Hello and welcome to MagnaChip Semiconductor's Q2 2019 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. And now, I would like to introduce your host for today's call, Bruce Entin, Head of Investor Relations. You may begin.

Thank you, Towanda and thank you for joining us to discuss MagnaChip's financial results for the second quarter ended June 30, 2019. 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. 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 discuss the company's recent operating performance and market outlook for our product categories. And Jonathan will provide an overview of our Q2 financial results and provide financial guidance for Q3, 2019. There will be a question-and-answer session following today's prepared remarks. During the course of the 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 our 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 website under the Investor Relations tab at www.magnachip.com. I now will turn the call over to YJ Kim. YJ?

Welcome to everyone on the Q2 conference call. Revenue of $205.1 million surpassed the updated guidance we provided on June 11 and represented the highest revenue recorded in a second quarter since our IPO in 2011. Sequential revenue growth of 30.4% was due to strong customer demand across the board and throughout the quarter. Revenue for the OLED and power businesses both set records and foundry revenue rose sharply over Q1. An increase in wafer loading in the foundry business led to higher fab utilization that helped lift our gross profit margin in Q2 to 21.4%. On our Q1 earnings call on April 30th, we provided Q2 revenue guidance of $173 million to $181 million or up 12.5% at the midpoint of the range. On that call, we guided for sequential OLED revenue growth of approximately 30% in Q2 and predicted that foundry revenue would be about flattish in Q1. Our guidance at the time reflected our best estimates during a period of low visibility across the industry and widespread concerns about macroeconomic uncertainty and fears of a trade war. When it became clear that we were on track to significantly exceed the high end of the guidance range, we updated our Q2 revenue guidance on June 11th to at least $194 million. We also updated our gross margin guidance to at least 21% from 16% to 18%. When all was said and done, we executed well in Q2. We surpassed revenue expectations in each of our three business lines and met our updated gross margin guidance. Let's review Q2 beginning with OLED. OLED revenue of $73 million was a record. Revenue increased 50.4% sequentially, which exceeded our April guidance of approximately 30% sequential growth and increased 17.4% from the previous record of $62.2 million in Q2, a year ago.…

Thank you, YJ. And welcome to everyone on the call. Let's start with revenue for the two business segments. And then move to a review of profitability, fab utilization, operating expenses and balance sheet items. Revenue in the Standard products group, which includes Display and Power business lines was a record $132 million up 11.2% year-over-year, and 31.6% quarter-over-quarter. Display revenue, was a record $84.3 million up 7% year-over-year and up 44.7% quarter-over-quarter. The year-over-year improvement in the Display business was offset in part by a continuing strategic reduction of our lower margin LCD business, of 31.9% from a year ago. As stated previously, Power revenue was a record, $47.7 million up 19.2%, year-over-year and up 13.5% from Q1. The Standard products group represented 64.3% of total revenue, up from 59.5% in Q2 a year ago and slightly up from 63.7% in Q1 of 2019. Display was 41.1% of total revenue in Q2, up from 39.4% a year ago. And up from 37% in Q1 2019. Power was 23.3% of total revenue, up from 20% in Q2, a year ago. And down from 26.7% in Q1 2019. The Foundry Services Group represented 35.6% of total revenue, down from 40.5% in Q2 a year ago. And down from 36.3% in Q1 2019. Let's now recap profitability metrics in Q2. Total gross profit was $43.8 million, down 18.6% compared to a year ago and up 93.1% from $22.7 million in Q1 of 2019. We believe gross profit is an important financial metric to monitor, because of the potential flow-through to operating income, adjusted EBITDA and cash flows. Total gross profit margin of 21.4% in Q2, met the updated gross profit margin guidance we provided on June 11. Gross profit margin was down from 27% a year ago, and up from 14.4% in…

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

[Operator Instructions] Our first question comes from line of Suji Desilva of ROTH Capital. Your line is open.

Hi, YJ and Jonathan. Congratulations on the progress here in the recovery. So the OLED market you have very strong design momentum here. How would you describe what's happening for you guys versus the overall smartphone market? Is the smartphone market recovering or are you seeing secular growth in what's a stable smartphone market? Any contrast there will be helpful.

Yeah. Sure. I mean according to the market studies smartphone overall is -- I don't think is that growing, but OLED portion is growing and as you can see. And if you look at the market outside the high end of the Samsung or the Apple phones most of the phones right now is a rigid or rigid variance. And we're doing very well in that regard. So I think we have about 12 -- about dozen end customers or end users. We -- as you know we sell directly to the panel makers and we have about dozen end customers and so we saw a very healthy growth in the Q2.

Okay. And then in the Power products segment, can you tell me if the premium part of the Power products has that a potential to go higher than the just over the 50% mix that it's at now or is this kind of a natural sort of mix long term with the lower end products kind of staying at levels there as well?

Our continued desire to increase the premium products the premium products are the Super Junction, IGBT and the Power IC and also when the automotive start kick in a few years that also is one of the premium products. So we hope to continue to grow the premium products segment.

Okay. And then the last thing on the Foundry restructuring efforts any thoughts on the -- in the overall macro environment impact on that process? Is it realistic with the linearity you've seen here in Foundry recovery to be achieved prior mid-80s level or is that not the target here? And is the macro environment at all affecting the restructuring effort?

As we said today that the -- some of the new product that were in preproduction in Q1 we saw a very good sign of full production. Those included somewhere in the computing segment as were some in the communication and also recovering some of the existing customer base in the consumer. And so we are going to grow in the -- sequentially in Q3 as well. So I cannot say about the overall Foundry, but our Foundry has done a better than expected in Q2 and we're going to sequentially grow in Q3.

All right. Thanks YJ, thanks, Jonathan, nice job.

Thank you.

Thank you.

Thank you. Our next question comes from the line of Rajvindra Gill with Needham & Company. Your line is open.

Yes. Thanks and congrats as well on good results. On the Foundry recovery in the last few quarters, China was a decent percentage of the Foundry business Chinese customer. I just want to get a sense of the business environment on the ground in China as you see it. Is it improving, or -- are your Chinese customers starting to rebuild inventory for some of your Foundry products? Any sense on the environment in China given the whole ongoing trade China trade war would be helpful.

Yes. Thanks for the question. So just to clarify, our Chinese direct customers or that Chinese companies that was established in China is still relatively small and -- so we have a tremendous opportunity to grow in that regard. And our customers whether they are located in the U.S. or Europe or Asia they do business in China. So again, so I think the -- all the combination we have a lot of potential to grow, especially with the direct customer in China in Foundry. So I think that's a good place to have because we still have a lot of room.

Okay. And on the Power business, you talked about premium products showing a lot of growth over 50% of Power and you mentioned specific growth in Super Junction MOSFETs, can you talk about the capacity environment the supply environment? As you know this is an area where there's been a lot of tight capacity for many quarters, how do we think about the ability to meet accelerating demand and what the capacity constraints are and are they being lifted from your suppliers? Any sense there will be helpful.

Yes. So, again, I'm going to focus the -- our situation where the total market I think each maker has a different situation. But for us, as you can see there, we probably outpaced the growth of the market of the discrete. We grow in the first half over double-digit. We manufacture IGBT and Super Junction internally, so we are trying to increase the output there very smartly and efficiently. We are also a leader in battery FET, which is a special battery protection FET and so we, I think, one of the leader in the marketplace. And then, some of the Power IC we also manufacture internally. And we have ways to grow the capacity, both internally or externally, so we can continue to grow this power business. So that's our case.

Okay, great. And last question for me on the OLED segment. You're seeing a lot of good traction, both on the 40-nanometer and the 28-nanometer product. Can you talk about, as you're going to encounter 2020, how you think about 5G as being a catalyst for OLED? Is that something that will, based on your feedback, would your customers really accelerate the adoption of OLED, or is it just going to be -- you're seeing just an increase in penetration rates and having that continue given the transition from LCD to OLED?

Yes. Very good question. So, I think, there are a couple of fronts there. One, 5G and AI, which is increasing, that's very power intensive. So having 28-nanometer driver IC in the market, there are only two of us in the market do that. And that creates a compelling advantage. First of all, our 28-nanometer is lowest power consumption device in the market. So that's a key advantage. And even for us comparing 40 to 28, we can reduce the power another 20%. So I think that becomes a compelling feature when you are building a 5G smartphone or a phone that has a lot of artificial intelligence, because they tend to use more CPU Power. Second, in terms of the LCD to OLED penetration that is happening, I was in China about three weeks ago and what we saw is that the -- many of our end customer or end users, they are -- in 2018 they may had -- 20% of the phone was OLED. They have grown that to 18% -- I mean, to 30%. Now, looking to 40% a year later. So I see the gradual shift there. And then the other interesting was they think the foldable is really future to go. So I think that's really good and foldable really require one or more driver IC and also will be very 5G-based, because given the price points. So, I think, it all points to who is going to have the lowest power consumption device. And I think that's going to be an edge for us.

Very good, Thank you.

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

Okay. Thank you, Towanda. So this concludes our second quarter 2019 earnings conference call. Please look for details of our future events on MagnaChip's Investor Relations website. Thank you for joining us today.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.