Hello, everyone, and thank you for standing by. Welcome to the Third Quarter 2024 Magnachip Semiconductor Corporation Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. Now it's my pleasure to turn the call to Steven Pelayo, Head of Investor Relations.

Great. Thank you, Carmen. Hello, everyone. Thank you for joining us to discuss Magnachip's financial results for the third quarter ended September 30, 2024. The third 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 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 statement 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 developments. 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 third 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 Q3 earnings call. Q3 revenue was $66.5 million, up 8.5% year-over-year and up 25% sequentially. Revenue was at the high end of our guidance range of $61.5 million to $66.5 million. Consolidated Q3 gross profit margin of 23.3% was down 0.3 percentage points year-over-year, but up 1.5 percentage points sequentially. The overall gross margin results was in line with the midpoint of our guidance range of 22.5% to 24.5%. Shinyoung will provide more details in her section. As we wind down and exit the Transitional Foundry Service business, Magnachip will be a pure-play standard products company based on industry-leading mixed signal expertise. Our standard products are comprised of our offerings in the MSS and PAS businesses, which include power ICs, advanced OLED DDICs and discrete power products for industrial, automotive, consumer communications and computing applications. Revenue in Q3 for our Standard Product business was $64.0 million, up 24.0% year-over-year and up 25.9% sequentially. Standard Product business gross margin was 24.4%, up 1.3 percentage points sequentially. We are on track with our guidance given at the beginning of the year for double-digit growth in MSS and PAS for 2024. We will provide 2025 guidance on our Q4 and year-end call as we've done in the past. Now let me provide more detailed comments for each of our Standard Products business lines. In terms of revenue contribution, PAS represented 74.3% of Standard Product revenue in Q3. Reported PAS revenue was $47.6 million, up 16.1% year-over-year and 21.2% quarter-over-quarter. The sequential increase was broad-based, so I'll share some details by application. The Industrial segment continued to see a strong rebound in solar. The issues of excess distributor and customer inventory in China now is behind us in this business segment.…

Thank you, YJ, and welcome, everyone, on the call. Let's start with key financial metrics for Q3. Total revenue in Q3 was $66.5 million, which came in at the high end of our guidance range of $61.5 million to $66.5 million. This was up 8.5% year-over-year and up 25% sequentially. Revenue from MSS business was $16.4 million, near the high end of our guidance range of $14.5 million to $16.5 million. This was up 54.5% year-over-year and up 41.8% sequentially. PAS business revenue was $47.6 million, above the midpoint of our guidance range of $45.5 million to $48.5 million. This was up 16.1% year-over-year and up 21.2% sequentially. Revenue from Transitional Foundry Services was flattish sequentially at $2.4 million and down from $9.6 million in Q3 2023 as we continue to wind down this service as we've explained previously. Consolidated gross profit margin in Q3 was 23.3%, slightly below the midpoint of our guidance range of 22.5% to 24.5%, down from 23.6% year-over-year, but up from 21.8% sequentially. MSS gross profit margin in Q3 was 38.7%, above the midpoint of the guidance range of 36.5% to 39.5%, up from 28.8% in Q3 2023 and up from 34.6% in Q2 2024. The year-over-year and sequential improvement was primarily attributable to a favorable product mix. PAS gross profit margin in Q3 was 19.4%, slightly below the midpoint of the guidance range of 18.5% to 20.5%, down from 28.6% in Q3 2023 and slightly lower than the 19.7% in Q2 2024. 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. Q3 SG&A was $12.1 million as compared to $11.7 million in Q2 2024 and $12.1 million in Q3 2023, primarily driven by the increase in stock…

In conclusion, Magnachip's strategic focus on its core Standard Products business drove a better-than-seasonal Q3 and outlook for Q4. We are on track with our expectations set at the beginning of the year for double-digit growth in both MSS and PAS. As we continue transitioning into a pure-play standard products company, we are focused on leveraging our industry-leading mixed signal expertise applied to Power ICs, advanced OLED DDICs and power discretes. These ongoing efforts position us well for the future. We will provide our outlook for 2025 on the next call, but I am confident that our business strategies are leading us in the right direction. We remain dedicated to enhancing shareholder value in every way possible. Now I will turn the call back to Steven. Steven?

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

[Operator Instructions] And it comes from the line of Suji Desilva with ROTH Capital. Please proceed.

Congrats on the progress here. Start off maybe with the gross margin. Can you talk about what drives the recovery to target here? Is it MSS utilization? Is it utilization for PAS? And kind of what's the time frame, I guess, for new products getting rolled into the foundry capacity that's -- the foundry usage that's being taken off?

So you're talking about probably the PAS gross margin because you talked about the utilization rate --

Correct.

-- capacity?

Yes.

Yes. So the power margin, I mean, if you look at our -- the Transitional Foundry revenue kind of size, it used to be kind of $10 million per quarter, came down to $5 million. Like this quarter, we had $2.4 million of foundry. We're going to have $2 million next quarter as well. So it's going to be almost kind of it's going to be wound down by the end of this this year, 2024. Going into 2025, we'll have to convert that portion for the power product. So I said, depending on the product mix, we used to use approximately 1/3 of our capacity for the foundry product. We can probably do a little better and like for the efficiency and kind of use some of the equipment for the power products. So maybe 20% can be idle after 2024. So we are doing the conversion like gradually. So I mean, that conversion will not going to happen overnight. So kind of switching that for the power product and fill that with the new product of PAS product, it will going to take -- I mean, take some time. So it will not going to happen like in Q1, but it will take some quarters. So it's kind of happening throughout the 2024.

And then switching over to the MSS business. The time -- like the ramp-up in '25, YJ, would that be 1Q would be a seasonal impact? Or are you having program ramps with your two China customers and perhaps more that would kind of offset that? Would it be steady growth from here? Or is it lumpy with programs? Any color on MSS outlook would be helpful.

Yes. So we said we are going to guide '25 next earnings call but the two - repeat, what we said we have two products they're going to production this first quarter. That's going to an increase throughout this quarter. And we also said that we have new product that 20% less power than previous generation. We just sampled, we expect to go into production '25. We expect to use a chip to multiple panel market to makers. So beyond that we don't have crystal ball in '25 to give outlook at the moment. But we can say we are very positioned well and we'll be in the right direction. Our product pipeline is improving in both PAS as well as MSS. And we -- that's going to also help fill the Gumi fab. And we are currently cautiously optimistic, but not guiding 2025.

And then one last quick question. When you talk about your two customers, I think you talked about one of them you're the primary DDIC vendor and the other one, you're a second source, if I heard that right. I'm just curious what kind of share difference that can imply as those models ramp up?

The primary, and that's really good. It's a major. And then the secondary means you are second. So you have a much less share. So that's typically how it's done.

Thanks YJ. Thanks Shinyoung.

Thank you so much. [Operator Instructions] Our next question is from Nic Doyle with Needham & Company. Please proceed.

Hi, guys. I'll echo the congrats on specifically the first year-over-year revenue growth in a long time. I guess on gross margins also, we're getting a bit of a surprise, $2 million in the foundry revenue next quarter. So does that kind of push out this gross margin bottom to 2Q '25? I mean I understand you're not guiding into '25, but we are kind of thinking the transition would really accelerate in 4Q and hopefully finish around 1Q, maybe into 2Q, but that kind of shaped a 1Q bottom for gross margin. So maybe anything else you could tell us about that?

So the foundry -- I mean, we've given them the end-of-life, I mean, the notice, and they've given that to their customers as well. Some of our clients' customers, I mean, they are kind of using our product for their automotive applications. So they were kind of giving our customers their end-of-life orders, the last time purchase orders rather slowly or more cautiously. So we thought initially, we are going to have probably almost zero revenue in Q4, but we are going to see some kind of $2 million-ish revenue in Q4. But beyond that, it's not going to be material. So we're going to manage that our utilization rate, I mean, along with our power product demand and also we can -- we're going to manufacture the foundry product in Q4. But in terms of the gross margin impact, I mean, depending on when we are going to load those wafers into our fab, we may have a slightly kind of carryover effect in Q1 2025. But 2025, Q1 is usually a seasonally soft quarter anyway for us. So we'll have to see the other kind of factors that's impacting gross margin, but we will see.

And just as a follow-up, I guess, what drove the uptick in R&D spending in the third quarter? And kind of do we expect that level going forward? I'm just trying to figure out what drove the larger-than-expected EPS miss or lower EPS. And I think that might be one of the big parts.

Yes. So for the R&D, I would say it's rather a quarterly fluctuation. So did that fluctuate quarter-over-quarter depending on the timing and the number of products in development for both business lines, MSS and PAS. So it looks bigger, but like when I kind of -- when I gave out the guidance for the full year 2024, the OpEx, SG&A, R&D together without stock-based charges, we said initially $100 million, but we lowered that to $95 million-ish like when we had a call last time. And I think we still we can finish 2024 with $94 million to $95 million range. So the Q3 was kind of rather a kind of quarterly distribution depending on the timing of the development. But again, for the annual expectation, we still stand by our previous comment that it's going to be between $94 million to $95 million. And also -- yes. For your question about EPS, that's literally kind of mechanics of how we calculate the quarterly, the income tax provision versus benefit. So we have to apply the annual ETR rate to the quarterly pretax income or loss. So we actually -- that means we took a little bigger income tax benefit in the first half, and then we had to take the income tax expense provision in Q3. But again, that really doesn't change our kind of the expectation for the annual guidance. So the annually, we still think that we are going to see some kind of $2 million-ish of income tax benefit. So that income tax benefit expense whole kind of fluctuation kind of that's impacting our EPS on a quarterly basis.

Thank you.

Our next question comes from the line of Martin Yang with Oppenheimer. Please proceed.

Good morning. Thank you for taking my question. My first question is on your OLED customers. As we get into 4Q, are you seeing any macro factors affecting your customers that are -- that leads you to believe the market could trend differently comparing to a few quarters ago? Are you seeing any fundamental improvement deterioration on OLED markets in China?

So for the fourth quarter, we don't see any -- for our businesses, our products and customers, we don't see any much difference in Q3 and Q4. And we -- I think we guided based on our quarterly -- quarter visibility, and we are guiding better than seasonality than our previous few years.

And then also on OLED market, can you maybe comment on how you think about some of the emerging display technologies like microOLED and -- microOLED and microLED for AR/VR devices? Is that a market that looks attractive to you? And do you already have programs targeting those markets? Thank you.

We've been disclosing that we are a leader in the microLED TV from the leading TV manufacturer. So that's the only announced product, and that's the production product that we're shipping. We haven't mentioned anything about the microLED for virtual reality at the moment.

My last question is on gross margin for MSS. So is there anything additional you can share with us other than product mix that contributed to the improvement for our gross margin?

So the -- because YJ mentioned that we had more automotive OLED, the product and also the Power IC, both of those kind of the segment out of the MSS business line, they tend to have a higher gross margin. So depending on like how much we have like from the generated revenue from the OLED, automotive and also the Power IC and the mobile OLED, that's what I meant by the product mix. So because of the increase in the automotive OLED and Power IC, that's kind of boosting of our MSS gross margin.

Got it. Thank you, Shinyoung. That's it for me.

Thank you so much. And with that, I will turn the call back to Steven Pelayo for his final comments.

Okay. Thank you. This concludes our Q3 earnings conference call. Please look for details of our future events on Magnachip's Investor Relations website. Thank you, and take care.

Thank you all for participating in today's conference. You may now disconnect.