Thank you for standing by. Welcome to the Magnachip Semiconductor Corporation’s Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After this presentation, there will be a 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 of The Blueshirt Group. Please go ahead, sir.

Hello, everyone. Thank you for joining us to discuss Magnachip’s financial results for the second Quarter ended June 30, 2024. The second 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 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, and Shinyoung will review financial results for the quarter and provide guidance for the third 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 statements 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 development. 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 measures 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 and thank you for joining us today and welcome to Magnachip’s Q2 earnings call. Q2 revenue was $53.2 million, down 12.8% year-over-year, but up 8.4% sequentially. This was above the mid-point of our previous guidance range of $49 million to $54 million. Consolidated Q2 gross profit margin of 21.8% was down 0.4 percentage points year-over-year, but up 3.5 percentage points sequentially. The overall gross margin result was above our previous guidance range of 17% to 19%. Both MSS and PAS gross margins were higher than our previous guidance. Shinyoung will provide more details in her section. Revenue in our Standard Product business, which is comprised of MSS and PAS businesses, was $50.8 million, down 1.1% year-over-year, but up 11.6% sequentially. Standard Product business gross margin was 23.1%, up nearly 2 percentage points sequentially. Now, let me provide more detailed comments for each of our Standard Products business lines. Beginning with MSS. Q2 revenue was slightly above the high-end of our guidance at $11.6 million, down 6.2% year-over-year, but up 28.7% sequentially. The quarter-over-quarter revenue growth was due to increased demand from OLED DDICs for China smartphone OEMs, as well as automotive and Power IC for LCD TV and OLED IT panels. We continue to collaborate with several OLED panel makers and smartphone OEMs targeting the China market. As a reminder, we have multiple DDICs in various stages of development and customer evaluation. These designs span the entire smartphone market spectrum from the mass market-tier to the premium-tier segments, as well as other display markets such as automotive and wearables like smartwatches. During Q2, we held a formal Opening Ceremony to mark the launch of our new operations in China under our wholly-owned subsidiary Magnachip Technology Company, Ltd. or MTC. The goal of MTC is to expand the company’s…

Thank you, YJ, and welcome everyone on the call. Let’s start with key financial metrics for Q2. Total revenue in Q2 was $53.2 million, which came above the mid-point of our guidance range of $49 million to $54 million. This was down 12.8% year-over-year, but up 8.4% sequentially. Revenue from MSS business was $11.6 million, slightly above the high-end of our guidance range of $9.5 million to $11.5 million. This was down 6.2% year-over-year, but up 28.7% sequentially. PAS business revenue was $39.2 million, slightly below the mid-point of our guidance range of $38 million to $41 million. This was up 0.6% year-over-year and up 7.4% sequentially. Revenue from Transitional Foundry Services declined to $2.3 million as we continue to wind down this service as we’ve explained previously. Consolidated gross profit margin in Q2 was 21.8%, above the high-end of our guidance range of 17% to 19%, down from 22.2% year-over-year, but up from 18.3% sequentially. MSS gross profit margin in Q2 was 34.6%, above the upper end of the guidance range of 30% to 33%, down from 36.4% in Q2 2023 and down from 44.6% in Q1 2024. As a reminder, we recognized non-recurring engineering revenue in Q1 2024. The year-over-year decline was mostly due to unfavorable product mix. PAS gross profit margin in Q2 was 19.7%, above the upper end of the guidance range of 15% to 17%, down from 23.1% in Q2 2023, but up from 15.4% in Q1 2024. The upside versus guidance was mostly due to stronger-than-expected U.S. dollar against Korean Won and the sale of reserved inventories primarily for solar applications. The year-over-year decline was mainly due to a lower Gumi fab utilization rate from the wind-down of Transitional Foundry Services. Turning now to operating expenses. Q2 SG&A was $11.7 million, as compared to…

As you know, we are undergoing a transformation of our business that will unfold over the course of two years. The first major transition involves the shift in our priorities to be laser-focused primarily on China expansion for our OLED display business. The second major transition involves filling idle capacity in our Gumi fab as a result of the previously disclosed wind-down of the Transitional Foundry Services business. We’ve already taken initial steps to realize our objectives by streamlining the structure of the company by creating separate MSS and PAS businesses to better align our product strategies. More recently, we formed a wholly-owned MTC subsidiary in China with the goal of accelerating our business there. We currently are pursuing multiple new OLED design opportunities with panel makers and smartphone OEMs in China. As we’ve said previously, filling idle capacity in Gumi with Power products is a high priority because of the impact on margins. A positive sign is that our Power business is expected to show sequential growth again in Q3 as a result of new design wins and leaner channel inventories. Longer term, we have a pipeline of new Power products that we expect to begin to contribute to wafer starts in Gumi over the course of 2025 and beyond. Our Power business in 2024 is currently forecast to grow by double digits over 2023. We have much work ahead to achieve our objectives, but I’m encouraged that our business strategies are pointing us in the right direction and I’m committed to taking any steps necessary to drive shareholder value. Now I will turn the call back to Steven. Steven?

Thank you. That concludes the prepared remarks section of our call today. Operator, you may now open up the call for questions.

Certainly. [Operator Instructions] Our first question comes from the line of Suji Desilva from ROTH Capital. Your question, please.

Hi, YJ. Hi, Shinyoung. Congratulations on the progress here. The OLED business is growing again nicely. Can you talk about, YJ, how many products are supporting that and how many are still on the come? Similarly, maybe customers and models, just to give a sense of where we are in fulfilling your pipeline?

Yes. Suji, very good question. So, obviously, you see we have a multiple design engagement, as well as multiple products in development. So, in terms of the design model opportunity, we are heavily designing to about four models that will go production in the next few quarters and that includes about three smartphones and one smartwatch. Obviously, we are also discussing more products as we speak and there are more models in the after-service market that we also disclose. In terms of products, we have two new products that we sampled in Q2, one for the next-generation OLED smartphone and one for smartwatch. And we just taped out the new product that has the next-generation IP, such as the sub-pixel rendering, color enhancement, the color uniformity management and less than 20% power reduction than previous generation, where that will be broadly -- expected to be broadly sampled to multiple panel maker. So, those are the pipeline and stages that we have.

Okay. Very helpful. And then on the gross margin side, if I take your full year guide, it would seem like gross margin is declining in the fourth quarter. I just want to make sure my math is correct there. And then, more importantly, what are the drivers for gross margin to improve, and the key ones were 2025, and remind us what the target gross margin is again?

So, the -- Suji, the gross margin for the full year, the year-over-year decline was mainly due to the phase-out of the Transitional Foundry Services, because we had those revenue in the first half and also $1.5 million in Q3. So, that’s coming down. So, the Transitional Foundry Services comprise approximately 20% to 25% of our equipment capacity. So, that portion becomes idle. So, that’s impacting our gross margin for the full year. So, that’s the main driver for the decline. But we were actually, we came a little higher in Q2, and we called out during the call that there was mainly due to some of the product mix improvements, reversal of some of the reserve inventories and favorable kind of FX impact on us. So, we kind of have that. And also Q3, we kind of guided flat, almost flat for the PAS. So, at the midpoint. The full year, we raised our guidance range by 200 basis points at the bottom and at the top. So, that’s what we are seeing, the improvement for the full year 2024.

And Suji, I forgot to also mention that the, I think today in the script, we said the, most of the next-generation OLED DDICs is 20% less power and our LV MOSFET is also 20% less power. This is very critical as we see new smartphones with AI-integrated features that will draw more power. So, this kind of power reduction is really needed for next-generation smartphones.

Okay. And then Shinyoung, YJ, the key drivers of gross margin improvement at 2025, is that refilling the Gumi fab capacity that freed up or are there other elements to it?

That is correct. That’s the -- we are going through the transformation, as we pointed out. We are trying to fill the idle capacity in 2025. So, new products, new generation products are rolling out, and so that will help us fill our idle capacity beginning in 2025.

Okay. Great. Thanks.

Thank you. And our next question comes from the line of Martin Yang from Oppenheimer. Your question, please.

Thank you. Thank you for taking my question. First, congratulations on recruiting Bing Lu, a very solid hire with a strong background. Can you maybe talk about his priority and his responsibility in China?

Thank you. Yes. Bing Lu is a very seasoned executive, and as you said, he has a very good proven record in China. So, he is the Co-President of MTC. So, he is responsible for the sales and marketing and business of the MTC, whereas the focus is OLED, driver IC and the Power IC.

Got it. And also, a clarifying question regarding your reference to OLED panels for IT. Is your current involvement with -- about your Power IC products for those products or are you supplying driver IC for OLED panels for IT applications?

The -- right now, initially, Power IC is the main driver.

Got it. And the next question is regarding your comment on power savings for your new DDIC products. Can you maybe give us more context around what does that 20% power savings mean for overall panel consumption or in the context of how that translates to overall a smartphone power savings?

Yeah. So, the high-end smartphone nowadays is either foldables or integrated AI, right? So, that consumes a lot more power. So, you need to offset the power consumption in many ways. Like today, we have the MOSFET we talked about and then driver IC. So, you need to save as much power as you can and giving that kind of 20% saving in the next-generation will really help out on the high-end smartphone. So, again, the saving is also a function of the features. So, I think the high-end has a lot more functionality and the on-chip AI integrated, which consumes more power. But if you were not to add those things, I mean, you’re talking quite significant saving in the actual applications.

Got it. Thank you. That’s it for me.

Thank you. And our next question comes from the line of Quinn Bolton from Needham. Your question, please.

Hi. This is Nick Doyle on for Quinn Bolton. Thanks for taking my questions. You’re lowering the fiscal year revenue target just slightly. You pointed out inventory levels are better. So, could you expand on what accounts for that slight change?

Yes. So, I think the -- we -- on the power, we are growing 7.4% in Q2, approximately 20% Q3. So, that’s quite a very good growth in the linear channel. But so, at the same time, with that kind of growth, we do see some seasonality. So, that’s the only thing that we would describe that on the fourth quarter.

Okay. So, just a little more seasonality than typical in that December quarter.

The -- December quarter is a seasonally low quarter for us before the COVID, yeah, when you go to normal cycle. Yeah.

Right. Do you have a view on whether these AI functions can drive a mobile replacement cycle? And I think you just touched on it, but how are you exposed to the trend? Is that mainly in the MSS segment or do you have also a PAS lever?

Oh! Yeah. In fact, we mentioned about the PAS. The low-voltage MOSFET, that is going to all the leading the Korean smartphone that has a built-in AI. So, our low-voltage MOSFET consumes 20% less than previous generation. So, we do see whether it’s the OLED DDI or the component in the smartphone in power is requiring that kind of competitiveness to be a win to the next-generation AI-based smartphone or affordable phone, which consumes more power.

Okay. And then last one, if I could sneak in. Your gross margins are moving higher. So, as they continue to improve, have you thought about a quarterly breakeven level and is that possible in 2025?

I mean, we don’t really guide for the 2025, but it’s really the function of the revenue and the gross margin. So, the gross margin is improving as compared with our previous expectation. So, some moving pieces. So, we have more visibility for 2024, so we guided up our gross margin full year guidance by 200 basis points. Going into 2025, definitely new products that are rolling out into the field are going to help us. They’ll fill our capacity, but the utilization rate and all of the manufacturing efficiency and cost and everything, we’re all going to be impacting our 2025 gross margin. So, the quarterly-wise revenue, we’ll have to see like $15 million to $15.5 million per quarter-ish. That should be a breakeven for the past business, as we’ve disclosed previously. But again, it’s all kind of the function of the revenue, like, and the gross margin.

Thanks a lot.

Thank you. 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 Q2 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.