Magnachip Delivers Solid Execution in First Quarter 2020
– Revenue from continuing operations was $120.5 million, up 12.3% year over year (YoY)
– OLED revenue of $69.7 million a record for Q1, up 43.6% YoY
– Revenue from discontinued operations was $76.5 million, up 52.7% YoY
– Foundry Services Group categorized as “discontinued operations” pending sale of the Foundry business and Fab 4
– Combined non-GAAP revenue of $197.0 million from continuing and discontinued operations, highest level achieved for a first quarter in 12 years; hits high-end of updated guidance
– Cash of $157.3 million highest in 7 Years; 4th straight quarter of positive net operating cash flow
SEOUL, South Korea and SAN JOSE, Calif., May 6, 2020 /PRNewswire/ — MagnaChip Semiconductor Corporation (NYSE: MX) (“MagnaChip” or the “Company”) today announced financial results for the first quarter of 2020.
In accordance with U.S. GAAP, the Company’s Foundry Services Group has been accounted for as a discontinued operation beginning in the first quarter of 2020, thereby impacting comparability to previously issued financial guidance. In March 2020, the Company announced the execution of a definitive agreement to sell the Foundry business and Fab 4. As previously reported, the transaction value is approximately $435 million, which includes $344.7 million in cash and approximately $90 million in accrued severance liabilities that will be transferred along with approximately 1,500 employees to the buyer at the close of the sale, expected in four to five months.
The Company now has one reporting segment for continuing operations, which consists of the results of operations of the standard products business, together with transitional foundry services related to Fab 3 that it expects to perform for the buyer of the Foundry business and Fab 4 for a period of up to three years (“Transitional Fab 3 Foundry Services”). The Transitional Fab 3 Foundry Services revenue will be accounted for at cost prior to the closing of the sale of the Foundry business and Fab 4. Additionally, the Foundry business and Fab 4 will be operated in the ordinary course of day-to-day business, but the related operational results will be shown as discontinued operations for accounting purposes until the closing of the sale.
First Quarter 2020: Results of Continuing Operations
Revenue from continuing operations (standard products business and Transitional Fab 3 Foundry Services) was $120.5 million, up 12.3% YoY.
Gross profit from continuing operations (standard products business and Transitional Fab 3 Foundry Services) was $29.1 million or 24.2% as a percentage of revenue from continuing operations, as compared to $19.0 million or 17.7% in the first quarter of 2019.
The Company is providing the following results of continuing operations, which excludes the impact of Transitional Fab 3 Foundry Services, in order to show the comparable results of the standard products business. This segment will constitute the Company’s core operations going forward.
Revenue from the standard products business, comprised of Display Solutions and Power Solutions business lines, was $110.7 million, up 10.4% YoY, and revenue from the Foundry Services Group was $86.3 million, up 51.1% from the same quarter a year ago.
The combined non-GAAP revenue of continuing and discontinued operations was $197.0 million, up 25.2% as compared with $157.4 million in the first quarter of 2019, and at the high-end of guidance range.
Gross profit from the standard products business was $29.1 million or 26.3% as a percentage of revenue from the standard products business, as compared with $19.0 million or 19.0% in the first quarter of 2019.
The combined non-GAAP gross profit margin of continuing and discontinued operations was 25.3%, up nearly 11 percentage points YoY and slightly exceeding the high end of guidance of 23-25%.
Management believes that segregating the revenue of the Transitional Fab 3 Foundry Services, which is more closely associated with the Foundry Services Group discontinued operations and not expected to be long-term core operations for the Company, from the revenue of continuing operations allows investors to better understand the results of continuing operations of our core standard products display solutions and power solutions businesses.
Due to the fact that these Transitional Fab 3 Foundry Services are being shown for accounting purposes at cost, management also believes that showing gross profit margin as a percentage of the standard products business provides investors with a clearer picture of the Company’s core operations for its standard products business.
We are providing certain non-GAAP combined results of continuing and discontinued operations to aid in the comparison to the updated financial guidance range provided on March 10, 2020. For a reconciliation of the Non-GAAP combined results of operations, please see the tables attached to this release.
CEO YJ Kim comments on Q1
Our business performed very well in the first quarter despite the COVID-19 pandemic that disrupted the global economy, as well as typical seasonal softness. OLED revenue of $69.7 million set a record for a first quarter, as eight OLED smartphones launched using our OLED display drivers. The Power business was impacted in part by COVID-19-related market softness and supply chain issues in China that have since improved, and we now expect Power revenue to show sequential revenue improvement in the second quarter. Gross profit margin from our standard products business, which is now our continuing business, was 26.3% in the first quarter and gross profit margin from the Foundry Services Group was 24.0%. Cash and cash equivalents of $157.3 million at the end of Q1 was at the highest level in seven years. We generated positive net operating cash flow of $21.1 million and free cash flow of $17.7 million. Notably, Q1 was the fourth consecutive quarter of positive net operating cash flow.
On COVID-19, mitigating risks to employees and supply chain
Our thoughts and prayers go out to everyone impacted by the COVID-19 pandemic, and we salute the brave first responders and essential health workers here in Korea and around the world. Due to the extraordinary nature of the global COVID-19 pandemic, we have taken several steps to mitigate potential risks related to the health and safety of our employees and to the resiliency of our supply chain. We disinfect areas in our fabs where employees gather, built partitions to separate employees in a cafeteria, upgraded the air filtration systems in our Seoul office, and require all employees to wear protective face masks and practice social distancing. Our supply chain currently is operating at normal levels, and steps have been taken to mitigate risks of disruption. Some of our Display subcontractors in Korea now carry extra inventory, while some Power assembly and test subcontractors in China now are capable of assembling multiple package types to help avoid a potential shortage at any individual plant.
Q2 2020 financial guidance
The COVID-19 pandemic is a rapidly evolving situation that reduces our forward visibility. While Korea and China appear to have made significant strides in controlling the spread of the COVID-19 outbreak, global markets are experiencing a sharp slowdown in business activity due to the global pandemic. To help account for market uncertainties, we have widened the typical guidance range we normally would provide for Q2. While actual results may vary based upon COVID-19 events that are still unfolding, MagnaChip currently anticipates based on best available current estimates for Q2 2020:
Revenue from the standard products business to be flattish to down from the first quarter of 2020. Revenue from the Foundry Services Group to be flattish to up. Non-GAAP combined revenue to be in the range of $191.0 million to $203.0 million, flattish at the mid-point of the projected range when compared with combined revenue of $197.0 million in the first quarter of 2020.
Gross profit margin from both the standard products business and the Foundry Services Group to be up. Non-GAAP combined gross profit margin to be in the range of 26.0% to 28.0%, when compared to 25.3% in the first quarter of 2020.
First Quarter Financial Review
Revenue from continuing operations was $120.5 million in the first quarter of 2020, up 12.3% as compared with $107.3 million in the first quarter of 2019.
Revenue from the standard products business was $110.7 million in the first quarter of 2020, up 10.4% as compared with $100.3 million in the first quarter of 2019.
Revenue from the Foundry Services Group was $86.3 million in the first quarter of 2020, up 51.1% as compared with $57.1 million in the first quarter of 2019.
Gross Profit and Gross Profit Margin
Gross profit from continuing operations was $29.1 million or 24.2% as a percentage of revenue from continuing operations, as compared with $19.0 million or 17.7% in the first quarter of 2019.
Gross profit from the standard products business was $29.1 million or 26.3% as a percentage of revenue from the standard products business, as compared with $19.0 million or 19.0% in the first quarter of 2019. The YoY improvement in gross profit margin was due primarily to an improved product mix and a decrease in inventory reserve related to a legacy display product.
Gross profit from the Foundry Services Group was $20.7 million or 24.0% as a percentage of revenue from revenue from the Foundry Services Group, as compared with $3.7 million or 6.4% in the first quarter of 2019. The YoY improvement in gross profit and gross profit margin was primarily due to a higher utilization rate stemmed from a recovery from a global customer inventory correction and an improved product mix.
Operating Income, Net Income, Adjusted Net Income, Adjusted EBITDA
Operating income from continuing operations for the first quarter was $6.0 million as compared to operating loss from continuing operations of $5.1 million in the first quarter of 2019.
Net loss from continuing operations, on a GAAP basis, was $31.1 million or $0.89 per basic and diluted share in the first quarter of 2020 as compared with net loss from continuing operations of $21.6 million or $0.63 per basic and diluted share in the first quarter of 2019.
Adjusted net income from continuing operations, a non-GAAP financial measure, totaled $1.1 million or $0.03 per basic share and diluted share in the first quarter of 2020 as compared to adjusted net loss from continuing operations of $9.7 million or $0.28 per basic and diluted share in the first quarter of 2019.
Adjusted EBITDA from continuing operations, a non-GAAP financial measure, was $9.9 million or 8.9% of revenue from the standard products business in the first quarter of 2020, as compared to negative $1.3 million in the first quarter of 2019.
Management believes that non-GAAP financial measures, when viewed in conjunction with GAAP results, can provide a meaningful understanding of the factors and trends affecting MagnaChip’s business and operations and assist in evaluating our core operating performance, as well as providing a meaningful comparison to previous information provided on a basis prior to the discontinued operations classification of the Foundry Services Group. However, such non-GAAP financial measures have limitations and should not be considered as a substitute for net income from continuing operations or as a better indicator of our operating performance than measures that are presented in accordance with GAAP. A reconciliation of GAAP results to non-GAAP results is included in this press release.
Cash and cash equivalents totaled $157.3 million in the first quarter, up from $151.7 million in the fourth quarter of 2019.
Note: The following table sets forth supplemental information relating to the continuing and discontinued operations (in thousands). Upon the execution of the definitive agreement to sell the Foundry business and Fab 4, the Foundry Services Group is accounted for as a discontinued operation.
First Quarter 2020 and Recent Company Highlights
Entered into a definitive agreement (the “Agreement”) by certain of its wholly owned subsidiaries to sell the Company’s Foundry Services Group and the factory in Cheongju, the larger of the Company’s two 8″ manufacturing facilities, to a special purpose company in South Korea established by Alchemist Capital Partners Korea Co., Ltd. and Credian Partners, Inc. Under the terms of the Agreement, the total transaction value is approximately $435 million.
Announced its offering of a 0.13 micron BCD process with improved performance to help automotive power semiconductor designers build more competitive products. BCD (Bipolar-CMOS-DMOS) is a process technology that combines three different process technologies onto a single chip: Bipolar for analog signal control and CMOS (Complementary Metal Oxide Semiconductor) and DMOS (Double Diffused Metal Oxide Semiconductor) for digital signal control and high-power handling, used primarily for power semiconductors.
Launched a new MOSFET for wireless earphones for preventing the battery from overcharging and entered to the wireless earphone market. This MOSFET is designed to control excessive current flowing into wireless earphones while recharging the battery in order to protect wireless earphones from being damaged. Since 2010, MagnaChip has been providing the world’s highest volume of MOSFETs for smartphone battery charging protection.
First Quarter 2020 Earnings Conference Call
The conference call will be webcast live and also is available by dialing toll-free at 1-844-536-5472. International call-in participants can dial 1-614-999-9318. The conference ID number is 4448257. Participants are encouraged to initiate their calls at least 10 minutes in advance of the 5 p.m. ET start time to ensure a timely connection. The webcast and earnings release will be accessible at www.magnachip.com.
A replay of the conference call will be available the same day and will run for 72 hours. The replay dial-in numbers are 1-404-537-3406 or toll-free at 1-855-859-2056. The access code is 4448257.
About MagnaChip Semiconductor
MagnaChip is a designer and manufacturer of analog and mixed-signal semiconductor platform solutions for communications, IoT, consumer, industrial and automotive applications. The Company’s the standard products business and Foundry Services Group provide a broad range of standard products and manufacturing services to customers worldwide. MagnaChip, with more than 40 years of operating history, owns a portfolio of approximately 2,950 registered patents and pending applications, and has extensive engineering, design and manufacturing process expertise.
For more information, please visit www.magnachip.com. Information on or accessible through MagnaChip’s website is not a part of, and is not incorporated into, this release.
Safe Harbor for Forward-Looking Statements
Information in this release regarding MagnaChip’s forecasts, business outlook, expectations and beliefs are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. These statements include statements about MagnaChip’s future operating and financial performance, outlook and business plans, including second quarter 2020 revenue and gross profit margin expectations, and the impact of the COVID-19 pandemic on MagnaChip’s second quarter 2020 and future operating results. All forward-looking statements included in this release are based upon information available to MagnaChip as of the date of this release, which may change, and we assume no obligation to update any such forward-looking statements. These statements are not guarantees of future performance and actual results could differ materially from our current expectations. Factors that could cause or contribute to such differences include the impact of changes in macroeconomic and/or general economic conditions, including those caused by or related to the COVID-19 outbreak, recessions, economic instability and the outbreak of disease; the impact of competitive products and pricing; timely design acceptance by our customers; timely introduction of new products and technologies; ability to ramp new products into volume production; industry wide shifts in supply and demand for semiconductor products; industry and/or company overcapacity; effective and cost efficient utilization of manufacturing capacity; financial stability in foreign markets and the impact of foreign exchange rates; unanticipated costs and expenses or the inability to identify expenses which can be eliminated; compliance with U.S. and international trade and export laws and regulations by us and our distributors; the risk that the pending sale of our Foundry Services Group business and the Fab 4 facility to Magnus Semiconductor, LLC or one of its wholly owned subsidiaries is not consummated according to our current expectations or at all; public health issues, including the COVID-19 pandemic; other business interruptions that could disrupt supply or delivery of, or demand for, MagnaChip’s products, including uncertainties regarding the impacts of the COVID-19 pandemic that may result in factory closures, reduced workforces, scarcity of raw materials and goods produced in infected areas, as well as reduced consumer and business spending affecting demand for MagnaChip’s products due to government and private sector mandatory business closures, travel restrictions or the like to prevent the spread of disease; and other risks detailed from time to time in MagnaChip’s filings with the SEC, including our Form 10-K filed on February 21, 2020 (including that the impact of the COVID-19 pandemic may also exacerbate the risks discussed therein) and subsequent registration statements, amendments or other reports that we may file from time to time with the Securities and Exchange Commission and/or make available on our website. MagnaChip assumes no obligation and does not intend to update the forward-looking statements provided, whether as a result of new information, future events or otherwise.
In the United States:
Director, Public Relations