Good afternoon, ladies and gentlemen, and welcome to the Q4 2019 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 call is being recorded. I would now like to turn the conference over to your host Mr. Bruce Entin, Head of Investor Relations. Please go ahead, sir.

Thank you, Alexander, and thank you for joining us to discuss MagnaChip's financial results for the fourth quarter ended December 31, 2019. The fourth 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 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 Q4 and year-end financial results. There will be a Q&A 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 also will 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 fourth 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?

Thanks, Bruce, and welcome to everyone on the Q4 2019 conference call. First, we'd like to extend our deepest thoughts and prayers to those coping with the impact of the coronavirus health crisis in China and elsewhere. I will come back to discuss this issue a little later. Let's begin now with a recap of Q4 results and the business outlook. We ended 2019 on a high note in Q4. If you recall our October 23rd earnings call, we said we expected normal seasonal softness in Q4 and guided revenue to be between $181 million to $191 million and gross profit margin to be between 24% to 26%. Due to an improving business environment, we updated guidance on January 13th and projected Q4 revenue between $198 million to $200 million and gross profit margin between 26% to 27%. Today, we reported actual Q4 revenue of $200 million, which was at the high-end of the updated guidance range and represented the highest level achieved in any fourth quarter since 2012. While seasonal selfness was effective for all three businesses as expected, total revenue in Q4 increased 11.5% from a year ago, OLED revenue was significantly better than expected, Foundry was better than expected and Power was seasonally softer than expected. Corporate gross margin profit margin of 26.6% was slightly above the mid point of the updated range due to better than expected fab utilization on improved OLED product mix and better manufacturing yields at an external foundry on latest-generation OLED display drivers. Our cash position improved by 15.5% sequentially, which Jonathan will discuss shortly. Now, let's review the performance of each business unit in Q4 beginning with OLED. OLED revenue of $67.3 million was the highest level achieved in any fourth quarter in the company’s history. Revenue increased twofold from $33.2…

Thank you, YJ, and welcome to everyone on the call. Let's start with key financial metrics for the 2019 year and Q4. Revenue in 2019 increased 5.5% despite macro uncertainty that caused the non-memory segment of the semiconductor industry to decline by 3.8%. It was our second straight year of annual growth. Our growth was fueled primarily by a lineup of homegrown standard products including low power OLED display drivers that accounted for 87 of our display revenue. The premium Power products that represented over 50% of total Power revenue. Let's turn to OLED results in 2019. OLED DDIC revenue of $267.1 million set an all time record and broke our previous record of $188 million in 2018. That 42% rate of annual OLED growth was more than 2.5 times the rate of growth for OLED smartphone panel shipments worldwide according to HIS. Turning now to Power. Revenue increased 12.4% for the first nine months of 2019, but a slowdown in Q4 reduced our annual growth rate to 4.1%. As a reference Power market declined by 3% in 2019 according to IHS, still revenue of $176.2 million marked our third consecutive year of growth following double-digit year-over-year increases in revenue in 2017 and 2018. Revenue from premium products, which include a Super Junction MOSFETs, IGBT and Power IC increased by 21.2% year-over-year. Now turning to Foundry, revenue in 2019 was $307.1 million down 5.6% from $325.3 million in 2018 but those figures don't tell the whole story. Foundry revenue and Foundry fab utilization were extremely disappointing in Q1 but the business stabilized faster than we expected and staged an impressive recovery in the final three quarters of the year. Now to Q4 results, revenue in the Standard Products Group, which includes Display and Power was $113.3 million up 17.7% year-over-year…

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

Thank you. [Operator Instructions] We have your first question from Suji De Silva from ROTH Capital. Your line is open.

Hi ,YJ. Hi, Jonathan, congratulations on the progress here. Outstanding results on display and across the board. So, maybe YJ, you've said this multiple times, so can you just kind of go through again why in the OLED the 28-nanometer products are seeing such a sharp design in and volume ramp interest. It's helpful to understand that as we go into 2020 and how you are competitively positioned?

Yes Suji, thank you. So in my remark, we entering the 2020 with 11 products where five are 28- nanometer. So obviously, that we started production in Q3 2019 and we had a very good ramp in the fourth quarter with more 28-nanometer. So, I think the 28-nanometer product will be a key product and you will see more 28-nanometer products that's going to tape out and sample in good production in 2020. So the, what's the 5G and the foldable, the power consumption is very key and our key aspect is lowest power consumption. So we think that that's going to play to our advantage and also the 28-nanometer products, put a foundation, our future OLED business roadmap.

Okay, great. And then specifically on OLED form factors like foldable and then you talk about large panel TV and one of the first times I've heard you talk about that. What kind of contribution can those sub-segments make within OLED, if that's the way to think about it. And can those help your gross margin in that business trend upwards throughout 2020.

So if you saw my comment earlier, the comment wasn't micro-LED TV. We have the industry's first active metrics, micro-LED TV controller DDS one chip, a full chip. So you can put as much as 256. And we also commented that the limited production will start towards the end of 2020. So, obviously it's not going to be big, but I think it's showing the capability of what this company can do. The micro-LED requires OLED knowledge as well as power IC knowledge as well as some of the analog and we have both display business, OLED business as well as the power IC to discrete analog business and then the – so that enables to create the worlds commercial active metrics, micro-LED TV DDIC. So, this is an example of us addressing adjacent or aggregate market that's next to OLED.

Okay. I didn't catch the part about being end of 2020, so that actually helps in terms of timing. And then similar question and for foldable, I think I asked as well in terms of – if you think of that as a separate sort of segment opportunity in 2020 for OLED or is it kind of blended in and can it help the margin?

Yes, so foldable as you know, it's the embryonic stage. The good thing is that there are already a half dozen products that have been introduced or to be introduced. So, we think that foldable is really future of the OLED and the market and the new smartphones. So we are excited about the future prospects of the foldable segments. So that's how we look at it.

Okay, great. And my last question is on the macro environment and the coronavirus China impact here. Which of your, since you had to guide a little bit lower than you had previous expected, which of the three segments kind of most contributed to that? A more cautious outlook and more generally, how are your three segments particularly Foundry, exposed to China and the demand environment there. Thanks.

Thank you, Suji. So, we don't break out product-by-product on where and how much we do, but I can generally tell you that at the coronavirus thing again, I feel really sorry for the people who's going through this tremendous crisis, my heart is out with them. And, but at the same time, it's – you don't know how long this will last, but if you look at the history in the SARS of course, that's a long time ago that the market really, really reacted and kicked back when the – when people saw that the numbers of the contract people started to go down. So again, this one, I don't know how long will last, but I'm hoping that is the similar kind of kickback that we are going to see. So that's going to determine the actual market and projection. But short term I think there will be some impact in how it's going to play out. We have to be very cautious. But in terms of Foundry we don't have a big exposure yet. But it's one of the key market, the Foundry revenue is expect to grow. And so that’s what I can say.

Okay. Appreciate the color during the difficult times, thanks again. Congratulation again YJ, Jonathan and Bruce.

Thank you.

Your next question comes from the line of Raji Gill from Needham & Company. Your line is open.

Yes, thank you. And I echo my congratulations on the great momentum in OLED. Just go back to the coronavirus, based on your press release, you're thinking about a little over $200 million and you're guiding to like $187.5 million at the mid-point. So it is $11 million, $12 million impact. You talked about that you don't have big exposure to Foundry yet in China. I just want to clarify that – is the $11 million or $12 million impact mostly related to smart phones? My concern is that demand is going to be affected pretty significantly, particularly smartphones in China because of the extent Lunar New Year and many of these cities are locked down. And so I just want to get an impact, try to get an impact maybe going into June as well, if you thought about June at all.

Well, thank you, and I think it's a very valid question. But I think everyone will agree that the visibility is fluid. If you look at what happened in China, we are looking more optimistic before in the Lunar New Year and the Lunar New Year has extended almost three weeks. And the fab production – I mean the manufacturing production just began middle of last week and someone to up to 90% utilization or some are still at much less than 50% utilization. So again, we started to get some, the demand impact or forecasts just getting this week. So I think that's why, our visibility is fluid and limited. But the interesting thing is I'm hearing that the TV sales are up year-over-year. So, I think because the people are staying home and they watch TV more. So again, I think it's all depends on how soon this corona gets settled, and you start to see that number coming down is going to be very critical? But obviously I cannot forecast when that is going to be. But, and if you look at also the history of the SARS the industry was at the bottom of the curve and we had a very strong kickback. The industry started to recover, and we’re hoping that it will have a similar curve and I'm sure that China government wants to also do the revamp very quickly. So again, the analysts, I'm sure you have a similar numbers you look at. So, but beyond that, I cannot really comment and give you an accurate forecast.

And on the power of business, which was strong for three quarters and then saw some pricing pressure in Q4 and in some weakness in communication and other end markets. YJ you mentioned that power may go sideways in the near term, just wanted to see if you could kind of elaborate a little bit further on that comment. Is the pricing pressure from the inventory correction? Is that over? And so, maybe that reverses itself and you could see kind of a benefit there and any thoughts in terms of the end markets in power picking back up again and maybe Q1 or Q2, any views on Power would be helpful.

Sure. Let's look at a big picture. The power last year discrete and power I see for the word has decreased minus 3%. So that's according to IHS. If you look at our power number, we grew 4% year-over-year. We had a double-digit growth in the first three quarters. And fourth quarter, just like everyone else, we saw – we caught up with the supply and demand in our customer segments and – but we still ended 4% year-over-year growth. It is the market assessment and all – the data you see from all the power makers, they think that the market will recover second half this year. And last year, I think the power industry went down due to slowdown in automotive, with the trade tension in China also slowdown. But the second half we expect to see a really good kickback, including hopefully the coronavirus has gone. Therefore, there's a big exhalation. So, my consensus – my forecast belief is similar to other people, who have announced about the outlook on the power business.

That's great. And on the foundry side, you said the highest level in six years in Q4 and the highest full annual foundries are going public. You mentioned that the strong growth in BCD, EEPROM, these high-voltage processes. What end products – end markets are driving this kind of significant increase in your Foundry business? And how do you describe your competitive differentiation in Foundry given the high growth last year?

Yes. So to look at the real numbers, we actually decrease in the Foundry revenue last year. As you know, we had a very poor Q1 due to the industry downfall or our most Foundry had between about 20% to 25% downfall, Q4 to Q1 in 2019. And so despite we recovered nicely, especially in the second half our run rate on six months was highest on the 8" revenue in the history of the company. You are seeing multiple things here. I think the industry in Foundry is very healthy. I think you will see that the capacity is really tight below 40-nanometer today due to CMOS image sensor to latest APs and so forth to RFIC to all kinds, now including OLED by the way. And then you see 8" or so the supply is tight, so that helps in favor of our Foundry. And I think the product we offer very competitive BCD technology. We offer very competitive EE for the IoT market. And we do have one of the best low noise mixed-signal for sensors to other application in this legacy process. And I think the – with continued progress in the stable strategic evaluation keeping our customer intact. So, all these points are making our Foundry business stable.

Thank you and congratulations.

We have your next question from Atif Malik from Citi. Your line is open.

Thank you for taking my questions and congratulations on good results and guide. And why do – I have a question in terms of your March quarter outlook you're guiding to a better than seasonal total sales. I don't know of what's embedded in for display and other segments, but when I look at some of the revisions that third parties are making to the global smartphone unit, the forecast, because of the supply and demand disruption in China from the coronavirus. We're looking at like 11% sequential unit down globally and China units down like 30% year-over-year. So I'm just trying to understand the guidance that you’re providing. How much of that is a function of you guys gaining share versus factoring in the weakness in the overall market?

Yes, Atif, very good question. So let me try to address that. So, I think one thing you have to look at is OLED is a growing segment within the smartphone. So I think that helps. And also I think the 5G is a growing segment within the smartphone. If you look at the Global Times of China, they said that China mobile believes that the 5G phone sales or introduction in China in 2020 will be higher than 4G phones. So if you look at that the 5G OLED is all uptrend. So even though just like last year, the smartphone was either flat or minus, but we grew 42%. So I think it's a combination of OLED going up, combination of 5G going up. It helps us then people who have to sell everything whether it's OLED and LCD, that’s one perspective. And other thing is that this year our selling into non-China market is expect to grow. So – and I think we alluded in last year that we had a lot of phones introduced by Korean maker. So I think if you look at all of these combinations maybe why we are slightly different than the others. But again, how the corona will do, it's – I don't think anyone knows exactly, but look we’re taking one quarter at a time and we are also putting wider outlook for Q1 due to the uncertainty that we left in about one month of full revenue.

Great. And then as a follow-up Jonathan, if you can give us some pointers on how should we think about OpEx modeling for the full year?

Sure. So, we've been very focused on cost savings and profitability and we were able to keep our SG&A relatively flat. So as we look ahead for the first half of 2020, I think the SG&A will continue to be flattish to the second half of 2019. And then also with respect to R&D as we've discussed previously, given our OLED related activities, R&D could go up. But, overall, I think on the SG&A side, it will be flattish. And on the R&D, the amounts related to R&D will fluctuate based on our activities related to OLED.

Thank you.

I'm showing no further questions at this time. I would now like to turn the conference back to Mr. Bruce Entin. Please continue.

Okay, thank you operator. So this concludes our fourth 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, this concludes today's conference call. Thank you for your participation and have a wonderful day. You may all disconnect.