Good day, ladies and gentlemen, and welcome to the Second Quarter 2018 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 reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Bruce Entin, Director, Investor Relations. Sir, you may begin.

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 Web site. 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 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 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 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 that 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. And now, I'll turn the call over to YJ Kim. YJ?

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 to $188 million and reached the highest level of any quarter in nearly six 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 it showed sequential top-line growth, but OLED was the standout performer and the main catalyst for 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 an expectation that about 10 OLED smartphones with MagnaChip OLED DDIC would hit the market in Q2. Instead, we entered mass production for 15 new OLED smartphones and our…

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] [ph] addition 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 displays 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 application. Our non-OLED display business declined as part of a deliberate and strategic for fully optimization effort 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…

Thank you, Jonathan. OLED was the star of the show in Q2, but all three 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 the 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's smartphone makers needed to jumpstart their smartphone launches and to match the feature in new models from the leading global brand. 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 oil revenue decline in Q4 due to typical seasonal factors. With the OLED revenue ramp in Q2, we demonstrated that we built a solid foundation for the growth of all three businesses. In general, barring unforeseen factors, total revenue for MagnaChip in Q3 is anticipated to increase sequentially and total annual revenue will grow by double digits as you compare 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 anticipate 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 margins 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?

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

Thank you. [Operator Instructions] Our first question comes from Rajvindra Gill with Needham and Company. Your line is now open.

Yes. Thanks for taking my questions and congrats on very impressive results and congratulations on the OLED business ramping, that's great news. 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 maybe some color on the feedback from customers over the last one to two months and how do you see that the shift to flexible happening in the second half of next year going into the 2019?

Raj, thanks for the question. So as we said earlier today that I think we saw the shift to the OLED quicker than the market because we had the new product that enables very low cost bezel-less high-resolution with a very good aspect ratio. So and that enables the product that is very compelling at a very much lower price. And so I think that has -- that design when they started in second half '17 actually are turning to better than expected revenue in Q1 really surpassed our expectation in Q2. And that momentum continued into Q3 where combine now look pf 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 gross margin as well as the balance of portfolio. And for the high-end flexible, I think it's very important that the -- you need to really have a really low power device. And so we are 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 roadmap with that.

That's great. So if I kind of look at the segments, the combined Q2 and Q2 for OLED, it does imply 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?

That's a very good question. So I think, first of all, I think we did abnormally strong in Q2. So that's normal because a lot of people sketched up to come up with notch trench design. So that's abnormal phenomena that we saw because originally it's not ten, but with production but 15 did. But in terms of our business, if you look at the power at this particular quarter in Q2, it grew 13.3% year-over-year that's very strong double-digit growth. We continue to have positive growth in that segment. We going to also see growth in the foundry, so as I alluded to earlier, we now have a very three strong foundation for all three businesses.

And last question from me, the reorganization -- 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 were clearly are seeing the impact the raw wafer price increases across the industry. Several companies have cited that as well. As 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 you look at your mix shift because it seems like OLED is ramping its higher margin foundry is good margin. Maybe you could talk a little about your thinking about margins in the longer term? Thank you.

Yes. 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. And that's not a significant. And so we did try to prepare earlier on to mitigate that that impact which included making prepayments engaging in long-term contracts and we talked about today the fact that we're also bringing in additional epi tool 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 is 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 its common knowledge and there are many reports out there that talk about the wafer price headwind to continue. 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.

Right. Very good. Thank you.

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

Hi, YJ. Hi, Jonathan. Congratulations on the momentum here. Good to see. To start, housekeeping question, maybe it's for Jonathan. The non-OLED display business, is that going to be flat going forward or declining as a legacy? How might I just want to understand how that a move?

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 the business and we may 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.

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

It's a very good question. So I already give 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.

Okay. That's helpful for framing that. And then, I know you have two large customers for OLED, I'm wondering what the mix is today with those two customers, is that weighted toward one of them versus the other or getting more balanced and what kind of balance do you expect in the '19 timeframe between two customers and just trying to understand the diversification of its revenue stream?

Unfortunately, we don't break out the product by customer, I think we do report, which grew than 10%, than those two customers tend to be Samsung and LG display.

Okay. Thanks. I'll look that up. And then lastly maybe a longer term question, you had a really good run say with this '18 sort of China smartphone catch up from the features to the flagship, the trench notch. Do you see some sort of similar feature in the '19 timeframe that kind of recreate this scenario where people have to keep catching up? And I think that looking out the horizon that maybe foldable, but that could be a little early, so I'm not sure what -- if there is another similar kind of upgrade cycle in the '19 timeframe? Thanks.

Yes. So it's a very good question. Unfortunately as you know, we only guide one quarter at a time. But what we can say is that look, I think we created a good foundation now in the OLED. I think the last quarters we are validating it that we proving that we can we execute. So our goal -- our aim is to make sure we continue to grow every year. So that's what we can say. And we are working on very compelling products like 28-nanometer with rich features and so forth. So the market is coming towards OLED in every device. So people who don't have OLED, the panel display or drive IC, they will work on it, right. So first job is to make sure we have a compelling roadmap, a 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.

Okay. Once again YJ and Jonathan, Bruce congratulations on the progress. Thanks.

Thank you. And our next question comes from Atif Malik with Citi. Your line is now open.

Hi, guys. It's [indiscernible] on behalf of Atif. Congratulations on the great performance. Just wanted to see if we can get a little more clarification on China expectations for the second half for design wins?

Yes. So I think the -- some of the color we threw out today as we know we had 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 sample three of them so far, we sampled two last year, one this year that had translated to come with very compelling bezel-less, rigid trench or notch design about 70% of the 40-nanometer display application. So that create a very compelling price performance in 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 a difference that we did not have in '16. We had that chip, we sampled a couple months ago. Now we're going production, we keep winning design and then we will be readying the next set of design with our next gen 28 nanometers and so forth. So that's what's happening. So I think we stay ahead of the curve for the industry because we had a compelling new chip.

Thank you.

Operator, are there any more questions?

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

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

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.