Good day, and thank you for standing by. Welcome to the Q1 2022 MagnaChip Semiconductor Corporation's Earnings Conference Call. At this time, all participants are in a listen-only mode. As of the speakers' presentation, there will be a question-and-answer session. To ask a question one is being recorded. And if you require any assistance during the call, press. I would now like to hand the conference over to your speaker today, Ms. So-Yeon Jeong. Mr. Zhang, the floor is yours.

Thank you, everyone, for joining us to discuss MagnaChip's financial results for the first quarter ended March 31, 2022. The first quarter earnings release that was filed today after the stock market closed can be found on our 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 Sinon Park, our Chief Financial Officer. YJ will discuss the company's recent operating performance and business overview, and Xin Yang will review financial results for the quarter and provide guidance for the second quarter of 2022. There will be a Q&A session following the 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 statement 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 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 Investors section at www.magnachip.com. I now will turn the call over to YJ Kim. YJ?

Hello, everyone, and thank you for joining our call today. To begin, I'd like to quickly touch on our Q1 consolidated results and then give an update on some challenges we are seeing in the broader macro environment. After that, I will provide a detailed review of our business segments. In Q1, we reported revenue of $104.1 million in a severely supply constrained environment. This, along with strong gross profit margin generated a non-GAAP EPS of $0.28, which was an increase of 27% year-over-year. While it is good to see the healthy bottom line bolstered by improved gross margin, I am still disappointed with these results because it doesn't represent the full potential of this company. As we approach the end of Q1, we are optimistic that we would begin to see incremental improvements in business conditions for the rest of the year. However, the ongoing lockdowns in China have added new challenges to an already stressed supply chain to both of our businesses. We want to take a cautious stance for the near term despite recent positive momentum, which I will go over in detail. Moving on to a detailed review of our Q1 results by product segment, starting with OLED. Our OLED revenue in Q1 was $26.1 million, down 30.7% sequentially and down 53.1% year-over-year. As expected, severe shortages in 28-nanometer 12-inch wafer capacity, where we produce most of our new OLED products continue to significantly impact our results. However, we remain focused on supporting our existing customers, winning new business or additional capacity plans to set ourselves of a strong recovery. First, our dedicated customer support and engineering teams are working closely with the top-tier panel maker in Korea to initiate and support to OLED drive IC projects, which we expect to kick off this month. Second,…

Thank you, YJ, and welcome to everyone on the call. Let's start with key financial metrics for Q1. Total revenue in Q1 was $104.1 million, down 5.7% sequentially and down 15.4% year-over-year. Revenue from the Sundar Parks business was $94 million, down 5.5% from Q3 and down 16.7% from the same quarter a year ago. Once again, both the sequential and year-over-year decrease was due mainly to a significant decrease in revenue in our display and OLED business driven by the previously mentioned supply shortage. However, our power revenue in Q1 was very strong and achieved a record revenue of $64.8 million, which represented an increase of 11.4% sequentially and 20% year-over-year. The significant growth was due to strong demand across most product families, particularly our premium products. Gross profit margin in Q1 was 37.5%, up 250 basis points from Q4 and up over 960 basis points from Q1 a year ago. The year-over-year increase was primarily attributable to an improved product mix, combined with an increase in average selling price under a favorable pricing environment. Sequentially, Q1 benefited by approximately 200 basis points from a timing mismatch of lower-cost 12-inch wafers that was purchased in the prior period and sold in Q1. Turning now to operating expenses; Q1 SG&A was $14.2 million as compared to $13.3 million in Q4 2021 and $12.6 million in Q1 last year. Q1 R&D was $12 million as compared to $12.2 million in Q4 2021 and $13.4 million in Q1 last year. Stock compensation charges, including operating expenses were $1.6 million in Q1 and the same $1.6 million in Q4 and Q1 2021. In Q1, our operating income was $12.9 million compared to $63.9 million in Q4 last year and operating loss of $2.1 million in Q1 2021. As a reminder, our Q4 2021…

Thank you, YJ and Xenon. So operator, this concludes our prepared remarks, and we'll now open the call for questions.

Thank you. [Operator Instructions] Our first question comes from Suji Desilva of ROTH Capital.

So let me start off with some of the recent press about potential OLED driver industry consolidation. I just want to get a sense from your perspective, if you can update on Magnachip's strategic review process, where that might be post the Wise Road bid that was terminated?

Suji, nice talking to you. But unfortunately, we don't comment on rumor and the rumor deals and future deals. So let me put it that way.

Sure. I was thing to understand if you had a process in place that you already articulated and if there was, if that was -- how that was progressing.

I don't think we have made any other announcement after the wise road. So...

Yes. Okay, great. Switching over to the OLED business. I want to understand why [indiscernible].

Suji, but I can say that, look, we are focusing on the MX strategy as well as the Board management committee to protect and enhance our long-term shareholder value. So let me put it that way.

Okay. Appreciate that, Okay. So switching over to the OLED business, the obviously, understanding the supply constraint bar. Can we talk about the potential for the new non-Korean customers should we be conservative on that one? Or is that - can the wind base there potentially have that revenue run rate move toward a size similar to your existing customers? Any thoughts on how that could shape up free would be helpful intermediate term.

So first of all, let me say that the -- we are having a very key positive momentum. First, with our existing customer. And so we have a dedicated support team and engineering team. And as I mentioned today, with the top-tier Korean maker, we are studying 2 new projects. We will kick off this month. And additionally, on your question on the outside Korea customer, we actually successfully taped out the new product. And so we expect to go production towards the later part of the year. So we see a great feature with these 2 customers. So in addition to that, we are also producing OLED TV products for other the Korean makers. So we are diversifying customers and we are diversifying our product for so we expect to grow with that kind of momentum.

Okay, that's very helpful. And then on the gross margin side, the product gross margin, I believe, topped 40% for the first time. I know there was some onetime elements. But can you clarify what you meant when you said there was a favorable pricing environment this quarter?

I mean that this quarter, particularly see that 200 basis points represent a onetime timing benefit that we enjoyed this quarter at a lot because we lower cost 12-inch wafers that we purchased in the prior period, but we actually sold at a higher price in Q1 2022. So this is actually similar to what happened in Q3 of last year. So our, I guess, planning strategy is to pass this type of increased cost to our customers, but this may not happen all the time or the timing may not be aligned all the time. So that's onetime benefit that reaction had in this quarter.

I understand. So the pricing comment was related to the onetime comment. And then just to look ahead, I think even if I adjust for the 200 bps, the guidance is for a slight gross margin decline. Can you talk about the dynamics here, the gross margin quarter-to-quarter?

So the gross margin, I mean, can vary by quarter by quarter. And definitely, product mix has an impact on it. I mean, Q1 definitely has product mix. So Q2, looking into all those pricing and the product mix and some -- I mean the manufacturing cost variables and all that, we consider everything. And now based on the information we are having the Q2, that's the guidance that we are actually estimating the gross margin in Q2.

Okay. And then lastly, YJ, I know capacity is obviously one of the big factors here. Can you talk about the potential for these LTAs, long-term agreements and what supply agreements? And how much capacity - there’s the potential to secure. Obviously, everybody is fighting for the same capacity. So if you could walk us through some of the opportunity and strategy there, that would be helpful to understand as you’re approaching these discussions.

Sure. So we do have MOU with -- currently with multiple foundry makers that 12-inch and 28-nanometer. We are in the midst of transitioning into the actual LTA for the long term. And so we will update the market in the next few months, as I said today. And we also have the new 28-nanometer foundry coming from new foundry towards the later part of the year that will give additional 28-nanometer capacity. So we are pretty excited about the -- going into production when these new products for the Korean customer as well as outside Korean customer going to full production when the additional capacity comes online starting later part of the year.

Okay. That sounds a source of optimism. Thanks in -- thanks for the color.

Thank you.

Our next question comes from Raji Gill of Needham & Company.

So just , I think in the last quarter, remind me again, you had mentioned a pretty significant ramp in Q4 to hit some of your growth targets. I wonder if you could kind of update us there, if you still expect that to happen in Q1. So any update there in terms of anticipated ramp in Q4 as you get more capacity for 28-nanometer OLED?

Yes. So thank you for asking. So the things are changing rapidly, right, since the late March, you had the Shenzhen lockdown. Now you have a Shanghai lockdown that's about 5, 6 weeks and Ukranian work. So that is creating some uncertainties globally as well as some China market as well as especially affecting the supply chain. As you know, we have a back end for the power as well as potential in our in there. So that is creating some uncertainties as well as limiting our visibility. So it's creating very hard to pinpoint out how the rest will pan out. And so we are now back to guiding on care at a time. And once we get the better visibility, we will provide more color. But in Tom job talking more long term, despite these macro issues, on the OLED side, we are winning new customers and expanding into new applications. So we are very optimistic about the growth of the LED business. And once these new projects, whether it's Korea, new customer projects or the outside Korea, when we go production, we're going to ramp up with the new capacity that I just mentioned to Suji. And in terms of power, -- we have continued to execute our power plan through the Fab 3 productivity as well as our external foundry. And we are rolling out new generation products as we speak. And so we are very optimistic about the growth. So let me put it that way.

Got yes, I appreciate the a lot of volatility around the macro. But just any sense do you think you’ll still be able to grow this year overall revenue in light of these kind of macro concerns, but also on the flip side, the anticipated ramp with the new 28-nanometer capacity.

So as I said, it's very hard to pinpoint for the rest of the year, how it will pan out. But I can say that the -- once we have the new foundry capacity with new product goes into production, that's going to ramp. So once we have better visibility, we will guide you more and give better colors.

Got it. Okay. And then on the gross margin side, you mentioned that you’re kind of incurring some of the costs associated with the 28-nanometer and that the yields are suboptimal, but they’ll start to improve in 2023 as you get the volume. So should we be - how do we think about the margins kind of throughout the year - are we expecting that you’re going to be covering some of that fixed cost or still as you ramp between nanometer, the yields are low, that the margin should be kind of within this range? Or are there other drivers that can maybe bring it down?

Yes. So again, we are guiding one quarter at a time. But I think we already factored in the yield assumption curve. So I think it's I think conservatively is what you should look at initially, but we should be able to go up the yield curve, especially towards next year.

Yes.

Our next question comes from Martin Yang of Oppenheimer. Please unmute your line.

I was on mute. So my first question is about the display segment, trajectory, revenue trajectory in the second quarter. Can you maybe provide us with more details regarding either pricing or volume expectations for display?

Yes. So as you marked earlier today that the -- we expect the OLED to be flat to up this second quarter. Again, it's limited by the supply constraints. So that's what I can't comment.

Got it. My next question is about your potential opportunities for medium to large-size OLED display, particularly for IT and automotive applications. I think you highlighted although, but where are you positioned for potential adoption for notebooks monitors in the longer term?

So Martin, that's a very good question. So in the auto, we now have 3 design wins, and we said that the -- some of the product will go production starting the first half of '23 to the 3 end customer European automakers. On the IT side, we do see some trend going into the to the IT. There, we have opportunities, not only the Drive IC but also our PEMEX. So we are working on that. So once we have a production schedule that we can pinpoint then we will also share with you.

Got it. My final question is on your design with your non-Korean panel maker customers. Assuming everything goes to a satisfactory yield, will those products, let's say, shipping by the end of the year or early next year, will we have similar gross margins to pre-pandemic products? How does the gross margin profile compare for that customer versus other customers?

Yes. So we expect, based on the current forecast that we will go production by a later part of this year. Well the foundry will go through a yield learning curve on the 28-nanometer and OLED process. We've been a little cautious, but I think we will -- can update in the near future. So then we can give you more clear guidance on the margin. But I mean, we look favorably going into next year. But we will have more the pinpoint outlook in the near future.

And speakers, I see no further questions in the queue. I will turn it back over to you for closing remarks.

Thank you. This concludes our first quarter 2022 earnings conference call. Please look for details of our future events on MagnaChip's Investor Relations website. Before we end the call, I would like to officially announce that I will be transitioning out of my role as the Investor Relations adviser for MagnaChip. It's been an honor working with this great management team and representing such a wonderful company. Going forward, the Blueshirt Group will serve as MagnaChip's Investor Relations advisers, and you can find the primary IR lead Uzi and his contact information at the bottom of our earnings press release. Thank you, and take care.

This concludes today's conference call. Thank you all for participating. You may now disconnect, and have a pleasant day.