Thank you for standing by and welcome to the Magnachip Semiconductor Corporation's Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Steven Pelayo, Managing Director of The Blueshirt Group. Please go ahead.

Thank you, Jonathan. Hello everyone. Thank you for joining us to discuss Magnachip's financial results for the fourth quarter and full year ended December 31, 2023. The fourth 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 is YJ Kim, Magnachip’s Chief Executive Officer; Shinyoung Park, our Chief Financial Officer. YJ will discuss the company’s recent operating performance, business overview, and directional guidance for 2024, and Shinyoung will review the financial results for the quarter and provide guidance for the first quarter and full year 2024. YJ will then briefly recap the company's business strategy. There will be a Q&A session following the prepared remarks. During the course of this earnings 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 measure 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. Thank you for joining us today and welcome to Magnachip Q4 earnings call. First, I believe it's important for investors to understand how our financial results fit into the big picture as we undergo a substantial transformation in our business over the next couple of years. First, we are dramatically shifting priorities in our display business to be laser focused primarily on China. The strategy builds upon 20 years of OLED driver success primarily in Korea and follows the industry's dramatic shift to China production. Second, we will be working this year and next to fill ideal fab capacity in our Gumi Fab as we transition away from supplying non-core Transitional Foundry Services to higher margin power products. Third, starting early this year, we began operating on the new structure that streamlines our go-to-market strategy, strengthens the potential for increased shareholder value, and improves transparency for investors. Let me provide more detail on each of these transitions. The first major transition involved China, which is becoming the new center of the OLED display universe. We are executing on a strategy to penetrate this vibrant market with feature-rich OLED standard products, and I'm pleased to say we've made tremendous progress so far. We've laid the groundwork for success by establishing a China-dedicated entity and by building strong working relationships with Chinese panel makers and leading smartphone OEMs. Over the past few quarters, we've doubled our resources and staff in China - a team of more than 20 professionals dedicated specifically to our OLED display business. In addition, we hired senior advisors from a top 5G semiconductor company, the financial services sector, and the China supply chain to help accelerate our progress, and I now personally travel to China on nearly a weekly basis to meet our strategic customers, partners, and strategic OEMs. Our work in China is beginning to pay off. We've already secured two smartphone design wins with leading OEMs and expect more on the way. It's part of our strategy to serve the full spectrum of models from mainstream to affordables. I'm confident that the results of our strategy will become apparent beginning later this year with more significant revenue growth expected in 2025. The second major transition involves the ideal capacity we expect in our Gumi Fab, created by the wind-down of our Transitional Foundry Services business. We plan to fill the ideal capacity with our existing power product portfolio as well as a new slate of next-generation power products that we will introduce over the next several quarters. We believe these products will be on par with some of the best global suppliers of power products. As we've said previously, this fab transition will depress gross margins until we can adequately replace the legacy Transitional Foundry Services business with higher margin power products. And we intend to share updates on our perspective on this transition on a quarterly basis. To help achieve our goals during the transitions, we have now streamlined the structure of the company by creating two main business entities to better align our product strategies and also to provide more transparency to investors through our new MSS, Mixed Signal Solutions, which includes display and power IC products, and PAS, Power Analog Solutions, our traditional power discrete businesses. To help investors better track our business progress, we will break out MSS and PAS revenue as well as gross margin beginning on the Q1 earnings call. The reasons for deciding to separate the standard products business structurally and operate independently are mainly to increase shareholder value by maximizing the valuation of each business, strengthen business performance management by establishing independent and responsible management systems, and enhance flexibility in our business portfolio and increase strategic responsiveness to environmental changes. We are confident that the strategies outlined will put us on a path to achieve a sustained recovery over the next two years. While we typically provide guidance for one quarter only, I feel it's important in the current environment to provide directional guidance for 2024. We currently expect double-digit revenue growth in both the newly organized MSS and PAS businesses. Overall, we expect total company revenue to be flat to up slightly in 2024 over 2023, primarily due to the phase-out of the Transitional Foundry Services. Gross margin for the consolidated company is expected to be in the range of 17% to 20% for the year, severely impacted by the idle capacity when the Transitional Foundry Service revenue winds down. While the near-term outcome is disappointing, rest assured that my team and I are committed to working every day on behalf of our shareholders to improve the results. Now that I have provided the big picture context, let's review our Q4 results. Revenue was $50.8 million, and gross margin was 22.7%, both near the low end of our guidance range. During the quarter, our OLED business was impacted by slower design progress than expected due to longer OEM evaluation cycles. During Q4, we also embarked on another key OLED project aimed at diversifying our customer base to enter the smartwatch display market. Our Power business results were down 20.5% sequentially, primarily due to the ongoing inventory correction in industrial end markets, particularly in China's e-bike market and the solar sector. Now, let me provide updates on each of our business under the 2023 financial reporting convention. Beginning with our display business, Q4 revenue was in line with our expectation at $5.2 million, down 30.8% year-over-year and 18.3% sequentially. We received our first pilot production purchase order in China for our first trip from an after service market player during the December quarter, and we are making progress on many additional fronts. Specifically, Q4 marked the beginning of initial shipments in China of our first OLED DDIC chip that we taped out in 2022. In Q4 2023, we were awarded our first design win and related purchase order for the after service market. While its immediate financial contribution is expected to be modest, it marks our first pilot production PO in China and is a significant step towards the acceptance of our product capabilities as well as our team's efforts. Moving on to our current generation of OLED DDIC products, our third OLED DDIC chip successfully completed design evaluation at a leading Chinese smartphone OEM and is being assigned a high volume model for launch in Q2 2024. This resulted in a design win by obtaining a pilot production purchase order as a second source supplier for this leading Chinese smartphone OEM, we've been qualified and added to their approved vendor list. Moreover, we've been chosen to also work with them on their fall model with our next generation chip which we prioritized and we'll sample next quarter. Additionally, our second chip is still going through a design evaluation phase at a global smartphone OEM. We will provide an update on this once we receive the status from the OEM evaluation. Last year, we announced that we began developing another OLED DDIC chip targeted for the fast-growing affordable smartphone market. Third-party research from China securities estimates global affordable handsets are projected to grow over 50% year-over-year in the next few years, reaching over 100 million units by 2027 from just approximately 15 million units today. Finally, we are excited to announce that we partnered with a watch solution maker in China during Q4 to develop a new product targeting the OLED smartwatch display market. This is an adjacent market, and we are applying our smartphone DDIC technology know-how and development expertise. The delivery of the first sample is expected in mid-2024. This initiative demonstrates our strategies to expand into new high-growth markets with new product offerings that showcase our ability to innovate across segments. With regard to our OLED automotive business, we began production shipments to our large Korean panel maker for three different car models from two top-tier European car manufacturers between May and July 2023. Modest revenue from those devices began in May '23 and is expected to continue for a few years, given longer automotive cycles. All these efforts underscore our commitment to innovation and market expansion. Moving on to our Power business, Q4 revenue was $36 million, down 22.3% year-over-year and 20.5% sequentially. Sequentially, our Power business was impacted by an ongoing inventory correction in industrial end markets, particularly e-bike and solar. We also saw weakness in consumer TV and PC power. On a positive note, we secured two new smartphone design wins for our low voltage MOSFET family, which grew more than 20% sequentially in the fourth quarter for that product family. While the overall Power business results in the fourth quarter were disappointing, we currently expect a gradual recovery in our Power business in the first half of the year with increased momentum in the second half. Our major markets, such as consumer, computing, and communication, already underwent a major inventory correction over the last year. We continue to focus on execution in Q4; we developed and launched new power products and saw strong momentum in our design win activities. In Q4, we secured a new design win and began mass production for a major U.S. automotive brand that will contribute to revenue growth in 2024. I am extremely proud of the progress we've made in our automotive business as revenue for the full year 2023 was up over three times compared to 2022. I look forward to building on this momentum in the coming years. We also continue to innovate. In October, we announced two new 650-volt super junction MOSFETs that reduced the overall footprint by nearly 60% as compared to other products from competitors. These new MOSFETs offer excellent design flexibility, efficient heat dissipation, and low resistance characteristics. As a result, they are well suited for various applications that require compact size and high efficiency such as OLED TVs, servers, lighting products, and laptop chargers and adapters. In summary, in our Power business, our product portfolio is getting stronger as we continue to focus on rolling out our next generation power products to maintain our momentum in design-ins and wins. These new products will provide the foundation to fill out our Gumi Fab, achieve better margins, and help us get back to profitability. Entire families of our next generation products will be forthcoming in 2024. We will be releasing the next generation 650-volt IGBT in the first half of 2024, followed by 6th generation super junction MOSFETs and 6th generation IGBTs in Q3 of this year and 8th generation medium voltage MOSFETs and 8th generation low voltage MOSFETs in Q4 of this year. We expect these next generation product families to match or surpass the performance of our Tier 1 competitors. This will position us well to compete for high-end industrial and automotive markets, as well as serve our existing markets such as consumer, computing, and communications better. Additionally, we will be introducing a new line of commodity products by the end of the first quarter to improve fab utilization. I'll come back to wrap up the call after Shinyoung gives you more details of our financial performance in the fourth quarter and provides Q1 and full year 2024 guidance. Shinyoung?

Thank you, YJ, and welcome to everyone on the call. Let's start with key financial metrics for Q4. Total revenue in Q4 was $50.8 million, down 17% sequentially and down 16.7% year-over-year. Revenue from the standard product business was $41.2 million, and revenue from Transitional Foundry Services was $9.6 million. Within standard products, display business revenue was $5.2 million and power business revenue was $36 million. Gross margin in Q4 was 22.7%, down from 23.6% in Q3, mainly driven by lower fab utilization. Compared to the same period last year, gross margin decreased 370 basis points from 26.4%, primarily as a result of unfavorable product mix, lower fab utilization, and higher fab costs. Going forward, please keep in mind that there likely will be more volatility in our gross margin due to the relative sizes of the newly organized businesses on a standalone basis. In addition, among other things, product mix, fab utilization, and input manufacturing costs will impact our quarterly gross margin by business. As a reminder, our Transitional Foundry Services contract with Key Foundry expired at the end of August 2023, and we are planning to wind down these foundry services starting in Q1 2024, with revenue expected to be approximately $2 to $3 million per quarter in the first half of 2024. Transitional Foundry Services accounts for approximately 30% of our Gumi capacity when fully utilized with Foundry products. This anticipated decline is significantly impacting our factory utilization rating at Gumi, negatively impacting our product gross margin for the Power business. Turning now to operating expenses. Q4 combined R&D and SG&A was $27.5 million; this compares to R&D and SG&A of $23.7 million in Q3 2023, and $26.2 million in Q4 last year. R&D in Q4 was $15.4 million, compared to $11.6 million in Q3 and $13.7 million in Q4 last year due to higher mask costs. Stock compensation charges including operating expenses were $1.7 million in Q4 compared to $2.1 million in Q3 and $1.5 million in Q4 last year. Q4 operating loss was $15.9 million. This compared to an operating loss of $9.2 million in Q3 and an operating loss of $10.1 million in Q4 2022. On a non-GAAP basis, Q4 adjusted operating loss was $14.1 million compared to adjusted operating loss of $7.1 million in Q3 and $8.6 million in Q4 last year. Net loss in Q4 was $6 million, as compared with a net loss of $1.2 million in Q3 and a net income of $3 million in Q4 last year. Q4 adjusted EBITDA was negative $10 million. This compares to a negative $2.7 million in Q3 and negative $4.8 million in Q4 last year. Our GAAP diluted loss per share in Q4 was $0.16 as compared with diluted loss per share of $0.13 in Q3 and diluted earnings per share of $0.07 in Q4 last year. Our non-GAAP diluted loss per share in Q4 was $0.21. This compares with diluted loss per share of $0.04 in Q3 and $0.36 in Q4 last year. Our weighted average diluted shares outstanding for the quarter were 38.8 million shares. In Q4, under our new stock buyback program authorization of $50 million, we repurchased approximately 1.1 million shares or $8.2 million. We had about $36.4 million remaining out of the new $50 million program at the end of December 31, 2023. Moving to the balance sheet, we ended the quarter with no debt and cash of $158.1 million, down from $166.6 million at the end of Q3 2023. The primary cash outflow during the quarter was approximately $8.2 million of stock buybacks. Net accounts receivable at the end of the quarter totaled $32.6 million, which represents a decrease of 20.6% from Q3 2023. Our days sales outstanding for Q4 was 59 days and compares to 62 days in Q3. Our average days in inventory for Q4 was 77 days and compares to 61 days in Q3. The absolute dollar value of our inventory was up slightly quarter-over-quarter, while lower cost of sales primarily drove the calculations for days of inventory higher, specifically inventories net at the end of the quarter totaled $32.7 million. This compares to $30.8 million in Q3 2023. Lastly, Q4 CapEx was $4.7 million, and for the full year 2023, we spent $7 million in line with our previous estimates, which we reaffirmed last quarter. Now moving to our first quarter and full year 2024 guidance. Beginning Q1, we'll begin reporting reserves under the newly organized businesses MSS and PAS. While actual revenues may vary for Q1 2024, Magnachip currently expects consolidated revenue to be in the range of $46 million to $51 million, including approximately $3 million with Transitional Foundry Services. MSS revenue is expected to be in the range of $8 million to $10 million, compared with MSS equivalent revenue of $8.6 million in Q4 2023. PAS revenue is expected to be in the range of $35 million to $38 million, compared with PAS equivalent revenue of $32.6 million in Q4 2023. Consolidated gross profit margin is expected to be in the range of 17% to 20%. MSS gross profit margin is expected to be in the range of 40% to 43%, which includes the positive impact of expected one-time non-recurring engineering revenue. This compares with MSS equivalent gross profit margin of 41.3% in Q4 2023, which also included one-time non-recurring engineering revenue. PAS gross profit margin is expected to be in the range of 15% to 18% due primarily to the expected decline in Transitional Foundry Services revenue. This compares with PAS equivalent gross profit margin of 18% in Q4 2023. For the full year 2024, we currently expect MSS revenue to grow double digits year-over-year, compared with MSS equivalent revenue of $44.4 million in 2023. PAS revenue is also expected to grow double digits year-over-year, compared with PAS equivalent revenue of $151.3 million in 2023. Consolidated revenue is expected to fluctuate slightly year-over-year as the recovery in MSS and PAS is offset by the phase-out of Transitional Foundry Services. Consolidated gross profit margin is expected to be between 17% to 20%, due to idle capacity expected from the phase out of Transitional Foundry Services. This compares with the consolidated gross profit margin of 22.4% in 2023. Thank you. And now I'll turn the call back over to YJ for his final remarks.

I want to emphasize points I made earlier because they are important for investors to understand where we are and where we are headed. One, our Display business is building upon our past success in Korea to focus more squarely on China. As a sign of the importance of the China market, we have formed a dedicated China operating entity, enabling us to forge strategic partnerships with key players in the smartphone, TV, automotive, and ecosystems. This move strengthens our market presence and fosters valuable relationships within the industry. As we benefit from these strategic initiatives in our China operations, we are optimistic about the trajectory ahead for our Display business. Two, we are dealing head-on with an expected drop in fab capacity in our Gumi Fab as a result of the expected drop-off in Transitional Foundry Services and will provide regular updates on our plans. Three, we've separated the structure of the company into two entities to increase shareholder value by maximizing the valuation of each segment, strengthening business performance management, and enhancing flexibility to respond to changes in the business environment. The move also will dramatically increase our transparency to the investor community. Thank you to our shareholders for your patience. We appreciate your support as we work to achieve our goals. Now I will turn the call back to Steven.

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

Our first question comes from the line of Suji Desilva from ROTH Capital Markets.

YJ, in the display market in China, you say you have two smartphone OEM wins. Are those wins secured directly by you or by the display partner you have? Just trying to understand how those OEM wins are going to be secured going forward.

Yes, in China, we sell to the panel customer and the smartphone OEMs. They also dictate which DDIC they like to use. As I said, we doubled our resources in the last few quarters. We have more than 20 professionals, and I also had added three more direct OEM sales to smartphone and to OEMs, and I've also hired three advisors to help from the top 5G semiconductor companies and supply chain, and so forth. So, we are using both sell to the panel as well as the small OEMs, and that's how we're going to accelerate and win more sockets.

Also in the display market, can you tell me how many products you have now targeting the China market in total? And what is the after service market? Is that a special market that needs special products?

So let me talk about the after service market. So, the after service market is for either refurbished phones or when your screen goes off, then you have to replace it. According to market research, that market is now anywhere between 10% to 20% of the smartphone market. And as you see, there's an increase in used smartphones. So I think that's what we have seen and that's the first question answered. As for the number of products we now have targeting the China market, we have three, and we are going to have another chip coming out next quarter. We are working on both affordable and mainstream products that will all be out this year.

And then last question, as you convert the Foundry Services at Gumi to power, how should we size the revenue opportunity once that's fully converted incrementally for your Power business? The opportunity at least capacity-wise.

I think there are two vectors there. One is how we are going to fill the fab. The way we will fill the fab is during the transition. First of all, we are going to have a bunch of new products. As I said today, we have a slew of new generations coming out all this year. So we have a 650-volt IGBT in the first half, followed by 6th generation super junction and IGBT in Q3, and 8th generation in low voltage in the fourth quarter. Then another commodity product line to fill the factory in the fourth quarter. So that is the product strategy to fill it. In the second half, we will be converting the fab to power products and fill it up. Once all that is achieved, we expect revenue to go beyond what we did in the past, but it will take a little time.

Maybe I can ask one last question for Shinyoung, and then I will return to the queue. Shinyoung, regarding the gross margin for MSS, how much of that was due to NRE benefit? If you could provide an estimate, that would be helpful.

It's probably on a normalized basis; it's probably 30% plus.

Our next question comes from the line of Quinn Bolton from Needham.

Nick on for Quinn. Just a quick one, will you provide a historical breakout of MSS and PAS?

Yes, when you report the Q1 quarterly results, you will see the competitive historical period recall on the same basis.

We would at least see the first quarter, but hopefully we could get some second and third quarter numbers. So for gross margins, you mentioned we should expect volatility. You're winding down the Transitional Foundry Services, I think by the end of the second quarter. So how long will that fab be at least 30% underutilized? I guess I'd expect margins to maybe bottom in Q2 and remain low, maybe flat in Q3 into Q4 perhaps. I mean, after last quarter, I think we were expecting margins to bottom in the Q3/Q4 timeframe. So are you kind of pulling that in with maybe an accelerated foundry wind down? I guess what's the best way to think about the margin path?

I mean, we are going to still have some Foundry Services revenue, like $2 million to $3 million per quarter in Q1 and Q2. So technically, we can't really do anything about the 30% capacity in our Gumi fab, and we are going to wind down after Q2. So, I mean, we are going to see some idle capacity in the second half as well until we fully convert that capacity to power products. So you're going to see that the margin kind of depression throughout the year.

I think the difference in the second half is that we are rolling out by that time, all the new generations, which are higher margin and lower cost. That will be the lever that will try to maximize the margins.

When you kind of finish the idling process, maybe margins bottom in the third quarter and then stay flat until you fill up the fab. That's what it sounds like. In the Power business, you talked about an auto win that will contribute in 2024. So a couple of questions there. Just how do we think about sizing that win? Maybe when will it begin to ramp? What was the main technical driver of that design win? And then how does that ramp play out with your Gumi fab utilization? Sounds like that would kind of help in the Q3/Q4 timeframe.

So the automotive, as you know, we did not have any automotive business about two calendar years ago. And 2022 was the first year, maybe it was 1% or less than 1% revenue. Last year, we had about 5% of revenue. And then this year we'll still grow high double digits. So that's about the size of the automotive business. We now have more than two dozen design wins and wins in automotive, and we are still having the momentum.

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

My first question is about your customer engagement activities in China. Can you talk about how many customers are you actively engaged with, and are the new wearables and aftermarket wins with the same customer?

We are discussing with direct panel customers, like the panel guys. We have two panel guys we are doing business with now, and we are actively engaged with the top five out of six smartphone OEMs directly. That's what we are doing.

A question on the margins for power discrete products is how the current margin compares to historical levels, particularly the historical peaks, and what needs to occur for the power product margin to recover to its previous state.

As YJ mentioned, once we convert 30% of idle capacity for power discrete, we will be rolling out the new generation power product series, which will have a higher margin. Once we replace the foundry products, you will see the negative margins. The thing is ASP was fixed for those products, but the cost was high. So the power business now has to absorb those fixed costs from those foundry products. But if we fill that capacity with a higher margin based on the new generation product series, we have the potential to go back to our historical higher level.

So what else needs to happen fundamentally for you to fully fill that capacity?

I think that's a very critical point. We've been saying that today it is our top priority; it's about having the right product portfolio. We already had 650-volt super junction in the October release that is 60% better than before. We are introducing the new 650-volt IGBT in the first half, followed by 6th generation super junction and 6th generation IGBTs in the third quarter, and 8th generation medium voltage and low voltage products in the fourth quarter. Additionally, we'll have a new line of commodity products in the fourth quarter. These will drive to fill the fab with better margin and better performance.

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 Q4 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.