Thank you for standing by and welcome to the Magnachip Semiconductor Corporations Fourth Quarter 2023 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers’ presentation, there will be question-and-answer session. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Steven Pelayo, Managing Director of The Blueshirt Group. Please go ahead.

Thank you, Jonathan. Hello everyone. Thank you for joining us to discuss Magnachip's financial results for the fourth quarter and full year ended December 31, 2023. The fourth quarter earnings release that was issued today after the market closed can be found on the company's Investor Relations website. The webcast replay of today's call will be archived on our website shortly afterwards. Joining me today is YJ Kim, Magnachip’s Chief Executive Officer; Shinyoung Park, our Chief Financial Officer. YJ will discuss the company’s recent operating performance and business overview and directional guidance for 2024, and Shinyoung will review the financial results for the quarter and provide guidance for the first quarter and full year 2024. YJ will then briefly recap the company's business strategy. There will be a Q&A session following the prepared remarks. During the course of this earnings 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. Such statements are based upon information available to the company as of the date hereof, and are subject to change for future developments. Except as required by law, the company does not undertake any obligation to update these statements. 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 as supplemental measures of Magnachip’s operating performance that may be useful to investors. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measure can be found in our second quarter earnings release in the Investor Relations section of our website. With that, I'll now turn the call over to YJ Kim. YJ?

Hello everyone. Thank you for joining us today and welcome to Magnachip Q4 earnings call. First, I believe it's important for investors to understand how our financial results fit into the big picture as we undergo a substantial transformation in our business over the next couple of years. First, we are dramatically shifting priorities in our display business to be laser focused primarily on China. The strategy builds upon 20 years of OLED driver success primarily in Korea and follows the industry's dramatic shift to China production. Second, we will be working this year and next to fill ideal fab capacity in our Gumi Fab as we transition away from supplying non-core Transitional Foundry Services to higher margin power products. Third, starting early this year, we began operating on the new structure that streamlines our go to market strategy, strengthens the potential for increased shareholder value and also improve transparency for investors. Let me provide more detail on each of these transitions. The first major transition involved China, which is becoming the new centre of the OLED display universe. We are excluding on a strategy to penetrate this vibrant market with feature rich OLED standard products, and I'm pleased to say we've made tremendous progress so far. We've laid the groundwork for success by establishing a China dedicated entity and by building strong working relationship with Chinese panel makers and leading smartphone OEMs. Over the past few quarters, we've doubled our resources and staff in China -- a team of more than 20 professionals dedicated specifically to our OLED display business. In addition, we hired senior advisors from a top 5G semiconductor company, the financial services sector, and the China supply chain to help accelerate our progress and I now personally travel to China on nearly a weekly basis to…

Thank you, YJ, and welcome to everyone on the call. Let's start with key financial metrics for Q4. Total revenue in Q4 was $50.8 million, down 17% sequentially and down 16.7% year-over-year. Revenue from the standard product business was $41.2 million and revenue from Transitional Foundry Services was $9.6 million. Within standards products, Display business revenue was $5.2 million and Power business revenue was $36 million. Gross margin in Q4 was 22.7%, down from 23.6% in Q3, mainly driven by lower fab utilization. Compared to the same period last year, gross margin decreased 370 basis points from 26.4%, primarily as a result of unfavorable product mix, lower fab utilization and higher fab costs. Going forward, please keep in mind that there likely will be more volatility in our gross margin due to the relative sizes of the newly organized businesses on a standalone basis. In addition, among other things, product mix, fab utilization and input manufacturing costs will impact our quarterly gross margin by business. As a reminder, our Transitional Foundry Services contract with Key Foundry expired at the end of August, 2023, and we are planning to wind down these Foundry services starting in Q1 2024, and the revenue is expected to be approximately $2 to $3 million per quarter in the first half of 2024. Transitional Foundry Services accounts for approximately 30% of our Gumi capacity, when fully utilized with Foundry products. This anticipated decline is significantly impacting our factory utilization rating Gumi, which is negatively impacting our product gross margin for the Power business. Turning now to operating expenses. Q4 combined R&D and SG&A was $27.5 million, this compares to R&D and SG&A of $23.7 million in Q3 2023, and $26.2 million in Q4 last year. R&D in Q4 was $15.4 million as compared to $11.6 million…

I want to emphasize points I made earlier because they are important for investors to understand where we are and where we are headed. One, our Display business is building upon our past success in Korea to focus more squarely on China. As a sign of the importance of the China market, we have formed a dedicated China operating entity, enabling us to forge strategic partnerships with key players in the smartphone, TV, automotive and ecosystems. This move strengthens our market presence and fosters valuable relationships within the industry. As we benefit from these strategic initiatives in our China operations, we are optimistic about the trajectory ahead for our Display business. Two, we are dealing head-on with an expected drop in fab capacity in our Gumi fab as a result of the expected drop-off in Transitional Foundry Services, and will provide regular updates on our plans. Three, we've separated the structure of the company into two entities to increase shareholder value by maximizing the valuation of each segment, strengthening business performance management and enhancing flexibility to respond to changes in the business environment. The move also will dramatically increase our transparency to the investor community. Thank you to our shareholders for your patience. We appreciate your support as we work to achieve our goals. Now I will turn the call back to Steven. Steven?

Thank you. That concludes the prepared remarks section of our call today, operator or Jonathan would you now open up the call for questions.

Our first question comes from the line of Suji Desilva from ROTH Capital Markets.

YJ, in the display market in China, you say you have two smartphone OEM wins. Are those wins secured directly by you or by the display partner you have? Just trying to understand how those OEM wins are going to be secured going forward.

Yes, in China, we sell to the panel customer and the smartphone OEMs. They also dictate on the -- which DDIC they like to use as well. As I said, we doubled our resources in the last few quarters. We have more than 20 professionals, and I also we have added three more direct OEM sales to smartphone and to OEMs and I've also hired three advisors to help out from the top 5G semiconductor companies and supply chain, so forth. So, we are using both sell to the panel as well as the small OEMs, and that's how we going to accelerate and win more sockets.

Also in the display market, can you tell me how many products you have now targeting the China market in total? And what is the after service market? Is that a special market that needs special products?

So let me talk about the after service market. So after service market is like either refurbished phone or when your screen goes off, then you have to replace. According to market research that market now is anywhere between 10% to 20% of smartphone market. And as you saw there's an increase in used smartphone. So I think that's what we have seen and that's the first question answer. And then, the app -- what was the?

How many products do you have?

The number of products do you have?

The number of products we now have in China we have three and I said, we are going to have another chip coming out next quarter. And then we are working on the affordable and the mainstream product that'd be all out this year.

And then last question, as you convert the Foundry Services at Gumi to power, how should we size the revenue opportunity once that's fully converted incrementally for your Power business? The opportunity at least capacity wise.

I think there are two vectors there. One is, how are we going to fill the fab? The how are we going to fill the fab is during the transition first of all are going to have a bunch of new products. As I said today, we have a slew of new generation coming out all this year. So we have a 650 volt IGBT in first half, followed by 6th generation super junction and IGBT in Q3 and 8th generation in the -- and low voltage in fourth quarter. And then another commodity product line to fill the factory in fourth quarter. So that is a product strategy to fill. And then in the second half, we will be converting the fab to power products and fill it up. So, the once all that is achieved, we expect to revenue to go beyond what we did in the past, but it will take a little time.

Maybe one last question for Shinyoung, and I'll come back in the queue. Shinyoung for the NRE -- for the gross margin for MSS, how much of that was NRE benefit? If you could roughly size that that would be helpful.

It's probably the normalized basis. It's probably 30% plus .

30% of the margin?

No. So 41% is just because of that the one-time thing. So without that NRE kind of normalized display at this stage is 30 plus to 30%. Couple percentage more than that.

Our next question comes from the line of Quinn Bolton from Needham.

Nick on for Quinn. Just a quick one, will you provide a historical breakout of MSS and PAS?

We will, yes. Technically like when you report the Q1 quarterly, you're going to see the competitive -- the historical period recall on the same basis.

We would at least see the first quarter, but hopefully we could get some second and third quarter numbers. So for gross margins, you mentioned, we should expect volatility. You're winding down the Transitional Foundry Services, I think by the end of the second quarter. So how long will that fab be at least 30% underutilized. I guess I'd expect margins to maybe bottom in 2Q and remain low, maybe flat 3Q into 4Q perhaps, I mean, after last quarter, I think we are expecting margins to bottom in the 3Q, 4Q timeframe. So are you kind of pulling that in with maybe an accelerated foundry wind down? I guess what's the best way to think about the margin path?

I mean, we are going to still have some Foundry Services revenue, like $2 million to $3 million per quarter in Q1 and Q2. So technically we can't really do anything about the 30% capacity in our Gumi fab, and we are going to wind down after the Q2. So I mean we are going to see some the idle capacity in the second half as well until we fully convert that capacity to power the PAS the product. So you're going to see that the margin kind of depression throughout the year.

I think the second half the difference is that we are rolling out by the time, all the new generation, which is higher margin and lower cost. That will be the lever that will try to maximize the margins.

When you kind of finish the idling process, maybe margins bottom in the third quarter and then stay flat until fill up the fab. That's what it sounds like. In the Power business, you talked about an auto win that will contribute in 2024. So a couple questions there. Just how do we think about sizing that win? Maybe when will it begin to ramp? What was the main technical driver of that design win? And then how does that ramp play out with your Gumi fab utilization? Sounds like that would kind of help in the 3Q, 4Q timeframe.

So the automotive, as you know we did not have any automotive business about two calendar years ago. And the '22 was first year, maybe it was 1% or less than 1% revenue. Last year, we had about 5% of revenue. And then this year we'll still grow high double-digits. So that's about size of the automotive business. So we now have more than two dozen of design aims and wins and automotive and we are still having the momentum.

Our next question comes from the line of Martin Yang from Oppenheimer.

My first question is about your customer engagement activities in China. Can you talk about how many customers are you actively engaged with and are the new wearables and aftermarket wins with the same customer?

We are discussing with direct panel customer, like the panel guys. So we have a two panel guys. We are doing business now and we are actively engaged with top five out of six smartphone OEM directly. And that's what we are doing.

A question on the margins for power discrete products and how does the current margin compares to historical levels, especially historical peaks and what needs to happen before we see that discrete product -- power product margin recover back to where it was?

As YJ mentioned, that like once we convert the 30% of either capacity for the power discrete, but we are going to rolling out with the new generation power product series of them, which we're going to have a higher margin. So once we kind of replace the foundry product, you've seen the negative margin. The thing is ASP was fixed for those products but the cost was high. So the power now have to absorb those fixed costs from those foundry. But if we feel that capacity with a higher margin product based on the new generation product series, and we have a potential to go back to our historical kind of higher level.

So what else needs to happen fundamentally for you to fully fill that capacity?

I think, that's a very -- we've been saying that today that is our top priority and it's about having the right product portfolio. And so we already had 650 volt super junction in the October release. That's like 60% better than before. We are introducing the new 650 volt IGBT in first half followed by 6th generation super junction and 6th generation IGBT in the third quarter and 8th generation medium volt and low voltage mass for the fourth quarter. And additionally, we'll have a new line of commodity product on the fourth quarter. So those will drive to fill the fab with a better margin and better performance.

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Steven Pelayo for any further remarks.

Thank you. This concludes our Q4 earnings conference call. Please look for details of our future events on Magnachip's Investor Relations website. Thank you and take care.

Thank you ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.