Economy Processed transcript of the conference call or presentation on...

Processed transcript of the conference call or presentation on the HIMX results 13-Feb-20 13:00 GMT

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Taipei, February 14, 2020 (Thomson StreetEvents) – Published minutes of the conference call or presentation on the results of Himax Technologies Inc Thursday, February 13, 2020, 1:00 p.m. GMT

Himax Technologies, Inc. – CFO

Himax Technologies, Inc. – Founder, CEO, President and Director

MZ Group S.A. – MD from MZ North America

Dear Sir or Madam, Thank you for standing by and welcome to Himax Technologies fourth quarter and full year 2019 earnings call. (Operation manual). Please note that today’s conference will be recorded. (Operation manual).

I would now like to hand over the conference to your speaker Maili Bergman, Managing Director of the MZ Group. Please continue.

Maili Bergman, MZ Group S.A. – MD from MZ North America [2]

Thank you very much. Welcome to Himax ‘earnings call for the fourth quarter of 2019. Jordan Wu, President and Chief Executive Officer, is coming from the company. and Ms. Jackie Chang, CFO. After the prepared comments from the company, we gave time for questions in a question and answer session. If you have not yet received a copy of the press release with today’s results, please email [email protected] or access the press release on financial portals or download a copy from the Himax website at www himax. com.tw down.

Before I start formal work, I would like to remind everyone that some of the statements in this conference call include statements about expected future results, financial results and industry growth, and are forward-looking statements that involve a number of risks and uncertainties may cause actual events or results to differ materially from those described in this conference call. Factors that could cause actual events or results to differ materially from those described in this conference call include general business and economic conditions, the state of the semiconductor industry, market acceptance and competitiveness of the driver, and non- Driver. Driver products developed by Himax, demand for end-use application products, uncertainty about continued success in technological innovation, and the other operational and market challenges and other risks that are described from time to time in the company’s SEC filings, including those identified and in Section entitled Risk Factors in its Form 20-F for the fiscal year ended December 31, 2018, filed with the SEC in March 2019, with the exception of the company’s full year 2018 results, which are provided and provided in the Company’s 20-F was filed with the SEC on March 29, 2019. The financial information included in this conference call is unaudited and consolidated and is prepared in accordance with IFRS accounting.

This financial information is generated internally and has not been subjected to the same review, including internal review procedures and external reviews by an independent external auditor to which we submit our consolidated financial statements, and may differ materially from the audited consolidated financial information for the same period.

The company assumes no obligation to publicly update or revise any forward-looking statements based on new information, future events or for any other reason. I will now forward the call to Ms. Jackie Chang, CFO of Himax. The floor is yours, Jackie.

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Jacqueline Chang, Himax Technologies, Inc. – CFO [3]

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Thank you, Maili, and thank you all for coming to us. In today’s call, we will first review Himax’s fourth quarter consolidated financial performance, followed by the first quarter 2020 outlook. Jordan will then update our business status. After that we will answer questions. We will review our financial data on both IFRS and non-IFRS basis. Share-based payments and acquisition-related expenses are not included in the non-IFRS financial data. We announced preliminary key financial results for the fourth quarter on January 7, 2020 as quarterly sales, gross margin and earnings per share exceeded our guidance published on November 7, 2019. Revenue and gross margin were in line with the previously announced results, while EPS was at the upper end of the range.

In the fourth quarter, we had net sales of $ 174.9 million, an increase of 6.5% over the previous quarter. And a decline of 8.4% compared to the same period last year. Sales were better than our forecast for the flat quarter. Both the display driver and non-driver businesses contributed to better than managed sales. The gross margin was 20.6%, exceeding previous forecasts of a slight increase compared to 19.5% in the third quarter. A cheaper product mix between small display products, an improved utilization of the WLO factory and higher than expected engineering fees from new project orders increase the gross margin for the fourth quarter.

IFRS earnings per diluted ADS was $ 0.006, exceeding our forecast loss of $ 0.03 to $ 0.045. Stronger sales and an improved gross margin both contributed to the better-than-expected profit. In addition, we posted a $ 3.8 million revaluation gain from an AI start-up investment in November 2017. The revaluation gain was not included in the November guidance. Non-IFRS earnings per diluted ADS was $ 0.009, exceeding our forecast loss of $ 0.027 to $ 0.042. Large display driver sales were $ 57.9 million, an increase of 15.6% qoq and a decrease of 22% yoy.

The sequential growth was due to Chinese panel customers building new LCD factories and inventory in anticipation of growing demand and price hikes in 2020. However, revenue was below the level of the last quarter of 2018, when the panel manufacturer’s production peaked. Since then, they have reduced their production every quarter to meet the overall weak TV demand and industry-wide oversupply. Large driver ICs accounted for 33.1% of our total sales in the quarter, compared to 30.5% in the third quarter and 38.9% in the previous year. Sales of small and medium-sized display drivers were $ 81.1 million, up 5.1% quarter-on-quarter and 1.6% year-over-year. The segment accounted for 46.4% of total sales in the quarter, compared to 46.9% in the third quarter and 41.8% in the previous year.

Revenue growth, both sequentially and year-over-year, was primarily driven by higher automobile and tablet sales, offset by a decrease in TDDI smartphone sales. Although the decline was less than previously expected.

Smartphone sales declined sequentially by 22.5% and 14.3% year over year. Both the sequential and the decrease compared to the previous year were mainly due to lower TDDI deliveries.

On an annual basis, however, our TDDI deliveries in 2019 were almost twice as high as in the previous year because our fulfillment in 2018 was limited due to capacity bottlenecks.

From 4Q ’19. Our business experienced a major turnaround. Thanks to our penetration with more tier 1 smartphone OEMs, the rapid adoption of TDDI in mid to low end smartphones in the industry and our aggressive development of new foundries for TDDI. Jordan will be elaborating on this in a few moments.

Traditional TDDI fee revenue declined sequentially by 20.2% in the fourth quarter, but increased 14.3% year over year.

Display drivers for tablets and other consumer goods grew 26.5% sequentially, better than our previous forecast of 20%. This was due to the replenishment of customers and the strong demand from certain brand customers. Sales of tablets and consumer goods also increased in the fourth quarter compared to the previous year by 25.8%.

Our automotive driver IC sales grew 23.2% sequentially, better than our forecast of more than 15%. It rose by 1.9% compared to the same period in the previous year. Revenue from our non-driver businesses was $ 35.9 million, a decrease of 3% from the previous quarter and 2.6% from the previous year.

Non-driver products accounted for 20.5% of total sales, compared to 22.6% in the third quarter of 2019 and 19.3% in the previous year. The fourth quarter gross margin was 20.6% and increased 110 basis points sequentially, but decreased 370 basis points compared to the same period last year. The gross margin exceeded our previous expectation of a slight increase from 19.5% in the third quarter. The reason for the sequential increase was a cheaper product mix between small and medium-sized display driver products, the improvement of the workload and higher engineering fees from project orders.

The increased shipping of the WLO product to an anchor customer led to a higher capacity utilization of our WLO factory and thus to a better gross margin compared to the same period last year. The decrease compared to the previous year was mainly due to the erosion of the TDDI-ASP in smartphones, which was due to the increasing competition and to more TDDI deliveries for the lower end market.

In addition, our IC companies for large panel drivers faced headwind in 2019 when the cost of our COF packaging material increased due to capacity constraints and the display industry suffered from a large oversupply.

Our fourth quarter IFRS operating expenses were $ 37.4 million, a 5.6% decrease from the previous quarter and a 8.8% decrease from the previous year. The sequential decline was caused by lower salaries and lower R&D costs. The decrease compared to the previous year also resulted from lower salary and R&D expenses, which were offset by the increase in depreciation expenses.

Fourth quarter non-IFRS operating expenses were $ 36.8 million, a 6.2% decrease from the previous quarter and a 9.5% decrease from the prior year quarter. The IFRS operating margin for the fourth quarter was minus 0.8% after minus 4.7% in the previous quarter and after 2.8% in the same period of the previous year.

The sequential improvement resulted primarily from higher sales, a better gross margin and lower operating costs. The decrease compared to the previous year resulted from lower sales and gross margins, which were offset by lower operating costs. Non-IFRS operating loss for the full quarter was $ 0.7 million, or minus 0.4% of sales, compared to a non-IFRS operating loss of $ 7.3 million, or minus 4.4% of sales in the last quarter and after 3% in the same period last year. The sequential improvement in declines compared to the previous year was recorded for the reasons mentioned above.

Fourth quarter IFRS profit was $ 1 million, or $ 0.006 per diluted ADS, compared to a loss of $ 7.2 million or $ 0.042 per diluted ADS in the previous quarter and an IFRS profit of 8.5 million. USD or $ 0.049 per diluted ADS a year ago. IFRS earnings per diluted ADS exceeded previous forecasts for loss per diluted ADS from around $ 0.03 to $ 0.045. The better-than-expected profit was due to stronger sales, an improved gross margin, lower operating costs, and a revaluation gain of $ 3.8 million, or $ 0.022 per diluted ADS, from a previous investment in an AI start-up in November 2017.

This was the second revaluation gain we posted for the same investment, with the first profit of $ 2.9 million, or $ 0.017 per diluted ADS, posted in the same period last year.

The decrease compared to the previous year resulted from lower sales and gross margins, which were offset by lower operating costs. Excluding the revaluation gain, our quarterly IFRS loss for the quarter was $ 2.7 million, or $ 0.016 per diluted ADS, compared to a loss of $ 7.2 million or $ 0.042 per diluted ADS in the previous quarter and a gain of 5.6 $ Million, or $ 0.032 per diluted ADS from the same period last year.

Fourth quarter non-IFRS profit was $ 1.5 million or $ 0.009 per diluted ADS compared to a non-IFRS loss of $ 6.9 million or $ 0.04 per diluted ADS last quarter and a non-IFRS profit of $ 8.7 million, or $ 0.05 per diluted ADS, in the same period last year. Non-IFRS earnings per diluted ADS exceeded the previous forecast loss per diluted ADS of approximately $ 0.027 to $ 0.042. The better than expected result was due to the reasons mentioned above.

Excluding the revaluation gains, our quarterly non-IFRS loss was $ 2.2 million, or $ 0.013 per diluted ADS, compared to a non-IFRS loss of $ 6.9 million or $ 0.04 per diluted ADS in last quarter and earnings of $ 5.8 million, or $ 0.033 per diluted ADS period last year.

Let us now give a brief overview of the financial performance for the full year 2019. Revenue was $ 671.8 million in 2019, a 7.2% decrease from 2018. Revenue from drivers for large panel displays was $ 237.3 million, a decrease of 8.9% from that Corresponds to previous year. This corresponds to 35.3% of our total sales compared to 36% in 2018.

Revenue from small and medium-sized drivers was $ 307.4 million, a decrease of 5.6% year over year, which is 45.8% of our total revenue compared to 45% in 2018.

Revenue from non-driver products was $ 127.1 million, a 7.5% decrease from the previous year. This corresponds to 18.9% of our total sales compared to 19% in the previous year. The gross margin in 2019 was 20.5% after 23.3% in 2018. The decrease compared to the previous year is largely due to the erosion of the TDDI-ASP in smartphones, which is due to the increasing competition and significantly more TDDI deliveries for the lower market segment. In addition, our IC business with large panel drivers was affected by an industry-wide oversupply of TV panels and high material costs.

On a positive note, more WLO deliveries in 2019 led to improved capacity utilization at our WLO factory and thus to better gross margins.

Operating costs under IFRS were $ 156.2 million, a decrease of $ 9.3 million, or 5.6%, from a year earlier. The decrease resulted mainly from lower salaries, R&D expenses and share-based payments despite higher depreciation expenses from our new building.

As already mentioned, we did not issue RSUs in 2019 as in previous years, but instead granted stock options to employees. Fourth quarter stock option compensation expense was $ 0.33 million. Operating loss under IFRS was $ 18.3 million, a decrease of $ 21.7 million from 2018 due to lower sales and lower gross margins, which was offset by lower operating costs. For the same reason, the non-IFRS operating loss was $ 16.4 million, a decrease of $ 25.4 million from 2018. Our IFRS loss for the year was $ 13.6 million, or $ 0.079 per diluted ADS for a profit of $ 8.6 million, or $ 0.05 per diluted ADS.

The non-IFRS loss for 2019 was $ 12.1 million, or $ 0.07 per diluted ADS, a decrease of $ 25 million from the previous year.

Turn to the balance sheet. At the end of December 2019, we had cash and cash equivalents of $ 112.1 million and other financial assets, compared to $ 117.7 million at the same time last year and $ 128 million a quarter ago.

We generated operating cash flow of $ 23.4 million in the fourth quarter. However, the cash position was reduced from the previous quarter as we paid $ 33.4 million in unsecured loans and had a CapEx of $ 2.7 million in the quarter.

In addition to the cash position, restricted cash was $ 164 million at the end of the quarter, as in the previous quarter and a year ago. The restricted cash was mainly used to guarantee the secure short-term loans in the same amount. At the end of the fourth quarter, we had unsecured short-term loans of $ 57.3 million, well below the $ 90.6 million a quarter ago.

Our inventory at year end as of December 31, 2019 was $ 143.8 million, compared to $ 167.6 million in the last quarter and $ 162.6 million in the previous year. Trade receivables at the end of December 2019 were $ 164.9 million, compared to $ 157.3 million in the last quarter, compared to $ 189.3 million in the previous year.

Outstanding daily sales at the end of the year were 90 days compared to 95 days a year ago and 86 days at the end of the last quarter.

As highlighted in the last earnings call, we had to keep inventory levels higher in 2018 in response to the lack of capacity at foundries and certain packaging materials. Given the unfavorable market conditions and the relief of the foundry capacities in 2019, we have started to control our inventory since the first quarter of 2019. We believe that the inventory has reached a healthy level. And given the uncertain market conditions, we will monitor our inventory very carefully. Operating cash flow was $ 23.4 million in the fourth quarter compared to $ 2.3 million in the same period last year and $ 24 million in the last quarter.

Operating cash flow was $ 7.7 million in 2019, compared to $ 4 million in 2018. Investments in the fourth quarter were $ 2.7 million, compared to $ 5.2 million in the previous year and 31 $ 2 million last quarter. The vast majority of third quarter CapEx accounted for land acquisition, contraction of a new building, and expansion of WLO capacity.

The investment project was completed in the fourth quarter with a remaining payment of $ 1.5 million. The investment in design tools and R&D related equipment for our traditional IC design business was $ 1.2 million in the fourth quarter, compared to $ 2 million in the third quarter. Total investment for the year was $ 45.9 million, of which $ 7.3 million was for design tools and R&D related equipment. By comparison, capital expenditure for 2018 was $ 49.7 million, including $ 7.6 million for construction tools and R&D related equipment.

As of December 31, 2019, Himax had 172.2 million ADS outstanding, no change from the previous quarter. With total dilution, the total number of outstanding ADS is 172.6 million. In the past, due to the New Year holidays, the first quarter was the season with the lowest sales in terms of season and was reduced sequentially by more than 10%.

At this point, however, based on our current pipeline, we have strong sales in the first quarter, ignoring a seasonal factor. Jordan will discuss this in more detail later. However, the outbreak of corona viruses that is currently taking place in China and around the world is a major source of uncertainty for our business, especially in the short term. We work very closely with our customers and suppliers to minimize the risks.

We’ve seen some downward revisions to the first quarter forecast over the past week or two, mostly from certain Chinese-based small screen driver and CMOS image sensor customers who are still trying to get their operations back on track.

Our first quarter guidance below took these downward adjustments into account. In comparison, we see relatively little impact from the forecasts of large display customers who demand that our supply will not be interrupted by the incident, since the majority of operations are outside of China.

Our suppliers are largely unaffected by the outbreak of the corona virus. The focus is primarily on logistics management, including customs operations in various ports in China. It should be noted that we are very short-term engaged on both the customer and supplier side and in relation to our own activities in Wuhan and Hubei Province, the epicenter of the outbreak.

The situation is still evolving, in addition to the downward adjustments to the forecasts we’ve seen. We deliberately expanded and reduced forecasts for the lower end of the quarter to reflect the risks associated with the coronavirus outbreak. For the first quarter, we expect a sequential sales increase of between 1% and 10%, which corresponds to an increase of 8.2% to 7.8% compared to the previous year. The gross margin is expected to increase sequentially by 1% to 2% depending on our final product mix.

Shareholders’ IFRS earnings are expected to be in the range of around $ 0.005 to $ 0.018 positive per fully diluted ADS. Non-IFRS profit attributable to shareholders is expected to be in the range of $ 0.002 to $ 0.021 positive per fully diluted ADS. I will now give the floor to Jordan, the company’s CEO.

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Jordan Wu, Himax Technologies, Inc. – Founder, CEO, President and Director [4]

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Thanks Jackie. When we launched our third quarter earnings call last November, we were faced with market trends that created headwinds especially for us. At that point, our performance and forecast reflected the challenges we face in our smartphone TDDI business. This was compounded by the lower capacity available in the LCD industry, which had a negative impact on the sales and margins of our display driver ICs.

As a result, our overall sales and prospects were weak. Since then, we have seen a major turnaround in literally all aspects of our business. The trends we see in the first quarter are expected to extend to the second quarter and the rest of 2020.

Despite the uncertainty and the reason for the corona virus, we are confident that in 2020 we will see decent growth for all of our key product categories.

Let us guide you through all of our main business areas. Let’s start with the IC Business Update for Large Screen Ads.

For the first quarter, we expect sales of the IC segment for large display drivers to increase sequentially by approximately 10%. Find a strong find or panel price recovery. From the end of the fourth quarter of 2019, the panel manufacturers started to replenish their inventories and increase production.

Our leading Chinese panel customers are particularly active to gain further market share and take advantage of the ongoing restructuring of the Korean panel manufacturers.

As a leading IC provider, Himax is well positioned to benefit from the increased demand from the large Chinese large display players. These market trends, which tend to emerge in the fourth quarter of 2019, are expected to lead to strong first quarter results that will accelerate in 2020. On the supply side, during the last quarter’s earnings statement, we reported that Himax and some of our key panel customers have already seen capacity bottlenecks in the foundry for 8-inch silicon wafers for display driver ICs.

In anticipation of this, we have strategically prepared to pack and test our 12-inch foundry that has been reallocated in front of our peers to cover the potential 8-inch capacity shortage. Our coverage for design projects is strong among all leading Chinese panel manufacturers. We see the business prospects for our large display driver for 2020 as very positive.

With a view to technological development, the upcoming 2020 Olympic Games in Tokyo will be broadcast in 8K resolution. Before the event, all top TV brands tried to increase sales for 8K models.

At CES last month, many of these brands presented 8K televisions with Himax technology. Although the spread of 8K TVs is still low, we expect this to be a strategic opportunity for Himax. Because 8K TV sales would increase demand not only for our driver IC, but also for controller content.

Now let me come to the IC business for small and medium screen drivers. Starting with an update of our smartphone segment. Our TDDI product roadmap, new design success with end customers and the advantage of foundry capacity have positioned Himax to gain market share from the first quarter and throughout 2020.

The smartphone market continues to rely on new technologies and tends towards displays with a higher frame rate in order to enable a smoother screen display and a smoother gaming experience. This will drive the adoption of next generation high frame rate TDDI solutions for which Himax is a leading technology provider.

Demand for 5G in China is expected to drive global smartphone growth in 2020, which in turn will stimulate TDDI growth.

All of these trends will benefit Himax. As already mentioned, the small display business, which also includes the smartphone TDDI, will be the most affected by the outbreak of the corona virus in the short term.

Here, too, we work very closely with our customers, but only in our company to meet their short-term needs in the fight against the coronavirus outbreak.

After recovering the corona virus, we are confident that our smartphone TDDI business will grow strongly compared to last year. The price collapse of TDDI that we have seen last year is expected to subside in 2020. This is not only because the new hypermarket products have a higher ASP, but also because of the industry-wide tightening of the functional capacity for TDDI. Reminder: In 2018, the Himax TDDI parts were negatively impacted by a severe capacity bottleneck in the foundry, which meant that we were unable to meet customers’ delivery requirements. Although the capacity limit was removed towards the end of 2019. The delay is limited to our ability to participate in key design opportunities that would have driven the business in 2019.

The measures we took to develop them from 2018 to 19 enable an additional qualified foundry partner in front of our colleagues, combined with our superior technology and customer collaboration, and now position Himax in a unique way to prevent any tightening of the whole To benefit from TDDI foundry capacity in 2020.

We are well prepared to meet TDDI’s production requirements and continue to plan to build additional capacity this year to take advantage of the strong opportunities for smartphone TDDI and other TDDI applications such as tablets in 2020, a little later.

As expected, our traditional sales of discrete driver ICs for smartphones declined sequentially in the fourth quarter. This was mainly due to the fact that the traditional market for addressable smartphones with discrete driver ICs is quickly being replaced by TDDI and AMOLED.

As already mentioned, an important development on the market is the increased use of the OLED display for smartphones. This is due to the expanded OLED capacity and the increased demand for fingerprint technology under the display, which is currently only available in the AMOLED display.

We are encouraged by the progress we have made in AMOLED product development in close collaboration with leading panel manufacturers across China. We believe that AMOLED driver IC will soon become one of the most important growth drivers for our small panel driver business.

Im Segment Automotive Display steigt die Anzahl der Displays pro Fahrzeug weiter an, da der Gesamtmarkt für Automobildisplays ab 2020 zunehmen wird. Trotzdem wird erwartet, dass die weltweiten Autoverkäufe in diesem Jahr wieder sinken werden.

Noch wichtiger ist, dass sich der Markt für Himax schnell auf eine Reihe neuer Technologien verlagert, darunter eine höhere Auflösung, In-Cell-Touch, ein schmaler Rand, ein riesiger Bildschirm von Säule zu Säule, lokales Dimmen für höheren Kontrast und AMOLED für Kunststoff kostenlos. Formulardesign, die alle zu einer Zunahme der Multisize und der Nachfrage nach Kfz-Display-Treiber-ICs beitragen.

Himax hat mehr als 30% des globalen IC-Marktes für Kfz-Displaytreiber erschlossen und ist der Hauptpartner für die meisten Automobilhersteller weltweit, um die oben genannten neuen Technologien zu ermöglichen.

Es ist erwähnenswert, dass Himax auch der dominierende TDDI-Technologieanbieter für die Automobilindustrie ist und als alleiniger Lieferant an zahlreichen TDDI-Designprojekten verschiedener führender Panelhersteller arbeitet. Während wir für 2020 nur eine geringe Stückzahl erwarten, erwarten wir für das Jahr 2021 ein bedeutendes Volumen an Automobil-TDDI.

Wenden wir uns dem Geschäft mit Tablets und Unterhaltungselektronik zu. Wir gehen davon aus, dass das Tablet-Geschäft für Himax im Jahr 2020 ein wichtiger Wachstumsbereich sein wird, mit einem erheblichen Volumen an Tablet-TDDI-Lieferungen ab dem ersten Quartal. Die starke Dynamik wird sich im zweiten Quartal und im Laufe des Jahres 2020 beschleunigen. Das Geschäftswachstum wird hauptsächlich von führenden Nicht-iOS-Marken und der raschen Einführung der neu entwickelten In-Cell-TDDI-Lösungen angetrieben. In-Cell-TDDI wird aufgrund seiner geringeren Kosten und einer vereinfachten Lieferkette sowie der schnelleren und einfacheren Integration für Displayhersteller schnell zum Mainstream für Tablets.

Gleichzeitig wird erwartet, dass sich die Kundennachfrage nach diesen billigeren, schlankeren, leichteren und eleganteren Tablets beschleunigt. Himax ist derzeit der Hauptpartner für alle In-Cell-TDDI-Produkte für Nicht-iOS-Tablets. Und wir liefern bereits unsere neuen TDDI-Insert-Produkte für Tablets an eine Reihe führender Endkunden, von denen einige aktive Styles enthalten.

Darüber hinaus haben wir den Versand zusätzlicher Display-Treiber-ICs mit COF-Verpackung für größere Tablets fortgesetzt. Wir haben bei einem führenden chinesischen Markenkunden ein schlankes Lünettendesign gesehen und erwarten, dass sich die Dynamik für diese High-End-Designs im Laufe des Jahres 2020 beschleunigt.

Für das erste Quartal wird erwartet, dass der Umsatz für das IC-Geschäft für kleine und mittlere Treiber sequenziell um etwa 10% bis 20% steigen wird.

Lassen Sie mich nun einige der Fortschritte teilen, die wir im letzten Quartal im IC-Geschäft ohne Fahrer erzielt haben. Zunächst zu unserem WLO-Geschäft. Die Lieferungen im vierten Quartal waren sehr stark und stiegen gegenüber dem Vorjahreszeitraum um über 20%, trotz eines leichten Rückgangs gegenüber dem Vorquartal. Die Dynamik führte zu einer höheren Kapazitätsauslastung und trug zusammen mit einer verbesserten Produktionsausbeute zur Steigerung der Bruttomarge der Unternehmen für das Quartal bei. Nach der Versandprognose unserer Kunden erwarten wir ein weiteres starkes Quartal, in dem sich das Versandvolumen im ersten Quartal gegenüber dem Vorjahreszeitraum verdoppeln wird.

Es wird jedoch erwartet, dass das Versandvolumen im vierten Quartal gegenüber dem des letzten Quartals leicht zurückgehen wird. Wir machen weiterhin Fortschritte bei unseren laufenden Forschungs- und Entwicklungsprojekten für Produkte der nächsten Generation, die sich auf unser außergewöhnliches Design-Know-how und unsere Erfahrung in der Massenproduktion in der WLO-Technologie konzentrieren.

Als nächstes folgt ein Update zum 3D-Sensorgeschäft.

Im Smartphone-Segment haben wir unsere WLO-Optiklösung weiterentwickelt, um sowohl strukturiertes Licht als auch Flugzeit- oder ToF-3D-Erfassung abzudecken. Wir haben eine zunehmende Akzeptanz von ToF bei Smartphone-Herstellern für Kameras mit Blick auf die Welt festgestellt, um fortschrittliche Fotografie, Entfernungs- / Dimensionsmessung und Erzeugung von 3D-Tiefeninformationen für AR zu ermöglichen.

In den letzten Monaten haben wir aktiv mit einem branchenführenden Anbieter von ToF-3D-Kameras zusammengearbeitet, um eine neue und fortschrittliche ToF-Lösung für Android-Smartphones zu entwickeln, die auf unserer WLO-Technologie basiert. Wir haben große Fortschritte erzielt, indem wir dem Partner einen Spot-Projektor für sein Referenzdesign zur Verfügung gestellt haben, der bereits im ersten Quartal 2020 für die Bewertung durch führende Android-Smartphone-Hersteller bereit sein wird.

Unsere 3D-Sensor-Aktivitäten ohne Smartphone haben sich auf das intelligente Türschloss konzentriert, die Segmente der industriellen Automobilindustrie, in denen wir eine strukturierte lichtbasierte 3D-Sensor-Gesamtlösung anbieten.

Wir haben eng zusammengearbeitet, hauptsächlich mit zwei Arten von Partnern, die eng mit branchenführendem Know-how im Bereich Gesichtserkennungsalgorithmen und solchen mit Anwendungsprozessen mit starker KI-Fähigkeit verbunden sind.

Wir haben Designprojekte mit mehreren Endkunden für intelligente Türschlösser gestartet. Wie bereits erwähnt, arbeiten wir separat mit Partnern zusammen, die unser 3D-Sensing-Know-how nutzen möchten, um die Effizienz zu verbessern und die Kosten in der traditionellen Fertigung zu senken.

Eine Marktchance, die wir verfolgen, ist die Automatisierung von Schuhfabriken. Ich freue mich, Ihnen mitteilen zu können, dass derzeit Prototypen eines automatischen Roboterzementierungssystems mit 3D-Erkennung für beide Tests zur Produktionsoptimierung verfügbar sind.

Als nächstes auf WiseEye, unserer AI-basierten Smart-Sensing-Lösung mit extrem geringem Stromverbrauch. The demand for battery power smart device with AI intelligent sensing is rapidly growing.

Our total solution is built on Emza’s unique AI-based algorithm on top of Himax’s proprietary computer vision processor and CMOS image sensor or equipped with ultra-low power design.

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Currently, a laptop is the market of focus. Himax WiseEye 2.0 NB solution, provides a laptop-ready 3-in-1 RGB/IR/AI solution. We’re expecting privacy, our enhancing security for noble users.

At the CES 2020, the number of notebook OEMs and ODMs demonstrated our WiseEye NB solution in the next-generation premium notebooks with positive feedback.

In addition to notebook, we have also made progress in the display and IoT markets. Innolux, one of the world’s BD manufacturers of TFT-LCD displays has integrated the Himax-Emza WiseEye solution into displays to enable consumer privacy protection in real time.

Also, Chicony, one of the leading ODMs in the world and Emza jointly announced a reference design of the world’s first battery-powered human sensing solution for IoT in December 2019.

Both Innolux and Chicony showcased their products at the CES. Previously, we mentioned that in addition to total solution, Himax is also able to offer an ultra-low power smart sensing on the basis of individual parts, so as to address the market’s different needs and maximizes potential opportunities for Himax.

I will elaborate on this in a CMOS image sensor discussion below.

On CMOS image sensor business update, CMOS image sensor is another critical part of the WiseEye 2.0 NB solution. To support the lean camera design and high-quality image needed for thin bezel laptops, we have made a 2-in-1 sensor that offers the duo capabilities of high-quality HD image capturing and ultra-low power, low resolution visual sensing in 1 single sensor, the industry’s first with the first innovative design.

With this sensor, laptop makers can simplify their next-generation product design and save costs by eliminating the need for an additional camera to provide context awareness for better user experience. Our sensor has also incorporated an RGB-IR design to enable Windows “Hello” facial recognition.

These 2-in-1 CMOS sensor is currently available for partners/customers.

In addition, we recently announced the commercial availability of the industry-first, ultra-low power and low latency, backside-illuminated CMOS image sensor solution with autonomous modes of operations for always-on, intelligent video sensing applications such as human presence, detection and tracking, gaze detection, behavioral analysis and pose estimation for growing markets, such as smart home, smart building, healthcare, smartphone and AR/VR devices.

We are collaborating with leading partners within the ecosystem to reduce time to market for intelligent edge region solutions. Notably, we are working closely with Google and have become the reference design for its world-leading TensorFlow Lite AI framework, targeting low-power edge devices.

For the traditional human vision segments, we see strong demands in notebooks where we are one of the market leaders and have experienced increased shipments for multimedia applications such as car recorders, surveillance, drones, home appliances and consumer electronics among others.

Additionally, we have been — we have seen increased shipments and new design wins in the automotive segment, covering before-market solutions, such as surround view and rear-view cameras.

Lastly, on LCOS. We continue to focus on AR goggle devices and head up display or HUDs for automotive. Many of our industry-leading customers have demonstrated their state-of-the-art products, including holographic HUD, AR glasses and LiDAR system, with Himax LCOS technology inside at the 2020 CES with positive market feedbacks.

Our technology leadership and proven manufacturing expertise have made us the preferred partner for customers in these emerging markets and their ongoing engineering projects in AR goggles and HUD for automotive applications.

For non-driver IC business, we expect revenue to decrease by single-digit sequentially in the first quarter. Aside from the WOL sales, which I just mentioned, are expected to be down slightly. The CMOS image sensor sales for multimedia markets have been affected by the coronavirus incident with the operations of many of the customers here are still not back in order. That concludes my report for the quarter. Thank you for your interest in Himax. We appreciate joining today’s call and are now ready to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions). Our first question comes from Jaeson Schmidt with Lake Street.

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Jaeson Allen Min Schmidt, Lake Street Capital Markets, LLC, Research Division – Senior Research Analyst [2]

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I just want to start on the TDDI business. It sounds like you’re seeing some nice traction, given some pricing tailwinds this year. But outside of that, do you think some of the strength is really being driven by overall market growth or share gains as well?

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Jordan Wu, Himax Technologies, Inc. – Founder, CEO, President & Director [3]

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Definitely, it is driven primarily by our share gains and the market momentum. Certainly, 5G is going to help. And certainly, that, together with the current — the issue of capacity constraint are also in unique position for having a mature and sizable and ready-to-offer capacity that all these factors combined, I think, is going to add to our strong momentum expected for this year opportunity end.

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Jaeson Allen Min Schmidt, Lake Street Capital Markets, LLC, Research Division – Senior Research Analyst [4]

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OK. That’s helpful. And then just curious if you could comment your thoughts on what channel inventory looks like in the Chinese smartphone market?

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Jordan Wu, Himax Technologies, Inc. – Founder, CEO, President & Director [5]

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It’s a tricky question. You’re talking about smartphone, right? Am I correct?

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Jaeson Allen Min Schmidt, Lake Street Capital Markets, LLC, Research Division – Senior Research Analyst [6]

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Yes.

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Jordan Wu, Himax Technologies, Inc. – Founder, CEO, President & Director [7]

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OK. Okay, it’s a tricky issue because the coronavirus situation, I think it’s making things pretty blurry for us for the time being. Although I think things will get clarified soon. Having said that, though, I mean, the situation is indeed evolving.

I think I would like to probably further elaborate on your question. I think I mentioned earlier in my prepared remarks that we have taken into account overall, let me rephrase it. We have discounted already the impact coming out of the virus into our guidance, right? And so what we’ve seen, we have counted in our guidance. And on top of that, we have further widened our guidance on the low end just in case because, as I said earlier, it’s still evolving. And so you asked me, so effectively how much impact the coronavirus is going to have on our Q1 results. I would say, around 10% or even more of our all sales. And that is primarily coming from small panel, in particular, smartphone. And so the smartphone TDDI impact. Now I’m sure you’re all — you are going to wonder why smartphone and why not glass panel?

I think long story short, it is primarily because as many of you know, the larger the panel size, the less likely the panel makers are going to outsource their module assembly to third parties and vice versa. So in the case of TV, it is highly unlikely. Actually, it is — we have not seen that at all that panel makers are outsourcing their module assembly to outsiders. i.e. panel makers are making their modules themselves. And smartphone happens to be the smallest in size in display. So it is the most likely that the module assembly is outsourced to third parties. Some of them are actually designated by end customers.

Now it is the marginal side of the operations, which purchased our ICs, the front end side. So right now, what we’re seeing is that a lot of small players specialty module assembly houses who are primarily focusing on smartphone for the reasons I mentioned earlier. They are business because they are smaller in size, their business is not entirely in order, right? They are — some of them, even the boss, all the employees are being effected of the office because of all these constraints created by the various situation. And also, it is a lot more likely to — for such smaller module houses to react quickly to any other changes because IC for small panel size accounts for a larger percentage of the low cost. So they are very sensitive to inventory costs. While a large panel, especially very large TVs, IT accounts for a very small portion of the cost, so there’s a concern over there is that they need to make sure that ICs are secured. Otherwise, if they continue to produce sale, which they are doing right now, regardless of the various situation. There will be a fewer shortage when they are ready to ship. So that’s the kind of explains why the smartphone is the most severely impacted. And again, I think after discounting about 10% or even more of the impact that we saw over the last 2 weeks also out of the coronavirus situation. We are giving the guidance. And on top of that, we’re also widening our lower-end just to accomplish for that certainty. Having said that, though, we believe this is short term situation, although, I don’t have a crystal ball, so I don’t know how long this so called short-term is going to last. But I — we believe the market is still there. The 5G is still going to take off. And the smartphone, again given our good pipeline, our capacity, our foundry capacity advantage, our design win, et cetera, et cetera. I think, most likely, we are going to see explosive growth in (inaudible), too. So that is already on top of how we indicated around 10% to 20% sequential increase for Q1 expected. That is I think I extended answer to your question, Jaeson.

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Jaeson Allen Min Schmidt, Lake Street Capital Markets, LLC, Research Division – Senior Research Analyst [8]

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No. That’s very helpful. I appreciate that color. And then just last 1 for me, and I’ll jump back in the queue. You expecting some pretty nice gross margin net expansion here in Q1 — sorry, 22% at the midpoint of guidance. Should we assume that, that is the low watermark for the year? Do you still expect gross margin to expand as we progress throughout 2020?

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Jordan Wu, Himax Technologies, Inc. – Founder, CEO, President & Director [9]

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I certainly believe so. We expect in 2020, the gross margin to further improve because both smartphone, small size and all the last size from the capacity are both facing constraint. I mentioned again and again earlier in my prepared remarks. So that is going to provide a good price support.

And also, specifically, for example, TDDI new products, we’re going to ensure better ASP, non drivers such as (inaudible), for example, where actually, it’s — we could say the penetration is low for 8K TV, but we do have a major major market position, EBIT really going to take off, right? So again, that is high ASP and high margin. So other loan driver products as well are going to enjoy whether as a SPL margin. So I think we have a strong level of confidence that 2019 gross margins is ordinarily well. And we certainly expect a good rebound from that in 2020.

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Operator [10]

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(Operator Instructions). Our next question comes from Suji Desilva with Roth Capital.

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Sujeeva Desilva, Roth Capital Partners, LLC, Research Division – MD & Senior Research Analyst [11]

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Congratulations for progress here. The TDDI market, it seems like it’s a tight supply and firm pricing. How many quarters do you think that situation can persist before a pricing competition resumes competitively?

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Jordan Wu, Himax Technologies, Inc. – Founder, CEO, President & Director [12]

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Well, I think right now, what we’re seeing is the customers and customers included very anxious about capacity access. So unlike, this is a very, very different situation from none of us here. So I mean, fair enough, we got this virus situation. But I think overall, again, we believe the total market size are not going to — there could be some small haircuts, although TDDI this year was continuing to grow within the year. So we don’t think — we think TDDI share of market is going to further grow this year, and that is going to make the situation tightening situation. A real issue for both our direct customers and end customers. So I think in this year.

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Sujeeva Desilva, Roth Capital Partners, LLC, Research Division – MD & Senior Research Analyst [13]

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OK. That’s helpful, Jordan. And then the large panel, clearly, the China panel makers are gaining some share from [great], Can you get a sense of how much of the market is transitioning over? And then how much is Himax’s share go to China panel makers?

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Jordan Wu, Himax Technologies, Inc. – Founder, CEO, President & Director [14]

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We — for a large display driver pieces, vast majority of our I think effect share breakdown right now. I mean, I would say, probably more than happy to say about driver IC for large panel is coming from Chinese customers. And by the way, we are — I think we are pretty — we are #1 or equal #1 in China with a pretty decent market share.

And in terms of how much China is going to get from the Korean restructuring. I guess, it’s harder to predict this year, even though I don’t think I can give you, I can share some insights from 2019 against 2018. If you look at the cost output — cost area output distribution, in 2018, Korea had about 32%, while China had 35% right? So it’s 32% against 35% in 2018. While in 2019, the margin already widened to 28% against 43% or 44%. And I think the gap is expected to continue to widen further for 2019. So I think it is safe to say that in 2019, China is going to comment half or more than half of the global gross output for large panel. So that’s pretty significant.

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Sujeeva Desilva, Roth Capital Partners, LLC, Research Division – MD & Senior Research Analyst [15]

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Yes. So quite a move. Okay, great. And then my last question is on non-driver and WLO, if your lead customer here. Is there an opportunity for content gain, given competitive capacity challenges or is that something where that’s still expected to be phased out over time?

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Jordan Wu, Himax Technologies, Inc. – Founder, CEO, President & Director [16]

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I think I cannot elaborate too much on this, given the obvious reason, I can only say that right now, we are providing to our anchor customer. We are the sole source. And also, we are working on further projects. Some of them maybe will be bigger in size compared to current project. And I cannot indicate precisely, exactly when the new project is going to sum up cost rationale. I think I just have to keep updating you guys in due course.

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Operator [17]

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And I’m not showing any further questions at this time.

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Jordan Wu, Himax Technologies, Inc. – Founder, CEO, President & Director [18]

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Any more questions from the floor? Without more questions, as a final note, Jackie, our CFO, will maintain investor marketing activities and continue to attend investor conferences. We’ll announce the details as they caught up. Thank you, and have a nice day.

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Operator [19]

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Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.

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