Good day, and thank you for standing by. Welcome to the Q2 2023 Magnachip Semiconductor Corporation Earnings Conference Call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. To ask a question during the session, you need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised, today's conference is being recorded. I would now like to hand the conference over to your speaker today, Yujia Zhai, please go ahead.
Hello, everyone. Thank you for joining us to discuss Magnachip's financial results for the second quarter ended June 30, 2023. Second quarter earnings release that was issued today after the market close, can be found on the company's investor relations website. 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, and Shinyoung Park, Magnachip's Chief Financial Officer. YJ will discuss the company's recent operating performance and business overview. Shinyoung will review the financial results for the quarter and provide guidance for the third quarter of 2023. 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, 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, are intended to illustrate an alternative measure of Magnachip's operating performance that may be useful. The 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 will now turn the call over to YJ Kim. YJ?
Hello, everyone. Thank you for joining us today, and welcome to Magnachip's Q2 earnings call. Starting with our financials. Q2 revenue was $61 million, down 39.8% year-over-year and up 7% sequentially. Gross margin was 22.2%, up 100 basis points from Q1, driven by higher utilization at our Gumi fab. Our year-over-year results continue to be impacted by macro challenges that I will detail in each of our business sections, but I am pleased to see sequential improvement in our power business, driven by industrial and automotive applications. These positives were offset by weaker OLED smartphone revenue during the quarter from our top Korea panel customer.
During the quarter, we also completed the $25.5 million of our remaining stock buyback program. Today, I'm pleased that our board approved a new stock buyback authorization of $50 million, which signifies our confidence in our long-term business and unwavering commitment to enhance shareholder value. Earlier in the second quarter, we announced that our board approved the recommendation of each strategic review committee to separate our display and power business into separate legal entities. Broadly speaking, this strategic separation represents a significant milestone for Magnachip and highlights our commitment to unlock long-term value for our shareholders. We are currently working through the process of separating the business. They will have a distinct ERP, enterprise resource planning and accounting systems.
The process is expected to be completed at the end of 2023 and go live in January 2024. Post-separation, the board and management team will continue to oversee both businesses. This internal separation is aimed at enhancing transparency, accountability, business flexibility, as well as business focus and strategic optionality, and we look forward to providing further updates on our upcoming earnings calls. Let me now provide updates into each of our business segments. Beginning with our display business. Q2 revenue came in at $9.7 million, down 65.9% year-over-year and down 10.9% sequentially. Year-over-year, our results reflect the ongoing smartphone inventory correction and the continued impact of the last two years' supply shortages of 20 nanometer, 12-inch OLED wafers that affected our second half 2022 design wins.
Sequentially, our OLED revenue declined from Q1 due to decreased demand from our large Korean panel customer. Despite these near-term hurdles, we remain focused on expanding our customer base to include all major global panel customers, to deliver highly competitive products to achieve sustainable long-term growth as an industry leader in display. At our new global tier one panel customer, we delivered our second OLED DDIC project sample in Q1. Due to spec changes by the customer, we revised and shipped a second chip at the end of June. We aim to receive final qualification in a few months and anticipate production at the end of the year. Additionally, we sampled the third chip in Q2, which has been evaluated by the global panel customer and is now at the designing evaluation stage by a smartphone maker for the first half, 2024 launch.
Further, with our new global panel customer, we continue to collaborate on new projects. In Q2, we began developing a fourth OLED DDIC project for our global panel customer maker that has the potential to contribute revenue around midyear 2024. Additionally, we started work on a mass market OLED display driver flip chip, aimed at expanding market share of the low to mid-range OLED smartphone display market, which expect to drive revenue growth in the second half of 2024 and beyond. Given these developments, we feel confident about our odds of winning additional Asian smartphone designs and capturing significant market share over the longer term in Asia. It is estimated that in Q2 2023, China panel makers already have captured almost 40% of the worldwide OLED smartphone panel production.
With regard to our large panel customer in Korea, we began production shipment of first OLED automotive chip in Q2, targeted for two different car models for a leading European automaker. Following the quarter, and in July, we also initiated production shipment targeted to another top-tier European car manufacturer. We anticipate these three models to provide revenue beginning in the second half of this year and beyond. Further, we secure two new design wins, with a third European automaker in Q2, with mass production slated for second half 2025. With these wins, we now have five cumulative design wins targeted for a car models from leading European automakers. For our smartphone DDIC project at our large panel customer in Korea, we are awaiting our customer's alignment with Chinese smartphone OEMs, and look for such a alignment by the end of the year.
Moving on to our power business. Q2 revenue was $41.7 million, down 33.7% year-over-year, and up 2.6% sequentially, due to strengths in industrial and automotive markets. As we stated in our last quarter call, we believe we hit the bottom in Q1 2023, and we saw progress in inventory on hand. The demand improvement in Q2 was broad-based. For instance, we saw a revival in demand for TVs, solar, and lighting markets. Additionally, we continued our strong momentum with design activities in Q2, propelled by our robust product portfolio across automotive, industrial, and computing applications. In particular, notably, 35% of the design-ins and wins are attributed to new products and customers, while more than 17% emerged from new applications.
One key design win was at a leading home appliance maker in Korea, with production slated to begin in Q3 2023. Power products ASP remained strong, increasing 25.3% year-over-year, down slightly by 2.2% sequentially on lower premium product mix. We also contribute to innovate. In early July, we announced four new low-voltage MOSFETs using super short channel technology that significantly improves power, loss of smartphone batteries when charging or discharging. In summary, in our power business, our product design in win rate is stronger than ever, we are rolling out next-generation power products throughout this year. Looking ahead, we are seeing more improvements in our customer base, we expect further sequential growth in Q3. In our display business, we are very optimistic about the long-term growth of our OLED business.
We continue to collaborate closely with our new global partner, panel customer, we're excited about the additional new products that we are rolling out in the next six months. These new products offer compelling competitive advantages, are strategically aimed at tapping into the rapidly expanding OLED market in the Asian region. Thank you to our shareholders for your patience, we appreciate your support as we work towards our goals. I will now turn the call over to Shinya to go over the financial in detail.
Thank you, YJ, and welcome to everyone on the call. Let's start with key financial metrics for Q2. Total revenue in Q2 was $61 million, up 7% sequentially and down 39.8% year-over-year. Revenue from the standard products business was $51.4 million, and revenue from Transitional Foundry Services was $9.6 million. Within standard products, display business revenue was $9.7 million, and power revenue was $41.7 million. As YJ mentioned, while our results are still muted, we see sequential improvement in Q3. Gross margin in Q2 was 22.2%, up from 21.2% in Q1. We expect our Q3 2023 gross margin will gradually improve as utilization continues to improve with a higher demand in our power business.
As we have stated on our product call, we are planning for a wind down in our Transitional Foundry Services over the next several quarters, following the end of our contractual agreement with Key Foundry at the end of August 2023. Transitional Foundry Services account for approximately 25% of our Gumi capacity. We anticipate to begin the process of converting portions of the idle capacity to power standard products around the middle of 2024. Turning now to operating expenses. Q2 combined R&D and SG&A was $23.4 million. This compares to R&D and SG&A of $25.5 million in Q1 2023, and $26.1 million in Q2 last year. Our lower R&D and SG&A was primarily driven by our voluntary resignation program that we executed at the end of Q1.
Stock compensation charges, including operating expenses, were $2 million in Q2, compared to $1.1 million in Q1 and $1.9 million in Q2 last year. Q2 operating loss was $10.7 million. This compares to an operating loss of $21.8 million in Q1, and an operating income of $2 million in Q2, 2022. On a non-GAAP basis, Q2 adjusted operating loss was $7.8 million, compared to adjusted operating loss of $12.2 million in Q1, and adjusted operating income of $4.8 million in Q2 last year. Q2 adjusted EBITDA was negative $3.6 million. This compares to a negative $7.9 million in Q1, and a positive $8.5 million in Q2 last year.
Net loss in Q2 was $33.9 million, as compared with a net loss of $21.5 million in Q1, a net loss of $3.3 million in Q2 last year. Our GAAP diluted loss per share in Q2 was $0.09, as compared with diluted loss per share of $0.49 in Q1 and $0.07 in Q2 last year. Our non-GAAP diluted loss per share in Q2 was $0.06. This compares with non-GAAP diluted loss per share of $0.24 in Q1 and earnings per share of $0.23 in Q2 last year. Our weighted average diluted shares outstanding for the quarter were 41.7 million shares, which reflects shares repurchased as part of our expanded share repurchase program.
Our stock buyback in Q2 2023 amounted to approximately 2.5 million shares or $25.5 million. Cumulatively, since September last year to the end of Q2 this year, we've repurchased 4.9 million shares or $50 million. Moving to the balance sheet. We ended the quarter with no debt and cash of $173 million, down from $212.1 million at the end of Q1 2023. The primary cash outflows during the quarter were approximately $25 million of stock buybacks and payment of $11.4 million related to the voluntary resignation program, including one-time package cost of $8.4 million. Net accounts receivable at the end of the quarter totaled $35 million, which represents an increase of 8.9% from Q1 2023.
Our days outstanding for Q2 was 52 days and compares to 51 days in Q1. Inventories net at the end of the quarter totaled $32.3 million. This compares to $36.4 million in Q1, 2023. Our average days inventory for Q2 was 62 days and compares to 73 days in Q1. Lastly, Q2 CapEx was $1.4 million. We currently expect our CapEx in 2023 to be approximately $7 million, which is about 30% lower from our previous forecast of $10 million and nearly 70% lower from the 2022 level. Now moving to our third quarter guidance.
While actual results may vary, for Q3, Magnachip currently expects revenue to be in the range of $59 million-$65 million, including about $8 million of Transitional Foundry Services and gross profit margin to be in the range of 22.5%-24.5%. Thank you. Now I'll turn the call back over to Yujia. Yujia?
Thanks, Danielle. Thanks, Danielle. That concludes the prepared remarks section of our call today. Operator, you may now open the call for questions.
Thank you. Ladies and gentlemen, if you have a question or a comment at this time, please press star one one on your telephone. If your question has been answered or you wish to remove yourself from the queue, please press star one one again. We'll pause for a moment while we compile our Q&A roster. Our first question comes from Suji Desilva with Roth Capital. Your line is open.
Hi, YJ, welcome back, Shinyoung. On the OLED business, talking about the new tier one panel customer, you seem to, seem to have multiple products you may be able to ramp within the next four to eight quarters. Can you talk about how to size that opportunity versus your traditional business you've had in the Korea panel customers? It seems like the bigger opportunity, one understand that opportunity.
Yeah, Suji, thank you. We now have three samples, and as mentioned today, one will go through the qualification and expect to go towards the end of the year. The other one, the 3rd chip, is already in the designing evaluation stage and expect to go, if successful, go to launch in the 1st half next year. We are also getting a lot of encouraged because now we have three products. The ramp will be based on the, you know, each models. It's, it will be hard to say, but now, we are back on the pipeline, back to start starting the OLED ramp towards the end of the year.
Okay, that's helpful there. You know, where are your China panel customers? Where are they in the process of securing wins with their smartphone customers? Where are they in that process at this point?
Well, the fact that we already have design in evaluation stage, and then, we have a lot more encouraged. They are promoting a lot, and so we now will have about, you know, five, six different type of panel using the three chips that is being promoted. I said before that we will have two another chips coming in, in next six months, that will also enable 2024 revenue enablement on addition to the three chip being already being either sampled or started being evaluated by the end customers.
Okay. Okay, switching over to the power business, I'm curious, what kind of incremental revenue opportunity or capacity opportunity would you expect to happen as the Gumi service contract comes offline? How should we think about that opportunity incrementally?
The historical and transitional foundry services accounts for approximately 25% of our Gumi capacity. I mean, assuming all other things being equal, like, if nothing is done to fill the gap, our power products manufactured in Gumi fab will have to absorb approximately 25% of its fixed cost, which will increase our power product cost and result in lower gross margin. Again, that's also the opportunity for us to fill the gap. Our job is to fill the gap of transitional foundry wafers with our power wafers as soon as possible, but that will also require converting transitional service equipment to handle power devices. Like, again, our goal is to make the dip minimum and smoothly bring up more of our power business conversion in that fab.
Okay. Then following up on that, Shinyoung, the gross margin opportunity here, it seems like, you know, the prior peaks, you were in the high 20s when power is about 30% higher than where it is now, versus now in the low 20s. Is that the difference here in terms of, you know, recapturing power revenue to drive gross margin back up? Can you go above that with this incremental capacity if you ramp it?
I mean, it's gonna be our long-term goal to get to the, the high, the, the gross margin level. As I explained briefly, because of that, the switch from the transitional services to the power business, to kind of move some of the equipment from the Gumi fab to bring in, like, new equipment to support the power businesses. There's gonna be some, some gap there. Because the, the power product, during the process, will have to absorb more cost there. On, on long-term basis, we'll, we are trying to get back to the maximum level that you just pointed out, explained, but in the meantime, we're gonna experience some of the, the dip in the gross margin there.
Okay, got it. Maybe one last quick question. The OpEx from the current levels, do we expect it to be steady going forward, or will you be adding to the OpEx, or are there additional cost efficiency opportunities? Thanks.
I mean, the voluntary resignation program that we executed at the end of Q1, that's definitely helping our SG&A R&D to go down, and that's why you saw in Q2. R&D for the full year 2023, we're going to similar to the last year's level due to the development of, like, many new chips, as YJ explained during the call. You're going to see some increase in our R&D expenses in the second half of 2023, but the SG&A, we are trying to keep that at the reduced level, benefited from the voluntary resignation program effect.
Okay, great. Got it. Very helpful, Shinyoung. Thanks, everybody.
Again, ladies and gentlemen, if you have a question or a comment at this time, please press star one one on your telephone. One moment for our next question. Our next question comes from Martin Yang with Oppenheimer. Your line is open. Martin, your line is open. You can ask your question.
Hi, can you hear me?
Yes, we can hear you now.
Great. My first question is, maybe YJ, can you clarify your comment regarding your Korean panel customer and its alignment with Chinese smartphone on the end? Can you give us more details on what you mean by its alignment, and what are the potential outcomes out of the, you know, different scenarios for the alignment with the customers?
Yes, Martin, very good question. Our Korean panel customer, they tend to have three different type of customer, the Chinese smartphone makers, internal mobile division, and then, the fruit company. Our chip that we have provided to them last year in 2022 was targeted for their business for capturing some Chinese high-end smartphone. That's what they are working on. As you know, China's OLED market is very competitive, and they have five main panel makers. I think according to some market research data, they captured almost to 40% of the worldwide production or shipment in Q2 this year.
I think that's why some delay there, but, but at the same, at the same time, we, we are doing so many chips, with the new panel, global panel customer, and I think our strategy is on track.
Got it. My second question is on your the fourth and fifth chips and how that translates to maybe new customer relationships. Can you maybe tell us how many panel maker customers do you expect to have, OLED panel maker customers do you expect to have by the end of 2024?
The, by end of 2024, there's some, some echo. Hello? Hello. Yeah.
Yes, I can hear you.
Yeah, some echo here. We expect to get to two or three more panel customer by then, shipping. Sorry, the quality.
Are, are all of them Chinese?
Very well. Hello? Hello.
Yes, we can hear you.
Hi.
Yes, we can hear you.
Yep.
Okay.
Maybe you should ask your question again, Martin.
Sure. Just a follow-up on the, my second question is, are you expecting those additional panel customers, Chinese?
Yeah. We are expecting our future chips to be open, to be used by other than our current global customer.
Got it. I have no more questions. Thank you.
Again, ladies and gentlemen, if you have a question or a comment at this time, please press star one one on your telephone. I'm not showing any questions at this time. I'd like to turn the call back over to you, YJ, for any closing remarks.
Thank you. That concludes our Q2 earnings conference call. Please look for details of our future events on Magnachip's Investor Relations website. Thank you, everyone. Take care.
Ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful day.