Ladies and gentlemen, thank you for standing by and welcome to Q1 2020 MagnaChip Semiconductor corporate earnings conference call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will a question-and-session. [Operator Instructions]. Please be advised that today's call is being recorded. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Mr. Bruce Entin, Head of Investor Relations. Thank you. Please go ahead, sir.

Okay. Thank you for joining us to discuss MagnaChip's financial results for the first quarter ended March 31, 2020. The first 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 Shin Young Park, our Chief Accounting Officer. YJ will discuss the company's recent operating performance and market outlook for our product categories and Shin Young will provide an overview of the accounting treatment of continuing and discontinued operations. There will be a Q&A 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 first quarter earnings release available on our website under the Investor Relations tab at www.magnachip.com. I will now turn the call over to YJ Kim. YJ?

Thanks Bruce and welcome to everyone on the Q1 2020 conference call. First of all, our hearts go out to all those people whose lives have been impacted by the global pandemic. At MagnaChip, we are fortunate that Korea seems to have handled the COVID-19 breakout in a manner that minimized its spread. MagnaChip started 2020 on a high note. We executed well and delivered solid results in Q1 despite typical seasonal softness and market disruptions caused by the COVID-19 global pandemic. If you recall, on our Q4 earnings call on February 19, we guided Q1 revenue between $180 million to $195 million and gross profit margin between 23% to 25%. We updated our guidance on March 10 and raised the low-end of revenue guidance to $187 million and the high end to $197 million due to stronger than expected revenue in our OLED and foundry businesses and despite weakness in our power business. We kept the gross profit margin range the same. The financial statements we released today look different than in previous quarters because beginning in Q1, we now account for the foundry business as a discontinued operation under accounting rules. The continuing business includes the display business, power business and Fab 3 operations. The change in our reporting came about when we signed a definitive agreement on March 30 to sell the foundry business and Fab 4. Shin Young, Chief Accounting Officer, will soon provide a more detailed overview of the accounting rules that govern how we now present our financial statements. Meantime, we are pleased that the combined Q1 revenue from standard products and foundry services hit $197 million on a non-GAAP basis. That was our highest revenue level for first quarter in 12 years and met the high end of our updated guidance. We currently…

Thank you YJ. Let's review the accounting treatment for the continuing and discontinued operations. As you can see in our first quarter earnings release, the financial statements look very different from what we have reported in the past. Until we close the sale of foundry business and Fab 4, the prudent way to calculate our non-GAAP EPS is that you need to look at it on a combined non-GAAP basis. The foundry services group is accounted for as a discontinued operation beginning in this quarter and the assets and liabilities relating to the foundry business and Fab 4 are shown separately as those held for sale on our balance sheet. What this essentially does is that we are carving out foundry services group from our operational results and the assets and liabilities that belong to the foundry business and Fab 4. To do this carve-out, we have applied certain assumptions mainly for the allocation of OpEx between the foundry business and the standard products business. For instance, we used a list of approximately 1,500 employees as a basis for the allocation of payroll cost. If there is any change to the list of employees to be transferred through to the closing, we will make an adjustment as applicable. Following the consummation of the sale of foundry business and Fab 4 and for a certain period of time thereafter, we will provide transitional foundry services to the buyer for foundry products manufactured in Fab 3, which is our fabrication facility located in Gumi, Korea. For the period prior to closing, revenue we derived by providing transitional foundry services from Fab 3 to the foundry services group are recorded at cost in both of the continuing and discontinued businesses, resulting in no margin. As such, sales and costs are eliminated when reserves…

Thank you, YJ and Shin Young. So Crystal, this concludes our prepared remarks. With that, we now like to open the call for questions.

[Operator Instructions]. The first question comes from the line of Suji De Silva from ROTH Capital. Your line is open. Please ask your question.

Hello. YJ, Shin Young, congratulations on the execution in a challenging environment.

Thank you.

Yes. There's a little static. Let me know if you can hear me well. So the China smartphone market, maybe YJ, what are you seeing in terms of demand, the late March, April, early May, since the quarter closed, week-to-week trends? Anything, any color there would be helpful.

As you heard today, I mean we were expecting nine product launch in the first half. We doubled to 18. Part of reason is that there are uptick activities in the new design wins. So we are very pleased to report our design win in Q1. We continue to win more design wins. And we are excited about some of the new phones that we launched in Q2. So we will have nine new products to be expected to launch in Q2. So we think that the market is recovering. And one way to recover the revenue is also through product innovation and I think that's what we are seeing in the market.

Okay. And with the impact of COVID, perhaps the overall market, smartphone market maybe being weaker, are you seeing any increase in the OLED mix? Are the smartphone OEMs and service providers emphasizing 5G OLED upgrades in this environment? Are you seeing any of that benefit?

I mean even today, if you look what we just said, out of 14 design wins in the Q1, 10 were targeted for 5G smartphones. So we definitely see uptick on the 5G momentum. And because our product portfolio has increased from nine to 16, in fact, if you include, the legacy, it is 18. So we have doubled the number of the portfolio. So I think that the momentum is there going to the OLED.

Okay. And then the power segment, you say you are seeing recovery here. Would the premium mix continue to stay high and increase further here? Is that going to be how the power segment plays out the rest of the year? And would inorganic growth here makes sense to grow the portfolio and improve the premium product effort even more?

Yes. Our laser focus is improving the portfolio and the product margins. But as the market also recovers, there will be more demand on the non-premium as well. So we expect both segments to grow in terms of revenue.

Okay. Well, that makes sense. Maybe last question perhaps for Shin Young. The OpEx, I am trying to understand, going forward, what portion will be allocated to standard products versus the overall sort of non-GAAP that you have given in terms of OpEx? So we can understand the go-forward run rate of the OpEx?

That's right. Understood. We don't actually forecast like OpEx for the whole year, but I can repeat the comment that we gave last quarter earnings call. The OpEx for the first half of 2020 would be flattish with the second half of last year's. So that should stay hold true. And also, I would not really object if you are going to use the Q1 of 2020 as your proxy to kind of see the split between discontinued and the standard products business.

So that run rate makes sense, Shin Young. Is that right?

Yes. I mean, no, I would not object if you use standard ratio, yes.

Understood. I appreciate that. Thanks for the color. And again, congratulations on the progress. Thanks.

Thank you.

[Operator Instructions]. Your next question comes from the line of Rajvi Gill from Needham. Your line is open.

Yes. Thanks. You might have touched on this, but there's a lot of issues on this call, getting on the call in terms of logistics. So you talked about, YJ, I think in this part of it, the adjusted operating income will double 10% in the next few years. Can you talk about what the -- can you just repeat the operating income, the gross margin, the interest expense reduction, the time frame? What are those numbers? If you can repeat all of that?

Sure. Sorry, I had some hearing issues. So on the operating income. So operating income, we target to double from current levels. Our long term goal is for adjusted operating income, which excludes the stock-based comp to double to about 10% in the next few years. So that's what we said exactly.

What is it now? You said double from current years. I mean it's apples and oranges. What's the operating income now ex the foundry --?

It's about 5% on apple-to-apple base.

Okay. And what about the gross margin on a go-forward basis? Is this going to be kind of 28% gross margin for, well, yes, so you guided to 27% gross margin?

For a combined base.

For a combined, which implies about 28% for display and power. Is that the gross margin for OLED and power? What is the gross margin for OLED and power on a go forward basis?

We haven't provided those details today on the pro forma.

Okay. And so this OpEx of $22.6 million for Q1 and the revenue was $120.5 million excluding the foundry. In terms of the revenue of $9.8 million for the Fab 3 transitional service, how long is that going to be? And how do I model that going forward? And should we be modeling $120 million as the standalone business for the two segments and whatever our growth rate is on top of that?

Yes. So as you know, we don't give more than a quarter up, because a special situation. I think for this year, you could have a similar model, but ongoing more than a couple of years, we will give more depth on the Analyst Day on the model. But we expect the transition on service to be there next few years. But how the curve plays out will give you more forecast for next few years on the Analyst Day on that portion.

And when is the Analyst Day going to be? Have you set a date for it?

Yes. We said that we will have it after close of the Fab 4 transaction. And the Fab 4 transaction, we said it's going to be September, October time frame.

And then you mentioned also, I am sorry, go ahead. Finish your thought.

And the other thing, important thing we gave you is that we will delever and strengthen the balance sheet. So by this time next year, we should be largely freed of approximately $21 million in interest expenses, which will improve net income by $21 million, excluding the impact from the non-cash foreign currency gains or losses. And as you know, this interest expense is on top of the operating income that we are going to generate.

Right. So when you are doing the operating income or you are projecting about, I guess, 10% over the next few years, ex the stock-based comp, is that essentially the transfer of the majority of the 1,500 employees to the special purpose company? Does it also include any additional savings that's factored into this kind of number?

This is after the transaction is completed and additional saving and improvement that we are going to execute in the next few years. So that's all baked in. Because as I said before, that even today, on an adjusted basis, apple-to-apple, we are about 5%. So there is going to be a lot of other improvement we are going to perform to maximize shareholder value.

[Operator Instructions]. I am showing no further questions at this time, sir. I would like to turn the conference back to the speaker.

Okay. So thank you, Crystal. This concludes our first quarter 2020 earnings conference call. Please look for details of future events on MagnaChip's Investor Relations website. Before we end, I would like to welcome Ms. So-Yeon Jeong, a 20-year IR veteran in Silicon Valley, who replaces me as Head of Investor Relations. She is an IR pro in Silicon Valley and she looks forward to meeting all of you. As for me, thanks to everyone for a great ride over the past five years. I have enjoyed my time, had the honor of working side-by-side with YJ, his team and the Board. I will be spending less time on airplanes and more time at home and cheering on MagnaChip from the sidelines. Thank you for joining us today. Operator, thank you.

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