Ladies and gentlemen thank you for standing by. And welcome to the Fourth Quarter 2020 MagnaChip Semiconductor Earnings Conference Call. At this time all participants' lines are on a listen-only mode. After the speaker presentation, there will be a question-and-and answer session. [Operator Instructions] I want to like to hand the conference to your speaker today, So-Yeon Jeong. Please go ahead, Ma'am.

Thank you. Hello everyone, thank you for joining us to discuss MagnaChip's financial results for the fourth quarter ended December 32, 2020. The fourth 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 one 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 and annual operating performance and business overview and Young will review financial results for the quarter and the year and provide guidance for the first quarter of 2021. 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 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 at www.magnachip.com. I now will turn the call over to YJ Kim. YJ?

Hello, everyone. Thank you for joining our call today. MagnaChip's Q4 results exceeded our expectations, capping off one of the most challenging years for any of us. During Q4 demand for MagnaChip's product remained robust, driven by a strong ramp in 5G. More importantly, we were able to secure more supplies from foundry partners for LED products as well as from our internal Fab 3 for the power products. We achieved $142.9 million in revenue and $0.40 in non GAAP EPS. The revenue increased 14.5% sequentially and 15.9% year over year, and it surpassed the midpoint of our Q4 2020 guidance by approximately $11 million. There is no doubt that 2020 has presented its share of unique challenges such as the COVID-19 pandemic, unstable global economy and geopolitical uncertainties. Nevertheless, for MagnaChip's 2020 was a remarkable year of structural transformation. Among the highlights are, one, our adjusted operating income and adjusted EBITDA increased 36.7% and 29.3% from 2019 respectively. The revenue decreased 2.6% year over year, due mainly to our exit from the non-auto LCD business. If we compare apples to apples, our 2020 revenue grew 2.7%. GAAP gross profit margin of 25.3% represented a 290 basis point increase from 2019 as we improve the product mix. We successfully close the sale of our foundry business and Fab 4 for the total cash proceeds of $350.6 million, and we use $227.4 million to fully redeem the 6.625% Senior Notes due 2021. This action significantly strengthens our balance sheet, our stockholders equity turned positive to reach $345.6 million at the end of 2020, versus a negative $15 million in 2019. We laid out 2020 through 2023, strategic initiatives and key metrics on the MX 3.0 and launched a new brand identity underscoring our fresh start as a pure play standard products…

Thank you, YJ and warm welcome to everyone on the call. Let's start with key financial metrics for the fiscal 2020 and the Q4. The revenue in 2020 was $507.1 million down 2.6% from 2019. The slight decrease was due primarily to the exit of non-auto LCD business despite the recovery from the COVID-19 and 5G smart phone growth in the later part of 2020. Display business was $299.1 million down 3.1% from 2019. As a reference point, the normal LCD revenue accounted for approximately $34.5 million in 2019 and $7.9 million in 2020. Our 2020 OLED revenue set another all-time record in terms of annual revenue representing outstanding growth three years in a row. Turning now to Power business, revenue of $166.5 million was down 5.6% from 2019 due primarily to the impact from COVID-19 in the first half of 2020 and factory power outages in Q3. For the year we made great improvement in profitability in 2020. The gross profit margin improved 290 basis point year-over-year and adjusted operating income margin increased to 8.2% from 5.8% in 2019. Adjusted EBITDA represents the 10.4% of the total revenue in 2020 compared to 7.9% in 2019. Our non-GAAP diluted earnings per share from continued operations was $0.73 in 2020, up from $0.25 in 2019. Now turning to Q4 results, total revenue in Q4 was $142.9 million up 14.5% from Q3 and up 15.9% from Q4 a year ago. Revenue from the standard product business was $129.6 million up 11.4% from Q3 and up 14.4% from the same quarter a year ago. Both sequential and year-over-year increase was driven mainly by strong demand in our OLED product, especially for 5G and HFR OLED DDIC. Display revenue in Q4 was $82.7 million up 18.9% from Q3 and up 9.6% year-over-year. Adjusting for…

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

[Operator Instructions] Our first question comes from the line of Suji Desilva from ROTH Capital. You may begin.

Hello YJ, hello Young. Congratulations on a very strong 2020 and all the progress here. So I'm trying to understand your guidance, the impact of the visibility, obviously and uncertainty versus the manufacturing constraints. Can you give a sense of which segments are perhaps being impacted more by the manufacturing constraints as OLED or Power? And perhaps some of the steps you're taking YJ, specifically to address these would be helpful. Could you sound more optimistic about how soon it ends versus others in terms of the constraints?

Yes, so a very good question. So as you're aware, there's a global foundry supply constraints for all know that started in second half last year. The severe supply situation is continuing to Q1 as you know, and we manufacture all the OLED using external 12 inch Fab and we on the 28 nanometer node where we are leader in the market, there is a more pent-up demand on the OLED, as well as [indiscernible] sensor, 5G RFIC and IoT. And one of the IDM also tapped into foundry capacity given the supply constraints, even in the in house manufacturing. So there is some constraints on the 28 nanometer node along with every other note you see. Some of the demand and we see more demand than what we can supply in the Q1 as we said. So, some of this demand can be carried over where some of them also disappear. Some of the smart phone has a short term cycle, in terms of particularly to your question, we do see more shoulders in the OLED and we do see about 10 million more of demand than what we can ship at the moment. So, but we do see that the supply situation for this quarter to get better towards the end of the quarter. But again, we only guide one quarter at a time. And that is the best picture we can show you. And the other thing is that unlike the LCD product, where we have a generic device selling multiple panel customers, our devices are custom-made sic [ph] or OLED. So that means we actually have a real demand, we're trying to sell the same chip to multiple panel customers. Therefore, we are really working closely with our strategic customer and our foundry partners to address the supply constraints and we expect the supply situation to improve later in the quarter.

Okay, now it's very helpful color. YJ, thank you. And then my follow up question is about the gross margin. If I adjust for the factory service arrangement, it seems like you're approaching 30%, if I did my math correct, can you talk about the drivers of further expansion and gross margin, just to understand and level set the expectation we can have here?

Suji this is Shinyoung, the Chief Accounting Officer of MagnaChip. I mean, the gross margin can vary by quarter by quarter. So this particular quarter may look like we've achieved our longer term target already. But I mean, it can vary depending on the product mix and etcetera. So we will continue to achieve the longer term target up to 30% by 2023, as YJ mentioned before,

Yes, and it's also product mix, and you see a good product like Power IC and that's coming in, which is a high gross margin. So we're continuing executing and we're also putting additional capacity gradually. So, all these and we're going to have a new generation of the older products by 2022 as we explained, so all that should help towards the gross margin.

Okay, great. Thanks. Thanks again.

And our next question comes from Raji Gill from Needham. You may begin.

Yes, thanks for taking my questions and congrats as well. YJ, the OLED revenue was really great in Q4, terms of sequential growth as well as kind of the year over year growth. You know, you talked about that 5G represents about 70% of the overall revenue in Q4. And now it's going to be about 40% for all of 2020. I'm wondering how you're thinking about, the ramp as we go throughout the year, a lot of the folks in the supply chain the 5G smart phone supply chain pretty much have all said that there's going to be, the market is going to double for 5G smart phones from 2020 going up to about 500 million smart phones. And then there's a recent report that it's actually increasing to 550 million phones. So I'm wondering you know, given the fact that your OLED DDIC are so tied to new 5G phones. You know, how are you guys thinking about that business this year? And then I'll have a follow up.

Raji, thank you very good question, valid question. But as you know, we only come our results one quarter at a time. But you're correct; we see the 5G smart phone, more than doubling. And if you look at even the fourth quarter results, about 70% of revenue were from 5G was AH foul [ph] feature. So, you know, I can confirm that the demand is very strong. And as I said before, our product is a custom-made sic [ph]; I mean, each product is targeted for each panel customer. So it's not like something like you can ship to multiple people, and there's no double booking so forth. So I can tell you, yes, demand is very strong. And therefore, we are working very closely with our key customer and the partner, the foundry partners to address the demand and unfortunately, their supply constraints. And as we said that we expect the supply chain to get better towards the end of the quarter.

And on the power side, you know a reversal in terms of year-over-year growth. You know, post Q1 of last year, it was up about 24%, year-over-year in Q4, and so as we go into 2021. You know, what, are they kind of the key drivers for that business, specifically in 2021? And those drivers going to be different say from 2020? Or are they just kind of a continuation of what you're seeing in the power premium IC market?

Sure. So if you look at my remark, in second half of last year, we started to see tremendous pickup, as well as execution and we actually seeing in every of our product, whether it's the MOSFET to Power IC to Super junction and IGBT. And Power IC particular had a really strong, gross, starting second half as we penetrate new computing applications as solid state drive. And now we added to the computing segment and additional into the other IT and as you know, the IT is hot these days. So we are confidently expected to grow more than 35% on the Power IC this year. But we also see all strong cylinders in all our product line. And that's why we are gradually putting increasing the capacity now for Fab 3 and the capacity expansion will continue and we'll add about 40% on power capacity by end of 2022. So to meet up the market demand, that's what we are doing. And by 2022, we will have a complete new refresh cycle of a super junction, very fat [ph] and the IGBT; so we look forward to having much robust and competitive product in the power line to grow the market, as well as keep up demand with our customers.

Just one last housekeeping question. The foundry say the transitional services revenue can jump from $8.5 million to $13 million in Q4, talking about $10 million in Q1. Is it volatile like that or is it going to be in this kind of $9 million to $10 million range for modeling purposes?

So that's a very good question. So if you recall, we had a power outage in end of July towards. And it wasn't completely healed until the early part of October. So what happened during that time was that the some of the back end that did not go out in Q3, studies grew out Q4; so we actually study a lot of you know, wafer starts. About 80% was there but you know some of the bad back end was not able to ship due to power outage And so that will release and that's why you see a quite a jump from about $9 million to $13 million in the fourth quarter, but we expect the foundry transitional service to be around $10 million a quarter.

Thank you.

The next question will come from line of Martin Yang from Oppenheimer. You may begin.

Hi, YJ. Hi, Young. Thanks for taking my question. My first is on your emerging products, like OLED TVs, micro LED TVs and Power IC. Can you maybe talk about the potential different customer relationships you will be addressed with the new products? And is there any margin benefit from those emerging products?

A very good question, Mike. So all those three products you mentioned have higher than corporate gross margin. So I'm very excited about the work we are doing there. Obviously, Power IC, we are getting into new application and adjacent application. So we are getting a lot of momentum in IT, whereas solid state to the laptops to other IT and also continue expanding the TV power IC market. So that's why you're going to see huge growth this year on the power IC, even though you know, it's a small revenue, but we just crossed the $10 million revenue threshold in last year. In terms of the OLED TV and micro LED TV, again the microwave LED TV it's a very complicated and very putting the latest greatest OLED technology as well as Power IC technology in one chip. So you know that we can't talk too much specific about the timing, because it's really tied to some of our key customers. But we are seeing a progress there. But again, those are more niche products really targeted for high end, but it's very nice margin. And if money is no object, you should buy the micro LED TV in the high end. And then OLED TV, yes we expect it to start the production in second half. And we think that by end of the year, we'll generate some meaningful revenue. So we are all excited about all these progress we make in other emerging applications.

And that's great, a follow up question on Power IC. So can you maybe help us understand? So within the power solutions, how will a for instance of 10% gain on Power IC as a total power solutions help grow the margins for the power solutions segment? Any comments you can help us to understand or you know the margin benefits for Power IC for power solutions group will be helpful? Thank you.

Yes, thanks for asking. But you know, if you look at any fabulous Power IC maker, in fact, the Power IC is a fabulous model for us. Now, we make that in the Fab 4 for that result. But you know, any Power IC market, you should be looking at over 40% margins, what the any fabulous model for Power IC should be. So that's the hint I can give you. And so obviously, we'll try to do better but that's what it is.

Great, thanks.

Our next question will come through line of [indiscernible]. You may begin.

Hi, thank you for taking my questions and good job in the results. YJ, a quick clarification on the earlier responses on the supply constraints, the $10 million I assume that the unit number, the unmet demand in Q1 $10 million? Do you do you expect an impact in second quarter if supplies is going to be resolved by the end of this quarter?

So very good question. So it's a $10 million net unit. So what we say in Q1, we have access $10 million worth of the demand on OLED and your second question is how that usually happen is that, well usually what happens is that the even last Q4, we had more demand than supply. So some of them carried over to Q1, but some of actually more than half actually disappears. Because the smart phone demand is what you call its cycle is what six to nine months cycles. So you have to try to address that, unfortunately. But I think the point is that our chip is a custom matrix. So it's not like you're going to be replaced by someone else. So we don't see any double booking like other places out there. So it's showing very healthy demand in the end customer market.

Great. And just going back to Raji's question about the display outlook for the full year, if 5G units are supposed to go from 250 last year to 500 and the OLED adoption continues to grow. And then handsets grow in unit. And do we get back on that OLED growth trajectory that we were in prior to COVID?

So again, I think if you look at the market perspective, you're correct. The 5G transition is happening. Already in Q4, last year, 70% of OLED revenue was 5G, and HFR. So we see continued strong demand. And so again, we are working very closely with my customer, very key customer, and the foundry partners to work on the supply constraints. And we expect to make progress starting later in the quarter.

Great, thank you.

Thank you. And our next question comes from Jon Lopez from Vertical Group. You may begin.

Thanks very much guys, you hear me okay?

Yes.

Oh, fantastic. I have three questions. I'm hoping I could just do them one at a time. The first one is coming back to the OLED side. I'm wondering, I guess my question is has the capacity situation in calendar Q1, excuse me, has that affected your design engagements at all? In other words, our customers perhaps more reticent to design your parts higher end parts, given the perhaps the inability to get access to them? Or is that unchanged, akin to what it was in 2020?

Well, if you look at the trend you saw in 2020, our design win pipeline is stronger than ever, we had a 38 design win with accumulate 44 that number increased drastically from 2019. So and we are seeing new product taped out every month, or quarter. So the design momentum continues. And each OLED product address is anywhere between four to six different variants of the panel. So we continue to see that demand as well as the needs, it just the unfortunately we cannot meet the demand due to supply constraints. But the product that we are doing is showing very good demand and healthy situation from the OLED end markets.

That's great. Very helpful. My second one on the power business, if I remember correctly, you guys had gotten channel inventories, perhaps a bit below where you wanted them in late 2020. Can you update us on that? Have you made any progress on that front? Just state of affairs on the power channel inventory would be great.

Yes, very good question. So in Q3, we said that our inventory level in channel was less than months. That's very, very low, by the way. So normally we like to see about two months and so we are still working towards that. If you look at our peers in power, their channel inventories is up to six months, but we tried to make about two months normal inventory but we're not quite there yet. So we've continued to work on that and we are continue cranking out our Fab 3 As well as the Fab 4, we still manufacturer some other power products. So that is our current situation.

Okay, great. My third one on the power side, you had made some comments in the prepared remarks about Power IC. And I didn't quite catch them. I think you mentioned that it cost $10 million in quarterly contribution. And the expectation was that portion would grow. I think you said 30% to 35%, perhaps in 2021? Would you mind just spending a second and correcting wherever I'm wrong in that recollection?

Sure. So to correctly phrase it, so it's actually we crossed the $10 million annual revenue threshold in 2020. And we expect to grow bigger than 35% this year. So you're going to see a huge high double digit growth on Power IC this year? And the point is that Power IC was relatively small, but we now first crossed the $10 million annual revenue last year.

Got you. Okay, I'm sorry, I have one last one. I apologize. I'm going to speak an extra line in to make it for. Can you speak for a second on the automotive engagement? I know you guys have been progressing there for several months now. I guess my question is, given the state of affairs in automotive, semiconductor supply demand now, is that affecting your engagement, either positively or negatively, i.e. is that causing that customer to rethink supply chain decisions? Or is it bringing more customers to engage with you. Just any thoughts you have around those dynamics, please?

Yes, it's very good question. So I think the current situation, as you know, doesn't hurt. I mean, the automotive and also especially, electric vehicle is going to continue to grow. So I think that they win a good place; so we [indiscernible] call, we expect to start pre-production second half. And I think we'll start to revenue in automotive, for that power discrete device for the electric vehicle usage. So given the supply constraints, there'll be, hopefully and should be more demand for new partners and that kind of devices. So we are fortunate to have our own factory that can service the automotive makers. So we are excited about the future in the midterm and long term.

Very good. Thank you very much for all the help.

Thank you. And I'm not showing any further questions at this time. I'd like to turn the call back over to So-Yeon Jeong for any closing remarks.

Thank you. This concludes our fourth 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. Good-bye.

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