Magnachip's Q3 2025 Earnings Call: Contradictions in Incentive Impact, Gross Margin Outlook, and New Product Revenue

Date of Call: September 30, 2025

Financials Results

• Revenue: $45.9M, down 13.3% YOY and down 3.5% sequentially (apples-to-apples)
• EPS: Non-GAAP diluted loss of $0.01 per share, vs $0.20 loss in Q3 2024 and $0.05 loss in Q2 2025
• Gross Margin: 18.6%, at the low end of guidance; down from 22% YOY and down from 20.4% sequentially
• Operating Margin: Adjusted operating loss of $7.4M, vs adjusted operating loss of $2.9M in Q3 2024 and $4.8M in Q2 2025

Guidance:

• Q4 2025 revenue expected $38.5M–$42.5M (midpoint down 11.9% sequential, down 17.1% YoY); Q4 gross profit margin 8%–10% (≈600 bps negative from a $2.5M channel incentive)
• Full‑year 2025 revenue down ~3.8% YoY at midpoint; FY gross profit margin expected 17%–18% (Q4 incentive ≈100 bps negative to FY)
• At least 20 new‑generation product introductions in Q4; new‑gen products expected to be ~10% of revenue in Q4 and in 2026; IGBT licence with Hyundai Mobis — qualification in 2026, initial revenue expected in 2027
• CapEx reduced: Gumi upgrade ~$30–35M through 2027; total 2025 CapEx ~$29–30M; expected year‑end 2025 cash in mid‑$90M range

Business Commentary:

• Product Portfolio Repositioning:
• Magnachip released 50 new-generation products in 2025, compared to only 4 in 2024.
• The company is focusing on low and medium-voltage MXT MOSFET products, Super-junction MOSFETs, and IGBT products to improve competitiveness and achieve revenue growth.

• Financial Challenges and Strategic Initiatives:
• Q3 revenue was $45.9 million, approximately at the midpoint of guidance, with gross profit margin at 18.6%.

• Magnachip is addressing pricing pressure and inventory issues by right-sizing its OpEx structure and conserving cash through reduced CapEx investments.

• Strategic Licensing Agreement with Hyundai Mobis:

• Magnachip signed a strategic licensing agreement with Hyundai Mobis for its IGBT technology, expanding its footprint beyond automotive markets.

• This partnership is expected to contribute initial revenues by 2027, with qualification results anticipated in 2026.

• Profitability and Cash Management:

• Non-GAAP diluted loss per share was $0.01 in Q3, with adjusted operating loss at $7.4 million.
• The company is focusing on heightened financial discipline and cash preservation, reducing annual OpEx by about 35% and headcount by more than 20% year-over-year.

  Sentiment Analysis:

  Overall Tone: Negative

  • Q3 revenue $45.9M, down 13.3% YoY and 3.5% sequentially; consolidated gross margin 18.6%, down from 22% YoY; adjusted operating loss $7.4M; Q4 gross margin guide 8%–10% driven by a one‑time $2.5M incentive with ≈600 bps headwind. Management calls 2026 a "challenging gross margin" period despite product roadmap and strategic actions.

Q&A:

• Question from Sujeeva De Silva (ROTH Capital): So the incentives that you're doing, the impact, should we understand that, that will be an impact that happens through the December quarter and is cleared? ... So should we think of that as being a 1-quarter event, Camillo, in terms of the effort there?
  Response: Yes — the $2.5M incentive is a one‑time Q4 expense intended to encourage channel inventory sell‑through; it's booked as a one‑time reduction in Q4 revenue and gross margin.

• Question from Sujeeva De Silva (ROTH Capital): If we take the 4Q guidance of 9 and then we add back the 600 bps, should we think of that as a trough level looking into '26 for gross margin? Or maybe you could give us some sense of the puts and takes, maybe utilization along with that to think about the trends there?
  Response: Q4 is likely the trough on utilization (mid‑50%); gross margin is pressured by low utilization and the one‑time incentive and will remain challenged into 2026 until new‑generation products ramp over multiple quarters.

• Question from Sujeeva De Silva (ROTH Capital): Maybe you can talk Camillo about the Hyundai Mobis agreement and just the genesis of it, kind of how it came about and if we should think about there being more agreements like that to target more product end markets beyond industrial IGBTs?
  Response: The Hyundai Mobis licensing deal stems from multi‑year development work; it licenses our IGBT tech, targets industrial (and beyond automotive) markets, is confidential on specifics, with qualification in 2026 and expected initial revenue in 2027.

• Question from Sujeeva De Silva (ROTH Capital): The communication strength you saw there, I presume some of that's consumer smartphone. I'm wondering the sustainability of the wins and the strength you're seeing there.
  Response: The communications strength reflects regained competitiveness with new products and strong customer relationships in Korea; sustainable if we replicate that competitiveness across the broader product portfolio via the new‑generation launches.

Contradiction Point 1

Impact of Incentives on Sales Channel and Inventory Management

It involves the company's strategy to move existing inventory and its expected impact on financial performance, which could influence investor decisions and expectations.

Will the impact of the incentives be resolved by the December quarter? Should we view the 1Q double-digit guidance as a one-quarter impact, Camillo? - [Sujeeva De Silva](ROTH Capital)

20251104-2025 Q3: We expect the $2.5 million financial impact this quarter. This program is aimed at encouraging sales channel to move existing inventory, which we hope will reduce over time. - [Camillo Martino](CEO)

What was the impact of incentives in the December quarter, and what does the 1Q guidance of double-digit growth imply? - [Sujeeva De Silva](ROTH Capital Partners, LLC, Research Division)

2025Q3: The program is intended to encourage sales channel inventory movement. We hope this strategy will reduce channel inventory levels over time. - [Camillo Martino](CEO)

Contradiction Point 2

Gross Margin Outlook and Revenue Contribution of New Generations

It involves the company's outlook on gross margins and the expected revenue contribution from new generations, which are critical financial indicators for investors.

Adding the 600 bps to Q4 guidance of 9, is that a trough level for 2026 gross margin? Can you provide insight into the factors and utilization affecting the trends? - [Sujeeva De Silva](ROTH Capital)

20251104-2025 Q3: The current Q4 is likely to be the lowest point for gross utilization, impacting current and next quarter's margins. Pricing pressure on old generations continues, but we expect improvement as new generations contribute more. - [Shin Young Park](CFO)

Is the gross margin guidance a trough, and what factors will drive future trends? - [Sujeeva De Silva](ROTH Capital Partners, LLC, Research Division)

2025Q3: Q4 likely has the lowest gross utilization rate, impacting margins. New-generation products will gradually contribute more revenue, slowly improving margins. But we'll feel pricing pressure on older products until then. - [Shin Young Park](CFO)

Contradiction Point 3

Incentive Impact and Revenue Recovery

It relates to the impact of financial incentives on the company's revenue and the expected timing of recovery, which are crucial for investor expectations.

Are the incentives' impacts fully realized in the December quarter and cleared? Should the 1Q double-digit guidance be viewed as a one-quarter event? - [Sujeeva De Silva](ROTH Capital)

20251104-2025 Q3: We expect the $2.5 million financial impact this quarter. This program is aimed at encouraging sales channel to move existing inventory, which we hope will reduce over time. - [Camillo Martino](CEO)

Is the gross margin decline in Q1, Q2 and Q3 primarily due to pricing or adjustments in utilization and inventory management? - [Suji Desilva](ROTH Capital Partners, LLC, Research Division)

2025Q2: For the second half, we're assuming a 5% headwind in terms of pricing pressure and a headwind on volume. So obviously, that's also impacting our revenue outlook. - [Shin Young Park](CFO)

Contradiction Point 4

Gross Margin Recovery Timeline

It involves the expected timeline for gross margin recovery, which is a critical financial indicator for investors.

Should adding 600 bps to the 4Q guidance of 9% represent the trough-level gross margin for 2026? Could you also provide insight into utilization trends and other factors affecting this outlook? - [Sujeeva De Silva](ROTH Capital)

20251104-2025 Q3: We expect the current Q4 to be the lowest point for gross utilization, impacting current and next quarter's margins. Pricing pressure on old generations continues, but we expect improvement as new generations contribute more. - [Shin Young Park](CFO)

Is the decline in gross margin in Q1, Q2, and Q3 primarily due to pricing, or are you adjusting utilization and managing inventories in the current environment? - [Suji Desilva](ROTH Capital Partners, LLC, Research Division)

2025Q2: Gross margins for Q3 are expected around 75%, with full-year guidance in the mid-70s. - [Shin Young Park](CFO)

Contradiction Point 5

Gross Margin Trends

It involves differing expectations for the lowest point in gross margin utilization, which impacts investor expectations and financial forecasting.

If we add 600 bps to the Q4 guidance of 9%, should we view this as the trough level for gross margin in 2026? Could you also provide insight into the key factors and utilization trends affecting gross margin? - [Sujeeva De Silva](ROTH Capital)

20251104-2025 Q3: The current Q4 is likely to be the lowest point for gross utilization, impacting current and next quarter's margins. - [Shin Young Park](CFO)

Where do you expect gross and operating margins to be next year? - [Michael Barton](Needham & Company)

2025Q1: For calendar year 2025, we expect our gross margins to be between 46% and 47%. - [Shinyoung Park](CFO)