Himax Technologies - Earnings Call - Q1 2019

Transcript

Speaker 0

morning, ladies and gentlemen, and welcome to the Himax Technologies First Quarter twenty nineteen Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr.

John Matteo, U. S. Investor Relations. Sir, you Thank

Speaker 1

you, operator. Welcome everyone to Himax's first quarter twenty nineteen earnings call. Joining us from the company are Mr. Jordan Wu, President and Chief Executive Officer and Ms. Jackie Chang, Chief Financial Officer.

After the company's prepared comments, we have allocated time for questions in the Q and A session. If you have not yet received a copy of today's results release, please e mail jmatteolamniantl dot com or access the press release on financial quarters or you can download a copy from Himax's website at www.himax.com.tw. Before we begin the formal remarks, I would like to remind everyone that some of the statements in this conference call, including statements regarding expected future financial results and industry growth, are forward looking statements that involve a number of risks and uncertainties that could cause actual events or results to differ materially from those described in this call. Factors that could cause actual events or results to differ materially from those described in this call include, but are not limited to, general business and economic conditions, the state of the semiconductor industry, market acceptance and competitiveness of the driver and non driver products developed by Himax, demand for end use application products, the uncertainty of continued success in technological innovations, as well as other operational and market challenges and other risks described from time to time in the company's SEC filings, including those risks identified in the section entitled Risk Factors in its Form 20 F for the year ended December 3138, filed with the SEC in March 2019.

Except for the company's full year of 2018 financials, which provided in the company's 20 F and filed with the SEC on March 2839, the financial information included in this conference call is unaudited and consolidated and prepared in accordance with IFRS accounting. Such financial information is generated internally and has not yet been subjected to the same review and scrutiny, including internal auditing procedures and external audits by an independent auditor, to which the company subjects its annual consolidated financial statements and may vary materially from the audited consolidated financial information for the same period. The company undertakes no obligation to publicly update or revise any forward looking statements, whether as a result of new information, future events or otherwise. Now I'd like to turn the call over to Ms. Jackie Chang.

Jackie, the floor is yours.

Speaker 2

Thank you, John, and thank you everybody for joining us. Our outline for today's call is first to review the Himax consolidated financial performance for the first quarter, followed by the second quarter twenty nineteen outlook. Jordan will then give us an update the status of our business, after which we will take questions. We will review our financials on both IFRS and non IFRS basis. The non IFRS financials exclude share based compensation acquisition related charges.

Our first quarter twenty nineteen revenues, gross margin and EPS all met our guidance issued on February 19. For the first quarter, we recorded net revenues of 163,300,000.0 a decrease of 14.5% sequentially and an increase of 0.3% year over year. The first quarter is traditionally the bottom of the year in terms of sales because it has fewer working days due to the Lunar New Year holidays. Customers' inventory correction on smartphone and the worldwide sluggish automotive sales also negatively impacted our first quarter revenues. Gross margin was 22.6%, down 170 basis points sequentially due to less favorable product mix.

IFRS loss per diluted ADS were $0.13 in line with the guidance range of $01 to $03 Non IFRS loss per diluted ADS were $0.11 in line with the guidance range of $0.08 to $0.28 Revenue from large display drivers was $70,000,000 down 5.7% sequentially and up 18% year over year. The sequential decline reflected the impact of seasonality, while the year over year increases was driven by higher ASP and more four ks TV shipments. Large panel driver ICs accounted for 42.9% of our total revenues for the first quarter compared to 38.9% in the fourth quarter of twenty eighteen and thirty six point four percent a year ago. Revenue for small and medium sized display drivers came in at $67,600,000 down 15.4% sequentially and down 5.8% year over year. The driver IC for the segment accounted for 41.4% of total sales for the first quarter as compared to 41.8% in the fourth quarter of twenty eighteen and forty four percent a year ago.

Revenues for this segment in the first quarter declined by mid teens as anticipated due to seasonality. Declining car sales across all major markets and most importantly, the lackluster demand of the global smartphone market. Sales into smartphones were down 25.5% sequentially and down 4.1 year over year. The sequential decline was mainly caused by lower TDDI shipment and ASP reflecting weak smartphone market and the major TDDI customers' inventory correction. The year over year decline was due to the much decreased shipment in traditional driver IC for smartphone, down close to 50%, as the traditional driver ICs is being quickly replaced by TDDI and AMOLED, but offset by higher TDDI sales.

Display drivers for tablet and other consumer products were down 4.2% sequentially and 27.8% year over year due to weak overall market demand. Our driver IC revenue for automotive applications reached $28,500,000 down 13.4% sequentially, but up 14.5% year over year, accounting for 20.7% of our total driver IC revenue. The sequential decline partially reflected seasonality, but was largely driven by the weak car sales momentum across all major markets. Another attributing factor is the new European Union emissions regulations effective September, which has since caused car sales to slump for several major European automakers. Revenues from our non driver businesses were $25,700,000 down 30.2% sequentially and down 19% from last year.

Non driver products accounted for 15.7% of our total revenues as compared to 19.3% in the fourth quarter of twenty eighteen and nineteen point six percent a year ago. Lower shipments of timing controllers have attributed to both the sequential and year over year decline. The WLO anchor customers' lower seasonal demand also contributed negatively to the sequential decline, but on a year over year basis, WLO shipment almost doubled. Our IFRS gross margin for the first quarter was 22.6, down 170 basis points sequentially and up 10 basis points from the same period last year, both a result of product mix. Our IFRS operating expenses were $40,200,000 in the first quarter, down 2% from the preceding quarter and up 1% from a year ago.

The slight year over year increase was primarily a result of increased depreciation expense, mainly from the new building and equipment needed to support the three d sensing business. However, salary expense came down from last year due to NT dollar depreciation against U. S. Dollar as we pay the bulk of our employee salaries in NT dollars. Likewise, on a sequential basis, salary and R and D expenses also depreciation charge also went up for the same reason.

IFRS operating margin for the first quarter was minus 2.1%, little changed from minus 2% in the same period last year, but down from 2.8% in the prior quarter. The sequential decrease was primarily a result of lower sales and gross margin, offset by lower operating expenses. The year over year decline was a result of higher operating expenses. First quarter non IFRS operating loss was $2,900,000 or minus 1.8% of sales versus non IFRS operating loss of $2,900,000 or minus 1.8% of sales for the same period last year and down from 3% a quarter ago. IFRS loss for the first quarter was $2,300,000 or $0.13 per diluted ADS compared to profit of $8,500,000 or $0.49 per diluted ADS in the previous quarter and IFRS loss of $2,800,000 or $0.16 per diluted ADS a year ago.

Part of the sequential profit decrease was a result of lower sales and lower gross margin, offset by lower operating expenses. Another factor causing the profit decline is the last quarter's revaluation gain on investment of $2,900,000 accounting for $0.17 per diluted ADS, coming from an AI startup investment made in November 2017 that we reported during the fourth quarter twenty eighteen earnings call. Excluding the investment gains, IFRS profit for Q4 twenty eighteen would be $5,600,000 or $0.32 per diluted ADS. First quarter non IFRS loss was 2,000,000 or $0.11 per diluted ADS compared to non IFRS profit of $8,700,000 or $05 per diluted ADS last quarter and non IFRS loss of $2,600,000 or $0.15 per diluted ADS the same period last year. Excluding the above mentioned investment gain, non IFRS profit for fourth quarter twenty eighteen would be $5,800,000 or $0.33 per diluted ADS.

Turning to the balance sheet, we had $108,200,000 of cash, cash equivalents and other financial assets as of the March 2019, compared to $151,900,000 at the same time last year and $117,700,000 a quarter ago. On top of the cash position, restricted cash was $164,300,000 at the end of the quarter, same to the preceding quarter and up from $147,000,000 a year ago. The restricted cash is mainly used to guarantee the company's secured short term borrowing for the same amount. We had $40,000,000 unsecured short term loan at end of Q1 twenty nineteen. We expect the loan balance to rise further next quarter, primarily due to land payment, which will be explained a bit later in the CapEx discussion.

Our inventories as of March 3139 were $189,300,000 up from $162,600,000 a quarter ago and up from $148,000,000 at the same time last year. Accounts receivable at the March 2019 were $176,200,000 as compared to $166,600,000 a year ago and $189,300,000 last quarter. Days sales outstanding was ninety seven days at the March 2019 as compared to ninety two days a year ago and ninety five days at end of

Speaker 3

the last

Speaker 2

quarter. As highlighted in the last earnings call, in response to capacity shortage of foundry and certain packaging material, we had to keep the inventory level higher than usual. Looking forward, given the prevailing uncertain market conditions, we have started to control our inventory level, targeting to bring it down to a more normal level. Net cash outflow from operating activities for the first quarter was $22,100,000 as compared to an inflow of $2,300,000 for the same period last year and an inflow of $2,300,000 last quarter. Net cash outflow from additional inventory buildup, mainly for driver ICs, including TDDI, amounted to $31,500,000 during the quarter.

As highlighted above, in response to capacity shortage of foundry and certain packaging material, we had to keep the inventory level higher than usual. First quarter capital expenditure were $6,300,000 versus $18,600,000 a year ago and $5,200,000 last quarter. The investment in CapEx design tools and R and D related equipment for our traditional IC design business amounted to $2,400,000 in the quarter. The remaining $3,900,000 was for the ongoing payment for the new buildings construction, WLO capacity expansion and installation of active alignment capacity to support our three d sensing business. The second quarter CapEx for our expansion project will reach the peak, budgeted to be $33,000,000 including $27,700,000 for the land purchase.

By then, we will have concluded substantially all the CapEx payments for the expansion project, which is just $3,000,000 left to be made. As of March 3139, Himax had $172,100,000 ADS outstanding, unchanged from last quarter. On a fully diluted basis, the total ADS outstanding are $172,600,000 For the second quarter, we expect revenue to increase around 2% to 7% sequentially. Gross margin is expected to be around 19.5% to 20%, depending on our final product mix. IFRS loss attributable to shareholders are expected to be in the range of around $02 per zero three five diluted ADS based on $172,600,000 outstanding ADSs.

Non IFRS loss attributable to shareholders are expected to be in the range of $0.18 to $0.33 per diluted ADS based on $172,600,000 outstanding ADSs. I will now turn the call over to Jordan.

Speaker 4

Thank you, Jackie. As Jackie just mentioned in the guidance, we expect the second quarter gross margin to decline around 3% with slightly increasing revenues from the previous quarter. We fully realize that this quarter will mark the second consecutive quarter that we will make a bottom line loss the first in our corporate history. While we remain committed to our big picture strategy, we are actively taking measures to get back to steady profitability. I will touch on a few of those areas as I go through the outlook discussion below.

The second quarter gross margin will decline for three major reasons. Firstly, the higher material cost of the large panel driver IC resulting from industry wide material shortage will lead to lower gross margin. Our large size panel customers are going through a difficult period of increasing supply and lackluster demand right now. We thought it was prudent not to pass on the rising material cost to our customers during this quarter as we used to for the consideration of long term relationship. Secondly, the gross margin of the WLO business would also fall because of reduced shipment per anchor customers' demand, which will lead to lower capacity utilization.

We do expect the gross margin of WLO to return to a much improved level in the second half when orders are expected to come back strongly, reflecting the anchor customers' demand seasonality. I will elaborate on this a bit later in the WLO business discussion. Finally, smartphone segment gross margin will likely shrink a little for product mix change. We anticipate significant sequential increase in the second quarter shipment of TDDI for lower end market and certain traditional discrete driver IC for smartphones. Both will generate gross margins lower than the corporate average.

Again, I will provide more detail later. Based on our Q1 results and Q2 outlook, our first half twenty nineteen revenue would experience year over year decline as the current market conditions have not shown signs of improvement. The uncertain market conditions, including global economy, oversupply of TV panel markets, weak global smartphone demand and automotive sales have led to pricing and cost pressure for us. Customers ongoing downward inventory adjustment in smartphone TDDI was also outside of our expectation. However, looking ahead into the second half, among our major product segments, we expect TDDI and WLO shipments to increase significantly, offset by shipment decline of the traditional discrete driver IC for smartphones and automotive display drivers.

Automotive display drivers are expected to stay relatively weak following several years strong and continuous growth. I'll talk more about this product line later. Last but not least, we continue to tighten our cost and expense controls. As Jackie mentioned, we are in the process of bringing inventory down from an unusually high level, which was built up in response to material shortage. We will begin to see reduction in inventory days and in absolute value in Q2.

We are also putting close control in R and D expenses, targeting to continuing R and D activities across our strategic areas without raising R and D expenses from the last year. This includes next generation display driver technology for eight ks TV and AMOLED, three d sensing for both mobile phone and mobile phone applications and AI based ultra low power smart sensing solutions. Total OpEx for 2019 is budgeted to be at around the same level as that of the last year, excluding the anticipated increase of 4,900,000.0 in depreciation arising primarily from the construction of the new fab. Now let me give you further insights behind our Q2 guidance and trends that we see developing in our businesses. As usual, let us start with the large panel driver IC business update.

I just explained the background behind the second quarter margin pressure for our large panel driver IC business, namely panel market which is in oversupply and COF, the material needed to make large panel driver IC which is in shortage. Q2 revenue in this segment is expected to decrease by mid teens sequentially with lower gross margin as mentioned earlier. While the large display market is still clouded with concerns of oversupply and waning demand, our current forecast for the second half is showing signs of revenue rebound, thanks to certain of our product upgrades and early design wins and most importantly, our efforts to secure additional COF capacity, which is leading to more allocation from our panel customers and even more design wins. The margin for large panel driver will likely still be under pressure during the second half, but we are working on ways to improve the cost and margin. On technology development, I'm pleased to report that we have started shipping eight ks TV related to ICs to one of our industry leading panel customers and expect a few more to come during the second half when more TV brands are scheduled to launch new eight ks TV models.

Having said that, eight ks TVs are still expected to hold a small share in the TV market because eight ks contents and transmission technology have not yet matured. While eight ks TV is a strategic area for Himax as it will boost demands for higher LCD driver ICs and timing controller contents over the next few years. Now let's turn to the small and medium sized display driver IC business. Declining sales into the smartphone market has been the key factor causing our P and L pressure over the last few quarters, especially considering that smartphone market have been the number one contributor to our top and bottom lines for many years in the past. We are determined to take back market share by securing more Tier one customers with the existing TDDI products and advancing our technology to win the next generation TDDI market.

With that, now let me start the small and medium sized display driver IC business update from a quick review on the first quarter smartphone business. Reflecting weak smartphone demand and the bigger than expected inventory correction by a major Chinese end customer, our first quarter TDDI shipment declined more than 30% sequentially. The fluctuation is high due to our rather concentrated customer base for the time being. Despite the unsatisfactory Q1 result, we made good progress in diversifying to other leading end customers, We need more strategic projects and starting to make production shipment of lower end HD plus TDDI chips, primarily for leading Korean smartphone end customer. As we said in the last earnings call, because of capacity constraint, we chose to limit our TDDI shipment to only higher end full HD plus projects previously as they yield higher revenue and better margin.

We are particularly pleased with the expanded partnership with the leading Korean smartphone customer, which has been a partner of ours for a long time. We expect more shipments for other leading smartphone makers to begin in the second half and possibly expand our end product coverage of TDDI shipments to tablet market. Such new design wins, new end customers and new markets will contribute to our TDDI sales in Q2 and the strong growth for the remainder of 2019. Looking ahead, we are in the forefront of offering new generation TDDI's which will further enable narrow bezel panel design without the uses of COF packaging. As I just described earlier, COF material not only is costly, but also suffers from serious supply constraint.

This will provide a new option for smartphone design going forward. We are working on several design in projects with our new generation TDDI with small customers in evaluation stage right now. I just mentioned that we could potentially start shipping TDDI chips for tablet market within this year. In fact, it won't take long to also see the adoption of TDDI in automotive display tablet with active stylus and even two in-one notebooks. We are in the frontier in terms of exploring these opportunities and engagement with customers.

Our TDDI for automotive display has started production shipment in Q1 to a leading panel customer for the use of a prominent carmaker. The initial volume started small, but the pipeline for next year's mass production looks promising. This could potentially resume the growth of our automotive segment and strengthen its gross margin amidst the stagnant car market worldwide. On tablet, our TDDI chips are under verification by panel makers. We expect revenue contribution to start from Q4 this year with a number of leading end customers.

Furthermore, we are leading the industry in TDDI with active stylus by partnering with the world's leading brands for tempered tablets and interactive pen displays. While both segments are smaller than smartphone in terms of volume, they do represent growth areas for our TDDI solutions in the near future. In addition to TDDI, we also seen a stronger second quarter for traditional discrete driver IC in smartphone segment. Our design win with a major Chinese smartphone maker went into production in March and the shipment is set to expand strongly in Q2 per the customer's forecast. Notwithstanding this rebound, the trend of the traditional discrete driver addressable market being quickly replaced by TDDI and AMOLED in smartphone will continue.

We expect the traditional discrete driver for smartphone to decline substantially in the second half of twenty nineteen. Combining significantly more shipment of lower end TDDI and discrete smartphone driver, our Q2 sales into the smartphone market is expected to increase by close to 50% sequentially. However, such growth in revenue will lead to lower overall corporate gross margin as both products generate lower gross margin than the corporate average. On AMOLED product line, we have been collaborating closely with leading panel makers across China for product development. We believe AMOLED driver IC will be one of the long term growth engines for our small panel driver IC business.

In automotive display market or segment as Jackie reported earlier, our panel customers were greatly affected by the weakened worldwide automotive market demand during the first quarter. Many were forced to reduce shipment to major European markets due to the new and tightened European Union emission testing rules. Suffering from high inventory, our customers are foreseeing a sequential decline of shipments in the second quarter for automotive segments. As Himax commenced more than 30% of the global automotive display driver IC market, Such wide range inventory correction has had a significant impact on our business. Q2 sales into this segment is likely to decrease by mid single digit sequentially.

Looking forward, on the backdrop of a feeble car market, the penetration of displays into vehicles is also maturing. Therefore, we may not be able to see the same kind of growth that we enjoyed in the past several years for automotive segment. However, we are still the leader in this space and we are leading the market in the introduction of new technologies including TDDI, AMOLED, and lower dimming timing controller. We believe such new technologies will rejuvenate the industry and bring our automotive sales back to a growth trajectory. Our tablet and consumer electronics businesses represented around 10% of our total sales in the first quarter.

Although the overall market remains weak, we expect heavily business to rebound during Q2 for additional shipment to a leading end customer and white box market as well as improved foundry support for this segment. As mentioned earlier, we also started to provide OEMs with samples for our world leading in cell TDDI that supports the use of active stylus for tablet in the first quarter. We will report progress in due course. Combining tablet and consumer electronics businesses, we expect the sales increase of around 20% sequentially in the second quarter. For second quarter small and medium sized driver business, expect revenue to increase by more than 20% sequentially.

Now let me share some of the progress we've made on the non driver IC businesses in the last quarter. First on three d sensing business update. We continue to participate in most of the smartphone OEMs ongoing three d sensing projects covering structured light and time of flight or ToF. At present, Android smartphones front facing three d sensing adoption is still hindered by the high hardware cost, long development lead time and the lack of killer applications. Instead of three d sensing, most of the Android phone makers have chosen the fingerprint technology, which can achieve similar phone unlock and online payment functions with a much lower cost.

Reacting to their lukewarm response, we started to work on the next generation slim three d sensing total solution aiming to leapfrog the market by providing high performance, easy to adopt and yet cost friendly total solutions, targeting the majority of Android smartphone players. Currently, have completed the feasibility study for our Gen2 SIM solutions, covering detailed specifications, performance and cost. Our next step is to seek feedback from Android smartphone OEMs. We start we will then determine the way forward for our three d sensing total solution strategy. For the avoidance of doubt, we remain and are committed to be the leader in the optics for socialized three d sensing, where we are currently engaged in multiple development projects from multiple customers.

Being a leading provider of three d sensing technology, we are also an active participant in smartphone OEMs design projects for new devices involving ToF technology. We see ToF building momentum in such use cases as advanced photography, distance or dimension measurement and three d depth information generation for AR. Unlike structured light three d sensing, where we provide total solution or just projector module for optics, depending on customers' needs, with ToF, we will only focus on transmitter module by leveraging our WLO related expertise. I've mentioned previously that three d sensing can have a wide range of applications beyond smartphone. We have started to explore business opportunities in various industries that are typically sensitive to cost and always require a total solution.

Among such projects is a collaboration effort with Naron, an industry leader in edge based artificial intelligence in which we have made an equity investment to develop an AI enabled three d sensing solution targeting security and surveillance markets. We are also working with partnerscustomers on new applications covering home appliances and the manufacturing. As to our CapEx investment for three d sensing production capacity, while we still need to absorb the associated cost in the short term, the capacity is a strategic investment necessary to substantiate engagement with customers. The production capacity, which is primarily WLO fab, can be used not only to support our own slim total solution, It is essential for us to provide optics products to customers for their structured light or ToF three d sensing projects. Furthermore, the WLO capacity can be used for various other product areas, including, but not limited to, waveguide for AR goggles devices, where we are still getting frequent inquiries from top tech companies.

As a matter of fact, having some readily available production capacity has become a competitive advantage to participate in leading customers' new design projects at a time when the smartphone product cycle and therefore the design lead time is getting shorter. With the capacity coupled with our unique know how in sophisticated diffractive optics design, we are often the partner of choice when customers are exploring advanced optical challenges. Next is some discussion on our WLO business. As anticipated, the first quarter WLO revenue declined substantially due to an anchor customer's lower seasonal demand. We expect further reduction for the second quarter.

The much reduced shipment will lead to lower capacity utilization and therefore negatively impact our Q2 gross margin. Himax WLO business has been largely dependent on wide angle customer for the past couple of years. Despite good design in pipelines and collaboration projects with multiple customers. We were informed of a product replacement decision by the anchor customer after our last earnings call on February 1939. Foreseeing that WLO shipment volume in 2019 will decline significantly starting from the third quarter, we disclosed the information in our 20 F filing in March.

The filing also warned of the additional negative impact the anticipated volumes fall off would cause to our 2019 margin and profitability as the substantial cutback of WLO fab capacity utilization would lead to higher equipment depreciation and Fed overhead on a per unit basis. As it turns out, we have very recently been notified by the anchor customer of their new decision. Contrary to our earlier warning, we now expect the second half WLO shipment to increase significantly to a scale comparable to that of the same period last year, with stable similar amount of equipment depreciation and fab overhead charges on a per unit basis. As a semiconductor company, we are not immune to customer supplier decision, which can work in or against our favor. We believe the customer's early replacement decision was a normal occurrence in the semiconductor industry and are pleased that this new direction decision has removed the concerns of the short term impact of the revenue and profitability of our WLO business.

Regardless, we believe such incidents would not affect our long term partnership with the anchor customer. In fact, we are very optimistic about the growth opportunities we have with the customer. We have many ongoing development projects for their future generation products centering around our exceptional design know how and mass production expertise in WLO and related technologies. On CMOS image sensor business update, we continue to make great progress with our machine vision sensor product lines. Himax and AMSA unveiled the second generation Wi Fi AIoT Intelligent Vision Solution at the ISC West twenty nineteen in early April.

The solution is consisted of Himax industry leading ultra low power sensor and ASIC design with MDAR's unique AI based ultra low power computer vision algorithm. The solution is uniquely positioned for AIoT markets, featuring battery powered human detection sensor, AI based machine learning and always on visual sensor, all operating at the edge device. Furthermore, it brings an enhanced user experience and better informed decision making and running on minimum power and much better cost compared to similar solutions consuming much higher power. We are pleased with the status of engagement with leading players in areas such as connected home, smart building and security. In parallel, we are actively participating in the rapidly growing AIoT ecosystem, which we believe will open up further future opportunities for Himax.

For traditional human vision segment, we see strong demands in laptop, and increasing shipment for multimedia applications such as car recorders, surveillance, drones, home appliances and consumer electronics among others. Finally, I will now give an update on the Airhorse business, where our main focus areas are AR goggle devices and head up display for automotive. In 2018, many AR goggle devices were launched, targeting primarily niche industrial or business applications, with top name multinationals continuing to invest heavily to develop ecosystem, applications, software operating system, system electronics and optics. Oral AR goggles will take a few more years to fully realize its market potential. We believe Aerocross remains the mainstream technology in this space.

Our technology leadership and proven manufacturing expertise are evidenced by the growing list of AI gallo device customers and ongoing engineering projects. In addition, we continue to make great progress in developing high end holographic head up displays and high end automotive. It will cost for both goggle device and HUD enjoy much higher ASP and better gross margin for us and represents a long term growth driver for us. For non driver business, we expect revenue to increase by mid single digit sequentially in the second quarter. That concludes my report for this quarter.

Thank you. We appreciate you joining today's call and we are now ready to take questions.

Speaker 0

Thank you. And also to make sure that everyone is able to ask a question today, we do ask that you only do one question and one follow-up at this time. Our first question is going to be from the line of Tim Savageaux with Northland Capital. Your line is open.

Speaker 5

Hello. Question on the WLO. I wondered if you could provide any color on the kind of nature of the change, whether this was kind of a competitive situation that you were able to recoup or any change on the customer's part in terms of their technology direction? And then with WLO coming back into the model, I wonder if you have any comments on the trajectory of overall gross margins and toward the second half of the year. I imagine that would provide an uplift to margins

Speaker 4

relative Thanks. Thank you, Tim. Yes, WLO business is now very concentrated on one single end customer's business. Obviously, we are working very hard to try to diversify into more projects with the anchor customer and also projects from other customers. That's something we are working on.

Now with the concentration of one single customer, in fact, one single product, the fluctuation does have a major impact on our gross margin because the whole production line is the depreciation and overhead charge on a per unit basis with one the fluctuation of one single product certainly is it can be very easily get impacted. So you are right in saying that the second half with the WLO volume expected to increase substantially from the first half, there will be a gross margin uplift in this regard. As to why and how the customer changes direction or changes decision, we are very much bound by the NDA. So I'm afraid we cannot comment much further other than what I just described in the prepared remarks.

Speaker 5

Okay. And if I could follow-up briefly. As you look in, I guess you're sizing that opportunity similar to what you saw last year. Ostensibly that have the three d sensing the larger number of units this year. I wonder if you could comment on any pricing pressure or other dynamics in the WLO market?

Thanks.

Speaker 4

Again, the pricing is ongoing subject with the customer, right. So I think we've been treated fairly and we have been making reasonable profit from the production couple of years and we anticipate the same going forward for the next product cycle. And again, certainly we cannot predict precisely the volume, but when we say we expect comparable volume compared to last year, I think what we indicated is that we are in the same position in their product ecosystem, or we are in the same position as a vendor this year and next year as how we were last year.

Speaker 5

Okay. Thanks very much.

Speaker 4

Thank you, Tim.

Speaker 0

Next question comes from the line of Jason Schmidt with Lake Street. Your line is open.

Speaker 4

Hey, thanks for taking my questions. Jordan, just wondering if you could comment on what you're seeing from a pricing standpoint in the TDDI market? Certainly, the volume shot up very fast and very quickly. And also on the other hand, by saying volume, I mean penetration, market penetration of TDDI technology into smartphone. It showed up probably faster than anybody thought.

And also the current market condition of smartphone being really rather sluggish. So yes, there are pricing competition and there are price pressure for everybody. And so we are not immune to that. We are certainly hoping that we are I mean, admittedly, we are playing catch up, right? So we certainly have to be we cannot be too conservative on pricing, right?

We have to go up there and compete. Luckily, certainly, this is still a profitable business, I suppose for every major participant, the same for us. But yes, there are pricing pressure. Okay. And then as a follow-up, I think last call you mentioned the target of reaching 10,000,000 units per month as far as TDDI capacity goes in the back half of this year.

Just curious if you could update us on what you're thinking from a capacity standpoint within the TDDI business? We no longer have concern on capacity, the capacity constraint ever since we successfully switch into a new foundry, which offers abundant supply of capacity. So that is of our list already. So now the concern is the demand. And unfortunately, we all know the how the smart market is going right now.

So despite the market uncertainty, I think both the macro level and also on the more micro level, people changing, replacing their smartphones slower than what it used to be and so on. So despite all this market uncertainty, we still anticipate significant sequential growth in the second quarter and also the second half for TDDI. Note that we are still playing catch up against the current market leader. So in addition to winning more projects from major customers, are working towards bringing our next generation solutions into mass production ASAP. So I think smartphone market is not going anywhere, right?

So it's a marathon. It's not a 100 meter dash. So we are learning the lesson from the execution mistakes this time. And that is why we are falling behind compared to the leading the market leader at the moment. So we are trying to win back our market share.

And we said before that our target is to reach 10,000,000 ICs of shipment towards the end of the year. We are still holding that target unchanged. Having said that, I have to be cautious about the again, the smartphone market being rather sluggish and also the additional macro uncertainty. So but again, that is still our target. We just have to see how it goes.

So I think how quickly we can be successful in bringing the next generation TDDI technology into mass production with a number of major projects, major customers, think is the key that is going to detect how quickly and how quickly we can reach the 10,000,000 IT shipment monthly shipment mark. I think that is going to be the key. Thank you, Jason. All right. You.

Speaker 0

Our next question comes from the line of Jerry Su with Credit Suisse. Your line is open.

Speaker 3

Hi, Jordan. Thanks for taking my question. So on the driver IC side, could you elaborate a little bit on the reason for the second quarter large sized driver IC business to decline sequentially? Because I think your peers or the panel makers are expecting volume to grow. And then for the TDDI, I think in the prepared remarks, you mentioned that the gross margin is below corporate average.

It seems like something that way. But I think for your peers, their TDDI margin seems to be above corporate average, which is around 30% plus. Can you also give a little bit color on that as well? Thank you.

Speaker 4

Firstly, on second quarter large panel guidance of decline guidance, I think we are one of the market share leaders you know, worldwide in large display market with some 20 some market share, I suppose. So we are not immune to market weakness overall. And I think second half second quarter compared to first quarter, we all know the large panel market is going through oversupply and sluggish demand right now. And I think at the same time, we mentioned repeatedly in the last few earnings calls, starting from foundry shortage and then thereafter COF material shortage. So I think a few of our major customers seeing the shortage situation, they probably prepare their inventory a bit early in Q1 or arguably end of Q4.

So I think that explains our anticipated revenue decline slight revenue decline during Q2. Having said that, I think quite a few of our major customers and us together, we all feel that there's a reasonably likelihood of the market rebounding in the second half. And that is why I think we are working probably harder than anyone in terms of getting ourselves prepared in securing those necessary materials in particular COF. And we have actually been requested by a number of our customers to also secure capacity for them and even in the second half to prepare some inventory for them inside of the potential market rebound in the second half, meaning prepare inventory slightly higher than normal during Q2 in preparation for the second half potential rebound. As for TDDI margin, I want to emphasize, yes, we are we said the additional shipment of TDDI in Q1 resulted in margin pressure because this margin is lower than corporate average.

We are referring to HD plus low end TDDI products. For HD plus certainly the margin is higher. And I would say, if you have a more like a balanced portfolio in between HD and full HD, you have a breakdown similar to the market breakdown, then your TDDI business gross margin will certainly be higher our corporate average for sure. But it just happens that in Q1 we dependent largely on one anchor customer because of capacity constraints that we explained, right. So with either customer, we shipped basically only the high end full HD TVDI.

But second but that customer has a major inventory correction. And then we have the second major anchor customer coming in, for which we are shipping lower HD plus TDDI. So lower end is lower margin and that explains our second quarter lower margin for TDDI compared to corporate average. I hope that explains your that answers your question.

Speaker 3

Yes. Okay. Thank you. And then a follow-up, if I may. On the Sling generation of Sling, can you give a little bit color on what's the improvement you're expecting for this product?

Speaker 4

As I said, we learning from the lesson, right, of the first generation. We are now a lot more cautious than before. I think we in the first generation, we were looking back, we were probably a bit too enthusiastic or optimistic, right. So we put together the solution and we try to promote the solution, you know, thinking that Apple, the market leader is already doing three d sensing, structured light and Android market would have to follow. And certainly for the reasons we explained in the past and this time in our prepared remarks, there are reasons why Android market turn out to be a lot more cautious than we anticipated.

So I think we realized the cost will be much lower. But certainly regardless of how much we do, our cost is still higher than other displacing the print. There's no doubt, right. So if display unlock and face recognition and online payment remains to be the only application over live front facing socialite three d sensing. Then I can tell you the customer will still be challenging our costs and comparing our costs to the steel much lower cost of display fingerprint.

So that is one thing. Although we have been able to substantially bring down the cost compared to January 1, We are still not certain whether this is sufficient, especially if under the assumption that unlocking is still the main function that three d sensing can do. We are aware our customers and others are working on new applications, but what we don't know is how quickly this new application will materialize and whether these applications or which one will become the true killer application that is still remain unknown, right. So that is one area. So we have been able to bring down the cost substantially with much improved performance, meaning power consumption, the accuracy and even the packaging.

The package becomes smaller and with better precision, better power consumption, better ISFP protection and so on so forth, even much better cost. But what we don't know is whether that is enough. Again, the three d sensing structure like total solution, I emphasize total solution, meaning a projector, receiver and processor decoder, right, altogether. That's why we call total solution. Total solutions market is for Android market other than the top few customers who do have their own total solution.

So if you like, if you break down and join market into two segments, one is the top tier segment where the customers do have their own total solution, in which case our strategy is to supply them with our optics or projector. But then you have the second segment, which is still as of today remains unserved, which is a market where people somebody needs to bring total solution for them to embed the solution to their smartphones. But then market certainly is arguably even more cost sensitive compared to the former category, right. So again, we are taking a very cautious approach. We are evaluating the cost and benefits and timing and so on.

And certainly we are also taking non smartphone application into consideration as well. But again, we haven't made any final decision. We are exploring the market situation, getting market feedback. If anything, I think most likely than not, we will make adjustments. What kind of adjustment we will make, I think I don't want to talk about it right now because it's probably too early, but we will certainly report in due course.

But I don't think it's highly unlikely that we'll stay the same course last time because we know we have to adjust and we know where to do better this time. Thank you, Jerry.

Speaker 0

Thank you. And our next question comes from the line of Donnie Tang with Nomura. Your line is open.

Speaker 6

Hi, Jordan and Jackie. Thank you for taking my question. My first question is regarding to your anchor customers' decision to let you back into second half. What kind of reason behind and does that mean we still have a chance to further expand our projects in the future? Because previously I thought that we are a little bit negative on the future cooperation with the anchor customer.

But at the current time point, do you feel more opportunities in next year or in near future?

Speaker 4

I'm afraid, Dali, I think your previous thinking is misconception. Yes, they did inform us about the replacement decision. But even at that point in time, we never ever had any doubt about the future potential and all the active projects that we are working with them extremely closely as we speak. And they actually at the time assured us repeatedly that this does not in fact the long term collaboration opportunity or relationship. And certainly we are we certainly feel better about the short term change.

As far as why they are making such decision and how and that is something again I'm afraid I cannot share. And I think in that regard, I've said just about everything I can say in my prepared remarks already. But I want to emphasize, we feel there's a great opportunity, there's a great area of opportunity out there in our WLO business vis a vis like the customer and certainly others as well going forward in the next few years. Got it.

Speaker 6

And my second question is regarding to TDDI. So do you have any volume forecast in the second half or next year? And what kind of gross margin trend we are thinking right now if we are seeing more TDDI shipment in the second half of next year, should it lead us to have better gross margin on small and medium displays for IC business?

Speaker 4

Given the uncertainty in the smartphone market right now, and certainly in the macro economy and also the fact that we are in close discussion a number of major customers on a number of major projects. They are not so they are probably greater deal of uncertainty than usual at this point for us to make a more credible prediction on the shipment volume in the remainder of the year, not to mention next year. So I will reserve I would not comment on that other than to say that we are very confident. Q3, we'll see a substantial growth from Q2 and Q4, another substantial growth from Q3 and that I think we are confident about. But we know losing one or two major projects can change a lot given our current status in terms of volume prediction.

So I think we just have to give you updates as we go along. As far as margin is concerned, as I said earlier, once we reach a more balanced portfolio of customers and projects and higher end and lower end TDDI solutions, I think the overall margin will be better than corporate average for sure. And also once we start production for the next generation TCI products, which involve better code and code functionalities, so to speak, because it does enable better narrow better design for our customers. And also it is lower cost for us and therefore hopefully better margin as well. So again TDDI or smartphone market has a long way to go.

So we recognize we have a major setback in the first round, if you like, and we are determined to get it back. And I think both in terms of volume and gross margin. Certainly TDDI being an SoC gross margin in the long term as a long term trend should be better than the straightforward driver IC for large panel. That's for sure.

Speaker 6

My third question is housekeeping question maybe for Jackie. So what's our OpEx guidance in second quarter and this year and next year according to your current forecast? And also, what's our plan on the share buyback? I know previously Chairman announced share buyback and I'm wondering what kind of price level that we will engage more? Thank you.

Speaker 2

Okay. Hi, Donnie. Your first question, okay. Our in our Q2 guidance, what's in the operating expenses right now, we're projecting about $39,400,000 okay, around that range. And looking forward for this year, as we reported in the prepared remarks, our total operating expense will not exceed the level from last year with the exception of the depreciation.

So right now, net net, we're looking at probably around $168,000,000 for the year based on the current forecast. And the answer to your second question is, it's really not the corporate share buyback, right? It's the Chairman's own share buyback that he announced November of last year. And we really cannot comment on the detail because he has a 10b-five purchase plan that he's currently executing. And at the end of the purchase plan, we will have to file with the SEC to conclude and announce that the buyback has been completed, but it's ongoing right now.

Speaker 4

Yes, the total is set to be $5,000,000 All we can share is that he's buying shares according to 10b-five and we certainly cannot it will be unfair to him right before the program's conclusion to release further details. But it's all in accordance with the law regulations and he's buying it, he's buying shares for sure.

Speaker 6

Got it. Thank you so much.

Speaker 4

Based on the regulation, he can only buy shares pretty much in line with the market, right. That's basically what he cannot have advantage of the market. So that is pretty much the rule, the spirit of the rule.

Speaker 3

Next question. Thank

Speaker 0

you. And this does conclude our allocated time for Q and A. And I'll now turn the call back over to management for closing remarks.

Speaker 4

As a final note, Jacky, our CFO will maintain investor marketing activities and continue to attend investor conferences. We'll announce the details as they come about. Thank you and have a nice day.

Speaker 0

Ladies and gentlemen, this does conclude the program. You may now disconnect.