Magnachip Semiconductor Corporation (MX) Earnings Call Transcript & Summary

Good day, everyone, and thank you for standing by. Welcome to the Magnachip Semiconductor First Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Steven Pelayo of Investor Relations. Please go ahead.

Great. Hello everyone. Thank you for joining us to discuss Magnachip's financial results for the first quarter ended March 31, 2025. The first quarter earnings release that was issued today after the market close and can be found on the company's Investor Relations website. The webcast replay of today's call will be archived on our website shortly afterwards. Joining me today are YJ Kim, Magnachip's Chief Executive Officer, and Shin Young Park, our Chief Financial Officer. YJ will discuss the company's recent operating performance and business overview, and Shin Young will review financial results for the quarter and provide guidance for the second quarter. There will be a Q&A session following the prepared remarks. During the course of this conference call, we may make forward-looking statements about Magnachip's business outlook and expectations. Our forward-looking statements and all other statements that are not historical facts reflect our beliefs and predictions as of today, and therefore, are subject to risks and uncertainties as described in the safe harbor statement found in our SEC filings. Such statements are based upon information available to the company as of the date hereof and are subject to change for future developments. Except as required by law, the company does not undertake any obligation to update these statements. 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 as supplemental measures of Magnachip's operating performance that may be useful to investors. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in our first quarter earnings release in the Investor Relations section of our website. With that, I'll now turn the call over to YJ Kim. YJ?

Hello, everyone, and thank you for joining us today, and welcome to Magnachip's Q1 earnings call. As a reminder, on April 8, we announced that after a thorough review, our Board of Directors unanimously approved a plan to shut down the company's display business by the end of Q2, though we will continue to evaluate opportunity to monetize display assets. The company had previously announced its intention to explore all strategic options for the display business and to classify the display business as discontinued operations when it reports Q1 results in order to focus as a pure-play power semiconductor company. Shin Young will provide details in her section. As a result, the Power Analog Solutions and Power IC businesses, which accounted for $186 million in revenue in 2024, represent Magnachip's going forward continuing operations. Our strategic pivot to focus exclusively on Power Analog Solutions and Power IC business is designed to drive a structural improvement in operational efficiency and position the company for a return to sustainable profitability. Navigating an unpredictable macroeconomic landscape will likely pose challenges for our industry. We have a very small amount, less than $2.5 million in direct shipment to the U.S., but we are monitoring the tariff situation closely. However, our aim is still to attain a quarterly adjusted EBITDA breakeven from continuing operations by the end of this year. We also believe that reaching this goal will pave the way for achieving positive adjusted operating income in 2026 and positive adjusted free cash flow in 2027. Each of these targets will act as milestones towards achieving a goal in 3 years to reach a $300 million annual revenue run rate with a 30% gross profit margin target. We call this our 3-3-3 strategy. Turning to Q1 results. Consolidated Q1 revenue from continuing operations, which includes Power Analog Solutions and Power IC and excludes our former display business was $44.7 million, up 12.1% year-over-year and down 8.5% sequentially on an apples-to-apples basis. Consolidated Q1 revenue from continuing operations was in line with the midpoint of our guidance range of $42 million to $47 million. Consolidated Q1 gross profit margin from continuing operations of 20.9% was up 3.3 percentage points year-over-year, but down 2.3 percentage points sequentially. Consolidated Q1 gross profit margin from continuing operations exceeded the high end of our guidance range of 18.5% to 20.5%. Shin Young will provide more details in her section. Q1 was the fourth consecutive quarter of year-over-year growth from continuing operations, driven by Power Analog Solutions growth in communications and automotive markets as well as strength in Power IC. We released 27 new generation Power Analog Solution products in Q1 that are fully qualified and ready for commercial sampling. These innovative product families open new high-value market opportunities for Magnachip such as automotive, industrial and AI applications. We currently expect these 3 market opportunities to represent more than 60% of Magnachip's future product mix in 2028, up from 37% in 2024. We already have ongoing engagement to penetrate other markets, which we expect to reach over 10% of our revenue by 2028 from less than 5% in 2024. In Q1, we saw Power Analog Solution design wins across multiple end markets and regions, including Korea, China, U.S.A. and Taiwan. Many of these design wins were from our new generation products. As part of our pivot to a pure play on power, we will be sharing additional metrics each quarter, such as the number of design wins. We define a design win as receiving a purchase order for a new application. We achieved 15 design wins in Q1, up 13.6% from 44 wins we achieved in the quarter a year ago quarter. The industrial business had 25 design wins up from 22 in Q1 2024 and representing 50% of the total. Other notable design win activity included the computing business, which had 11 design wins in the March quarter, nearly double the 6 achieved in Q1 2024. And the automotive business had 5 design wins, up from 2 in the year ago period. From an application perspective, our new generation Gen 6 Super Junction products had design wins in the China lighting market, a PC power and computing application in Taiwan and a TV main motherboard application in Korea. Our new generation low-voltage Gen8 MOSFETs had a design win for new flagship foldable smartphone in Korea and our prior generation medium voltage and Super Junction products had design wins in the industrial market for e-scooters and automotive power charge application from Taiwanese suppliers and an automotive electric oil pump for vehicles targeted for the European market. In Power IC, we secured design wins in Q1 with leading notebook manufacturer in China and Korea as well as additional wins for LCD TV and monitors in Korea. We currently plan to launch a total of more than 50 new products, including 40 new generation Power Analog Solutions products in 2025 and more than 55 additional new generation products in 2026. We expect these new generation power products to drive higher revenue and given the smaller die size and yield 20% to 30% more die per wafer in our Gumi fab. When fully ramped, these new products are expected to drive higher gross margins compared to the previous generations. Now I will provide more details by business line. Power Analog Solutions business revenue of $39.9 million was up 9.1% year-over-year and down 8.3% quarter-over-quarter. Power Analog Solutions represented nearly 90% of Q1 consolidated revenue from continuing operations. The sequential decline was mostly due to seasonality in each of our major segments, except in communications, where we enjoyed quarter-on-quarter growth. The year-over-year increase was primarily driven by the communication market and more specifically deeper penetration in smartphone and customer in Korea, while a smaller portion overall, the automotive business showed strong growth and had new design wins in the European and American end customer automotive markets. By segment, industrial revenue declined 8.7% year-over-year, representing approximately 1/3 of Power Analog Solutions revenue. The decline stemmed from slower e-bike and e-motor revenue, offset by strength from lighting. 5G battery managed systems, power tools and solar. As stated earlier, we are securing initial design wins for our new Super Junction Gen 6 products for China lighting and e-motor applications. In Consumer, revenue increased 4.6% year-over-year. Overall, the consumer market accounted for 36% of Power Analog Solutions revenue in Q1. Communication revenue represents 23% of Power Analog Solutions revenue in Q1 and increased nearly 64% year-over-year, fueled by design wins for battery FET in mainstream and flagship portable and AI-enabled smartphones in Korea. In addition, we saw expanded adoption in wearables such as watches and earbuds. As we mentioned before, we believe we now have #1 market share in battery FET at our major Korean smartphone end customer, including the majority share of their flagship smartphone product line, which will utilize our new generation Gen 8 products. Overall, our low-voltage MOSFET revenue grew more than 40% year-on-year in Q1. Representing 7% of Power Analog Solutions revenue, the computing segment saw a 10% year-over-year decline in Q1 due to softer pricing and weaker demand from China for PC and laptop power adapters. We are leveraging our new Super Junction Gen 6 products to penetrate more PC power in Taiwan and expect to benefit from new notebook adapter design win moving into mass production in Q2 '25. While still less than 5% of Power Analog Solutions revenue, the Automotive segment saw strong year-over-year growth driven by increased global expansion beyond Korea and Japan with new design wins for vehicles targeted Europe and the U.S.A. The number of automotive applications continues to increase and now includes electric oil pumps, cooling fans, power steering and car chargers. We are also seeing strength for IGBTs from China brands used for positive temperature coefficient or PTC heaters for electric vehicles. Turning to our Power IC business. Revenue was $4.9 million, an increase of 44.1% year-over-year and down 10.0% sequentially. The Power IC business represented 11% of consolidated Q1 revenue from continuing operations. The year-over-year growth was strong for both TV LED and OLED power ICs. The introduction of 20 new mid-to low-end TV models by our customer for 2025 also led to strong sequential growth in TV LED in Q1. In summary, Q1 was Magnachip's fourth consecutive quarter of year-on-year growth from continuing operations, which expect to continue for fifth consecutive quarter in Q2. We expect inventory levels in the channel to slightly decrease in Q2. The strong performance in Power Analog Solutions in Q1 was driven primarily by market share gains and new products in communications. The automotive market also performed well in Q1, given new design wins for vehicles targeted in Europe and the U.S.A. and continually broadening applications. Now I'll turn the call over to Shin Yo to give you more details in our financial performance in the first quarter and provide Q2 and full-year 2025 guidance. Shin Yo?

Thank you, YJ, and welcome, everyone, on the call. Let's start with key financial metrics for Q1. Total Q1 consolidated revenue from continuing operations, which includes Power Analog Solutions, PAS and Power IC, PIC was $44.7 million, which was in line with the midpoint of our guidance range of $42 million to $47 million. This was up 12.1% year-over-year and down 8.5% sequentially on an apples-to-apples basis. This compares with equivalent revenue of $39.9 million in Q1 2024 and $48.9 million in Q4 2024. Revenue from Power Analog Solutions was $39.9 million. This was up 9.1% year-over-year and down 8.3% sequentially, primarily reflecting seasonality. Revenue from Power IC was $4.9 million. This was up 44.1% year-over-year and down 10% sequentially. In Q1, consolidated gross profit margin from continuing operations was 20.9%, exceeding the high end of our guidance range of 18.5% to 20.5%, up from 17.6% year-over-year and down from 23.2% sequentially on an apples-to-apples basis. The upside versus guidance and year-over-year improvement was mostly due to the stronger than expected U.S. dollar against the Korean won. The sequential decline was mainly due to an unfavorable product mix. As we've disclosed previously, the company announced its plan to shut down the Display business by the end of the second quarter of 2025. Shutting down the Display business includes the liquidation of Magnachip Mixed Signal Limited, MMS, the company's wholly-owned subsidiary that had operated the discontinued display business. As a result, the display business has been classified as discontinued operations from Q1 2025 and has reported separately on the face of the company's P&L. The prior period conformed to the current period presentation as it appears in our Form 8-K and in the Form 10-Q in Q1. All the following figures reflect results from continuing operations. Q1 SG&A was $9.7 million as compared to equivalent SG&A of $9.5 million in Q1 2024 and $10.4 million in Q4 2024. Q1 R&D was $5.9 million as compared to equivalent R&D of $6.2 million in Q1 2024 and $6.9 million in Q4 2024. Stock compensation charges, including operating expenses from continuing operations were $0.8 million in Q1 as compared to $0.8 million in Q1 2024 and $1.6 million in Q4 last year. These charges fluctuate every quarter depending on the timing and size of stock award grants. In Q1, we have narrowed operating losses due to a combination of higher revenue and improved gross profit margins as compared with Q1 2024. Q1 operating loss was $6.3 million. This compares to an equivalent operating loss of $9.4 million in Q1 2024 and an equivalent operating loss of $7.8 million in Q4 2024. On a non-GAAP basis, Q1 adjusted operating loss was $5.4 million compared to an equivalent adjusted operating loss of $8.6 million in Q1 2024 and an equivalent adjusted operating loss of $4.5 million in Q4 last year. Loss in Q1 was $5.1 million as compared with an equivalent loss of $14.3 million in Q1 2024 and an equivalent loss of $8.7 million in Q4 last year. Q1 adjusted EBITDA was negative $2.1 million. This compares to an equivalent adjusted EBITDA of negative $4.8 million in Q1 2024 and a negative $0.5 million in Q4 last year. Q1 GAAP diluted loss per share was $0.14 as compared with equivalent diluted loss per share of $0.37 in Q1 2024 and equivalent diluted loss per share of $0.24 in Q4 last year. Q1 non-GAAP diluted loss per share was $0.10. This compares with equivalent non-GAAP diluted loss per share of $0.26 in Q1 2024 and equivalent non-GAAP diluted earnings per share of $0.12 in Q4 last year. Our weighted average non-GAAP diluted shares outstanding for the quarter were 36.9 million shares and 38.5 million shares in Q1 2024 and 37.7 million shares in Q4 last year. Under our $50 million stock buyback program authorized in July 2023, we repurchased in Q1 2025 approximately 0.3 million shares for an aggregate purchase price of $1.1 million, leaving about $23.5 million remaining authorization as of March 31, 2025. Additionally, we spent $1.9 million in April 2025 and repurchased approximately 0.6 million shares. Moving to the balance sheet. We ended Q1 with cash of $132.7 million and $138.6 million at the end of Q4 2024. Net accounts receivable at the end of the quarter totaled $28.3 million and $28.4 million at the end of Q4 2024. Our days sales outstanding for Q1 was 47 days and compares to 41 days in Q4 last year. Our average days in inventory for Q1 was 70 days and compares to 60 days in Q4 last year. Inventories net at the end of the quarter totaled $32.6 million and $30.5 million at the end of Q4 2024. Q1 CapEx was $0.2 million. For the full-year 2025, we reiterate our prior total CapEx forecast range of $26 million to $20 million, which includes approximately $14 million to $15 million to upgrade of Gumi fab. We expect the majority of this CapEx to occur in the second quarter. This $14 million to $15 million was part of the previously disclosed $65 million to $70 million investment over 3 years to upgrade the Gumi fab. The depreciation cost from the new investment in the Gumi facility will not begin to be reflected in our financial statements until 2027. At the time, we anticipate that a more robust portfolio of new generation power products will at least partially offset the impact. Additionally, we announced previously that we secured a $26.5 million equipment financing to partially support this $65 million to $70 million investment to upgrade the Gumi fab. Under the agreed terms and conditions with the lender bank, we expect to fund about half of the $14 million to $15 million using this equipment financing, majority of which will occur in the second quarter of 2025. And the remaining half is expected to be funded by the company's cash. This new investment in Gumi is expected to drive development of the new generation power product portfolio and upgrade new tools to optimize product mix and improve gross profit margin. Lastly, as YJ mentioned above, as a result of the strategy changes we are making, we aim to attain a quarterly adjusted EBITDA breakeven from continuing operations by the end of this year. The actions that are being undertaken by the company in connection with the liquidation process are expected to result in a 30% to 35% reduction in annualized operating expenses, excluding equity compensation charges as compared with 2024. We'll execute all available cost reduction initiatives to align our spending level with the strategy to become a pure-play power company while enabling us to continue to make progress towards our 3-3-3 strategy. Now let me provide finance-related comments regarding the discontinued Display business. The company is expected to provide limited support for remaining customer obligations, including the sale of end-of-life EOL display products, which will be conducted by Magnachip Semiconductor Limited, the company's wholly-owned subsidiary that operates the power business. The sale of the EOL display products and the potential monetization of the intellectual property assets of the discontinued Display business are currently expected to generate cash inflow of approximately $15 million to $20 million over a period of approximately 2 years after the completion of the liquidation, depending upon the demand of customers and the outcome of the monetization efforts of the display intellectual property assets. The total estimated cash cost of liquidation is approximately $12 million to $15 million, which is expected to be offset by the cash inflow that will generate as described before. The one-time liquidation cost is expected to be consist of statutory severance and other employee-related costs, contract termination charges and other associated costs. Of this estimated total cash cost, approximately $4.5 million represents the net statutory severance required by law, which had already been fully accrued in the company's prior period financial statements. The company expects to recognize substantially all of these charges, excluding the already fully accrued net statutory severance of $4.5 million in the quarter ending June 30, 2025. Now moving to our second quarter and full-year 2025 guidance. While actual results may vary for Q2 2025, Magnachip currently expects consolidated revenue from continuing operations, which includes Power Analog Solutions and Power IC businesses to be in the range of $45 million to $49 million, up 5.2% sequentially and up 6.6% year-over-year at the midpoint on an equivalent basis. This compares with equivalent revenue of $44.7 million in Q1 2025 and $44.1 million in Q2 2024. Consolidated gross profit margin from continuing operations to be in the range of 19.5% to 21.5%. This compares with equivalent gross profit margin of 20.9% in Q1 2025 and 22.5% in Q2 2024. For the full-year 2025, we currently reiterate consolidated revenue from continuing operations to grow mid-to high single digit year-over-year as compared with the equivalent revenue of $185.8 million in 2024. Consolidated gross profit margin from continuing operations between 19.5% to 21.5%, reflecting the fact that we have completed the wind down of transitional foundry services and new generation power products will just begin production in the second half of 2025. The equivalent gross profit margin was 21.5% in 2024. Thank you. Now I'll turn the call back over to YJ for his final remarks. YJ?

We believe we hit the revenue bottom in Q1 for power for this year. Looking to Q2, we currently forecast mid-single-digit sequential growth, leading to another quarter of mid-single-digit year-over-year growth from continuing operations. We currently expect the industrial and computing markets to be relatively strong, driven by lighting and battery management system applications in industrial as well as strength in PC power from Taiwan in the computing market. The Communications segment will likely decline quarter-on-quarter due to exceptional strong performance in the last 2 quarters, but is currently expected to show strong year-over-year growth in excess of 30%. To wrap up, the pure-play power strategy we announced last quarter focuses on shareholder value and prioritizes a return to profitability, supported by clearly articulated transparent short-term and midterm financial targets. As previously mentioned, uncertainty over macroeconomic headwinds will likely pose challenges for our industry over the coming quarters. Our strategic pivot to focus exclusively on Power Analog Solutions and Power IC business is designed to drive both top line growth during new product launches as well as long-term structural improvement in operational efficiency, allowing us to achieve our target of a $300 million revenue run rate, 30% gross margin in 3 years. Now I will turn the call back to Steven. Steven?

Great. That concludes our prepared remarks. Let's open the call for any questions that you may have. Operator, please go ahead.

[Operator Instructions] Our first question coming from the line of Suji Desilva from ROTH Capital.

Maybe YJ, you can start at the high level and talk about the tariffs that are going on here and how Magnachip is positioned for that from a manufacturing footprint in the markets you sell to, just to understand the opportunity or impact going forward?

Great. Thank you. Yes. So we haven't really seen negative impact on the first half of the year. As we disclosed at the Analyst Day that 94% of our revenue comes from Asia. And we have very material direct shipment to the U.S. with less than $2.5 million a year. So we are closely monitoring the situation, and we think care risk is manageable at the moment, but we are really looking at every day.

Okay. All right. And then maybe on the financials, Shin Young, maybe you talk about the gross margin. What are the drivers going forward for the power-based business? Just to understand that generally. And then how much is the Gumi utilization benefit opportunity there? What's the timing of that tailwind?

Thanks Suji. So at least for 2025 because we wind down the transitional foundry services by the end of last year, we said about 20% of our Gumi capacity was for actually for the foundry services. And the new investment, $65 million to $70 million investment over like the next 3 years, that's going to be to upgrade the Gumi fab to convert the portion of the Gumi fab to support the new generation power product. So that competition we're going to go from like 10% to 17%. So that will going to drive our gross margin in like to achieve the 3-3-3 strategy. It's not really, we are expanding our capacity simply. We are actually converting and upgrading Gumi fab to support that the new generation power product. So you're going to see and we're going to see that the improvement coming through like over the next couple of years when we kind of march toward the 3-3-3 strategy, at least for 2025 because of this idle capacity and our new generation product we're going to come in probably just to begin to come in, in the second half of 2025, and that's why you saw our kind of annual gross margin guidance already we gave out to the market.

Okay. Very helpful. And then lastly, on the segments, trying to understand the Power IC segment versus the Analog segment. Is there a concerted effort there, YJ, to grow that segment in the mix? Does that have favorable margins there? Some products focus on that? Or is the power analog segment really the focus of the growth near term?

Yes. It's a very good question. So I think we outlined 3-3-3 strategy that requires a double-digit growth for the next few years. So our goal is to grow both segments, whether it's Power Analog or Power IC, double digit over the next few years. So we do have focus on both areas for growth.

Our next question is coming from the line of Nick Doyle from Needham & Company.

I'll also ask about the tariffs. Do you think any of the consumer or communication strength that you had in the first quarter represented a tariff-related pull forward? And how are your customers communicating order patterns around the tariffs? And I understand that you have the high exposure to Asia.

Yes, very good question. So interesting enough, we only saw one pull-in in Q1 that was in Power IC, that's for the TV applications. But it was very small. It's like $0.1 million. Other than that, we did not see any pull-ins at all. And so Q2, they are also very material, and we'll provide that detail. So we haven't seen much pull-ins other than that I mentioned right now on the tariffs.

Just a follow up on that. I mean, it is a really small number, but I guess how are you able to categorize that one specifically as a pull-in?

You could tell by customer telling us or you can look at change of backlogs from Q2 versus Q3. That's how we notice. And as we said, we shipped 94% to Asia and only $2.5 million or less is direct shipment to U.S. So we actually monitor the situation very carefully.

And as my second question, the OpEx came in kind of at the low end of the guide, better than expectations. Should we expect that level to hold through the year around the $15 million level? Or are some of these kind of one-time benefits in the $14.8 million number?

So therefore, the $15 million that you saw, the actual Q1, the OpEx without the stock-based compensation, that's actually when we strip out the direct costs associated with the display business. So when we kind of shut down the display business and strip out the direct cost, we talk about 30% to 35% cost reduction from the last year's level. But because we are going to -- and that's our target to attain adjusted EBITDA breakeven quarterly by the end of this year. So if you kind of strip that out and multiply like annualized, you will find that it's going to be a little short. So that's why we said we used to have a -- we still have the shared service function, which supported both display and power businesses together. So we're going to do like all the rightsizing and like the actions to attain the quarterly adjusted EBITDA breakeven in by the end of this year.

And there are no further questions in the queue at this time. I will now turn the call back over to Steven for any closing comments.

Great. Thank you. Before we conclude, I just want to give everyone a quick reminder of our upcoming investor conferences. On June 25 and 26, we'll present at the 15th Annual ROTH London Conference at the Four Seasons Park Lane in London. Attendance at the conference is by invitation only. For interested investors, please contact your respective sales representative to register and schedule one-on-one meetings with the management team. Please look for details on our future events on Magnachip's Investor Relations website. This concludes our Q1 earnings conference call. Thank you, and take care.

Thank you for your participation in today's conference. This concludes today's conference call, and you may now disconnect.