Hello and thank you for standing by. Welcome to the Q3 2022 Magnachip Semiconductor Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] It is now my pleasure to introduce Investor Relations Representative, Yujia Zhai.

Hi, everyone. Thank you for joining us to discuss Magnachip’s financial results for the third quarter ended September 30, 2022. The third quarter earnings release that was issued today after the stock 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 are YJ Kim, Magnachip’s Chief Executive Officer; and Shinyoung Park, our Chief Financial Officer. YJ will discuss the company’s recent operating performance and business overview. Shinyoung will review financial results for the quarter and provide guidance for the fourth 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 will also 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 third 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 us today and welcome to Magnachip’s Q3 earnings call. First, before I begin, let me say that our hearts and prayers are with the families affected by Halloween incident over the weekend in Seoul and we wish a quick recovery for all those who were injured. Moving on to our results, we closed Q3 revenue at $71.2 million, which was within the guidance range that we provided, but represented a disappointing 43.9% decrease year-over-year and 29.8% decrease sequentially. This result is obviously not satisfactory. As we indicated last quarter, our second half is being severely impacted by several macro challenges that I will detail as I discuss each of our two main businesses. Beginning with our Display business, Q3 revenue was $6.4 million, down 89.1% year-over-year, and 77.6% sequentially. These results were primarily due to the supply shortages of 28 nanometer 12-inch OLED wafers in the second half of this year that impacted design-in projects from our large panel customer in Korea, which are typically awarded in advance based on future wafer supply allocation. In addition, China COVID lockdowns and the dramatic slowdown in consumer spending as a result of global inflationary pressures reduced demand for smartphones, particularly in China, and resulted in an oversupply of channel inventories. This caused our large customer in Korea to significantly reduce orders to normalize inventory levels. Unfortunately, we believe these poor dynamics will continue in the near future, but we expect inventory levels will normalize by the middle of next year. As the global geopolitical situation and economy remains very uncertain, we are focusing on executing the initiatives that are in our control and delivering a strong recovery of our Display business in 2023. During Q3, we made progress in these following areas: First, regarding our new…

Thank you, YJ, and welcome to everyone on the call. Let’s start with key financial metrics for Q3. Total revenue in Q3 was $71.2 million, down 29.8% sequentially and down 43.9% year-over-year. Revenue from the standard products business was $62.8 million, down 31.2% from Q2 and down 46.5% year-over-year. As YJ already mentioned, both the sequential and year-over-year decrease were mainly attributable to the supply constraints for wafers in our OLED business and slow demand for Chinese and Korean smartphone models as a result of the global downturn in the smartphone market. Revenue from our Power solutions business was [$56.4 million] [ph], down 10.4% sequentially and down 4.2% year-over-year. The sequential decline was due to a slowdown in TV, e-bikes, and computing applications affected by COVID lockdowns in China, but was partially offset by higher demand in solar and industrials. Gross profit margin in Q3 was 24.2%, below the low-end of our guidance range as we recorded a $3.3 million charge to scrap 12-inch wafers as a result slowing demand caused by elevated smartphone inventories in China. Excluding this charge, our gross profit margin would have been 28.8%, slightly above the high-end of our guidance range. In addition to the scrap cost, our lower gross profit margin year-over-year was driven by a lower utilization rate at our Fab 3, higher third party foundry costs, and unfavorable product mix. Turning now to operating expenses. Q3 SG&A was $11.4 million, as compared to $12.7 million in Q2 2022 and $12.6 million in Q3 last year. Q3 R&D was $13.3 million, as compared to $13.4 million in Q2 2022 and $12.3 million in Q3 last year. Stock compensation charges included in operating expenses were $0.9 million in Q3, compared to $2 million in Q2 and $2 million in Q3 2021. In Q3, our…

Thanks Shinyoung. That concludes the prepared remarks section of this earnings call. Operator, please begin the Q&A session.

Certainly. [Operator Instructions] Our first question comes from the line of [Technical Difficulty] Needham & Company.

Yes. Thanks for taking my questions. YJ, just a few questions on the OLED business. You talked about the smartphone inventory levels won't normalize until mid-2023, just wondering if you could from your vantage point characterize the amount of channel inventory that exists in the Chinese handset market right now? The market has been coming down in terms of units all year, but it doesn't seem like we're still at the bottom yet, any clarity on how much channel inventories is still there? And your comment about mid-2023, if I think I heard you correctly, maybe you can provide some insight on that timeframe.

Yes. Raj, thanks for asking the question. So, we can't really tell each customer by customer or the vendor, silicon vendor by silicon vendor, but that’s the signs that we see for ourselves. So, I think as you know, that we have a new product that we take out and sampled and it being qualified, we expect to go to production in first half with that product. And we also wrote a lot of inventories between Q2 and Q3 this year. We expect to consume that in the first half and middle of next year. And then we expect to tape out two new products this month, and that we expect to go to production by second half. So, our comments based on those knowledge with our customers and our programs, but I can't say for the industry and what they may be. So, that's what we can say.

Got it. Okay. It makes sense. And so, you mentioned that you are – you're seeing shortages on 28 nanometer, 12-inch that impacted your design in panel at Samsung display, but then you also mentioned that because of the reduction in demand that there is more capacity that's being freed-up, particularly in 2023. So, just kind of reconcile, I guess what's happening on 28 nanometer, 12-inch and kind of the commentary about 2023?

Yes. So, you know we have qualified three 28 nanometer. And with the slowdown in the economy, we do see better variability. So, we are working with all the foundries and working out the arrangements and allocation for 2023 and 2024. And we do have either written or verbal commitment from our partners and we see more activity as a result as our customers also crosscheck with the foundries and we see more RFQs that's coming in from our customers. And also there have been more top level meeting involving myself with our customers. So, we are working to come out and recover next year and beyond.

Got it. And just last question. You're sitting on 250 million of cash on the balance sheet. The market cap is currently sitting around 460 million, so almost half of the market cap is in cash. So, what are the intentions for that cash on the balance sheet given where your stock price is now? Thank you.

Yes. So, we do have a strategic review committee that's formed and we are looking at every option to maximize shareholder value. One of them is a stock buyback, which we started to implement and we're still doing that. And we're looking all the various means to maximize shareholder value and also during this downturn, also a strong balance sheet also will help us come out of the downturn as well.

Thanks.

Thank you. And our next question from the line of Martin Yang with Oppenheimer.

Hi, YJ. Thank you for taking my question. Can you first talk about some of the associated expenses that potentially will be invested in relating to your [indiscernible], are you raising to the new customers you're engaging in China?

So that’s Martin, I mean the – currently we are incurring some R&D expenses and that's why you are seeing that, I mean our OpEx in Q3 was a little lower. That's mainly due to some, kind of true down of our stock compensation expenses, but I mean our R&D is not really going down and that's mainly due to, kind of to support those design R&D activities to support that new, kind of customer.

Got it. And as you expand your business in China, do you see and how has the COVID restrictions impact your business development activities in China?

So yes, Martin, this is YJ. So, thank you. So, I mean, it's – we send our engineers and FAEs there. They have to go through quarantine just like anyone else, but it doesn't – it [turns from] [ph] working with our new customer. So, but we're hoping that the China becomes more available and reduced quarantine and trades more freely with the Western parts of the world.

Thank you. Last question from me, are you seeing any capacity constraints for yourself either at [28 or 40] [ph] today?

So, most of our product in OLED is 28 nanometer. So, we are seeing more availability of those. And as I said before, we have three foundries that we have qualified 28 nanometer. And either written or verbally, we have a better commitment for 2023 and 2024. So, we expect to have a long-term supply agreement with many of them and also grow the business together. And we are excited to see that the capacity will not be limiting factor, but more design wins. We started to see the design win activities picked up.

Got it. Thank you very much. That's it for me.

Thank you. And our next question comes from the line of Suji De Silva with ROTH Capital.

Hi, YJ, Shinyoung. So, for the China business, I'm curious what the foundries you're securing, do you have domestic China foundry supply available to support that, I just reduced the de-risk kind of the geopolitical [potential issues] [ph]?

Yes, Suji. Hi. Yes. So, we have – all the 12-inch foundries, as you know, is located outside Korea. And other than the global foundry, we haven't really disclosed, but we are working out through the geopolitical situation, as well as make sure that the customers – our panel customers are comfortable using the foundries that we choose for them. So, that's how we work out the relationship. So, that's what we're doing.

Okay. Help us understand that. Thanks. And then for the Power business, you said that was impacted by consumer spending, how does the next few quarters, kind of lay out for that? Is there inventory that has to be worked down in that segment or is that maybe, kind of reaching toward the back-end of that inventory adjustment?

I think as I said before today, the consumer segment seems to be a little soft, but we still see strong industrial and the other premium product lines. So, as soon as I think the consumer sector becomes more normalized, I think we should be okay. So, that's our current outlook obviously at this time.

Okay. And my last question is on the gross margin. Beyond the guidance for 4Q, what's the intermediate-term outlook here maybe into [2023] [ph], what are some of the puts and takes on gross margin we should be thinking about as the year progresses?

I mean, we only guide one quarter at a time. So, we haven't really guided for the full-year 2023, but gross margin, they are like multiple factors, like that's a [better gross margin] [ph]. So, the product mix obviously, but at the same time utilization of our internal fab and foundry cost, external foundry cost was 12-inch wafers, now that we're going to be impacting our 2023. So, we are, I mean, we don't really disclose our, kind of target for 2023, but we are trying to get back to a little – because we have a little – the past two quarters we had, kind of one-time hit from the recognition of the inventory reserves and the scrap costs. So, we are trying to kind of get back to a normalized level in next year.

Okay. Thanks, Shinyoung. Thanks, YJ.

Thank you. And I’m showing no further questions. I'll now hand the call back over to Investor Relations representative, Yujia Zhai, for any closing remarks.

Thank operator. So, that concludes our Q3 earnings conference call. Please look for details of our future events on Magnachip’s Investor Relations website. Thanks everyone and take care.

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