MagnaChip reported first quarter earnings this week. The company reported revenue of $104 million and non-GAAP EPS of $0.28 cents per share, up 27% year-over-year. MagnaChip’s business remains supply-constrained and the company is focusing efforts on its high margin business. Gross profit margin increased to 37.5% during the quarter, up 250 basis points from the prior quarter and 960 basis points year over year.

CEO YJ Kim noted:

“the ongoing lockdowns in China has added new challenges to an already stressed supply chain. Despite the current macro issues, which may limit our near-term growth, our recent design tractions with an existing OLED customer, broadening customer base, and new wafer capacity later this year give us confidence and optimism about our long-term growth.”

Table of Q1 performance versus Q4-2021(prior quarter) and Q1-2021(year-over-year):

MagnaChip continues to hold too much cash on its balance sheet. Using the latest figures, 33% of the market cap is sitting in cash. Management needs to do a much better job of capital allocation. Today, it is an $18/sh stock with $6/sh in cash and zero debt. Management should be buying back stock at these levels.

Source: MagnaChip

It appears the company repurchased close to 1 million shares during the quarter as the total number of fully diluted share count declined from 47,691,816 on 12/31/2021 to 46,693,294 at 3/31/2022.

The “not great” news on the conference call is that the rolling lockdowns in China are adding to the ongoing supply chain problems for the company. Management was reluctant to affirm 2022 guidance given these ongoing problems due to COVID. Regardless, they are adapting to the situation, focusing on high margin business, and continue to see demand that far outstrips their ability to produce chips. These are good problems. Q2 guidance is for revenue in the $100 - 105 million range and a gross profit margin in the 33-35% range.

The good news, and the reason we own the stock as a special situation, is there is an active M&A process underway led by JPMorgan. There are multiple reports of interested parties looking to make a bid for MagnaChip.

“South Korea’s LX Group and SK hynix are emerging as strong candidates to acquire U.S.-listed chipmaker Magnachip Semiconductor.

LX Group is considering buying Magnachip, according to industry sources. South Korea’s Kolon Group has recently stopped studying the acquisition.”

And in this article, LX Holdings confirmed they are looking at the MagnaChip deal:

“A spokeswoman of LX Holdings, the holding company of the group, confirmed the group is reviewing the acquisition of U.S. stock market-listed semiconductor company Magnachip Semiconductor.

"It is true that the group is under consideration for acquiring Magnachip. In terms of its growth strategy, the group is considering various M&A opportunities and one of them is Magnachip," the official said.

The official added that none of the affiliates had yet been determined, in regards to which company would take over Magnachip, but the industry expects LX Semicon, which is in charge of the group's semiconductor design, to jump into the acquisition race.”

Now, we wait. A Letter Of Intent (LOI) to acquire MagnaChip could come any day from LX Group or another interested party. We continue to view shares of MagnaChip as attractive for purchase in the $18s (or lower) and we expect an eventual buyout offer will be announced at an acquisition price of $25/sh or more.