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 Second Quarter 2018 MagnaChip Semiconductor Corporation Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Bruce Entin, Director of Investor Relations. Sir, you may begin.

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Bruce Entin, [2]

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Thank you for joining us to discuss MagnaChip's financial results for the second quarter ended June 30, 2018. The second 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 1 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. And Jonathan will provide an overview of our Q2 financial results. And then YJ will provide a brief recap as well as provide financial guidance for the third 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 account -- 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 second quarter earnings release available on our website under the Investor Relations tab at www.magnachip.com.

And now, I 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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Thank you, Bruce, and welcome to everyone on the Q2 conference call. Let's dive right in.

Total revenue of about $200 million exceeded our prior guidance of $182 million to $188 million, and reached the highest level of any quarter in nearly 6 years. Revenue of $199.7 million increased 19.8% from Q2 a year ago and increased 20.4% sequentially. Gross profit dollars, operating income and adjusted EBITDA increased by double-digits year-over-year as well as sequentially. We also generated meaningful positive free cash flow in the quarter. Jonathan will review our financials in more detail shortly.

Here are the Q2 takeaways. Display, Power and Foundry each showed sequential top line growth, but OLED was the standout performer and the main catalyst for our better-than-expected revenue performance in Q2.

OLED revenue of $62.2 million increased 309.6% from Q2 of last year and 81.3% sequentially from $34.3 million in Q1 of 2018. It was the second straight quarter of a triple digit year-over-year growth. The OLED revenue we achieved in Q2 was the highest level in any quarter since MagnaChip began shipping OLED drivers in 2007, and was 17% higher than Q3 2016, which was our highest OLED revenue quarter during 2016. That was the year we reported record OLED revenue of $161 million, and I'm pleased to say that we are currently on track to set a new OLED revenue record in 2018.

Let's briefly talk about how we got here and where we are headed with the OLED drivers. On our Q1 earnings call in May, we estimated our OLED revenue in Q2 would increase sequentially by about 50%. That was based on expectation that about 10 OLED smartphones with MagnaChip OLED DDICs would hit the market in Q2. Instead, we entered mass production for 15 new OLED smartphones and our OLED revenue was abnormally strong. We anticipate to be in mass production for additional 6 months, once in Q3.

Let's touch briefly on our design activity and discuss our product pipeline. If you recall, several smartphone makers in China had delayed plans for new devices because they were waiting for a highly anticipated smartphone from a global brand to hit the market in late last year. Once that happened, China smartphone makers were playing catch up and the design floodgates opened. In fact, approximately 70% of our new 40-nanometer design-wins enabled latest and greatest rigid bezel-less smartphones with trench or notch features, which offer better price performance than a leading global brand. As we close the books on Q2, we had a total of 32 design-wins with about a dozen smartphone makers. We also secured our first design-win through our panel maker for an OLED tablet application for an OEM in Asia in Q2. We continue to get more design-wins with our third-generation 40-nanometer driver IC to new compelling and leading edge smartphone makers outside Korea. This 40-nanometer device, which enables low-cost bezel-less rigid OLED screens with 21 x 9 aspect ratio and full HD plus-plus resolution is one of our 6 rigid and flexible OLED display driver portfolio, and all of them are now in volume production. While rigid drivers represented the majority of shipments in Q2, the product mix will begin to ship towards more complex and higher margin flexible display drivers.

In a report published last week, market research from displaysupplychain.com said prospects are positive for OLED smartphone growth in Q3. Here is their quote, OLED smartphone growth is accelerating with impressive growth expected in Q3 as a rigid OLED to LTPS LCD price gap narrows to about $5 and more brands increase their flexible OLED offerings.

Speaking for MagnaChip, we agree with their point of view and we expect our combined Q2, Q3 OLED revenue to be in the range of $120 million. We're very excited about a particular flexible OLED display driver in our product pipeline. This is our ultra-low power 28-nanometer OLED display driver. We've already taped out a test strip and expect to begin sampling by end of the year or early next year at the latest. It will have a technically compelling specs that will meet the exacting requirements of high-end smartphones, including foldables in the future. We believe the foldables category will reignite a new wave of smartphone innovation and have the potential to drive increased demand for the OLED display drivers and associated Power components that MagnaChip supplies. It's not clear when foldable devices will hit the market in volume, but it is clear that foldables will combine the best features of a smartphone and a tablet and require flexible OLED panel in order to bend. As a reminder, LCD displayer is not flexible and cannot be bent.

MagnaChip and our OLED panel customers already have made a significant stride in solving issues related to burning and screen aging. In addition, we've enabled complex functions such as significantly more sophisticated pixel optical compensation capabilities in high-resolution using high-density SRAM, and diverse compensation functions that could only be realized using final process technologies, an important step leading to photo cost reduction and development of advanced flexible OLED screens.

Ever finer geometries of DDICs, including 28-nanometer, will have even greater capabilities. Such devices will enable a very small dice size with large embedded SRAM memory to support the high screen resolution such as QHD+ or UHD, and the lowest levels of power consumption. Ultra-low power is ultra important to reduce heat, preserve battery life and improve device up-time, especially since foldables may have multiple screens and perhaps multiple drive ICs. Ultra low-power will also improve performance of application processors and other components attached with managing algorithms and complex functions like artificial intelligence, augmented reality and virtual reality. DDICs also will be required to control complex display driver operations and manage integrated modules, with sensor functions for enhanced touch and see interactive features.

As a company with the longest OLED design and manufacturing track record, we at MagnaChip believe that our 28-nanometer display driver will have the industry's lowest power, utmost cost efficiency and the most advanced OLED display capabilities. Stay tuned.

While we are talking about the display business, let me give you a brief update on the portfolio of the MagnaChip effort we've undertaken with our LCD business. In Q1, we decided not to actively pursue unattractive LCD opportunities of approximately $11 million in low-margin business and told you we would use a platform approach to product development. We also said we would redirect the business towards higher-margin opportunities, including automotive applications. I am pleased to report that we won 2 designs in Q2 for automobile center stack display. In ordinary terms, this is the dashboard or console screen used to control multiple car functions.

Turning now to the Foundry business. Our Foundry revenue and gross profit margin both increased sequentially in Q2, despite a substantial increase in raw wafer prices. We've taken a number of steps to mitigate the impact of higher wafer prices, but we need to do more. As a result, we are in the process of raising Foundry prices. Foundry revenue based on BCD, E2PROM technology grew in double digits sequentially in Q2. This technology continued to be the foundation of our Foundry business because the combination of analog-based BCD and E2PROM technology is ideal for power management solutions and Power ICs used in high volume smartphone, IoT devices and USB-C applications, although notable takeaways from our Foundry business in Q2, new product revenue, an indicator of the health of the business pipeline, increased by double-digit year-over-year and sequentially as well.

Database tape outs increased by double digits in the first half of 2018 as compared with the first half of 2017. Not all tape outs have equal revenue potential, but some view the metric as an indicator of potential business down the road.

Now turning to the Power business. Results in the Power Standard Products business, once again, were impressive, as demand continued to outpace supply both in the industry and also for MagnaChip. Revenue grew by double digits year-over-year and over 3% sequentially due to strong demand for medium voltage MOSFETs as well as high-voltage Super Junction MOSFETs and IGBT devices for TV and industrial markets.

To help ensure that we meet customer demands, we are opportunistically increasing wafer starts in the Power business by converting lower-margin LCD capacity. Portfolio optimization efforts began more than 2 years ago continued to pay off. We continue to convert key Power products into neo-geometric generation offerings, that carry higher margins. And also have increased average selling prices on 13 Power products due to industry shortages and product allocation. In some cases, we have begun to sell certain price-competitive Power products in wafer form to improve profit margin.

I'd like to highlight one new Power Standard product, targeted to retail signage application for exterior glass windows. This 36 channel LED driver IC product, which already has entered volume production is based on Power IC technology. This product is an enabler of micro LED solutions using our Power LED IC solutions.

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 third 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. We made progress in the second quarter on several financial fronts, despite headwinds. Most notably continued price increases on raw wafers and lower fab utilization compared to the period a year ago.

Let's do a brief recap of our results. As a housekeeping item, we will discuss historical numbers on an as-reported basis. Please refer to our published financial tables for the as-adjusted historical numbers. The improvements of our financials began with our stronger-than-expected revenue performance. Revenue in Q2 increased 19.8% from a year ago due to a 39.6% year-over-year revenue increase from our Standard Products Group. This was offset in part by a 0.8% revenue decline in the Foundry business.

For Q2, the Standard Products Group represented 59.5% of revenue, comprised of 39.4% from display products and 20.1% from Power products. OLED revenue in Q2 represented 79% of the display business, up from 30.5% in Q2 last year and 69.1% in Q1 2018. The Foundry Services Group represented 40.5% of Q2 revenue. OLED display driver revenue quadrupled year-over-year and Power products were up 13%. We increased ASPs on certain Power products as others in the industry have done in response to a shortage that has caused long lead times and product allocation. Our non-OLED display business declined as part of a deliberate and strategic portfolio optimization efforts in that low-margin product category. Our Foundry revenue was flattish from a year ago.

On a year-over-year basis, gross profit dollars improved 15.4%, operating income rose 42.8% and adjusted EBITDA increased 15.7%. On a sequential basis, those metrics all increased by double digits, but the standouts were operating income and adjusted EBITDA, which increased by 88.6% and 51.7%, respectively.

Notably, the incremental fall-through from gross profit to operating income was $7.4 million in Q1 and $13.9 million in Q2, which are encouraging signs that gross margin dollars are growing faster than operating expenses. We believe that it will be useful to monitor gross margin dollars as a key financial metric, because our revenue growth in 2018 represents fall-through of gross profit dollars to operating income, adjusted EBITDA and free cash flows.

We also strengthened the balance sheet. We tightly managed inventories in a high-growth environment, and in a prudent use of cash, we once again made prepayments to wafer vendors and purchased buffer wafers to secure adequate supply. One particular financial highlight is that we generated meaningful positive free cash flow in Q2 as compared to negative free cash flow in the same period a year ago as well as in Q1 this year. We anticipate that we will continue to generate positive free cash flow for the second half of 2018.

Gross profit margin in Q2 was 27%, which was within guidance range and up slightly from 26.9% in Q1. Gross margin declined by 1% year-over-year due to several factors, including lower fab utilization due primarily to a strategic and deliberate decision to reduce the volume of low-margin LCD products and a decrease in demand of certain lower-margin Foundry products. Fab utilization in Q2 was in the low 90% range as compared to mid-90% range a year ago.

Other factors effecting gross margin in Q2 included OLED product mix and higher prices of raw wafers. We anticipate more favorable OLED product mix as higher margin flexible OLED drivers become a larger percentage of our shipments. Wafer prices likely will remain an issue, not only for us, but industry wide.

We said as far back as the Q4 2017 earnings call, that we had the potential to achieve overall gross margin in fiscal 2018 to be flattish, give or take, with the gross margin result to be posted in fiscal 2017. Despite the headwinds we mentioned, we still stand by those words. We said previously, that if left unmitigated, higher raw wafer prices would impact gross profit margin by 2% to 3%. But we've also said that we had no intention of letting that happen. We continue to engage long-term supply arrangements with wafer vendors and make prepayments that guarantee wafer supply at attractive prices. Also, we continued to opportunistically buy raw wafers to add to buffer stock inventory.

A new initiative we are undertaking will take matters into our own hands with respect to a shortage of special epitaxial wafers. Those type of wafers, also commonly referred to as epi-wafers, are used primarily to manufacture our power standard products. We are planning to build in-house a portion of the epi-wafers that we expect we'll require in 2019 to meet customer demand and to moderate the impact of anticipated continued price increases from outside suppliers.

We intend to use silicon substrates to grow the epi-wafers, which we've done in the past to meet certain customer requirements. To do this, we will increase the number of epi tools this year and next year. As a result, capital spending will increase by approximately $3 million to $4 million in both 2018 and 2019 to support this initiative. We estimate approximately 2 to 3 years ROI for these investments.

A few notes before I turn the call back to YJ. SG&A was $18.9 million in Q2 as compared with $17.6 million in Q1, which included an unexpected benefit of $700,000 in Q1 to recoup an insurance claim for restatement related legal fees. The increase in SG&A in Q2 included over $500,000 due to the revised stock-based compensation program that includes performance-based incentives designed to align company performance with increase in shareholder value over time. In the second half of 2018, we expect SG&A will trend up primarily related to this revised stock-based compensation program.

R&D was $21 million in Q2, up from $19.6 million in Q1, primarily to support research and development programs associated with the OLED business. In the second half of 2018, we currently expect R&D will trend higher as we have previously forecasted, primarily to continue to support the OLED activities. We entered into an arrangement in Q2 to acquire a water treatment facility to support our fab in Gumi, Korea for $4.2 million. This transaction involved managing of acquiring the facility from SK Hynix and then engaging a third-party company to fully finance this acquisition and run the facility for the next 10 years.

Capital spending totaled $8.4 million in Q2 or $4.1 million on a normalized basis, that excludes the $4.3 million, fully financed by a third-party related to the above-mentioned water facility arrangement. We currently expect our capital expenditures in 2018 to be approximately $39 million or $35 million on a normalized basis as compared with $32.7 million in 2017. Cash was $131.7 million at the end of Q2 2018 as compared with $123.1 million in Q1 2018 and $131.5 million in Q2 2017.

In summary, key financial metrics moved in the right direction in Q2, including achieving positive free cash flow, improved results in operating income and adjusted EBITDA as well as gross profit dollars. As a management team, we're committed to improve profitability over time and already are taking steps to achieve that goal. Those steps include among others, raising prices in Power and Foundry, entering into long-term supply agreements with wafer vendors, and we've been selling a portion of our Power products to customers in wafer form to minimize lower-margin back-end operations.

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. OLED was the star of the show in Q2, but all 3 of our business lines performed well. We showed improvement in our operational and financial results in the second quarter, despite multiple headwinds.

A few closing comments on OLED. While some believe that China smartphone market will show signs of recovery beginning in the second half of the year, we believe MagnaChip got a head start in the first half of the year. Quite simply, we had the new display driver portfolio that China smartphone makers needed to jump start their smartphone launches and to match the features in new models from the leading global brands.

The new wave of design activity that started in the second half of 2017 is paying off for us now. We also like what we see in Q3. Our OLED revenue was abnormally strong in Q2, but we still currently anticipate that OLED revenue in Q2 and Q3 combined will likely be in the range of about $120 million. For the third time this year, we are raising our own internal guidance for OLED growth. On our Q4 call in February, we said OLED revenue would top $100 million in 2018. And on our Q1 call in May, we said OLED revenue had the potential to approach our previous record of $161 million. Now, it seems certain that OLED revenue will set a new record this year, despite expected OLED revenue decline in Q4 due to typical seasonal factors. With the OLED revenue ramp in Q2, we have demonstrated that we have built a solid foundation for the growth of all 3 businesses. In general, barring unfortunate factors, total revenue for MagnaChip in Q3 is anticipated to increase sequentially and total annual revenue will grow by double digits as compared with 2017, and handily beat the forecasted rate of growth in the non-memory semiconductor market.

With that, let's turn now to our forward-looking guidance. For Q3 2018, MagnaChip anticipates revenue to be in the range of $200 million to $210 million, up sequentially 2.7% at the midpoint of the projected range. The guidance for the third quarter compares with $199.7 million in the second quarter of 2018, which was higher-than-expected revenue, and $176.7 million in the third quarter of 2017. Despite headwinds, gross profit margin to be in the range of 26% to 28%. This compares to 27% in the second quarter of 2018 and 28.5% in the third quarter of 2017.

Now I'll turn the call back to Bruce. Bruce?

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Bruce Entin, [6]

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Thank you, YJ. So Hermaine, 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 Rajvindra Gill with Needham & Company.

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Rajvindra S. Gill, Needham & Company, LLC, Research Division - Senior Analyst of Microcontrollers, Analog & Mixed Signal; Consumer IC & Multi-Market [2]

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Congratulations on the OLED business ramping, that's great news. The -- I was wondering if you could talk a little bit about the overall adoption rate of OLED. It clearly seems that Chinese OEMs are adopting it at a rapid pace, but they're also using your solution disproportionately given your technology lead. So I was wondering if you could provide may be some color on the feedback from customers over the last 1 to 2 months. And how do you see that -- the shift to flexible happening in the second half and -- of next year going into 2019?

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

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Raj, thanks for the question. So as we said earlier today that I think that we saw the shift to the OLED quicker than the market because we had the new product that enabled very low-cost bezel-less high-resolution with very good aspect ratio, and that enabled the product that is very compelling at a very -- much lower price. And so I think that has -- that design win that started in second half '17 actually has turned into better-than-expected revenue in Q1, really surpassed our expectation in Q2 and that momentum continued into Q3 where our combined outlook of Q2 and Q3 is about $120 million. In terms of flexible, the flexible price point is still high. But as far as going into second half, there will be more product mix in the flexible, which helps us boost margin as well as the balance of our portfolio. And for the high-end flexible, I think it's very important that you need to really have really low power device. And so we're working on that 28-nanometer, which we believe will be the lowest power with the richest feature set, with the most cost efficiency in the market. And we are very excited about the future road map with that.

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Rajvindra S. Gill, Needham & Company, LLC, Research Division - Senior Analyst of Microcontrollers, Analog & Mixed Signal; Consumer IC & Multi-Market [4]

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That's great. So if I kind of look at the segments, if you combine Q2 and Q3 for OLED, it doesn't -- probably the OLED will take a little bit of a drop in Q3. Can you talk a little bit about the other segments growing into Q3, any kind of color commentary in terms of how Power or Foundry will do next quarter?

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

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That's very good question. So I think -- first of all, I think we did abnormally strong in Q2. So that's not normal, because a lot of people catched up to come up with notch trench designs. So that's abnormal phenomenon that we saw because we originally thought it will depend -- it won't go production but 15 did. But in terms of our -- the business, if you look at Power, this particular quarter in Q2, it grew 13.3% year-over-year, that's very strong double-digit growth. We continue to have a positive growth in that segment, we're going to also see growth in the Foundry. So as I alluded earlier, we now have a very 3 strong foundation for all 3 businesses.

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Rajvindra S. Gill, Needham & Company, LLC, Research Division - Senior Analyst of Microcontrollers, Analog & Mixed Signal; Consumer IC & Multi-Market [6]

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And last question from me. The reorganization in the -- actually let me just ask a question on the gross margin. So it seems to me that you as a company anticipated the increases in raw wafers maybe further than most people, and we're clearly are seeing the impact of raw wafer prices increases across the industry. Several companies have sited that as well. If we look into next year, if we put the raw wafer price increases to the side, how do you look at your margin profile? How do you look at your mix shift because it seems like OLED is ramping higher margins, Foundry is a good margin, maybe if you could talk a little bit about your thinking about margins longer term?

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Jonathan W. Kim, MagnaChip Semiconductor Corporation - CFO, CAO & Executive VP [7]

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Thank you very much for that question, Raj. So as we look ahead and if we think about the situation with wafer prices, we do see this to continue to be a headwind for us. And what we said several quarters ago was that the impact that we're anticipating in connection with the wafer price increases was 2% to 3% to our gross margin. That's not insignificant. So we did try to prepare earlier on to mitigate that impact, which included making prepayments, engaging in long-term contracts and we've talked about today the fact that we are also bringing in additional epi-tools to try to bring some of that in-house. So we're doing a number of things to mitigate the impact. And at the same time, the OLED business picking up, it's certainly helpful. So for example, this quarter, we were able to say that we now have meaningful level of free cash flow for the quarter, while we had negative free cash flow a year ago as well as last quarter. So we think this is a very good development for us when we look at the gross margin dollars as a metric. In 2019, I think, it's common knowledge and there are many reports out there that talk about the wafer price headwind to continue. I mean, so there are many components to gross margin, but I think with healthier OLED business than what we saw in the past as well as to the extent that we're picking up more healthy business on Foundry and Power. It should help out with the gross margin. But again, we cannot forget that there is a strong headwind in connection with the wafer prices.

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Operator [8]

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(Operator Instructions) Our next question comes from Suji Desilva with Roth Capital.

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

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Just a housekeeping question may be for Jonathan, the non-OLED display business, is that going to be flat going forward or declining as a legacy? I just want to understand how that moves.

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Jonathan W. Kim, MagnaChip Semiconductor Corporation - CFO, CAO & Executive VP [10]

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So related to the non-OLED business, we talked about the LCD business and some of the low-margin business that we did not pursue because it would not have been beneficial for the company. So there's probably not going to be a significant movement out of our business, and I think we took some steps earlier on in the quarter, there could be some ups and downs between quarters, but I think overall what you saw during the first half should be somewhat consistent during the second half.

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Sujeeva Desilva, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [11]

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Okay, fair enough. And then switching over to the OLED business, can you talk about the magnitude -- or of a typical maybe fourth quarter seasonal pattern if you have that as a match to kind of the smartphone market or how should we think about what typical seasonality will be in 4Q?

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Young-Joon Kim, MagnaChip Semiconductor Corporation - CEO & Director [12]

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Yes, it's a very good question. So I already gave the Q2, Q3 combined outlook, that only leaves the Q4. So if you look at the 2016 curve, we think we could be better than that, but there's definitely seasonality in the fourth quarter.

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Sujeeva Desilva, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [13]

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That's helpful for framing that. I know your 2 large customers for OLED. I'm wondering what the mix is today with those 2 customers, is it weighted toward one of them versus the other or getting more balanced and what kind of balance do you expect in the '19 time frame between the 2 customers, just trying to understand the diversification of this revenue stream.

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Young-Joon Kim, MagnaChip Semiconductor Corporation - CEO & Director [14]

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Unfortunately, we don't break out the product by customer. I think we do report who has greater than 10% and those 2 customers tend to be Samsung and LG Display.

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Sujeeva Desilva, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [15]

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Okay. And then lastly it maybe a longer term question. You had a really good run in U.S.A. with this '18 sort of China smartphone catch up on the features to the flagship, the trench notch. Do you see some sort of similar feature in the '19 time frame that kind of re-creates this scenario, where people have to keep catching up? Is there anything looking on the horizon that may do that? It may be foldable but that could be a little early, so I'm not sure, what -- if there's another similar kind of upgrade cycle in the '19 time frame?

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Young-Joon Kim, MagnaChip Semiconductor Corporation - CEO & Director [16]

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Yes, so it's a very good question. So unfortunately, as you know, we only guide one quarter at a time. But what we can say is look, I think we created a good foundation now in the OLED. I think the last quarters we're validating it, we're proving that we can re-execute. So our goal, our aim is to make sure we continue to grow every year. So that's what we can say. We're working on very compelling products like 28-nanometer with very rich features and so forth. And so the market is coming towards OLED is inevitable. So people who don't have OLED in the panel display or driver IC, they will work on it, right? So our first job is to make sure we have a compelling road map, compelling product, compelling cost to make sure that we keep winning more design-wins and grow the revenue. So that's what we intend to do.

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Operator [17]

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And our next question comes from Atif Malik with Citi.

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Unidentified Analyst, [18]

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It's (inaudible) on behalf of Atif. Just wanted to see if we get a little more clarification on China expectations for the second half for design-wins?

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Young-Joon Kim, MagnaChip Semiconductor Corporation - CEO & Director [19]

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Yes. So Atif, I think the -- some of the color we threw out today, as you know we had a run of the revenue starting this Q1, and Q2 actually really exceeded our expectations as well, is because the new-design of the 40-nanometer chip that we sampled, 3 of them so far, we sampled 2 last year, 1 this year, that had translated to come with very compelling bezel-less rigid trench or notch design about 70% of the 40-nanometer display applications. So that created very compelling price performance and feature-rich smartphones by the leading Chinese smartphone makers and that got us to the revenue in Q1 and Q2 and that momentum continued into Q3. We are still winning more design-wins using our third-generation 40-nanometer. Again, this is the difference that we did not have in '16. We had that chip. We sampled a couple months ago. Now we are in production, we are going to keep winning designs, and then we'll be readying the next set of designs with our next-gen 28-nanometer and so forth. So that's what's happening, so we -- I think we stayed ahead of the curve for the industry because we had the compelling new chip.

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Bruce Entin, [20]

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Operator, are there any more questions.

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Operator [21]

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This concludes today's Q&A session. I would now like to turn the call back over to Bruce Entin, Director of Investor Relations, for closing remarks.

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Bruce Entin, [22]

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Okay. Thank you, Hermaine. So this does conclude our second quarter 2018 earnings conference call. Please look for details of our future events on MagnaChip's Investor Relations website. Thank you for joining us today.

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Operator [23]

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