Himax Technologies - Earnings Call - Q2 2022

Transcript

Speaker 0

Hello, ladies and gentlemen, and welcome to Highmark Technologies Inc. Second Quarter twenty twenty two Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we conduct a question and answer session. Instructions will follow at that time.

You would need to press 11 on your phone. Again, that is 11 on your phone to ask a question. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Mark Swongberg from MZ Group.

Please go ahead.

Speaker 1

Thank you. Welcome, everyone, to the Himax second quarter twenty twenty two earnings call. Joining us from the company are Mr. Jordan Wu, President and Chief Executive Officer Ms. Jessica Pan, Chief Financial Officer and Mr.

Eric Lee, Chief IRPR Officer. After the company's prepared comments, we have allocated time for questions and a Q and A session. If you have not yet received a copy of today's results release, please email himxmzgroup dot us, access the press release on financial portals, or download a copy from IMAX's website at www.imax.com.gw. Unless otherwise specified, we will discuss our financials based on non IFRS measures. You can find the related reconciliation to IFRS on our website.

Before we begin 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. A list of risk factors can be found in the company's SEC filings, Form 20 F, for the year ended 12/31/2021, in the section entitled Risk Factors as may be amended. Except for the company's full year of 2021 financials, which were provided in the company's 20 F and filed with the SEC on 03/23/2022, 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 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.

I will now turn the call over to mister Eric Lee. Eric, the floor is yours.

Speaker 2

Thank you, Mark, and thank you everyone everyone for joining us. My name is Eric Li, chief IR PR officer at Himax. On today's call, I will first review Himax consolidated financial performance for the second quarter two thousand twenty two, followed by our third quarter two thousand twenty two outlook. Jordan will then give an update on the status of our business, after which we will take questions. The second quarter presented a challenging business environment, Yet we continue to diligently focus on navigating these obstacles while positioning ourselves for long term sustainable growth.

Access rating interest rate hikes to combat rising inflection, ongoing rolling breakdown lockdowns in China and the Russia, Ukraine, and war continue to plague business activities and reduce consumer confidence. The grimy visibility of our end customer led to reduced and shorter forecast along with the most stringent inventory control across the board from brands to panel houses. We revised our guidance on 06/20/2022 to better reflect these soft conditions. Our second quarter revenues, gross margin, and EPS were all in line with the updated guidance range. Second quarter net revenues of $312,600,000 decreased 24.3% sequentially, but were within our updated guidance of a decline of 22% to 27%.

Our gross margin came in at 43.6%, a decrease from 47% last quarter, but we've seen our initial guidance of around 43% to 45%. Now IFRS profit per diluted ADS was 43.9¢, an upper range of the updated guidance of 40 to 45¢. IFRS profit per diluted ADS was 40.4¢ at high end of the updated guidance of 36.5 to 41.5¢. Revenue from large display drivers was $68,600,000 in q two, a decrease of 38% sequentially. TV and notebook IC revenues were down double digits sequentially due to customers' inventory control on the backdrop of slowing end market sell through and reduced business visibility.

Monitor IC sales declined sequentially in q two, but increased more than a 100% year over year for the six months ended 06/30/2022. Thanks to a substantial shipment growth for high end area such as Hello. This is Alex from HiMap. Can you hear us now?

Speaker 0

Yes.

Speaker 3

Okay. Sorry. So there was some interruption in our connectivity, but we are using the backup smartphone. So we are carrying on, Eric.

Speaker 2

So I'll probably start from the revenue for our our large display driver. So our revenue from the large display driver was $68,600,000 in q in q two, a decrease of 38% sequentially. TV and the notebook IC revenue were down double digit sequentially due to customers' inventory control on the backdrop of slowing end market sell through and reduced the business availability. Monitor IC sales declined sequentially in q two, but increased more than a 100% year over year for the six months ended 06/30/2022, thanks to substantial shipment growth for high end area such as the high frame rate gaming monitor. Large panel driver IC sales accounted for 22% of total revenues for this quarter compared to 26.8% last quarter and 23.4% a year ago.

Moving on to our small and the media size, the display driver segment. Revenue was $201,600,000, a decline of 22% sequentially. Our automotive business, as was the case in q one, was once again the largest revenue contributor in the second quarter, representing over 30% of total sales. We expect this upward trend in automotive sales contribution to continue throughout 2022. Meanwhile, for AMOLED business, we successfully piloted the production of our total solution covering DDIC and the TCOM for the premium tablet for global leading NAND as a sole source supplier.

Our AMOLED business in the second quarter accounted for more than 4% of total sales. Small and the media size driver IC segment accounted for 64.5% of total sales for the quarter compared to 62.6% in the previous quarter and 63.1% a year ago. The automotive IC sales in Q2 decreased low teens sequentially, but the market was adversely impacted by logistical hurdles brought on by brought on by China city lockdown. However, on a year over year basis, automotive IC sales for the quarters were up almost a 100%. Thanks to broad design win coverage and a better product mix.

Our automotive IC sales in the first half were up a 130% year over year despite macroeconomic headwinds and the supply chain disruption. Second quarter smartphone and the tablet revenues both declined double digit sequentially as channel inventory across panel houses, OEMs, and end brands remain stop only high against the drop of continuous sluggish demand. Both the smartphone and the tablet driver IC sales represented almost core sales ratings in the second quarter. Our ePaper business grew more than 100% sequentially in the second quarter, stemming from increasing demand by a leading customer along with the cash off shipment that were delayed last quarter due to logistical disruption from lockdown in China. Second quarter non driver revenue was $42,400,000 slightly down from a quarter ago.

Our TCOM business was flat con sequentially, supported by increasing TCOM shipment for automotive, AMOLED for tablet and high end display. TCOM business represented over 8% of our total sales in the second quarter. Non driver products in Q2 accounted for 13.5% of the total revenues as compared to 10.6% in the previous quarter and the 13.5% a year ago. Now IFRS gross margin for the second quarter was 43.6%, a decrease from 47% of last quarter and 47.5% of the same period last year. As we previously reported, there were two primary factors that adversely impacted our gross our margin profile.

First, price adjustments in support of our non automotive customers amidst soft demand worldwide. Second, our cost of goods sold for Q2 reflected the higher foundry prices for the previous quarters. IFRS gross margin was also 43.6% for the quarter. Our non IFRS operating expenses for the second quarter were $45,000,000 up 2.1% from the previous quarter and up 14.4% from a quarter ago

Speaker 3

From a year ago.

Speaker 2

Up from a year ago. The sequential increase was caused mainly by increased r and d expenses, while year over year expenses increased because of higher salaries and R and D expenses. IFRS operating expenses were $52,600,000 for the second quarter, up 2.1 from the preceding quarter and up 32.9% from a year ago. The higher IFRS figures were mainly due to the trench of annual bonus compensation, which we award employees at the September each year. The 2,021 annual bonus compensation, including RSU and the cash awards, totaled $74,700,000, out of which $24,800,000 was immediately last digits and recognized in the February.

The remainder will be equally lasted in three tranches at the first, second, and the third anniversary of the grant date. The remaining compensation expenses will be recognized on a straight line basis over the vesting period of each tranche. The second quarter non IFRS operating income was $91,500,000 or 29.3% of sales versus 36.3% of sales in the last quarter and 36.8% of sales from a year ago. Non IFRS after tax profit was $76,800,000 or 43.9¢ per diluted ADS, decreased from a $121,900,000 or 69.7¢ per diluted ADS last quarter. Turning to the balance sheet.

We had $461,600,000 of cash, cash equivalents and other financial assets as of 06/30/2022, compared to 2,000 $270,400,000 at the same time last year and the $447,100,000 a quarter ago. The higher cash balance was mainly from $9,100,000 of operating cash inflow during the quarter and payments received from customer to secure their long term shift supply. We had $49,500,000 of long term unsecured loans as of end of q two, of which $6,000,000 was the current portion. It was worth noting that our cash balance at the end of the third quarter will be substantially reduced following the annual cash dividend payout of $217,900,000 in July. The annual dividend of $1 and a quarter per ADS is is equivalent to 50% of last year's net profit.

The payout ratio was lower than our historical average, reflecting our decision to reserve cash in the light of macroeconomic uncertainty. Our quarter end inventory as of 06/30/2022 were $337,300,000, up from $253,100,000 last quarter and up from a $134,200,000 a year ago. Our high inventory level reflected the abrupt drop in demand triggered by strict customer inventory control due to sluggish end market demand and the reduced visibility, which led to growing customer inventory, particularly in consumer electronics. The halt in demand adversely affected our sales and in turn cost elevated inventory level as our production always begins months in advance. Accounts receivable at the June 2022 was $371,000,000, down from $442,200,000 last quarter, but up from $329,000,000 a year ago.

DSO was ninety three days at the quarter end as compared to eighty eight days a year ago and ninety six days from last quarter. Second quarter capital expenditures were $2,500,000 versus $3,600,000 last quarter and $1,400,000 a year ago. The second quarter CapEx was mainly for R and D related equipment for our IC design business. As of 06/30/2022, Himax has a 174,300,000.0 ADS outstanding, unchanged from last quarter. On a fully diluted basis, total number of ADS outstanding for the second quarter was a $174,800,000 Now turning to our third quarter twenty twenty two guidance.

We expect third quarter revenue to decrease 35% to 39 sequentially. Now IFRI's gross margin is expected to be around 35.5% to 37.5% depending on final product mix. Now IFRI's profit attributable to shareholders is expected to be in the range of 11.6 to 15.6¢ per fully diluted ADS. The third quarter IFRS profit attributable to shareholders is estimated to be in the range of $0.2 to $0.2 per fully diluted ADS. Similar to our usual practice, we will grant employees annual bonus, including RSU and cash awards on or around September 30 this year.

The third quarter guidance for IFRS profit per diluted ADS has taken into account the expected 2,022 annual bonus, which subject to board approval is now assumed to be around $40,000,000, out of which $17,600,000 or 8¢ per diluted ADS will be vested and expensed immediately on the grand date. As a reminder, the total annual bonus amount and the immediate of the last day the portion are our current best estimate only, and the actual amount could vary materially depending on, among other things, our q four profit. And the final board decision for the total bonus amount and the investing scheme. As is the case for previous years, we expect the annual bonus Brent in 2022 to lead to higher third quarter IFRS operating expenses compared to other quarters of the year. In comparison, the 2021 annual bonus totaled $74,700,000, out of which $24,800,000 was vested immediately.

As a side note, regarding a proposed resolution regarding the company's LTIP long term incentive plan at this year's annual general meeting to be held on 08/15/2022, we'd like to clarify that the proposed is to extend the duration of the company's existing LTIP for another three years rather than to initiate a new plan. As mentioned earlier, we grant an annual bonus including cash and the RSU to employees on on or around September 30 every year to award them for their devotion to the company. The the existing LTIP, which was initiated in 2011 for a duration of five years and thereafter extended a couple of time at annual general meeting in the past few years will expire again on 09/06/2022. Therefore, unless the plan is extended again this year or new a new plan is initiated. For this year's annual bonus, we will be able to grant only cash to employees at the September and lose RSU as the the other means of compensation.

We believe RSU is an important incentive for employees to focus on long term success of the companies. First of the June this year, among the total number of 20,000,000 authorized ordinary shares of the existing LTIP, 49% have already been granted with the remaining 51% still valid to award our employees if the plan is extended. I would now turn the call over to Jordan. Jordan, the floor is yours.

Speaker 3

Thank you, Eric. Several macro level factors continue to present significant headwinds to our business while also cloudy visibility as we enter the second half of the year. They kept high inflation rapidly rising interest rates in addition to the ongoing war and potential for more China city lockdowns have caused widespread disruption to demand. Faced with frozen demand, piled up inventory, and eroding panel prices, and brands are downsizing their panel procurement plans. Consequently, panel makers all initiated downward and extended fab utilization adjustments along with rigorous ICE inventory cuts.

The sudden halt in demand together with the lens of our production lead time has led to elevated inventory level for q three. While in the midst of this inventory offloading cycle, we are naturally cutting back on new orders with our suppliers. However, the contracts that we entered with foundries and back end suppliers when the industry experienced an unprecedented demand in February incur charges if the minimum purchase orders are not fulfilled. While the negotiation with suppliers are still ongoing as we seek ways to increase flexibility in executing the agreements. Such supplier charges have already been factored in for our Q3 guidance and is the predominant factor for the Q3 gross margin contraction.

While we are uncertain about when the current business environment could turn around, we believe our inventory will peak in q three as we curtail our new wafer starts and our customers continue to to restart after inventory digestion. On the revenue front, we believe the growth will be restored in Q4 boosted by healthy demand for automotive and tablet segments where there is better visibility. Yet, the ODD IC sector is still set to remain sluggish for the remainder of the year. Against the backdrop of challenging market conditions, we expect our Q4 gross margin to be still under pressure because the cost of goods sold still reflect high prices from previous quarters, while inventory offloading will lead to selling price erosion. However, the sequential decline Q4 gross margin will likely be modest as there is still solid price support from a few product areas, notably automotive, TCOM, AI modded, and AI image sensing, which altogether now accounts for more than 40% of our total sales.

Our automotive sales especially have a high likelihood of a strong fourth quarter rebound from the strong of q three. From a longer term perspective, we are very optimistic about our automotive business and continue to look to expand our leading market position. With that, I will begin with an update on the large panel driver IC business. Our third quarter last piece per driver IC revenue is projected to decline by double digit sequentially and below what we typically see on a seasonal basis. As customers imposed high inventory control measures to reduce near term inventory due to continuous deterioration of forecast visibility from their customers.

The outlook for last size driver IC business remains soft with moderating TV sales through and muted Chromebook sales. While monitor customers exercise strict inventory control. Q3 monitor notebook and TV IC sales are expected to decline double digit reflecting the overall market softness, reduced business visibility and destocking pressure from our customers. Now turning to the small and medium sized display driver IC distance. In the third quarter, revenue is expected to decline double digit sequentially.

Our Q3 automotive driver IC sales are anticipated to be down double digit sequentially as customers' stock inventory accumulated during the second quarter when production was severely disrupted by the widespread city lockdowns in China. However, the extent of the sequential revenue decline for automotive is likely to be less than loss suffered by other product areas, while business visibility into Q4 and next year are also much better for our automotive business. As indicated earlier, despite the Q3 decline, we expect our automotive driver IC sales to see strong business momentum in Q4. We see TDDI sales outgrowing lows of DDIC. We expect our automotive TDDI business to continue to be a key driver of high margin growth for Himax for many quarters to come.

In the meantime, smartphone and tablet driver IC sales are set to decline double digit, the result of the ongoing deterioration of forecast visibility. As our customers prolong their efforts to reduce inventory amidst the backdrop of soft demand and the weaker macro environment. Now for quick update on each of the major sectors in our small and medium sized display driver IC business. First, on the automotive sector, as Eric mentioned earlier, automotive now is our largest revenue contributor set to represent almost 35% of our total sales in q three. We are poised to sustain our leading position and dominant global market share as we offer the most comprehensive automotive product portfolio ranging from traditional CPICs to technologies such as TDDI, LPDI, and AMOLED.

Additionally, we are the pioneer of mass production for TDDI, a technology that is essential for large sized, inactive, stylish, and curved automotive displays. For TDDI is still in early stage of mass deployment for automotive market, it is on track to be a fast growing segment. We are glad to report that we expect our automotive TDDI to reach a milestone of over 10,000,000 units cumulatively shipped by the end of Q3. TDDI adoption rate for motto for automotive has been advancing at a rapid pace, and our design win coverage continues to quickly expand with panel makers, tier ones, and auto brands. Meanwhile, China's government recently created incentives to stimulate more NEV sales, which may trigger accelerating adoption of higher automotive displays by incorporate in cell TDDI.

While our automotive for 2022 might be less than previously predicted, the growing reliance on automotive electrification and small cabin and and and smart cabin because the semiconductor content values are increasing that small cabin and and small and and smart cabin because the semiconductor content values are increasing rapidly per vehicle. We'll be a key beneficiary of this trends and expect to see sustainable growth in the automotive market on top of the already strong 2021 base. Next, regarding smartphone and tablet businesses, we expect both product lines to decline double digit sequentially as earlier stated. With that said, our shipments for high end AMOLED tablet, both provide both TVIC and TCON to certain digit brands are on the rise with momentum expected to last in the foreseeable future. And for smartphone, despite being awarded a growing number of projects by brand customers, much of our shipments to key customers for their next generation new designs that support high frame rate, actual stream bezel, and high resolution features.

They've been postponed in the midst of excess inventory for their older models on the backdrop of frozen end market demand. Turning to the e paper driver business, another product is our small and medium sized driver lineup. Our e paper business is expected to decline double digit and quarter over quarter due to customers downsizing their annual business plans amidst soft consumer electronics market. If the world continues to transition towards green energy and covered footprint reduction, we expect long term demand for e paper to endure. Therefore, we continue to collaborate with world class customers for certain ASIC projects with increased r and d efforts spent on their next generation products towards larger size, higher resolution, and colored e paper displays.

We are glad to report that one of our e paper ASICs in collaboration with E Ink for their latest e book solution was awarded best choice award of Computex two thousand twenty two. The ASIC enables fast handwriting speed for e table display while also greatly improving the average latency of the display with reduced power consumption, characteristics that are critical for next generation e paper devices. Next, for an update on AMOLED. We continue to gear up for AMOLED driver IC development jointly with major Korean and Chinese panel makers in various applications. In the third quarter, AMOLED sales are expected to increase more than 50% sequentially with small AMOLED for tablet models commencing mass production this quarter.

Our AMOLED business, including T car and driver, is expected to amount to more than 8% of total sales in q three and slated for strong growth in the next few years. As a reminder, we provide both AMOLED driver and T card and are the sole source supplier for global leading tablet customer. In addition, the number of awarded projects for our flexible AMOLED driver and TCAM for automotive is also increasing with worldwide conventional carmakers and LED vendors. Finally, we are making good progress with leading panel houses for the development of AMOLED displays, drivers for smartphone, TV, and mobile applications. In light of serious constraints on the capacity for smartphone air voltage per driver in the next few years, we have secured and continue to vie for more such supply, more such capacity for the future.

Now let me share some of the progress we've made on the non driver IC businesses. Starting with an update on timing controller. We anticipate q three TCAM sales to decline double digit sequentially, pressured by lower shipments for TV monitor notebook markets. Yet TCAM shipments for airborne tablet in automotive sectors is set to enjoy decent growth, and we expect these two areas to see accelerating design in momentum in the coming quarters. Our cutting edge automotive leading local DIMMIN TCON has won numerous awards and potential and penetrating to OEMs, tier ones, carmakers premium new car models with some of which already commencing mass production.

We anticipate more than 50% year over year sales growth for automotive T Con, which will represent about 2% of total sales in the third quarter with additional product projects stated for bigger volume shipments starting in 2023. For AMOLED tablet, Gecan, as reported earlier, in the second quarter, we successfully commenced the mass production of our tablet AMOLED solution, including both T card and driver to support a leading tablet brand as a source of supplier in their newly launched tablet model. Additionally, we are undertaking new design developments supporting even larger panel sizes with small name customers. We expect to gain traction with small shipments to key customers in upcoming coming quarters and are optimistic about the long term potential for our TCOM business with secured capacity from our foundry partners in pursuit of sustainable growth. Switching gears to the ultra low power AI in the same in total solution, which incorporate time x ultra low power CMOS image sensor, our proprietary AI processor, and CNN based AI algorithm.

On the AI image sensing business or notebook, we continue to support sales production ramp up in a range of their new models. In addition, a number of other leading laptop vendors and CPU platform players have also shown interest in our AI total solution in the effort to further broaden use cases for next generation next generation notebooks. In addition in addition to presence, look away and outlook detections, we are developing a variety of new context aware AI features for next generation smart notebook market. Our AI image sensing solution featuring ultra low power tiny admiral vision AI in a tiny form factor. It's a perfect fit for the resource constrained and battery powered endpoint applications.

The new AI area, which is now ardently explored by AI communities. Automatic meter reading or AMR is one of our successful showcases to the endpoint AI industry where our AI total solution has been adopted by several Chinese vendors and shipments is slated to begin in the second half of this year after some delays caused by city lockdowns in China. We've also kicked off projects jointly with water authorities, utility companies, meter OEM, ODMs, and or IoT network providers from China, Japan, Europe, and India over the past few quarters. Our power efficient AMR solution can operate with a battery pack for over five years and is easy to install over the existing conventional water meters for real time water consumption readout and detection of abnormalities such as water leakage. We also see expanded adoption of our tiny ML based endpoint AI solution in new areas such as share, bike parking, capture endoscope, and more broadly in areas of automotive, smart office, smart home, agriculture, and environmental preservation.

In smart office, we have several projects ongoing with office office automation ODMs where our ultra low power AI solution is used for meeting room human presence detection and people counting with an aim to save energy for lighting and temperature control. For environmental conservation, we are collaborating with Seed Studio, Edge Impulse, and Dexter dot I o jointly organizing the event of IoT to the wild contest for sustainable planet two thousand twenty two. Aiming to cost the AI experts around the world to take out different real world environmental challenges. We are excited by the expression this new relatively new AI product line has generated. I expect to see increasing sales contribution throughout 2022 and beyond.

Lastly, I'd like to give an update on our optical related product lines covering WLO, LCOS, and three d sensing. HyMas continues to work on strengthening our offshore related technologies. At the same time, better position better better positioning ourselves to capture the vast opportunity presented by the future of the metaverse. Equipped with exceptional know how and years of proven track record for mass production, Himax is playing a key role in enabling next generation metaverse related applications. Currently, we have multiple intensive collaborations ongoing with world leading tech giants who are aggressively investing in this emerging field with a lot of potential.

Now to quickly go over a few recent updates. First, on our Delco's micro display, we continue to have steady joint collaboration with leading tech names and OEMs for their next generation products in AR glasses, where we offer a leading edge from mid air cosmical display that features lightweight, small form factor, and full color with unique characteristics of high illumination and low power consumption, which are critical for the success of future AR glasses. We have received promising feedbacks thus far, and we'll report more progress in due course. Moving on to the updates for three d gesture control for human interface sensing. Our WLO technology is deployed in those three d camera to empower three d perception sensing for precise gesture control, the technology that can be applied to current AR VR goggles for controller free gesture recognition.

Last, for an update on three d scanning and recon and reconstruction project, our three d sensing technology is deployed for customers three d scanning device for the purpose of generating real time digital twins, avatar, and three d environments around this. The collaboration is still underway, and we expect to be to begin engineering build from the February. While the opportunity in optical and metaverse related products is vast, it is still very much in the earliest innings. We are optimistic about its potential though and continue to work to position our strong optical product portfolio for future growth in the years to come. For non driver IC business, we expect revenues to decline double digit sequentially in the third quarter.

That concludes my report for this quarter. Thank you for your interest in Himax. We appreciate your joining today's call, and we are now ready to take questions.

Speaker 0

Thank you. As a reminder, to ask a question, you'll need to press 11 on your telephone. Please stand by while we compile the q and a roster. And we do ask that you limit yourself to two questions. Again, we ask that you limit yourself to two questions.

And one moment for questions. One moment for questions. And our first question comes from Jerry Su from Credit Suisse. Your line is now open.

Speaker 4

Okay. Thank you. Thanks for taking my question. Petroleum, I want to ask you about, I think, regarding the LTAs and the wafer capacity. Think has wafers has been turning less you know, tight for most of the processing nodes, I think, except for the OLED related.

So what is your, you know, current, you know, structure of of these contracts with the wafer foundries? Are you able to renegotiate, you know, for new terms? Or or you are, you know, pretty much forced to keep navigation and then perhaps, you know, pay some penalties, to the foundry suppliers? That's the first question. And then the second question is more regarding the your comment about fourth quarter for the revenue to rebound.

I know you mentioned about automotive and tablet, but can you give us more color about what you think the tablet business by the fourth quarter could see some recovery? Thank you.

Speaker 3

Thank you, Jerry. Firstly, on LTA, that actually our LTAs actually cover mostly foundry, but also to some degree again as well. Some are expiring towards the end of the year, but that is small portion compared to the total. I said in my prepared remarks that we are negotiating indeed. I mean, everybody I mean, if people are getting bigger and bigger picture about the the the the the short term prospect of the market.

Right? And and, I mean, there's no need for for me to elaborate. So I think us and our our partners come together, we are working to as I say in in our prepared remarks, to hopefully increase the flexibility for execution of those contracts. And so we are not saying we are going to cancel the agreement or we are going to walk away from the agreements. Firstly, I mean, certainly, as a company, we still honor the agreements.

And secondly, we feel if you look into a longer term horizon time horizon, this contract will still be very important for our long term growth. So I think only only usually, you know, understanding a good way basis, we're working to hopefully increase the flexibility for our execution on these contracts. Having said that though, I I I I want to repeat because this is important. In our q three guidance, we have factor e, the potential penalties incurred by this agreement where we our our our new wave of stars would be less than than the the minimum required according to the agreements. So those are the factor in the effect.

Those those charges represent the predominant portion of q three margin contraction. So in short, I guess, renegotiating, but we will continue to follow those contracts. And I think, hopefully and if everything goes as planned without any major surprises, I think, hopefully, q four such charges incurred to us will be less than those of q three for the simple reason that our application is based on where we'll start. Right? So if you look back in q two, towards the end of q two, there's a sudden freeze in in market demand.

So everybody was, like, hit by surprise. That's when we started to push our brakes. Right? But that was already too late because all the q two new wave starts will come out in q three, and that explains why our q three inventory will reach the peak. And, certainly, we have much reduced the new level stuff starting from the end of q two and also in q three.

And that is one reason that is the main reason why the charges out of LTA will peak also in q three because our new will start will be the minimum. But in q four, hopefully one, as I said, hopefully, there'll be some negotiation and so the rules will be rewritten or compromised. And also, after after after our customers' digestion of inventories, hopefully, in q in q q four, we will be able to selectively selectively start up new waivers. And that's certainly in itself will lower the the the LTA charges. Right?

And that's certainly well, very much depends on the outlook of q one and with the the visibility is so limited. I really can't comment too much on next year or q or even q one, but that is the plan. And that looks to be the the most likely scenario for now. And your second question is about our q four revenue. We are saying there's a good chance of rebound from q three, especially supported by automotive and tablet.

The visibility now appears to be decent for both sectors. Although, I must say, other than our AMOLED or AI and a few, like, new emerging areas where revenue, the tuition are relatively small. Other these few sectors, I must say, you know, for TV, large panel, smartphone, etcetera, the visibility remains limited. Automotive, there's a there's a hiccup in 02/03. As we said, right, in q two, there's a sudden widespread city lockdowns in China.

And so the inventories that our customers took during q two and which was supposed to be used in q two were not used. And therefore, they are consuming those equipment for for during q three. And I explained our our our bit of automotive IC shipments in q three. But, again, visibility is relatively relatively strong for automotive, and we we believe our customers' inventory level will be back to normal towards the end of q three. And in q starting q four, it will be I can say, exactly business is normal, but I think you will recover a great deal from q three plus.

And a very similar story for tablet. Having said that, tablet, we have suffered from two quarters of pretty significant sequential declines already. And our customers are really just running out of their inventory as we see it. So q four will be a process of restocking. Having said that, I must say, in terms of longer term visibility for for tablet for us, The visibility certainly is lower than that of automotive.

Speaker 4

Okay. Thank you. That's very clear. Thank you.

Speaker 3

Thank you, Jeremy.

Speaker 0

Thank you. And, again, if you would like to ask a question, that is star one one. Again, if you'd like to ask a question, that is star one one. One moment for the q and a register. Now I'm showing no further questions.

I would now like to turn the call back over to Jordan for closing remarks.

Speaker 3

As a final note, Eric Lee, our Chief IRPL Officer, will maintain investor marketing activities and continue to attend investor conferences. We'll know the details as they come about. Thank you, and have a nice day.

Speaker 0

This concludes today participating. You may now disconnect.