Good day, ladies and gentlemen, and welcome to the Q3 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 conference is being recorded. I would now like to introduce your host for today’s conference, Bruce Entin, Investor Relations. You may begin.

Thank you for joining us to discuss MagnaChip’s financial results for the third quarter ended September 30, 2017. The third quarter earnings release that we filed today after the stock market closed and other releases can be found on the Company’s Investor Relations website. 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 website for one year. Access information is provided in the earnings press release. Joining me today are YJ Kim, MagnaChip’s Chief Executive Officer; and Jonathan Kim, our Chief Financial Officer. YJ will begin the call with a discussion of the Company’s recent operating performance. 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 fourth 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 third quarter earnings release available on our website 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 Q3 2017 conference call. We ended up with a strong financial performance in Q3. Revenue increased sequentially for the first three quarters. Gross profit margin, operating income and adjusted EBITDA in Q3 all will add their highest levels in more than four years. Revenue of $176.7 million declined year-over-year by 8.1% from $192.3 million, but increased 6% quarter-to-quarter and was at the higher end of the guidance range. The sequential improvement in revenue was driven primarily by double digit gains in both the power and display business lines. A key takeaway is that growth resumed in our OLED business in Q3, more on this later on the call. Gross profit margin of 28.5% in Q3 came in above the midpoint of the guidance range and compared to 28% in Q2 '17 and 20.4% in the third quarter a year ago. Foundry gross margin topped 30% in Q3. Operating income of $15.5 million or 8.8% of revenue was up nearly 60% from $9.7 million or 5.8% in the second quarter of this year and compared with operating income of $0.6 million or 0.3% in the same period a year ago. Adjusted EBITDA came in at $24.7 million or 14% in Q3, up 22% sequentially from 20.3 million or 12.2% in Q2 '17 and it more than doubled from the 10 million or 5.2% reported in Q3 last year. We achieved these improved financial results in Q3 despite a lingering slowdown in the China smartphone market and on August power outage that cause us to scrap wafers and briefly halt the production in our larger fab. Back in august, we estimated that the incident had the potential to impact Q3 revenue by up to 3 million and gross profit by up to…

Thank you, YJ, and welcome to everyone on the call. YJ provided a detailed view of our business and financial performance in Q3, so I'll provide context on our financial results of the first nine months of 2017 and provide commentary onto below the line of P&L items and balance sheet highlights for the third quarter. Let's start with how our high grade business model worked to our financial advantage in the first nine months of 2017, by balancing out our revenue and helping MagnaChip avoid a downdraft in our cumulative financial results. Revenue for the first nine months of 2017 was $505.1 million, down $2.4 million or 0.5% as compared to $507.5 million in the first nine months over '16. This relatively flat year-over-year performance was achieved despite a 45.5 million decline in revenue from our Standard Products group during the same period, stemming from weakness in our display business and also a slowdown in the china smartphone market. However that 45.5 million revenue decline was offset in large part by a 43.3 million increase in revenue from the foundry services group during the same timeframe. The offsets from our two operating segments helped explain how total cumulative revenue was flat in the first nine months of 2017 versus 2016 while beneath the surface revenues from the different business lines were moving in opposite directions. And it helps to explain the benefit of having a diversified unbalanced standard products portfolio and a foundry service business as well. The two operating segments account for essentially all of the revenue for MagnaChip. For the first nine months of 2017, our foundry services group represented 47.4% of total revenue for the Company up from 38.7% of revenue for the first nine months of 2016. In comparison our Standard Products group which includes…

Thank you, Jonathan. As we enter the homestretch of 2017, we feel very good about progress we’ve made so far this year on the financial and operation front. Our key financial indicators have moved in the right direction, as gross margin and adjusted EBITDA in Q3 were at the highest levels in more than four years. We’ve executed well in our three business lines in Q3. We breathe new life in our Power Standard Products business and may progress on both the top and bottom-line. Our fab utilization, which was only in the low to mid-60% range two years ago, today is covering in the low to mid-90% range. Takeout to up and the long-term pipeline is getting strong. Our non-OLED display business has grown for two straight quarters and we now are designing to nearly three dozen UHD TV models. The OLED business is coming back slowly at first, but there is a little down about the direction it is heading. Smartphone makers hit the pause button in recent months. So they’re new product launches, which core insight with a leading global brand good reflection model has just now hit the market. We whether that slowdown and we are in a really good position to capitalize on what we see becoming recovery. It is becoming clear to us that OLED is becoming the defect or standard display panel in mid-range and high in smartphones. We’ve introduced four state-of-the-art OLED displays of ICs and already secured about a dozen design wins for OLED smartphones in China, Korea and elsewhere. A few have been introduced and other should appear in Q1. We believe our smartphone design footprint with significantly grow from current levels in 2018. We continue to innovate with new display driver ICs for our product augment. We are far…

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

[Operator Instructions] And our first question comes from the line of Rajvindra Gill from Needham. Your line is now open.

Just a question on the gross margin. So the foundry margins have done very well the last several quarters and that's clearly due to higher utilization rates an also I would imagine part of the cost restructuring initiatives. How do you think about the foundry gross margins going forward since it drove -- it’s been driving a tremendous amount of the increase in gross profit? Are we going to see more margins, higher favorable mix shift in foundry? How do we think about the foundry gross margin specifically going forward?

Sure. And when we think about profitability and gross margin, there are many components and we have to be doing many things right all at the same time to maintain a good growth probability. And as you know we have already done some significant actions to improve profitability. And we already mentioned that we looked at product portfolio, bought in some new customers, we’re churning also new opportunities. And so, there are significant actions that we’ve done on the revenue side as well as the cost side. As you know we’ve done a recent headcount reduction, so these are kind of activities that we have consistently and successfully executed up until this point. But I think it’s important to know that we’re not stopping there and we will continue to look for these kinds of activities with the focus on profitability.

Okay. And you’ve mentioned that the OLED gross margin is higher than corporate average. So as OLED is going to increase 50% year-over-year based upon what your forecast is saying. We should start to see a favorable mix shift, the impact of that on gross margins going into next year. Is that fair to assume that OLED will be also a gross margin driver next year in addition to revenue?

Right, so when we have better product mix, obviously, that has a positive impact to our gross margin. But there are also some -- there could be some headwinds and we did mention the overall wafer pricing sort of going up and that’s what we’ve been seeing out in the market. So we’re continuing to closely monitor the situation. We’ll obviously address that issue to make sure that it has minimal impact. And also on the side -- on OLED side, LCD pricing has also been decreasing. So these are some of the things that I had also talk about earlier with regards to the probability that there are many moving parts, and we will be addressing these items and again our focus is on profitability.

Sure. And last question from me, YJ. So, a lot of excitement around OLED for you guys, but you kind of mentioned in Q4 some sequential growth now that the new phone is come out in the top OEM, obviously has better sense of when the production going to be. I would expect maybe that the Q4 OLED number might be would have been higher given that the Chinese OEMs now, I think, have a good sense of the timing. So why don’t you talk to that issue real quick?

Yes. So I think that the product launch from that global brand I think where everyone is expecting to be September and roll it out September, but we know that it’s just shipping this week, which is November, but two months later. So that have the kind of shift to the whole value chain, food chain, who want to think and actually see and see the reaction. I think everyone saw that and global phone had key features I’m sure which you’re aware of including the ultra wide aspect ratio including the nuts design and the AMOLED and bezel less and so forth. So our chip and there we take that in 40 and 55 had all these features, so our customers may be trying to be more competitive and that has shifted many of the product launch into Q1 '18. But as we said that we have about dozen design wins that we know in the pipeline. So, we feel confident that we can exceed 50% growth next year as well as clearly exceed $100 million in revenue for OLED next year.

Thank you. And our next question comes from the line of Suji De Silva from ROTH Capital. Your line is now open.

Hi, YJ. Hi, Jonathan. Congrats on the progress here on the adjusted EBITDA and all the metrics. As I look at the OLED business. Can you talk about the -- update us on progress of recycling customer and when the timing of that customer ramping would be versus your primary customer?

You're talking the panel customer?

Correct.

So as I said today, in the transcript that the all of our 110, 55 and 40 nanometer have begun production in the Q3, so all of my two panel makers have gone to production.

Okay great appreciate that update. And then as we look ahead to the 55 and 40 nanometer ramps. Are those parts are we seeing the majority of the customers are moving towards new features? Or is it just a handful and some of that sticking with the more traditional rigid form factors? What's the kind of mix you can see as OLED ramps up in '18?

It's a very good question. So, a lot of people I think divided based on rigid and flexible, but our view is different. We called rigid which is traditional rigid. And then there is a bezel less rigid, and then there is a flexible and bezel less, okay, all our chip does either bezel less or flexible bezel less. So, we are more progressive and more sexy to the end customer. So, we don't -- we're not shipping our state-of-the-art drivers, enable all these features with ultra wide aspect ratio and at least bezel less design, so it doesn't look like rigid. So, that's our key benefits.

Okay. So more flexible for the customers and sounds like so.

So from the end user perspective even the rigid would look like more like flexible and that's why we called bezel less rigid and we just call it bezel less. It requires a different packaging technology. So, we are one the leader in that.

And then also OLED, power business started to grow again. Should we expect that business to kind a resume a growth trajectory? Or are you still pooling that portfolio?

We are continuing to doing what we're doing. We are doing the portfolio optimization. We are pushing hard to make the premium portion of business growth, so that's what we're continuing doing. We are making steady progress. And you saw the progress we have made over the last 24 months with the 10 percentage points in gross margin up and we are continuing making steady progress.

Okay. And then lastly, Jonathan, the restructuring cost benefit. Is there still impact from that filling some in the early 2018 timeframe? Or is that impact largely being comprehended in the numbers? Thanks.

The full effect of the cost savings international as a headcount reduction is being reflected in Q3, of course, we will continue to benefit from account reduction that we completed.

[Operator Instructions] And our next question comes from the line of Amanda Scarnati from Citi. Your line is now open.

Just for continuing on the OLED trajectory. What was the percentage details for OLED this quarter versus last quarter?

So, the OLED counted for 31% of the display this quarter in Q3 and last quarter was also 31%. But the actual number is 17.6 million and last quarter was around 15 million. So, we grow about 15.6% from Q2.

And then as we expect to see more Chinese smartphones coming out early next year and strong growth in OLED to hit that 100 million potential target. Do you expect to see that percentage of detail of the display business grow or should we also see continued strong growth another areas of the display business?

We are only guiding the outlook of the OLED at the moment because OLED has been very key focus for a lot of the investors. So, right now, we feel very good about the OLED pipeline. And so based on the designs and the competitiveness and we are sure in the OLED outlook despite, we’re not in Q4 guidance yet.

And then the next question I have is on CapEx. Just wanted to make sure that I heard that comment correctly that it's estimated to be about 32 million for 2017. And is that the correct number? It seems like quite a bit step up from last year. Can you talk about what’s going on there? And how those expectations changed since last quarter?

So, yes, you did hear right. So, the previous estimate that we made was about 30 million. We added approximately 2 million to that budget and it's in connection with a new foundry customer that we brought in. And here is a good example of the foundry services group bringing in new customers to back to our pipeline as YJ mentioned in his prepared remarks. With respect to the CapEx and how we should be look at it, we’ve historically trended about 4% to 5% of revenue in CapEx. And I think also is in line with that range. And so, when we look at CapEx, we are very careful about how we spend CapEx every dollar that we put into an equipment, we want to make sure that the equipment full utilized and also at the same time obviously we try to be smart about how we use our CapEx to make sure that we’re meeting the demand of our customers.

And then, is there any gross margin benefits locked from the restructuring and the employee severance? Or is that you much all take it out at this point?

So as mentioned earlier, Q3 does reflect the full benefits of the headcount reduction.

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

Okay, thank you Linda. So, this concludes our third quarter earnings conference call. Please look for details of our future events on MagnaChips, investor relations website. Thank you for joining us today.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone have a great day.