Thank you for standing by, and welcome to the Q4 2021 Magnachip Semiconductor Corporation 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] As a reminder, today's conference call is being recorded. I would now like to turn the conference over to your host, Ms. So-Yeon Jeong. Ma'am, you may begin.

Thank you. Hello, everyone. Thank you for joining us to discuss Magnachip financial results for the fourth quarter ended December 31, 2021. 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 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 Chief Executive Officer; and Shinyoung Park, our Chief Financial Officer. YJ will discuss the Company's recent and annual operating performance and business overview, and Shinyoung will review financial results for the quarter and the year and provide guidance for the first 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 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 Investors section at www.magnachip.com. I now will turn the call over to YJ Kim. YJ?

Hello, everyone. Thank you for joining our call today. For the first quarter, the demand and signals from our customers remain strong across the board. However, severe supply constraints continue to significantly limit our OLED revenue potential which was partially offset by our stronger Power business. We reported $110.3 million in revenue and $0.31 in non-GAAP diluted EPS. Our revenue decreased 13.1% sequentially and 22.8% year-over-year as a result of the supply constraints. The shortage was felt more severely for 28-nanometer, 12-inch wafers, where we have been producing most of our new OLED products, winning numerous designs and rapidly expanding market share in the past few years. Case in point, the revenue from 28-nanometer products grew 80% to $174 million in 2021 from $97 million in 2020, representing 90% of the total OLED revenue in 2021 as compared to only 34% in 2020. The success of our 28-nanometer product line has been and we expect will continue to be one of the critical growth enablers for us. Unfortunately, a severe shortage of 28-nanometer OLED wafers adversely affected our OLED business as a major limiting factor, adding tremendous pressure to an already difficult supply environment. Fortunately, we enhanced our supply chain for an additional 28-nanometer capacity last year, which we expect will start to come online in the later part of this year. Looking at the full year. While our revenue for 2021 declined 6.5% year-over-year due to the wafer supply shortage, partially offset by outstanding growth in our Power business, I am pleased that we delivered solid profitability for the full 2021 year. Gross profit margin reached 32.4%, representing an increase of 710 basis points from 2020. Adjusted operating income margin increased to reach 11.8% of total revenue from 8.2% in 2020. Adjusted net income was 10.8% of total revenue…

Thank you, YJ, and welcome to everyone on the call. Let's start with key financial metrics for the full year 2021 and Q4. Revenue in 2021 was $474.2 million, down 6.5% from 2020. The decrease was primarily due to a decrease in revenue from our OLED DDIC products stemming from a continued severe supply shortage, which was offset in part by strong revenue growth from our Power business. Display business revenue was $205.3 million, down 31.3% from 2020 whereas Power business revenue was up 36.8% from 2020 to $227.8 million. Power business revenue growth was driven by solid demand across most product families, coupled with increased internal capacity resulting from our timely investment in Fab 3. Despite the decline in revenue year-over-year due mainly to the global shortage in manufacturing capacity, gross profit margin in 2021 improved 710 basis points year-over-year to reach 32.4%, which flowed through to non-GAAP metrics of adjusted operating income, adjusted net income and adjusted EBITDA, all of which improved year-over-year, as highlighted by YJ earlier. Our non-GAAP diluted earnings per share was $1.09 in 2021, up from $0.73 in 2020. Now turning to Q4 results. Total revenue in Q4 was $110.3 million, down 13.1% from Q3 and down 22.8% from Q4 a year ago. Revenue from the standard product business was $99.5 million, down 15.2% from Q3 and down 23.2% from the same quarter a year ago. Both the sequential and year-over-year decrease was driven mainly by a significant decrease in revenue from our OLED products due to the previously mentioned supply shortage. Power revenue in Q4 was $58.2 million, down 1.1% sequentially but up 24.2% year-over-year despite the fact that Q4 usually is a seasonally soft quarter. The significant increase year-over-year was due to strong demand across most product families as well as from…

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

[Operator Instructions] Our first question comes from Raji Gill of Needham & Company. Your line is open.

Thank you and thanks for all the insight on the quarter and what you kind of expect throughout the year. YJ, on the supply constraint issue affecting your OLED revenue, you mentioned -- and you and Shinyoung mentioned that Q1 will be the bottom in terms of your overall revenue and OLED revenue specifically. I'm wondering how the capacity that's coming online from this new partnership, how that will kind of flow throughout the year? Are we expecting more supply coming online in the third and fourth quarter? And then to match the revenue ramp? And are you kind of confident that you're going to match the timing between the new supply coming online and you're ramping with OLED with this new non-Korean panel maker? It's really more about the cadence and timing of the demand and supply.

Yes. So Raj, thanks for the question. So I think we gave kind of a framework. As you know, we fully comment one quarter at a time, but we wanted to give some framework to all so that you have a kind of understanding. And so yes, we are bringing a new 20-nanometer foundry. And usually, when you bring a new 20-nano foundry, you will go through a typical learning curve. So we are currently being cautious. So that's why we're saying that we expect the revenue to start towards the later part of the year. And I think we'll give you more clarity in the second quarter, but we are associating the typical learning curve in a new foundry and the process. But we are very excited about this additional foundry partnership as well as the new customer that's very world-class and that's outside Korea. So we expect, based on supply constraints, we frame that the OLED revenue will be flat to up and the, I think, power to grow more than the market. And so that's what we see.

Okay. So that implies a pretty big ramp in OLED in the second half. So I would assume by that time, third or fourth quarter, you would have overcome some of the learning curves in terms of bringing the capacity. How do we think about the gross margins because the gross margins have really been really good the last few quarters, and you're guiding it to 35.5% at the midpoint? When more supply comes online from this new foundry, how would that affect your margins, if at all? Maybe talk quickly about the pricing environment. Is that affecting your margins positively? What about the mix shift within power to premium power because the margins have been moving up despite some of the revenue declines in OLED?

Yes. So we are continuing to work on the high-value, high-margin products. So that's how we've done in lieu of the shortages. The -- also, when you bring the new process, again, we'll go through yield learning curve. So initially, we've been cautious. We think that will have impact on the margin. So that's already baked into our forecast. So again, we will let you know how it progresses. But right now, I think it's best that -- put some conservative, cautious because when you bring a new foundry, new process, there's a yield learning curve.

Our next question comes from Suji Desilva of Roth Capital. You line is open.

So maybe perhaps a quick follow-up on Raji's question on gross margin. The -- what was the impact on the sale of written off product in this quarter?

It was just regular. There's not really the particular, the special kind of write-off that we took in Q1. So it's just a regular quarter in the normal...

Okay. That happens periodically, Okay. And then, YJ or Shinyoung, the comment about 1Q '22 being the bottom. Can you just talk about the two or three key elements that give you the confidence to say that going forward at this point? Because it sounds like the foundry capacity, the new foundry won't be coming on until the end of the year. So I'm just curious on the comments behind that.

Yes. So there are a couple of points. On the power side, as Shinyoung mentioned, we are putting a special $8 million of CapEx. So the goal is to bring that additional capacity within six months. So -- and so -- and we will work on the productivity in the second quarter so forth to get the -- more productivity. On the OLED side, as you said, we said that we're expecting more new foundry coming online in the later part of this year. So, those -- so right now, the projection is based on supply constraints. And the demand is still higher than the -- what we can supply.

Okay. Fantastic. And then the new non-Korean OLED customer, can you talk about what the time frame for that turning into material revenue? Just to understand how far off that would be as an incremental element to your revenue.

So again, so we are -- I think we said that the OLED revenue will be flat to up than last year. So that kind of gives you what may happen in the second part of the year. And that will coincide with our new foundry as well as new customers coming online.

[Operator Instructions] Our question comes from Andrew Northcut of Oppenheim & Co. Your line is open.

This is Andrew Northcut filling in for Martin Yang. Just one question for you. When you're thinking about the quarterly revenue, how are you thinking about the seasonality for 2022? And how does that kind of compare to 2021?

Well, I think we are just saying that the seasonality is there typically. But right now, our revenue is actually limited by the supply constraint. So the curb is actually limited by the supply constraint rather than the seasonality. But normally, our pattern has been Q3 in the peak, Q4 down, and Q1 down. And go up in Q2, Q3. But that's not normal seasonality. But right now, our revenue has been kept by the supply constraints on both OLED and Power side.

This does conclude our call today. I'd like to turn the call back over to management for any closing remarks.

Thank you, operator. This concludes our fourth quarter 2021 earnings conference call. Please look for details of our future events on Magnachip's Investor Relations website. Thank you for joining us today. Goodbye.

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.