Good day, ladies and gentlemen, and thank you for standing by. At this time, I would like to welcome everyone to the Quarter 3 2020 MagnaChip Semiconductor Corporation Earnings Conference Call. [Operator Instructions] It is now my pleasure to turn the conference over to Ms. So-Yeon Jeong. Ma'am, please go ahead.

Thank you. And thank you, everyone, for joining us to discuss Magnachip's financial results for the third quarter ended September 30, 2020. The third quarter earnings release that was filed today after the stock market closed 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 Young Woo, our Chief Financial Officer. YJ will discuss the company's recent operating performance and business overview, and Young will review financial results for the quarter and provide guidance for the fourth quarter. 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 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 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 at www.magnachip.com. I now will turn the call over to YJ Kim. YJ?

Hello, everyone. Thank you for joining our call today. COVID-19 indeed change the way we live, work and think. And our team members at MagnaChip have been actively adapting to the new normal by adhering to our multiple safety protocols and business continuity plan. We hope that you and your family are all healthy and well. We successfully completed the sale of the foundry business and Fab 4, slightly ahead of our internal schedule for a purchase price of about $350.6 million. We used $227.4 million of the proceeds to fully redeem all of the 6.625% senior notes due 2021 on October 2, 2020, lowering the future interest expense by approximately $16 million annually. This sets our new chapter as a fab-lite, pure-play standard product company, generating substantial and sustainable cash flow. In Q3, we achieved solid quarterly results with a 5% sequential revenue growth, which came in above the high end of the guidance range as well as a healthy bottom line. This was achieved despite the backdrop of market disruptions caused by the global pandemic, the escalated U.S.-China trade tension and supply-constrained environment. Gross profit margin was largely impacted by 2 onetime items, including the delayed recovery from the power outage of Fab 3 and the display's excess inventory charge related to the U.S. government's export restrictions to Huawei. These 2 onetime items together negatively impacted our gross profit margin by 3 percentage points. Adjusted for the impact of these onetime factors, we delivered non-GAAP diluted earnings per share of $0.14. Now let's take a look -- closer look at our product business, starting with the display business. I remind you that we have completely exited the non-auto LCD business in Q2 2020. As a reference point, our display revenue in Q3 of 2019 was $90.6 million, which…

Thank you, YJ, and welcome to everyone on the call. Let's start with the key financial metrics for Q3. Total revenue in Q3 was $124.8 million, up 5% from Q2 and down 16.3% from Q2 (sic) [ Q3 ] a year ago. The revenue from the standard product business was $116.3 million, up 6.7% from Q2 and down 16.5% from the same quarter a year ago. The sequential increase was driven mainly by strong demand in our power product for personal transportation and TV applications. The year-over-year decline was primarily due to the U.S. government export restrictions on Huawei that impacted the shipment of certain OLED display driver ICs to our customers. The year-over-year decline was also attributable to the strategic exit of non-LCD business, which amounted for $10.4 million in Q3 2019 and nil in Q3 2020. Display revenue in Q3 was $69.6 million, up 0.6% quarter-over-quarter and down 23.2% year-over-year. Adjusting using the non-auto LCD business, it was down about 13% year-over-year. Power revenue in Q3 was $46.7 million, up 17.3% quarter-over-quarter and down 4.2% year-over-year. The sequential improvement in the Power business was due to a solid rebound in the China market. Gross profit margin in Q3 was 22.9%, down 4.1 percentage points from Q2 and down 1.7 percentage points or 70 basis points from Q3 a year ago. There are 2 unusual items, as mentioned by YJ earlier that collectively translated into a negative 3% gross profit margin hit in the third quarter. Turning now to operating expenses in Q3. Operating expenses were $25.4 million or 20.3% of total revenue as compared to $23.5 million or 19.8% in Q2 and $20.9 million or 14% for the same quarter a year ago. SG&A in Q3 was $12.9 million as compared to the $12.4 million in Q2 and…

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

[Operator Instructions] And your first question comes from the line of Raji Gill from Needham.

Yes. Thank you, and congratulations everyone on really good results despite the uncertain environment. So 2 questions, one short term and one long term. On the short term, the gross margin guidance is showing a bit of an uptick after the issue that you faced in Q3 related to the power outage. I wanted to get your thoughts in terms of how we should be thinking about the gross margins in Q4, but also going into 2021. I know you talked about kind of a 30% gross margin target, but are the power outages kind of complete? And going forward, the gross margin improvement over the next several quarters should be driven by mix or improvement on price. Just wondering what are the thoughts on the gross margin, the puts and takes for the near term.

Sure, Raj. Thank you. So yes, the power outage is now under control. It was -- we got control in early October. And in terms of the guidance we provided in fourth quarter, $25 to $27 million, that includes all the foundry -- Fab 3 transitional service for FSG, which, as you know, has a little low or no margin. So the product business unit margin, obviously, is a couple of points higher, and we will be sharing more of near-term margin forecast at the Analyst Day, which now has been rescheduled. But the -- but what we provided is by 2023, where we see that the company will be fully product streamlined company, so we are providing clear guideline. And until then, we still -- we'll have some of the transitional of service, Fab 3. So we'll give more detailed breakout during the Analyst Day.

And in terms of the growth in power, so there was a rebound in China, as you said, in Korea, driven by personal transportation and TV. And that was a nice reversal. How do we think about Power in 2021? What are the major growth drivers in Power? Are you seeing adoption of electric vehicles accelerating in China and Korea that's fueling a lot of the growth in 2021? And what are the other markets in power that are -- that you're excited about?

Yes. So today, we serve the 4 segments well. That's communication, consumers, computing and industrial. I can say that industrial and the consumer is the biggest -- more bigger segment for us. We are also excited about some of the SSD penetration. That's in the computing space. And as you know, we are also working on 10,000-hour quality in automotive, and we have alluded before that should come in the second half next year, but it won't be a meaningful revenue. So -- but we expect the automotive to be 5% to 10% in few years out. So we're excited about that. And as I said before today, that by 2022, we will have a complete new set of the discrete power portfolio from Super Junction to IGBT to medium voltage to power battery Fab that will have much higher performance as well as much improved costs. So we are very excited about that in the near-term as well as the mid-term.

And on the OLED side, you mentioned that you're benefiting from the 5G momentum. And so just curious, in terms of the adoption of OLED, would you say that goes hand-in-hand with the 5G momentum going into next year? So 5G phones are going to double, more than double that we should expect -- I wouldn't say the attach rate doubling, but we should expect that OLED adoption will continue to kind of accelerate in 2021 to support these 5G phones. Do they kind of go hand-in-hand when these OEMs launch 5G phones with high frame rates?

Yes. So I think there are 2 things. First, the industry transition from LCD to OLED. And as you know, even for next year, that may be 40% or closing to 50%. But as time goes by, that's going to accelerate more to OLED. So that's in our favor. Second, in terms of 5G, yes, there's a great momentum. The first half this year, we had about 20%. On the third quarter, about 40%. In fact, the industry was slightly less than what our numbers by a couple of percentage points, but it's the right direction we're seeing. And then according to market research, they see the 5G phone to grow at least -- about 2.5x of this year. So we are very encouraged by all the signs, both on the 5G adoption as well as the industry moving from LCD to OLED. So that should all help out.

Your next question comes from the line of Suji Desilva from ROTH Capital.

Congratulations on the progress here. So on the smartphone market, YJ, the OLED demand, can you talk about how the China market demand is shaping up 4Q? It seems like the backlog is good and then early calendar year '20. Are you seeing evidence of a multi-quarter recovery here? Or is the visibility still challenging?

Well, so first of all, we -- as you know, we only guide one quarter at a time, but what I can say is that the industry is seeing a more demand than -- so the supply is very tight. So I think it's a reflection of the market being strong. Now in terms of how the market players are happening, it seems like there is a lot of competition. We're trying to win the Huawei socket. So there is improved business among the non-Huawei. For us, we have about dozen end customers, but we don't -- they're not our direct customers. So we don't name them. But -- so I think the market is trying to have the new dynamics as well as the industry also having a good silicon demand. So for -- that's what we see in the near future.

Okay. Great. And then perhaps you could talk about the trend in foldable smartphones and how that's impacting your mix in products in OLED. Is it still early? Or is that an opportunity to calendar '21 for you?

Yes. We're excited about the new application, the OLED is bringing to. I think the foldable is one of them, the automotive is second and then the TV. I think the -- next year, that there will be more OLED TV from multiple vendors. So I'm very excited about the new application developing in the U.S., particularly about foldable. And foldable will be more mainstream if there will be vendors who can produce in high volume. But absolutely, for the mid-term and long term, that foldable is the new form factor for the phone and perhaps for some of the portable applications.

Your next question comes from the line of [ John Lopez ] from [ Vertical Group ].

Can you hear me okay?

Yes.

Terrific. I have a couple. The first one is, just on a clarification for the Q4 guidance. Is there any latent impact from the outage going from Q3 to Q4? In other words, are you selling out product in Q4 that has higher production costs that theoretically goes away in 2021??

So that's a very good question. So some of the Power products that had the power outage in Q3 that was in the WIP will have that higher cost due to the higher utilization that will ship in the fourth quarter, but the fourth quarter will have a very high utilization as the fab will be full. So to answer your question, there will be some of that in the fourth quarter on the Power devices.

Got you. Okay, helpful. But in theory, that should probably start to work itself out as we go into early next year? Sorry, is that right, that should largely resolve itself into early 2021?

Yes. By the Q1 treatment, you should have -- if the parts are made in the mid-October and later, that should be the, what we call, ideal conceptual thing.

Perfect. Okay, perfect. My second question, I'm wondering, just -- would you mind quantifying your exposure to Huawei in calendar Q3 or even perhaps year-to-date?

Sorry, as I said before, we don't break down the customer by end customer because we don't actually sell to them. We only sell to the panel, but we did say that the onetime exposure on the write-off of those inventory was $2.3 million.

Okay. Got you. I have a few other quick ones. The first one, if I look at the display guidance for the calendar fourth quarter, I know you're not guiding specifically, but if we kind of [Audio Gap] very strong, much stronger than it usually would be seasonally. This is obviously an unusual year, a whole bunch of different ways. But I suppose my question is, assuming that's correct, would you have us think any differently about how seasonality might play in 2021, just given what seems like kind of a stronger end to this year?

So I think you're correct about seasonality. Seasonality for us typically has been the Q3s are high, and Q4, we go down slightly low. So this is unusual pattern. So '21, we'll see what happens then. But you're correct that we are doing much better than the normal seasonality for the company.

Okay. Got you. My very last one. I'm wondering if you could talk just a minute about the dynamics in the Power market. And one thing in particular, we're picking up is a pretty reasonable amount of concern about the potential for sanctions on SMIC. Well, obviously, a pretty sizable 8-inch footprint. So I guess I'm wondering, are you seeing that development specifically driving opportunities for you, either to expand with existing customers or perhaps pick up new customers. Could you just talk for a minute about the market? And what kind of the opportunity set for you might look like to the extent that those developments continue?

Well, so I think there are 2 separate things in there. First of all, the discrete devices, we may factor most of that in our Fab 3. There are some stuff still made in the Fab 4. But in terms of the SMIC, I don't think they -- if you were to have SMIC make it, I assume they'll be more PMIC. So -- but in any rate there, I think the -- that would tend to have a better business thing, but we count on our product portfolio on our discrete devices that we have IEP and we make internally as well as the Power IC. So we're going to grow based on that and our competitiveness, and I feel really good about our next-generation products. So that's how we're going to win the business. So -- but the SMIC thing mentioned, that shouldn't hurt us, in fact, or help us. Got you.

[Operator Instructions] And there are no further questions at this time. I would now like to turn back the call over to Ms. So-Yeon Jeong for some closing remarks.

Thank you. This concludes our third quarter 2020 earnings conference call. Please look for details of our future events on MagnaChip's Investor Relations website. Thank you for joining us today. Goodbye.