Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2019 MagnaChip semiconductor Corporation Earnings Conference Call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Bruce Entin, Head of Investor Relations. Please go ahead, sir.

Thank you for joining us to discuss MagnaChip's financial results for the third quarter ended September 30, 2019. The third quarter earnings release 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 1-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 Q3 financial results and provide financial guidance for Q4, 2019. There will be a question-and-answer session following today's prepared remarks. During the course of this 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'll 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. And now I will turn the call over to YJ Kim. YJ?

Thanks, Bruce. Welcome to everyone on the Q3 conference call. Q3 was MagnaChip's highest revenue quarter since our IPO in 2011. Revenue of $229.7 million increased 11.5% year-over-year and 12% sequentially and was at the high-end of our guidance range of $220 million to $230 million. Display and Power, both achieved record revenue in Q3 and Foundry turned in its best revenue quarter in 5 years. Display, Power and Foundry all showed year-over-year and quarter-over-quarter revenue growth, while our OLED business had its highest revenue quarter ever. Total gross profit margin was 26.5%, which exceeded our guidance range of 22% to 24% due primarily to increased revenue and higher fab utilization that benefited Foundry as well as Power and non-OLED standard products manufactured in-house. Gross margin now has increased sequentially for 2 consecutive quarters and was about 12 percentage points higher in Q3 than the abnormally low level recorded in Q1 of this year. Jonathan will provide commentary on gross margin shortly. Let's begin our review of Q3 with OLED. OLED revenue was a record $78.3 million, which broke the previous record of $73 million set less than 90 days ago in Q2. OLED revenue increased over 34% from a year ago and was up over 7% sequentially. Our OLED business in Q3 benefited from the launch of 6 OLED smartphones in Asia with our OLED display drivers. In the first 9 months of this year, 20 OLED smartphones were launched worldwide with our OLED display drivers. We were awarded a record 11 new OLED DDIC design wins in Q3, including three midrange designs from a major smartphone maker in Korea. Of the 11 design wins, seven were based on our 40-nanometer product family and 4 were based on our newest and advanced 28-nanometer drivers that have the lowest power…

Thank you YJ, and welcome to everyone on the call. Let's start with revenue for the 2 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 $139.2 million, up 14.1% year-over-year and up 5.5% sequentially from the previous record of $132 million in Q2. Display revenue was a record $90.6 million, up 16.7% year-over-year and up 7.5% from the previous record of $84.3 million in Q2 of this year. The year-over-year increase was primarily attributable to an increase in revenue related to our mobile OLED display drivers due to the launch of new OLED smartphones by smartphone makers in Asia. This increase was offset in part by a strategic reduction of our lower margin LCD business. OLED revenue in Q3 represented 86.4% of our display business as compared to 75% in Q3 2018. Power revenue as noted earlier was $48.7 million, up 9.5% year-over-year and 2% quarter-over-quarter. The year-over-year increase was due primarily to higher demand for premium power products such as high-end MOSFETs, primarily for TV and industrial applications. Foundry services group revenue was $90.3 million, up 7.7% year-over-year and up 23.6% from Q2 of this year. The increase was primarily attributable to an increase in demand from the computing and communication segments. The Standard Products Group represented 60.6% of total revenue, up from 59.2% in Q3 a year ago and down from 64.3% in Q2 of this year. Display was 39.4% of total revenue in Q3, up from 37.7% a year ago and down from 41.1% in Q2 2019. Power was 21.2% of total revenue, about flat with 21.6% in Q3 a year ago and down from 23.3% in Q2 2019. The Foundry…

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

[Operator Instructions]. Our first question comes from Raji Gill.

Congrats on really good results in light of this uncertain environment. YJ, I wanted to see if you could maybe elaborate a little bit on the Foundry sale. Could you maybe discuss what has kind of changed incrementally from your discussions say at the beginning of the year versus now in terms of potential interest? And you had also mentioned that you and the management and the board would evaluate a variety of options and would determine what is the best outcome. Can you elaborate on kind of what metrics or kind of how you are going to frame that in terms of whether -- you to decide which exit strategy you are going to have for the fab business?

Yes, a very good question. So the management and the board are clearly looking at the venue where to maximize shareholder value. As we laid it out, we're looking at range of options from a potential sale to joint venture, to any accretive measure in partnership to maximize shareholder value. So we are very consistent on that front but beyond that, I cannot disclose anything like timeline and so forth.

But are you still committed to the end of the year, I think, is what you had said at the beginning of the year that there would be some sort of strategic action on that fab?

If you go back to our February announcement to last announcement now, we have not put any timeline on it. So we are continuing this path and we understand where we are coming from and we haven't set a time line.

And in terms of the business, the improvement -- significant improvement in the gross margins because of the higher utilization rates. Can you talk a little bit about the recovery that you are seeing in Foundry? You talked about computing and consumer, I would imagine a lot of those end products are going into China. Is there any thoughts about what's happening in China in terms of those end products and recovery that's going on there?

Yes. So I think your question was on the Foundry, right?

Yes, the Foundry, which is -- which I believe a large percentage of it is going into China.

So if you look at us as a company, about 95% of the business is outside U.S. and today, we said about 90% of the business is in Asia. If you ask for exactly on the China, about 50% of those 90% of business is in the greater China for us. Going back to the consumer and computing segment uptick we saw in the Foundry, some of the product we started production starting early this year. We saw a ramp up in Q2 and we continue to see the ramp-up in Q3. Some of the communications, we had very good product launches and demand in China that created additional revenue upside in Q3 and those were the -- some of the next level details.

And on the OLED traction, which has been growing really well, you talked about maybe a little bit less seasonal kind of change in Q4 than initially that you had in last year. What's the cause for the OLED being less seasonal in Q4 this year versus last year? And the attach rates that you are seeing on OLED going into next year, can you talk a little bit about kind of what design they are for, are they more of your flexible high-end designs? Are they across the board? And how are you competitively positioned there?

Yes. Thanks for the question and there were multiple questions, so let me try to answer that. So on the question of why we see a better slope on the fourth quarters than last year is one of the key indicators as you know is number of design wins. Last Q3 of 2018, we had 6 design wins. If you look at the design wins we just announced for the Q3 is 11. So 11 is much higher and that carries a some momentum going through some of the revenue for the Q3. While we had record revenue in the Q3 last year, Q2 was slightly higher than Q3 and that carries into momentum into fourth quarter of this year. So I think that's one way to look at it for that. In terms of the market research done by supply chain management, they are estimating about roughly 46% of the new product introduction from chinese smartphone makers is OLED this year. So obviously, the momentum in China also on the OLED is growing, and so we are seeing similar trend there. As far as our products concern for the next year, I think we mentioned that this year 40-nanometer was most majority. Next year, we expect the 28-nanometer to become mainstream products. What that means is that we expect much of the design win activity will be based on the new -- current and new 28-nanometer offering going into 2020. And we will have full free offering of the chip on glass, chip on plastic, which is for the flexible OLED as well as a 1-layer COF, which is for the rigid and then 2-layer COF for the high end flexible. So we'll have a very good portfolio going into next year. And we also said this year, by end of this year, I expect about dozen product portfolio. This is quite significant. If you look at last year, end of the 2018, I had 6 products lineup, variety of different products going into 2019. So I think we are well-positioned getting into 2020.

Our next question comes from Suji Desilva with Roth Capital.

Can you talk about the metrics like revenue per wafer. Are those improving with the customer mix here? The utilization seems pretty similar to prior peaks. So I'm wondering if you are shifting mix toward higher-value customers in Foundry?

You are cutting out there. Can you repeat your question, again?

Sure. It was about the Foundry and whether the wafer mix has been improving because you had record revenues here with similar utilization to past peaks?

Sure, yes. So the product mix did improve. And as we mentioned on our prepared remarks, the better-than-expected gross margin was primarily related to our better-than-expected revenues on the Foundry side, which increased the utilization as well as better product mix. So those were the 2 factors that were driving the better than expected gross margin.

Okay. And then on the OLED side, the 28-nanometer products as those start to ramp into volume, do expect share gains here? Is there an ASP uplift that you have with those newer products versus the 40-nanometer product line?

That's a very fair question. So our 28-nanometer offers the best power consumption in the industry today. And what our 28-nanometer brings to the table is that you see the foldable started to take off, although it's in embryonic stage. So market research data showing that the analysts are expecting to raise the shipment next year on the foldable phones. So things like that will really determine that the lowest power consumption is very important attribute. In terms of going into the ASP side, the ASP is going to be determined by not whether it's 40 or 28-nanometer, but the feature of the display driver, is this the QHD driver, is this the 21:9, does it have PCOP or 2 layers COF packaging. So those are the more attributes to determine ASPs.

Okay. And then my last question is on the manufacturing for the OLED and the gross margin. When do you expect the wafer yield from that new supplier to hit production? It will take several quarters? Or will it come in fairly quickly you think? Any thoughts there would be helpful.

Yes. So that's very good question. As you know, the 28-nanometer is a state-of-art OLED process technology available. We are the first one as a independent supplier going into production. In fact, we started producing in the third quarter and now, in the first months into the fourth quarter, our yield is very good now. So we feel comfortable from this quarter that the 28-nanometer is back into the range that we are expecting in terms of yield. So I like to thank my team who has gone to our foundries and developing this process over the last 18 months and bringing it to production. But I can tell you that the 28-nanometer OLED process is not available, we've done it with the foundry. We now made it full production ready.

[Operator Instructions]. And I'm not showing any further questions at this time. I would now like to turn the call back over to Bruce Entin for any further remarks.

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

Thank you, ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.