Good day, ladies and gentlemen, and welcome to the Q2 2017 MagnaChip Semiconductor Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call 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.

Thank you for joining us to discuss MagnaChip's financial results for the second quarter ended June 30, 2017. 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 Web site. A telephone replay of today's call will be available shortly after the completion of the call, and the webcast will be archived on our Web site for one year. Access information is provided in the earnings press release. Joining me today are YJ Kim, MagnaChip's Chief Executive Officer; and Jonathan Kim, our Chief Financial Officer. YJ will begin the call with a discussion of the Company's recent operating performance. Following YJ, Jonathan will provide an overview of our financial results. YJ will then briefly provide a recap as well as provide financial guidance for the third quarter of 2017. There will be a question-and-answer session following today's prepared remarks. During the course of this conference call, we may make forward-looking statements about MagnaChip's business outlook and expectations. Our forward-looking statements and all other statements that are not historical facts reflect our beliefs and predictions as of today and therefore, are subject to risks and uncertainties as described in the Safe Harbor discussion found in our SEC filings. During the call, we will also discuss non-GAAP financial measures. The non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles, but are intended to illustrate an alternative measure of MagnaChip's operating performance that may be useful. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in our second quarter earnings release available on our Web site under the Investor Relations tab at www.magnachip.com. I would now like to turn the call over to YJ Kim. YJ?

Thank you, Bruce and good afternoon to everyone on our Q2 2017 conference call. When we announced results for the fourth quarter of 2016, we told investors that our primary focus in 2017 would be to improve gross margin and overall profitability. Our financial results in Q1 of this year show that we were on the right track and moving in the right direction. The Q2 financial results we have reporting today continue to demonstrate that were executing according to our plan. As a management team, we closely tracked several profitability metrics but we believe gross profit margin and adjusted EBITDA are particularly good indicators of our progress because they provide a snapshot of the ongoing operational performance in our core business. Let's first review our gross margin performance in Q2 and then move on to adjusted EBITDA. Total gross margin in Q2 was 28% which exceeded the high end of our previous guidance range and was at the highest level in more than four years. Gross margin benefited from slightly higher fab utilization, a favorable product mix and earlier than expected cost benefits from departures of manufacturing employees who participated in our 2017 voluntary headcount reduction plan. Our eight inch fab utilization, a key driver of gross margin reached the low to mid 90% range in Q2 as compared with approximately 80% in Q2 of 2016. Foundry services gross margin in Q2 was 28.7%, an increase of about six percentage points from 22.8% in the second quarter of 2016. Gross margin in the Standard Products Group was 27.2% in Q2 or so up approximately six percentage points from 21.4% in the same period a year ago. Turning now to adjusted EBITDA; adjusted EBITDA in Q2 was $20.3 million or 12.2% of revenue, up 146% from $8.6 million or 5.2%…

Thank you, YJ, and welcome to everyone on the call. As YJ said, our primary focus as a management team is to improve gross margin and overall profitability. So let's start with the numbers for the second quarter and first half of 2017. Revenue in Q2 was $166.7 million, about flat with $167.1 million in Q2 a year ago; and up 3.1% from Q1 of 2017. The sequential improvement in revenue was due primarily to a 5% increase in foundry revenue, while revenue in the display and power business lines on a sequential basis were essentially flat. Total revenue in the first half of 2017 was $328.4 million, up 4% from revenue of $315.2 million in the first half of 2016 despite previously anticipated softness in the OLED business. Turning now to profitability metrics; we generated significantly more profit dollars in Q2 of 2017 than in Q2 of 2016 on total revenue that was essentially flat with Q2 of 2016. We generated $46.7 million in gross profit in Q2, up 27% from $36.7 million in Q2 of 2016 while gross profit in the first half of 2017 was $88.2 million, up 24% from $71 million for the first half of 2016. We previously had expected that gross margin would begin to reflect the benefits of our headcount reduction in Q3 of this year. However, our gross margin actually began to benefit from -- benefited more than expected in Q2 due primarily to earlier than expected cost benefits from departures of manufacturing employees. As a result, a portion of the incremental gains we previously had expected to record in Q3 actually were recorded in Q2. Starting from a slightly higher [indiscernible] in a favorable product mix, the benefits from the headcount reduction helps to explain why gross margin in Q2 exceeded…

Thank you, Jonathan. You've heard me say many times that our top priority is to improve gross margin and over profitability. But we also are committed to invest in any shape [ph] to fuel profitable revenue growth. We've been investing our analog and power business by developing higher margin standard products and investing in fab equipment New Process Technologies in IP for the needs of global foundry customers. We've also invested in improving product quality and with dramatic results, this year we were honored to receive the highest quality awards from our two largest Korean customers, who have a demanding quality standard. And of course, we are investing in OLED to build our current leadership position, we're increasing our R&D budget to generate match sets for new OLED product currently in the product pipeline. We are developing custom IP to improve screen resolution, aspect ratios, as well as lower power consumption and reduced manufacturing costs. We are all putting engineering resources in place to develop next-generation OLED packages that enable the volume production of new flexible OLED display driver IC. We've already introduced our first flexible OLED display drive IC for curve displays with no side-to-side bezels in offsetting our long-term sights to prepare for the day when affordable and roll over OLED displays will become a reality. There is a little doubt that the OLED market is in the early stages of growth and we believe we are well positioned to capitalize on this technology. For now though our sights are set on the day to day execution of the business and laying the foundation for overall corporate profitable growth. In summary, here is how we see the business shaping up. The outlook for 18 channel of [indiscernible] right for the longer term, 200-millimeter facet tight, the device running…

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

Thank you. [Operator Instructions] Your first question comes from Suji De Silva with ROTH Capital. Your line is open.

Hi YJ, hi Jonathan, congratulations on the strong executioner you're particularly showing up in the gross margin line. My first few questions are really around the display and AMOLED business here; can you help us understand the -- and whatever metric makes sense that the number of wins or placements you have kind of exiting '17 versus where you were in '16 to understand how much broader your footprint is?

Sure. So if you capture the last few earnings call, first of all, we sample our first 55-nanometer flexible AMOLED display drive IC with bezels [ph] drive IC in February of this year, now we are saying that we are going production this quarter. We also introduced our new 40-nanometer bezels drive IC in July we sample and we also saying that we're going to production tours end of this quarter and we just also said that we have two design wins in 110-nanometer that we are going production in Q3 this quarter, as well as the next quarter. And also I just disclosed today, we expect to sample another 55-nanometer flexible display driver with bezels, that is for high-end smartphone that we expect to go to production in first half 2018. So I mean you are seeing full new product that is pretty decent and so we feel very comfortable to say that we feel very confident that we can substantially exceed the gross rate of the OLED gross rate what the analyst pegged at 25% the 30%. So I think that's a good indication of the execution and the pipeline.

Okay. And then for some of the smartphone customers who are thinking about using AMOLED perhaps in the mid-year, the high-end around the flagship competition; what's driving the timing of when those phones come to market? Is this software macro demand? Is it kind of competitive dynamics; what do you think is the factor there when those phones come to market?

If you look at the industry rumors and so forth, there a lot of reports you're seeing. I think that they move to the AMOLED on the mid-range and iPhone is real. And there is also rumor that there is a global brand who is about to introduce OLED phone. So it seems that the market has been watching out or timing their new product with OLED around that timeframe; so once that product launches and it's really good, then we will feel more comfortable and confident about the prospect and I think that will show on the -- perhaps an our next earnings call to see what the impact has been but we remain hopeful that our customers who use OLED drive IC will have very competitive new AMOLED offering and once that the global brand launch is done we hope to see their results and the effects.

Okay, great. And then on the foundry part of the business; you had a relatively high utilization rate, can you talk about what the key elements are there that allow you to grow the revenue and the margin there and where you are in transitioning the AMOLED business outsource you have more room in your foundry?

Yes. I see you're asking very good question. So if you look at our foundry gross, that really helped our utilization to grow from 82% low to mid-90% now and the foundry revenue grew by about 30% year-over-year. And so we are looking at several things right, so we're looking at the -- just like an AMOLED, we have outsourced externally, we are also looking at some Standard Product Group to be outsourced possibly; and then we're going to also do better efficiency driving the operation and we also will look into maximizing utilization going up. And also as you mentioned, some of the AMOLED legacy and some of the display products, legacy products that are winding down; so that will give us some room to grow the foundry business. However, our number one priority is to drive the gross margin for the corporate and show what we will do is the optimized for corporate margin and so many levers and many things to consider, and we will try to optimize all three businesses.

Okay. Question on the financials; the gross margin here in sustainable products coming up here, I mean is that new level you've achieved sustainable and what are the puts and takes there from -- for each improvement you've achieved today on standard products?

So gross margins on the standard products group is obviously moving in a good direction and as YJ said before, we're completely focused on profitability. We are primarily focused on the corporate profitability; however, all of the businesses appear to be moving in a good direction.

Yes, so let me too add. I mean as we said in the call today, we have optimized portfolio and the power will continue to push the portfolio optimization power and of course the AMOLED continue to be above the corporate gross margin and we're relying on the external foundry. So we are going to do to focus number one as a corporate gross margin and then we will get each business to optimize their own gross margin based on the new product and the optimizing customer base or the portfolio of each product.

And then my last question on the OpEx; the R&D came down nicely here. What's the sustainable level here? Is there more room for that to come down and how our [indiscernible] maybe affecting that line?

Off the R&D line, as discussed in the prepared remarks there were some non-key R&D headcount that we were able to reduce, and so it did come down nicely. However, looking at -- going forward, given the OLED related R&D activities, R&D cost could likely go up; I mean so that's what we're looking at as we look forward.

Okay, great, Nice job guys, thank you.

Thank you. And your next question comes from Akif [ph] with Citi. Your line is open.

Thank you and nice job on gross margin execution. I have a question in terms of your restructuring and headcount reduction; when do we -- when should we expect that to complete and are there any other restructuring initiatives that you guys are looking at in terms of sale of certain products?

So the planned headcount reduction has been successfully completed by the end of Q2. And so the estimated cost savings as we mentioned is going to be approximately $24 million on an annualized with related cash cost of $31 million of which $28 million has already been paid. I mean, so the return on the investment that we've made on the restructuring I think is going to be quite healthy. As to the full effects of the cost savings kicking in, we think that it will be sort of in the back half of Q3. As to the gross margin impacts, the good news for us this quarter was that the benefits that we were anticipating to start hitting in Q3 actually came in little early and that's part of the reason why the gross margin came in higher than expected in the guidance that we provided for the quarter.

Okay. And then just kind of longer term on the gross margin; if I were to flat line the revenue at the midpoint, the 175, it's just based on your mix and some initiatives that you have; where can you take some of these gross margins kind of at a fixed revenue level?

We provide our guidance one quarter at a time for revenue and gross margin at the corporate level and that's been our practice. But as we've said repeatedly, we will continue to focus on profitability as well as our gross margin and we will be looking at all the different levers to execute our plan going forward. So we will continue to look at our strategy, our cost structure and various different opportunities to explore cost reduction opportunities; and as we've said, we're fully committed on executing our core business and committed to improving profitability.

Okay. And then did you disclose your OLED sales in Q2?

We said that it accounted 31% of our display revenue.

Okay. And then with respect to China, I understand you guys are proliferating in China the curve smartphones and -- but it's very difficult to predict which one of those smartphone are going to be winners. So -- but when you look at your funnel of the Chinese kind of customers and smartphones, do you think you're hitting all the top two or three guys like Huawei and [indiscernible] that your odds of growing this business next year should improve?

Yes, so you're asking very good questions. So first of all, we don't talk about our end customers publicly but if you look at in the last year 2016, we have more than 12 Chinese smartphone makers end customers; obviously, with all these new products we're going to -- we are going after that and I did said, I think that what we are excited about is that we enabling our previous customer or the current customer with the new design that allow you to do a mid-range phone, high-end phone flex similar curve though bezels, so this will be on no old/new form factors and I think this is the new trend. So we are excited to see the product launch that's going to happen towards the end of this quarter and see how that plays out. And we will also see how the global brand plays out and in the next earnings call we probably can give you an indication of the impact and effect.

Great, thanks.

Thank you. And your next question comes from Rajender Gill from Needham & Company. Your line is open.

Hi, this is Bob [ph] on behalf of Raj. Just going back real quick to the foundry business; I want to get a little bit more clarity around AMOLED coming off the 110-nanometer fab; I mean in terms of the percentage of the analog business, is it safe to assume this is around 30-year or so percent and how should we really track that going forward? Does these legacy products have a long tail or do we see most of the analog coming off as said in the next year?

Well, first of all we don't break down the AMOLED portion of our internal fab consumption. So for us, but -- as we disclosed today that we won two other sockets using our 110-nanometer; so it seems like that there we may have some usage of that internal fab through towards the end of next year. And so -- but it's not that large consumption, so we will try to make this much possible for our foundry growth and we also discussed that some other ways that I talked about perhaps outsourcing some of standard products to further, as well as some of the IT product waving down in the non-AMOLED display, things like that that will provide more room for the foundry usage growth.

Okay, thank you. And maybe just a more general question in terms of what demand you're seeing for power management products; are there any particular products that you feel you're seeing outsized growth within the market currently?

Well, so there are two areas in power fund, one is the -- our foundry and our own product. So they are different market, different customer; so -- but we are well positioned in the consumer, industrial and communications with our own products. And then our customers, they all love in all the five key segments and we don't compete which is also very good, and then our own product tend to be more concentrated in Asia whereas our customers are global; so that also gives a more diversification and so -- but the -- as we disclose today that is one of the key growth area for our foundry, as well as our own product and we think that those analog will be a good long-term growth and portfolio for us.

Okay, great, thank you. I appreciate the color.

Thank you. And I'm showing no further questions at this time. I'd like to turn to call back over to Bruce Entin for closing remarks.

Thank you, Heather. So this concludes our second quarter earnings conference call. Please look for details at our future events on MagnaChip's Investor Relations website. Thank you for joining us today.

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