Himax Technologies - Earnings Call - Q1 2020

Transcript

Speaker 0

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

Miley Bergman from MZ Group.

Speaker 1

Welcome, everyone, to Himax's First Quarter twenty twenty 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 remarks, we have allocated time for questions in a Q and A session.

If you have not received a copy of today's results, please email himaxmzgroup dot us or access the press release on financial portals or download a copy from Himax's website at www.himax.com.tw. Before we begin the formal remarks, I'd 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 conference call. Factors that could cause actual events or results to differ materially from those described in this conference 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 technology 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 3139 filed with the SEC in March 2020.

Except for the company's full year of 2019 financials, which were provided in the company's 20 F and filed with the SEC on 03/25/2020, 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 been subjected to the same review and scrutiny, including internal auditing procedures and external audits by an independent auditor to which we subject our annual consolidated financial statements and may vary materially from the audited consolidated financial information from 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. I will now turn the call over to Ms. Jackie Chang.

The floor is yours.

Speaker 2

Thank you, Marlee, and thank you everybody for joining us. On today's call, we will first review the Himax consolidated financial performance for the first quarter, followed by the second quarter twenty twenty outlook. Jordan will then give an update on 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 and acquisition related charges.

In light of the prevailing uncertainties clouding the global financial markets, we decided to preannounce preliminary key financial results for the first quarter on 04/03/2020, with revenues met guidance, while gross margin and EPS both exceeded the guidance issued on February 1320. Today, our reported results for revenues, gross margin and EPS were all in line with the pre announced results. For the first quarter, we recorded net revenues of 184,600,000.0 an increase of 5.5% sequentially and an increase of 13% compared to the same period last year. Historically, the first quarter has seasonally been the bottom of the year in terms of sales due to the Lunar New Year holidays, opened down by more than 10% sequentially. The coronavirus outbreak has prompted more than half of the provinces in China to extend the New Year holidays by at least a week in an effort to contain the spread of the virus.

The management of logistics, including worldwide custom operations in various ports and the supply chain were impacted significantly during this period of time. Despite these dramatic headwinds, we were able to deliver strong financial results in the first quarter, specifically when double digit revenue growth year over year. The 5.5% sequential increase of revenue was at the mid range of our guidance of an increase of between 1% to 10% quarter over quarter. Gross margin was 22.7%, exceeding the prior guidance of an increase of 1% to 2% from the 20.6% delivered in the previous quarter. A more favorable product mix among small display products, improved WLO factory utilization and higher than expected engineering fees from new project engagements, and hence the gross margin for the first quarter.

IFRS profit per diluted ADS was $0.19 exceeding our guidance of minus $05 to $0.18 Improved gross margin and lower than expected operating expenses contributed to the more positive earnings. Price profit per diluted ADS was $0.22 exceeding our guidance of minus $0.02 point dollars to $0.21 Revenue from large display drivers was $61,400,000 up 6% sequentially and down 12.3% year over year. The sequential growth was driven by Chinese panel customers ramping of new LCD fabs as well as the building of inventories in anticipation of growing demand panel prices in 2020. The revenue was however lower than the level of the same quarter last year when the production outputs of panel makers reached a peak. Since then, they have cut back their production each quarter to address overall weakness TV demand and industry wide capacity oversupply.

Large panel driver ICs accounted for 33.2% of total revenue for the quarter compared to 33.1% in the fourth quarter of twenty nineteen and 42.9% a year ago. Revenue for small and medium sized display drivers was $87,500,000 up 7.9% sequentially and 29.5% year over year. The segment accounted for 47.4% of total sales for the quarter compared to 46.4% in the fourth quarter of twenty nineteen and forty one point four percent a year ago. The sequential sales growth was driven primarily by a surge in tablet sales, offset by a decrease in smartphone TDDI and automotive sales. The strong year over year growth was attributed by both tablet and automotive sales.

Sales into smartphone were down 7.6% sequentially, but up 6.3% year over year. The sequential decline was caused mainly by lower TDDI shipments, reflecting certain customers' delay into the second quarter for their new product launches with our TDDI solutions. The coronavirus outbreak caused serious disruptions in customers' engineering work after the Lunar New Year holiday, leading to delay in new product verification and launch timetables. The first quarter sales of traditional DDICs declined by 5.7% sequentially, but increased 13.5% from last year. Display drivers and TDDI for tablet and other consumer products were up 51.7% sequentially and doubled year over year.

This was mainly due to customers' strong demand from newly launched tablets using TDDI as well as surging needs for online education and homeworking. We should emphasize that tablet TDDI was one of the main growth drivers for Q1 and will represent a significant growth opportunity for our business through the rest of 2020. While we only started mass shipment of in cell TDDI for tablet this quarter, it already represented around 5% of our total revenues in the first quarter. Jordan will elaborate on this later. Our driver IC revenue for the automotive application was down 9.7% sequentially.

It was up 6.2% from the same period last year. Revenue from our non driver businesses were $35,700,000 down 0.6% sequentially, but up 38.7% year over year. Non driver products accounted for 19.4% of total revenues as compared to 20.5% in the fourth quarter of twenty nineteen and fifteen point seven percent a year ago. Gross margin for the first quarter was 22.7%, up two ten basis points sequentially and 10 basis points from the same period last year. Gross margin outperformed our guidance of an increase of one percent to 2% compared to the 20.6% of the fourth quarter of twenty nineteen.

A more favorable product mix among small and medium sized display driver products, improved WLO fab utilization and higher engineering fees from project engagement were the factors behind the sequential growth. Increased shipment of WLO product to an anchor customer led to higher capacity utilization of our WLO fabs and therefore better gross margin compared to the same period last year. Our IFRS operating expenses were $37,300,000 in the first quarter, down 0.4% from the preceding quarter and down 7.4% from a year ago. The year over year decrease was a result of decreased salary and R and D expenses. Non IFRS operating expenses for the first quarter were $36,700,000 down 0.5% from the previous quarter and down 7.8% from the same quarter in 2019.

IFRS operating margin for the first quarter was 2.5%, up from minus 0.8% in the prior quarter and minus 2.1% in the same period last year. The sequential and year over year improvement were primarily a result of higher sales, better gross margin and lower operating expenses. First quarter non IFRS operating profit was $5,300,000 or 2.9% of sales, up from non IFRS operating loss of 700,000 or minus 0.4% of sales last quarter and minus 1.8% for the same period last year. Both sequential and year over year improvement were for the same reasons stated above. IFRS profit for the first quarter was $3,300,000 or $0.19 per diluted ADS compared to profit of $1,000,000 or $0.06 point dollars per diluted ADS in the previous quarter and loss of $2,300,000 or minus $0.13 per diluted ADS a year ago.

IFRS earnings per diluted ADS exceeded prior guidance of a per diluted ADS of around minus $0.05 to $0.18 The better than expected earnings were due to improved gross margin and lower operating expenses. The sequential and year over year increase were a result of higher sales, better gross margin and lower operating expenses. First quarter non IFRS profit was $3,800,000 or $0.22 per diluted ADS compared to non IFRS profit of 1,500,000.0 or $0.09 point dollars per diluted ADS last quarter and non IFRS loss of $2,000,000 or minus $0.11 per diluted ADS for the same period last year. Non IFRS earnings per diluted ADS exceeded prior guidance of around minus $0.2 to $0.21 Turning to the balance sheet. We had 126,600,000 of cash, cash equivalents and other financial assets as of March 2020 compared to $108,200,000 at the same time last year and 112,100,000.0 a quarter ago.

We delivered an operating cash inflow of $10,600,000 during the first quarter. The higher cash balance from the last quarter was mainly due to additional unsecured borrowings of $10,600,000 during the quarter. On top of the cash position, restricted cash was 164,000,000 at the end of the quarter, the same as the preceding quarter and a year ago. The restricted cash is mainly used to guarantee the second the secured short term borrowing for the same amount. We had $67,900,000 of unsecured short term loan at the end of Q1 compared to the $57,300,000 a quarter ago and $40,000,000 at the same time last year.

Our inventories at 03/31/2020 were $148,400,000 little changed from $143,800,000 last quarter, but down from $189,300,000 a year ago. Accounts receivables at the March 2020 were $186,700,000 up from 164,900,000 last quarter and $176,200,000 a year ago. Days sales outstanding was ninety two days at the end of the quarter as compared to ninety seven days a year ago and ninety days at the end of last quarter. As highlighted in the last few earnings calls, in response to capacity shortage at foundry and certain packaging material, we have to keep the inventory level higher than usual in 2018. Given the unfavorable market conditions and easing of foundry capacity in 2019, we have started to control our inventory level since the first quarter of twenty nineteen.

We believe inventory has reached a healthy level by now. But given the prevailing market condition, we will monitor our inventory carefully. Net cash inflow from operating activities for the first quarter was $10,600,000 as compared to an outflow of $22,100,000 for the same period last year and an inflow of $23,400,000 last quarter. First quarter capital expenditures amounted to $3,100,000 versus $6,300,000 a year ago and $2,700,000 last quarter. As reported in the last earnings call, the CapEx for both new building construction and the three d sensing capacity expansion were concluded in the fourth quarter twenty nineteen.

The first quarter CapEx was for R and D related equipment for our IC design business. As of 03/31/2020, Himax had 172,200,000.0 ADS outstanding, no change from last quarter. On a fully diluted basis, the total number of ADS outstanding was 173,300,000. As we mentioned in the last earnings call, the coronavirus outbreak created major uncertainties in the marketplace and new challenges for our operations. We have taken swift actions and work extremely closely with both our customers and suppliers in effort to adapt to new circumstances.

Among other things, we have proactively monitored the logistics and customs operations in various ports in China to identify any potential impacts to the supply chain and quickly adjusted the production and shipping plans accordingly. At this time, with China reopening and other countries moving in the same direction, the market appears to be stabilizing, but business outlook remains murky. For the second quarter, we are confident in the smooth operation of our supply chain and the current driver IC shipment pipeline remains strong for notebook, monitor, smartphone and tablet. However, TV and auto businesses are under pressure as global consumption appears to have shrunk drastically. Among our non driver IC product, WLO sales were reduced significantly from the last quarter.

Jordan will elaborate on this in a few minutes. The second quarter gross margin is likely to be lower than that of the first quarter. Notably, the automotive display driver, which enjoys the best gross margin among our driver IC products is being hit by the coronavirus, while the monitor business, which is expanding in volume right now is relatively low in gross margin. In addition, as mentioned above, the second quarter WLO sales will drop significantly. This will also lead to much reduced gross margin of WLO for its lower fab utilization.

For the second quarter, we expect revenue to decrease slightly by within 5% sequentially. Gross margin is expected to be between 20.2% to 20.6% depending on our final product mix. IFRS loss attributable to shareholders are expected to be in the range of around $0.15 to $0.05 per diluted ADS. Non IFRS loss attributable to shareholders are expected to be in the range of $0.13 to $0.3 per fully diluted ADS. I will now turn the call over to Jordan.

Jordan, the floor is yours.

Speaker 3

Thank you, Jackie. Since late Q4 twenty nineteen, we have started to see a major turnaround in Italy, all aspects of our business with positive momentum and a strong outlook. This has been due to design wins with new and existing customers across our major product lines. However, the strong momentum was interrupted at around the time of the Lunar New Year holidays when many areas of China started to impose strict lockdown measures in the face of the COVID nineteen outbreak. Uncertainty in the marketplace has continued since.

Despite supply chain disruptions caused by China lockdowns, we delivered decent results in the first quarter, although the results could have been better without the coronavirus. China has recently reopened, and other countries are seemingly moving in the same direction following the long period of lockdown. At this point, our visibility into the second half of the year is rather limited as the pandemic has created a profound impact on the global consumption and the economy overall shorter term. Similar to the first quarter, our second quarter business is being affected by the COVID-nineteen, especially for TV and automotive related products. However, home working and online education have driven a surge in demand for notebook, monitor, and tablet related products.

We also see very strong momentum in our smartphone TDDI business and the backdrop of a sluggish global smartphone market. PVDF for tablet, which has made a decent contribution to our first quarter result, is the major highlight of our business right now as the technology is being adopted and put to mass production rapidly as we speak. We are the dominant TDDI supplier to global Tier one and joint replacement makers, making Himax the market leader in the emerging trend to replace the traditional design of having two ICs, namely display driver and touch panel controller with the integrated TDDI C for tablet displays. While still a new product, tablet TDDI already represents around 5% of our overall revenues in Q1, and we expect the business to continue to deliver strong growth in Q2 and throughout the rest of 2020. Despite the coronavirus, we are still making great progress and remain committed to ongoing r and d projects for forward looking products, notably ultra low power smart sense smart image sensing, TDI for automotive, three d sensing, and AMOLED.

All of these new product areas are growth opportunities with great potential. We have taken proactive steps to strategically manage the business through the current crisis and are confident that we will deliver both top and bottom line growth in 2020. Now let me take you through each of our major business areas. Let's start with the large panel display driver IC business. For the second quarter, we expect the large display driver IC segment revenue to decrease by high single digit sequentially.

Although we delivered a strong result in Q1, our visibility is low for the second half as the market is still cautiously adapting to the new market environment. On a macro perspective, our Chinese panel customers continue to gain market share in the LCD market, thanks to Korean panel makers accelerated exit from the industry in 2020. The leading IC supplier for the Chinese panel market, IMAX is well positioned to benefit from the increased demand coming out of the major Chinese large display players. If we look into specific product segments, the global TV market continue to face challenges with reduced end market demand as well as supply chain disruptions. Conversely, the strong growth momentum we experienced in Q1 for notebook and monitor is expected to expand into Q2 and second half.

Homeworking and online education have created new demand for these products. In addition, the Chinese government has recently mandated that all public offices and institutions replace foreign hardware and software with Chinese alternatives within the next three years. This has boosted the need not only for our last panel display driver ICs, but also timing controller contents. Our businesses in higher monitor and new generation low power notebook products, where we are the market leader in driver IC and or timing controller. We benefit significantly from this trends.

From the supply side, in anticipation of there being foundry capacity shortage of eight inches silicon wafers for display driver ICs. We strategically prepare 12 inch foundry as well as associated back end packaging and testing ahead of our peers to cover the potential eight inch capacity shortfall. Our design project coverage is strong across all leading Chinese panel makers. The additional capacity has enabled us to accommodate customers rush orders for monitors, which are in very strong demand globally. Looking at technology development, despite the delay of the twenty twenty Tokyo Olympics, our peer TV brands continue to promote eight ks TVs.

We have active design activities in both eight k TV display driver and timing controller ICs, of which we are the market leader. The eight k TV timing control technology enables the display to bring more realistic and vivid images, deliver an immersive viewing experience, especially for high resolution contents such as games. Recently, there have been multiple customers announcing their latest eight k TVs with Himax technology insight. Although the penetration of eight k TV is still low, we expect this to be a growth opportunity for Himax as eight k TV sales will boost demand, not just for our driver IC, but also timing controller contents where the product ASP is much higher. Now let's turn to the small and medium sized display driver IC business, beginning with an update on our smartphone segment.

Our TDDI product road map as well as new design wins with end customers and the foundry capacity advantage have positioned Himax to gain market share during the second quarter and throughout 2020. The smartphone market continues to embrace new technologies and is moving towards higher frame rate displays to enable smoother screen viewing and gaming experience. This will drive the adoption of next generation high refresh rate TDDI solutions for which Chimex is the leading technology provider. Also, demand for five g in China is is expected to stimulate smartphone demand in 2020, which in turn will drive the growth for TDDI. Expecting aggressive Chinese government subsidy for five g to boost the economy, Smartphone makers continue to aggressively develop five g products.

Timex will benefit from all these trends. Although global smartphone market demand has been severely impacted in the short term by the pandemic, based on the current pipeline, we expect our TDDI smartphone shipments to grow significantly in Q2 due to the new design wins into a certain newly launched models as well as ongoing strength in new design in schedules for 2020 mass production. Talking the strong headwind of a declining global smartphone market, we are confident that our smartphone TDDI business will grow strongly from last year for the reasons mentioned above that are specific to Himax. The price erosion of TDDI over the past year is expected to abate in 2020. This is normally because the new high refresh rate products will enjoy better ASP, but also that the industry wide tightening of foundry capacity for TDDI will likely provide price support.

Although we are currently facing some pricing pressure, we expect this to stabilize in the second half with gross margin improvements for smartphone TDDI. We have prepared the capacity to meet strong TDDI product demand and capitalize on the opportunities for smartphone TDDI as well as other TDDI applications such as tablet in 2020. Due to the strong demand, we expect in Q2 and second half, we foresee the potential for capacity tightness again. We are therefore working diligently to enable additional capacity. Our Q2 sales include TDDI for smartphone is expected to increase by over 40% sequentially.

Our traditional discrete driver IC sales into smartphone posted a slight sequential decline for the first quarter. We expect traditional smartphone display driver IC shipments to continue to decline in Q2. This will be more than offset by the increase in smartphone TDDI shipments. The traditional discrete driver IC for smartphone for the second quarter is expected to decrease by around 60% sequentially. As discussed previously, the major development we are seeing in the marketplace is the increasing utilization of the OLED display for smartphone.

This is due to expanded AMOLED capacity as well as increased demand for under display fingerprint technology that is only available in the AMOLED display at this time. We are encouraged by the progress we have made, collaborating closely with leading panel makers across China for AMOLED product development. We expect a small volume of smartphone AMOLED DDIC shipments in 2020. Additionally, we see OEMs aggressively gearing up to produce wearable devices. Beyond smartphone, we have made progress in wearable AMOLED display driver ICs where HiMex is very active.

Overall, we believe AMOLED driver IC will soon become one of the major growth engines for our smart for our small panel driver IC business. Turning to the automotive sector. The worldwide auto sales remains sluggish with highly uncertain consumer demand is in the second half. China commenced more than 30 of the global market in automotive display driver IC and inevitably this business has been impacted. Revenues were down 9.7% sequentially in Q1 and we expect to see around 15% decline in Q2.

Even so, comparing the two quarters, we are still up around four percent year over year. The year over year growth is mainly due to Chinese panel makers' increased market share globally, for which we benefit. Our Chinese customers are efficient to gain market share into in auto displays combined with our technology and leadership in this area position our automotive related business for further growth. Despite short term challenges, Chemex will remain the leader as the new as the major developing trends have not changed. In the auto display segment, the number of displays per week continue to continue to rise as the overall auto display market is set to increase from twenty twenty forward, Equally important for Himax, the market is quickly shifting towards a number of new technology for our display, including higher resolution, NCL touch, border, giant pillar to pillar screen, local dimming for higher contrast, and plastic AMOLED for free form design, all of which are contributing to expanding demand for automotive display driver ICs.

Chimex is the primary partner for most of the world's automotive panel makers to enable these new technologies. Specifically, Himax is the dominant automotive TDDI technology provider right now. In addition to working as a sole or main supplier with existing leading panel makers, We have numerous TDDI design projects with multiple new tier one customers, and our r and d activities in new technology development continue without delay despite the pandemic. While we only expect a small volume shipments in 2020, we anticipate very meaningful shipments of auto three d I as we move into 2021. We have also developed a new generation double dimming T GAM product that will improve display quality and contrast and impact by improvements for instrument cluster display, especially in that surroundings.

MobileDIMMY has shown the potential to improve contrast and achieve all the display properties without reliability concerns while also providing power savings over traditional backlight. Currently, we have numerous local dimming design in activities with global tier one carmakers. Turning to the tablet and consumer electronics businesses. We expect the tablet business to be a major growth area for Himax during 2020 with a significant volume of tablet TDDI shipments that began in Q1. The strong momentum is expected to accelerate into Q2 and throughout the rest of 2020.

The business growth will be driven primarily by leading Android tablet brands rapid adoption of the newly developed InCell TDDI solutions. In cell TDDI is quickly becoming mainstream for tablets to do its lower cost and a simplified supply chain as well as faster and easier integration for display manufacturers. At the same time, consumer demand is expected to accelerate for this cheaper, slimmer, lighter, and more stylish tablets. TriNet is the primary supplier for all Android tablet insert EDI products right now. While we only start mass production in shipwort in Q1, it already represents over 30% of our targeted revenue and around 5% of our total revenues for the quarter.

We continue to see growth demand in Q2, further boosted by the current trend of home working, online education and Chinese government's plan to replace IT equipment. Furthermore, we see TDDI tablet is active stylus becoming a new mainstream, and Himax is also the market leader in this space. It's worth it's worth mentioning it's worth highlighting that while tablet maker or while tablet market is smaller than smartphone, the ASP and number of units for TDDI in each tablet are much higher than in smartphone. In the second quarter, TDDI for tablet is expected to increase by around 80% sequentially. Additionally, for large sized tablets, we've seen bezel design.

We continue shipping our traditional display driver IC with COS packaging to a leading Chinese brand customer and expects strong shipments in Q2. We expect the strong momentum in our tablet products, both the spray driver IC and TDDI, to be one of the main growth drivers in Q2 and throughout 2020. Tablet TDIC and TDDI sales for the second quarter are expected to increase by around 40% sequentially and 150% year over year. For the second quarter, revenue for the small and medium sized driver IC business is expected to increase by low single digit sequentially. Now let me share some of the progress we've made on the non driver IC businesses in the last quarter.

First, on the WLO business, we delivered very strong results in Q1, almost doubling the business year over year despite the modest decline sequentially. However, we expect a significant decline in Q2 sequentially due to the coronavirus outbreak. The factory to which we usually ship this product has been ordered to shut down by the local government as part of their disease containment measures. The much reduced shipments in the second quarter, I. E, the much lower WLO fab utilization, will also have a negative impact on our overall gross margin.

The demand for this product is likely to remain uncertain for a while even after the factory reopens. Despite the short term disruption, we continue to make progress with our ongoing R and D projects for next generation products centered around our exceptional design know how and mass production expertise in WLO technology. Next is an update on the three d sensing business. In the smartphone segment, we have advanced our WLO optics solution to cover both structured light and time of flight or ToF three d sensing. We are seeing increasing ToF adoption by smartphone makers for world facing camera to enable advanced photography, distance slash dimension measurement, and three d depth information generation or AR.

In the past few months, we've been actively working with the industry leading ToF three d camera vendor to develop a new and advanced ToF solution, targeting Android smartphones. Leveraging our w o the our w o technology, we have made great progress providing the partner with a spot projector for their reference design, which has been ready for the Android smart makers evaluation this quarter, a slight delay from Q1 due to the pandemic. We have received positive feedbacks from our partner and have ongoing active design activities providing optical components or projector to our Tier one smartphone OEM customers. Three d sensing remains one of the main growth drivers for us. All known smartphone three d sensing engagements continue to focus on smart door lock industrial automation applications where we provide structuralized based three d sensing total solution.

We have been collaborating closely with two primary types of partners. Those with industry leading expertise in facial recognition algorithms and those offering application process ICs with strong AI capability. We have started designing projects with several smart door lock end customers. In addition to providing a total solution, we also offer individual key components, including optics and or our proprietary three d decoder ASIC, where we have received frequent inquiries from customers for various applications in three d sensing. We also continue to work with partners in short mention to optimize its manufacturing process for both cost and production efficiency.

I'm pleased to report that prototypes of our three d sensing enabled automatic robotic cementing system are ready now for production optimization testing. Next on our AI based ultra low power smart sensing solution. We see the surge in demand for battery powered smart devices with AI enabled ultra low power intelligence sensing, especially in markets such as home appliances, door lock, doorbell, TV, notebook, building control, and security. WiseEye, our total solution for AI based ultra low power smart sensor, is built on MSaaS unique AI based algorithm on top of Himax Himax's proprietary computer vision processor and CMOS image sensor, all equipped with ultra low power design. Currently, laptop is the market of focus.

Chimax WiSight two point o MD solution provides a laptop ready streaming one RGB IR AI solution, respecting privacy, worry, and security for local users. The number of mini notebook OEMs and ODMs demonstrated our Wi Fi NB solution in their next generation premium notebooks with positive feedbacks.

Speaker 2

In

Speaker 3

addition to notebook, we have also made progress with small OEMs in wide size solution into the display to enable consumer privacy protection in real time and the reference design of the world's first battery powered human sensing solution for IoT market. Although the COVID-nineteen disrupted the development schedule, we see customers already starting product promotion. In order for our Wi Fi technology to to reach its maximum potential, we have a bucket of accessible business model verified. In addition to the total solution approach mentioned above, We also offer individual key parts, both hardware and software, to address the customer's specific needs. For customers who own their own algorithm and wish to develop their own applications, we can provide our ultra low power AI processor and image sensor without our algorithm.

The customer can piggyback on our technology and focus their efforts on bringing AI to edge devices and transforming sensor data into actionable information for image, sound, activity, gesture, temperature, pressure, and biometrics among other things, all with extremely low power consumption. We continue to collaborate with Google TensorFlow Lite and other AI framework providers in order for our WiSAi AI processor and image sensor platform to boost the inference performance and short term short term the time to market for the customers targeting a wide variety of AIoT applications. Moreover, we also collaborating with cloud computing services providers in deploying MX's Wi Fi platform to edge to cloud certified IoT devices. We believe it will be a long term growth driver for Himax in smart manufacturing, retail, and smart building applications. Moreover, for those customers slash partners, whose main business is to provide AI processor.

We can offer our ultra low power image sensors without our AI processor and algorithm. We are pleased to report that our industry first ultra low power backside illuminated VCS CMOS image sensor has already been commercialized. It's designed with low latency and autonomous models for always on intelligent visual sensing applications, which enables with extremely low power consumption, human presence detection and tracking, case detection, behavioral analysis, and post estimation for growing markets such as smart home, smart building, healthcare, smartphone, and ARVR devices. The VCA resolution also supports greater than 90 degree wide field of view lens. That makes this idea in monitoring detecting and image capturing.

We expect demand for the ultra low power sensing AIoT market to explode in the near future. And numerous customers slash ecosystem partners are expressing their strong interest in our unique technology where we have made extraordinary progress in AITV, smart home appliances, smart door lock doorbell, smart surveillance applications that integrate voice and audio activation beyond facial recognition on edge device. We have covered our ultra low power smart sensing product status above. Now turning to our CMOS image sensor business update. We expect to see strong growth in this business due to the accelerated adoption of home working and online education.

Our industry first two in one CMOS image sensor, which is another critical part of the WiSAi two dot zero notebook solution, is currently available for our partners slash customers. This hybrid CMOS image sensor combines high quality HD image capabilities with ultra low power output for AI visual sensing applications, especially for notebooks. Features in unique design and small form factor enables laptop makers to achieve ultra narrow bezel design, which is on track to become the mainstream in the next couple of years. Our sensor has also incorporated in our our three IR design to enable Windows Hello facial recognition. It helps reduce cost by eliminating eliminating the need to add an additional camera.

We expect a small volume shipment for this product in 2020 with much extended volume in the years after. For the traditional human vision segments, We see strong demands in notebooks, so we are one of the market leaders and they experienced increased shipments for multimedia applications such as car recorders, surveillance, drones, home appliances, and, consumer electronics among others. Lastly, on air cost, we continue to focus on AI goggle devices and head up displays or HUD for automotive. Many of our industry leading customers have demonstrated their state of the art products, including holographic HUD, AR glasses, and LIDAR system. We financed the Air Force Technology Insight at the twenty twenty CES with positive market feedbacks.

Our technology leadership and proven manufacturing expertise have made us a preferred partner for customers in these emerging markets and their ongoing engineering products in AR goggles and SUV for automotive applications. For non driver IC business, we expect revenue to decrease by over 15% sequentially in the second quarter. Aside from the WLO sales, which are expected to be down, we expect other products to grow sequentially. That concludes my report for this quarter. Thank you for your interest in Himax.

We appreciate your joining today's call and are now ready to take questions.

Speaker 0

Your first response is from Tristan Gerra of Baird. Please go ahead.

Speaker 4

Hi, thanks for taking the question. I know visibility is very low, but you've mentioned that notebook demand was expected to be resilient even into the second half or at least in Q3. Could you give us a bit more color as what you're hearing from customers in terms of demand for some of your other end markets into Q3, whether you expect more segments to weaken further or do you see any areas that are potentially going to be rebounding in Q3?

Speaker 5

Right. Thank you, Kristen. The situation is evolving. And I think, yes, the visibility is low and people are cautious. But I think it is also fair to say that what we're seeing right now is that people's confidence are growing as opposed to a month ago, for example, in Italy or all aspects of of our businesses or applications.

So notebook certainly is one of the areas. And, also, don't don't forget. I I I also mentioned monitor repeatedly where we just happen to be a major driver ID supplier into the into the the the the the the segment. So what we are looking right now is extraordinary growth in q two and another very strong growth year over year for q three and q four. Although, because the, you know, the the the the we are building our production so fast that it is likely that if you look at second half against first half, the monitor business is likely to to be flat or slightly down.

But on year over year basis, it's still very strong. So I'm talking I've talked about notebook and monitor. And one thing we we like to highlight repeatedly is the template market. Template market overall is strong, again, for the same reason, the pandemic. Right?

People are working from home and so on. And template is especially meaningful for Himax because as I said earlier, we we we we have a dominant position in TDDI in Android tablet for traditional driver IC. And now we are almost a sole supplier for TDDI into tablet for Android, for which we are seeing exceptionally strong growth. The mass production started in q one, very strong growth in q two, and another very strong growth in q three and q four. So both year over year, y o y, Like, our automotive demand for the third quarter and even for q four is, I would say, extraordinarily high.

I I would say, you know, the reasons one of the reasons, obviously, is the fact that our market share in China for I'm talking about automotive display market. Our market share in China is very, very high. Although we also enjoy decent market share elsewhere, but our market share in China is very, very high. China, in terms of global market share overall, is still behind Taiwan, Japan, Korea in automotive sector. Although in other places such as TV and monitor, right, they they have already dominated the market.

So it's it's an area automotive displays an area Chinese panel market makers are very keen to catch up on. So we kind of take advantage of that. So I I we have fairly good confidence that although the automotive sector visibility is limited for the second half, our our our market share can actually grow in the second half because of the reason I mentioned, even the volume and revenue for second half. Now if we if I look at the focus pipeline, it's actually a decent growth from the first half. Although it is something still to be watched because of the the economy status.

TV is is is the area where I I I I've been hearing customers saying, you know, more more monitor, no put up so strong. I'm switching production into those areas, and I'm cutting back my TV production. And that is still the case. So we if we look at the the second half versus first half TV demand, we are likely to see some decline. So overall, I think, yes, we don't want to sound as if we are we are overly optimistic because the economic uncertainty is indeed very, very high as we all appreciate.

If we look at our product, our forecast pipeline and a lot of which because of high mix specific reasons, we actually feel pretty positive about our second half outlook compared to first half. So we are looking at, you know, we are certainly looking to achieve double digit growth for the whole year compared to last year and also double digit growth second half against first half.

Speaker 4

Okay, that's very useful. Thank you. And then just a quick follow-up. What is your view about inventory management in at your customer? Are they starting to reduce inventories given the headwinds in terms of fan demand?

How do you see inventory levels now in the supply chain and how you think they will be trending over the next couple of quarters? And finally, do you see any changes in your lead times or expect any changes in the coming quarter?

Speaker 5

Firstly, on lead time, I'll get back to the inventory level, you know, in a minute. We did suffer from and adapt to the new circumstances pretty rapidly and pretty, I would say, amazingly. So, you know, as as I speak right now, I I think in terms of on the supply side, logistics, customers customs, and so on, I think that sector has been fairly, to a very large extent, eliminated. On the inventory management, what's very interesting is that we are seeing customers with our wide portfolio products adjusting their production plan very, very quickly to address the new market demands or weakness thereof. So and and and for us, we also have to, you know, adjust our sales and production and planning, you know, very fast to to to to to meet their demands.

So, honestly, in a few areas, we are actually seeing kind of tightness of supply because of the pulling request, the ramping. So I hope I mean, certainly, again, the the visibility is limited. But what we're seeing is that people are watching extremely closely, paying much more attention than usual in terms of market demand changes and try to adapt their production accordingly with very fast speed, and we try to also accommodate such a such a such quick actions. And so, hopefully, we are not seeing was fine. So far, I'm not too worried about that inventory.

I don't even feel very good about that, so to speak.

Speaker 4

Great, that's very useful. Thank you very much.

Speaker 5

Thank you, Christian.

Speaker 0

Thank you. Your next response is from the line of Jerry Hsu of Credit Suisse. Please go ahead.

Speaker 6

Hi, Jordan. Thanks for taking my question. I just want to follow-up on the large size driver IP. I think you guided the revenue to decline high single digit in Q2. But if you look at your comments about the notebook monitor related things, they've probably been quite strong.

So are you seeing a very big slowdown for TV? Because if we look at the supply chain for the panel makers or your other peers, I don't think it sounds like the TV driver ID shipment is going to see that kind of a decline in the second quarter. So can you help us understand how is that evolve? Thank you.

Speaker 5

Thank you, Sherry. Indeed, large panel, said high single digit second quarter decline. It's mainly it's mainly the TV. And the TV in terms of volume is certainly much bigger than monitor and notebook. And so so if I if I if I if if I share with you the the the the whole picture, TV based on the current forecast and pipeline is likely to be down year over year by high single digit to, you know, high teens.

Right? What monitor is likely to be up by more than 20% and monitor up by, you know, by double digit in mid teens. Right? So so, however, although the monitor notebook are so strong, TV, you know, were were caused the whole whole segment of last display drive last panel display driver to be down high single digit. So indeed, that is primarily TV.

Although, as I said, we just have to adapt, you know, actually, just earlier today. In fact, you know, one of our major customers in China, which previously announced to us, the suppliers, that in q three, they are they they are planning to cut back their TV production. And now they say they are changing their mind, and they've actually got orders for further TV outputs. So they say q three TV is likely to be at a level similar to q two and so on. So as I said earlier, when, you know, answering Tristan's questions, I said the market is evolving, and it appears to be looking more positive now than even a month ago or even two weeks ago.

But I think overall, still, is a sector that is that is likely to be to suffer from some decline this year.

Speaker 6

Okay. Thank you. And then a second question on the WLO. I think you mentioned that your your customers are facility under shutdown. Can you give us a little bit more color on that, you know, which regional country and and when do you expect that, you know, that shutdown or the factory to restart?

Speaker 5

I can only tell you that the the country is not China. It is the module factory that we are instructed to ship our optics into. Right? And it has been that way since day one of our production. And, unfortunately, actually, towards the end of q three, that country started to impose a very strict incoming flights restrictions.

So we we actually together with our customers, we rush our our shipment towards the end of q three and early q end of q one and early q two. And thereafter, somewhere in April, that redact the entire region where the factory is located was completely shut down. So there's actually no no workers in the factory. There's not even people to receive our goods, and therefore, nobody can ship anything. And, I mean, that that kind of disruption, honestly, in our entire portfolio of shipments and operation was very rare, but it did happen.

Right? So I I would say in q one for WLO, we probably overshipped, and that that probably represent some cushion of some buffer of good inventory for the customers to use for their q two and q q '2 production, I would say. So and and q two, because of this unfortunate incident, double shipping is likely to be rather dramatically reduced from q one. And honestly, there's nothing we could do about.

Speaker 6

Okay. Got it. Thank you.

Speaker 5

Thank you, Jerry.

Speaker 0

Thank you. I'm showing no further questions at this time. I would like to turn it back over to the presenters for closing remarks.

Speaker 5

As a final note, Jackie Chan, 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 concludes today's conference call. Thank you for participating, and have a wonderful day.