Himax Technologies - Q2 2023

Transcript

Operator (participant)

Hello, ladies and gentlemen. Welcome to the Himax Technologies, Inc.'s Second Quarter 2023 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 is being recorded. I would now like to turn the conference over to your host, Mr. Mark Schwalenberg, from MZ Group. You may begin.

Mark Schwalenberg (Director)

Thank you. Welcome everyone to the Himax Second Quarter 2023 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 Li, Chief IRPR Officer. After the company's prepared comments, we've allocated time for questions in a Q&A session. If you have not yet received a copy of today's results release, please email [email protected], 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.

A list of factors can be found in the company's SEC Filings, Form 20-F, for the year ended 31st December, 2022, in the section entitled Risk Factors, as may be amended. Except for the company's full year of 2022 financials, which were provided in the company's 20-F and filed with the SEC on 6 April 2023, 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 like to turn the call over to Mr. Eric Li. Eric, the floor is yours.

Eric Li (Chief IRPR Officer)

Thank you, Mark. Thank you everyone for joining us. My name is Eric Li, Chief IRPR Officer at Himax. On today's call, I first review Himax consolidated financial performance for the second quarter 2023, followed by our third quarter outlook. Jordan will give an update on the status of our business, after which we will take questions. We will review our financials on an IFRS basis. Challenging business conditions due to ongoing macro headwinds persisted during the second quarter. We continued to execute successfully with gross margin surpassing the guidance range, while both revenues and EPS landed at the upper end of guidance range issued on 11 May 2023. Second quarter revenues registered $235 million, a decrease of 3.8% sequentially, at the upper end of our guidance range.

This was attributable to improved order momentum, particularly in the automotive DDIC, large display driver IC, and the non-driver business. Gross margin came in at 21.7%, a decrease from 28.1% of last quarter, but above our guidance range of 20%-21%, due to a favorable product mix. As we previously reported, Q2 gross margin was impacted significantly by a one-time expense related to the strategic termination of certain high-cost foundry capacity agreements, in addition to price erosion related to destocking. Q2 profit per diluted ADS was $0.005, at the upper end of the guidance range of -$0.029-$0.006. Revenue from large display drivers came in at $45.4 million, a decrease of 14.3% sequentially, yet above our guidance.

Monitor IC sales surpassed our prior guidance up single digits sequentially, driven by our client's proactive pull forward in preparation for the Q2 sales festival and the recovery of gaming display. Notably outperformed our guidance, thanks to a strong shipment to key customers. TV IC sales declined as expected, as customers suspended pull-ins, having already replenished their inventory over pi two consecutive quarters. Large panel driver IC sales accounted for 19.3% of total revenues for the quarter, compared to 21.7% last quarter and 22% a year ago. Moving on to our small and medium-sized display driver segment. Revenue was $150.3 million, a slight decline of 2.9% sequentially.

Smartphone and tablet driver sales increased mid-teens and the single digits, respectively, in second quarter, as we saw a recovery in business momentum, particularly in TDDI products. Q2 automotive driver sales decreased single digits sequentially, but outperformed our guidance of low teens decline, as clients resumed order replenishment for both traditional DDIC and the TDDI. Automotive driver business was still our largest revenue contributor, with around 30% of total sales in the second quarter. We are particularly confident in our automotive TDDI growth potential, backed by hundreds of design wins already secured, significantly ahead of our peers. Among these design wins, only a small portion has commenced the mass production.

With the design win projects under our belt, we believe we can continue to grow our market share in automotive TDDI, in addition to our already dominant position in traditional DDICs, where we have a 40% global market share. Small and medium-sized driver IC segment accounted for 63.9% of total sales for the quarter, compared to 63.3% in previous quarter, and 64.5% a year ago. Second quarter, non-driver sales also exceeded guidance, with revenue of $39.3 million, up 7.9% from a quarter ago. The better than expected sales performance was a result of higher shipment for TCON and the CMOS image sensor.

Despite the slight sequential decline in TCON sales in second quarter, it surpassed guidance of a low teens decline, bolstered by a better than expected shipment of monitor and automotive TCON. TCON business represented over 9% of our total sales in second quarter. Lastly, for WLO, notably, during the quarter, we commenced the volume production to one leading North American customer for their new generation VR devices to enable gesture control. Non-driver products accounted for 16.8% of total revenues, as compared to 15% in the previous quarter, and 13.5% a year ago. Our operating expenses for the second quarter were $53.2 million, an increase of 4.3% from the previous quarter, and 1.2% from a year ago. The sequential increase was mainly a result of increased R&D expenses.

Yet, amidst the prevailing macroeconomic headwinds, we remain focused on strict cost controls. Our second quarter operating expenses include the amortized expenses for annual bonus grant, made in prior years of $6.4 million, but compared to $6.5 million in previous quarter, and $7.4 million from a year ago. As a reminder, we grant annual bonuses to employees at the end of September each year, including RSU and the cash award. A portion of those bonuses is immediately vested and recognized in the third quarter, with the remainder equally vested in three tranches on the first, second, and the third anniversary of the grant date. Recognized on a straight line basis over the vesting period of each tranche.

Second quarter after-tax profit was $0.9 million, or $0.005 per diluted ADS, compared to $14.9 million, or $0.085 per diluted ADS last quarter. Turning to the balance sheet. We had $219.5 million of cash, cash equivalents, and other financial assets as of June 30, 2023, compared to $461.6 million at the same time last year, and $223.8 million a quarter ago. Second quarter operating cash inflow was approximately $1.7 million, as compared to an inflow of $66.4 million in Q1. Primarily due to $51 million income tax paid during Q2. An illustration of our continuous effort to deplete inventory for the past few quarters.

We had $43.5 million of long-term unsecured loans as of the end of second quarter, of which $6 million was the current portion. During the third quarter, we have made a payment of $83.7 million for annual dividend to shareholders. Further, we expect to pay out a total of around $30 million for employee bonus awards, comprised of around $9.3 million for the immediately vested portion of this year's award, and $21 million for vested awards granted over the last three years. Despite the substantial employee bonus payout, we still expect to guarantee positive

Jordan Wu (President and CEO)

To generate.

Eric Li (Chief IRPR Officer)

To generate, I'm sorry. We still expect to generate positive operating cash flow in Q3 again, due to the ongoing destocking process across major product lines. Our quarter-end inventories as of June 30, 2023, were $297.3 million, markedly lower than $335.2 million last quarter. Accounts receivable at the end of June 2023, was $239 million, down from $252.2 million last quarter, and down from $371 million a year ago. DSO was 90 days at the quarter end, as compared to 93 days last quarter and a year ago.

Second quarter, capital expenditures were $2.9 million, versus $2.8 million last quarter, and $2.5 million a year ago. The second quarter CapEx was mainly for our IC design business. As of 30 June 2023, Himax has 174.4 million ADS outstanding, unchanged from last quarter. On a fully diluted basis, total number of ADS outstanding for the second quarter was 174.7 million. Now, turning to our third quarter 2022 guidance.

Jordan Wu (President and CEO)

2023.

Eric Li (Chief IRPR Officer)

I'm sorry, 2023 guidance. We expect third quarter revenues to be flat to decline 7% sequentially. Gross margin is expected to be around 30.5%-32%, depending on the final product mix. The third quarter profit attributable to shareholders is estimated to be in the range of $0.015-$0.06 per fully diluted ADS. As we have done historically, we will grant employees annual bonus, including RSUs and cash awards on or around September 30, this year. The third quarter guidance for profit per diluted ADS has taken into account the expected 2023 annual bonuses.

Which subject to board approval, is now assumed to be around $10.5 million, out of which $9.3 million or $0.042 per diluted ADS will be vested and expensed immediately on the grant date. As a reminder, the total annual bonus amount and the immediately vested portion, are our current best estimate only. The actual amounts could vary materially, depends on, among other things, our Q4 profit and the final board decision for the total bonus amount and its vesting scheme.

As is the case for previous year, we expect the annual bonus grant in 2023, to lead to higher third quarter operating expenses compared to other quarters of the year. In comparison, the annual bonus for 2022 and 2021 were $39.6 million and $74.7 million respectively, of which $18.5 million and $24.8 million vested immediately. I will now turn the call over to Jordan to discuss our Q3 outlook. Jordan, the floor is yours.

Jordan Wu (President and CEO)

Thank you, Eric. The prevailing sentiment in the consumer electronics market for semiconductor remains sluggish. Customers continue to exercise caution towards panel procurements, limiting our visibility into the second half for consumer products. However, we see improving business momentum in the automotive sector, our largest sales contributor, where a healthy rebound for the first half weakness appears to be underway. As a reminder, the global automotive market experienced a severe downturn throughout the first half of the year, as major Chinese automakers cut back production. They implemented strict cost control measures due to intensified EV price competition, adversely impacting our first half sales. Now, looking ahead with renewed momentum in the automotive market, we believe the stage is set for a sales rebound as we approach the end of the year.

supported by more favorable, favorable product mix, improved cost structure and normalized inventory level, which should also lead to improved gross margin. In terms of gross margin for the third quarter, we expect substantial improvement from the Q2 trial, which was primarily related to the one-time early termination expense to foundry partners as we reported last quarter. I would like to stress again how this early termination decision was part of a crucial operating strategy for us. By sacrificing margin last quarter, we now have added flexibility where new wafer starts are no longer bound by minimum fulfill requirements and high wafer costs set during the severe foundry capacity shortage period. Furthermore, we can now leverage diverse foundry sources for optimal operational efficiency and much improved cost structure, thereby maintaining our product competitiveness.

Favorable product mix shift is also a key factor contributing to our expected Q3 gross margin expansion. This is predominantly driven by increased automotive sales, as discussed earlier. Thanks to a robust recovery in the Chinese automotive market, leading to order resumption from customers. Notably, our automotive sales for traditional DDIC, TDDI and TCON are all set to enjoy decent double-digit sequential growth in the third quarter and collectively are expected to represent almost 45% of our total sales. As a reminder, all these automotive products have a better than corporate average profit margin profile. Moving on to inventory destocking. Our inventory depletion is progressing nicely with Q3 inventory level on track for meaningful reduction. At this point, we are comfortable in our overall inventory level, thanks to our continuous effort to destock for several quarters.

In addition, the remaining stocks are comprised of IC products, which have a solid customer design base and long expected lifetimes. We now expect that our inventory will normalize near historical every average levels by the end of the year. While the macroeconomic environment still presents some headwinds for us, given the expected strength in automotive sales, improved operating flexibility and cost structure, in addition to our commitment to expand our presence in high value-added areas such as TCON, OLED and AI. We expect second half sales and gross margin to improve from the first half and believe we are well positioned for long-term sustainable revenue growth. With that, I will now begin with an update on the large panel driver IC business. Our third quarter 2023 largest display driver IC revenue is projected to be down single-digit sequentially.

We expect TV IC business to be down high teens quarter-over-quarter due to leading anchor brands, stringent production control measures amidst soft market. Non-driver IC sales are expected to increase by a decent double digits sequentially, predominantly from rush orders from end, from one leading brand. Meanwhile, monitor IC sales are set to increase single digits sequentially, continuing the customers' restocking momentum we saw last quarter. Turning to the small and medium-sized display driver IC business. Despite continuing uncertainty in consumer electronics, we improved with improved visibility and demand in the automotive market, Q3 revenue is expected to be flat or slightly up sequentially. Our automotive driver IC business is poised to increase by a decent double digit sequentially on a strong uptick in both TDDI and traditional DDIC. Smartphone and tablet sales are both projected to decline double digit.

The sequential growth of automotive DDIC business is fueled by resumption of customer orders across the board, following several quarters of inventory correction. Automotive TDDI business also resumed its growth traject, trajectory in the Third quarter, driven by increasing production of customers' new vehicles after an unexpected 2nd quarter disruption. The automotive's recovery has been further bolstered by supportive governmental policies, especially in China and the US, to incentivize new vehicle purchases. Given the rapid, adoption of TDDI in new generation vehicles, where we have already secured well over 300 design wins and a number of new design-in projects is still increasing as we speak. We remain confident that we'll continue to enjoy strong growth as our leading market share position remains unchallenged.

It is worth noting that automotive TDDI sales will account for over 30% of total automotive sales in the third quarter, and are poised to continue to increase. Let's move on to LTDI, a technology where Himax has been a pioneer in the market. Given the growing global demand for large panoramic, interactive, and intuitive in-car display experiences, we anticipate accelerating adoption of LTDI in the coming years. LTDI is gaining popularity, particularly among high-end car models with fancy and or larger than 30-inch automotive displays. Our integrated solution of LTDI and local dimming TCON has been adopted by many customers as their standard platform for higher displays, from which a variety of large automotive displays will be developed. This further solidifies our position among customers in the high-end automotive display market.

We expect an influx of collaborations leading to a growing number of projects slated for mass production starting 2024. As we've mentioned repeatedly, Himax is the, is a frontrunner- is at the frontrunner position in automotive display IC market, offering a comprehensive product portfolio covering the entire spectrum of specifications and technologies to address varying design needs, including traditional DDIC, TDDI, local dimming TCON, LTDI, and AMOLED. Having the broadest, one-stop shop offering also drives customer loyalty. As evidenced by years of extensive collaboration with panel makers across the globe, as well as deep engagement with Tier Ones and OEMs who deeply trust and rely on Himax expertise for their product roadmap. We are confident that our automotive business will continue to be our primary sales growth engine moving forward. Next, on smartphone and tablet product lines, we continue to see lackluster demand in the market.

Currently, a small group of peers are still in the midst of offloading inventory, offering aggressive pricing or enduring losses to deplete their excess inventory. As we near the end of our destocking process, our strategy is to not engage in pricing competition, even at the expense of forfeiting revenues by turning away unprofitable projects. Having said that, we have placed order stops for select products starting Q2. Next, for an update on AMOLED. Himax offers both DDIC and TCON for all the displays and has commenced production for tablet and automotive applications, jointly with global leading panel makers. For automotive OLED display, design activities are going smoothly with both conventional car makers and NEV vendors across different continents.

Concurrently, we continue to gear up for AMOLED driver IC development by strategically partnering with major Korean and Chinese panel makers on various applications covering smartphone, tablet, notebook, and TV. For smartphone AMOLED display driver, amidst a muted smartphone market, we still target to commence production towards the end of 2023. Now, let me share some of the progress we made on the Non-driver IC businesses. Starting with an update on timing controller. We anticipate Q3 T-Conn sales to decrease single digits sequentially, tempered by reduced shipment for monitors and all the displays for tablet. For OLED tablet business, our customers are still in the midst of inventory offloading due to muted end market demand.

Despite the soft demand environment, we are actively working on the next generation IC for OLED tablet, aiming to broaden our offering and better, better position us for when demand returns. Next, on our automotive TCON business, we continue to solidify our leadership position, particularly in local dimming TCON, which can improve display contrast while also lowering power consumption. We are encouraged by the growing validation and widespread deployment in both premium and mainstream car models across the globe. Our automotive SiCam business is poised to experience explosive growth with notable sales contribution starting 2024. We expect it to be one of our major growth engines in coming years. Switching gears to the WiseEye Smart Image Sensing Total Solution, which incorporates Himax proprietary ultra-low power AI processor, always-on CMOS image sensor, and CNN-based AI algorithm.

We continue to support the mass production of Dell's notebook, along with other endpoint AI applications, including video conference device, share bike parking, door lock, and smart agriculture, among others. We are also focused on strengthening our intelligent sensing module business in an effort to further broaden our customer base and application. The module offering, incorporating WiseEye technology, provides clients with a series of highly integrated plug-and-play module boards, which are user programmable, but also loaded with our pre-trained AI models for simple system integration. This can effectively shorten customers' time to market and reduce development costs, making it particularly well suited for markets featuring high variety and small quantity. Through our recent quarters, we have received excellent feedback from customers who are seeing large increases in projects for various applications.

Building on this momentum, we plan to roll out a series of modules that will expand our product offerings to cover more diverse markets and seize upon the vast opportunities presented in endpoint AI. Over the past few quarters, we have witnessed steady growth in the adoption of our WiseEye products, particularly in home surveillance applications, specifically door lock, doorbell, and battery camera. Notably, we are pleased to report a successful collaboration with a leading door lock vendor in China, the largest market globally. The project is slated for mass production starting in the second half this year, with anticipated growth extending to 2024. Our WiseEye solution is also being implemented for automotive applications, where it can intelligently detect the presence, movement, or posture of driver or passenger, delivering a broad array of AI use cases inside the vehicle.

Such demand is expanding rapidly with global leading car brands for new car models, primarily in application for car owner recognition and keyless access. With other new use cases also under development. Next, for an update on our WE2 AI processor, where we have engaged global network plans for their next generation product development. We have made significant progress in enriching AI features and use cases through collaborations with major CPU and AP SoC players for next generation smart notebook surveillance and a host of other endpoint AI applications. The WE2 processor offers further advancements in inference speed and ultra-low power, maintaining superior power efficiency compared to our already industry-leading first generation AI processor, WE1. Furthermore, in context-aware AI, WE2 enables more detailed computer vision, object analysis, such as real-time facial landmark, hand landmark, and human pose and skeleton, among others, at extremely low power consumption.

This enables sophisticated human expression detection for smart notebook and broader AI applications. Having established a leading position in ultra-low power AI processing and image sensing for endpoint AI applications, we are firmly committed to the WiseEye product line's ongoing development and growth. By leveraging broad ecosystem partners and customers, we aim to maximize market reach and explore potential applications. We believe that our WiseEye AI business will serve as a multi-year structural growth driver for Himax. Lastly, for an update on our optical-related product lines. Himax is one of the few companies in the world that can offer a diverse range of optical products, including WLO, 3D sensing, and LCOS, for the development of immersive technologies and the realization of the metaverse. Himax is well positioned to capitalize on the growth of this nascent industry....

Our technologies are vital for facilitating immersive content, evidenced by the growing list of AR/VR goggle device engineering projects with leading customers across the board. First, on WLO update. We recently commenced full production of our WLO technology to a leading North American customer, starting in the second quarter for their new generation VR devices to enable 3D gesture control. We expect a decent shipment for this customer in the second half, in preparation for the upcoming seasonal shopping sales. Our LCOS, on LCOS, Himax state-of-the-art Color Sequential Front-Lit LCoS microdisplay technology was one of the most high-profile demos at the DisplayWeek 2023 in May, and successfully captured the attention of numerous tech giants.

Through years of strenuous development, our color sequential from LCoS has achieved exceptional and industry-leading illumination in full RGB color, along with a groundbreaking tiny form factor, ultra-lightweight, and a wide degree field of view. These features make our LCoS microdisplay particularly well-suited for next-generation AR goggles, outperforming other competing technologies, mainly MicroLED. A growing number of engineering engagements are proceeding nicely with leading tech names. We are confident our color sequential from LCoS can be one of the most promising technologies that meets the rigorous requirements to enable AR goggles. The introduction of the latest mixed reality device of a leading tech giant exhibited the significant advancement for the whole metaverse ecosystem. Illustrates how the metaverse in immersive technologies continue to evolve, are increasingly accessible, and may gradually become a more integral part of our everyday life in the future.

We believe, given our expertise in optical-related technologies, including hundreds of patents in AR, VR, and 3D, customer can leverage our product suite to develop immersive experiences for a variety of futuristic and mainstream products in their metaverse applications. We continue to strengthen our optical-related technology suite, while forging partnerships with global technology leaders to strategically secure a distinct position in the space and create an additional diverse, long-term revenue stream. For Non-driver IC business, we expect revenue to decline double digits 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, we are now ready to take questions.

Operator (participant)

Certainly. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. One moment for our first question. Our first question will be coming from Jerry Su of Credit Suisse. Your line is open.

Jerry Su (Director)

Thanks for taking my question. Chuan, I just want to ask you on the, you have previously noted that the Second half revenue is likely to improve from First half. Judging from the guidance you provided already for third quarter, this side implies that the fourth quarter revenue should recover from the third quarter of year 12. What are the drivers, you know, behind that? That's the 1st question. In terms of the automotive, I think you have mentioned about the, you know, a lot of the new products in this area.

I want to ask about, you know, what is the pricing trend you are seeing for the automotive driver IC or timing controllers, and how does that compare with the other product line? Maybe on the wafer pricing side, as you have already terminated your long-term agreement with foundry partner in second quarter, how should we think about the wafer cost into the second half? Can you benefit from some of the renegotiation or the wafer foundry price reduction to help your margin? Those are my three questions. Thank you.

Jordan Wu (President and CEO)

Thank you, Jerry. Yes, I think there's a good likelihood, the, the Q4, will, will, will see a further recovery from the trough in Q3. However, as a disclaimer, you know, we are very confident on the, on the continuous growth of the monitor sector in Q4. However, in the, the consumer sector, the Q4 visibility still remains quite low. It really depends on the, the, the, the, the, the outcome of how, how the market is going to develop for the consumer products. In our current, projection, yes, indeed, second half is likely to be better than first half, and Q4 is hopefully going to recover from the trough in Q3. That's the first question. The second question, really, there are quite a few questions surrounding, automotive sector.

I think you mentioned pricing trend and specifically pricing trend for automotive sector compared to lows of other markets. I think, I mean, Himax does enjoy a very nice leading position with dominant in market share in automotive sector. Inevitably, we are seeing competition both internationally and coming from China. Certainly, you know, for competitors, one of the approach they will take for this relatively new market for them is to undercut our price. I think, and certainly, I mean, in that end, you mentioned you also asked a question about our cost structure.

I think certainly I, I'll elaborate a little bit on that in a few minutes, but certainly we are committed to continue to improve our cost through various means, including diversifying, diversifying our foundry base, as we reported, as we reported earlier, you know, by, you know, terminating certain local agreements that's, are not, not favorable to us, our, our long-term competitiveness. Yes, we will certainly be prepared to compete on pricing by improving, improving our cost structure vigorously. Having said that, I think automotive sector, compared to consumer markets, is has a much higher entry barrier for newcomers because of its, you know, very different ecosystem or supply chain. You know, here we talk about not just panel makers and end customers, also OEM.

Although TOIs play a very, very important role. Also, we have geographical diversity, which is certainly very, very different from any of the consumer markets. You know, here you have, you know, the U.S. market, Japan Japanese market, Korean, European, and certainly China market, which are all really quite different. They are dominated by very different players. Also, these very different names, which dominate different markets, they, they partner with sometimes rather different PON players, too. You're talking about a much more complex and diverse ecosystem players for IC vendors to cover. I think we do have a very clear advantage, being the early mover and also enjoying the leading market share.

You know, you, you, you are aware, automotive market replacement of any parts is a lot harder compared to consumer products, right? We feel, yes, there are price competition and, you know, customers do try to undercut our price, but that doesn't mean we always have to meet their price to remain the competitiveness. We do, we do, we do enjoy, you know, a better position. Very, very often, customer will still, you know, work with Himax, even, you know, having very aggressive prices on hands from our competitors. We are not taking competition lightly, we are still confident in across different product segments, you know, the multi-market, namely, you know, DDIC, DDI, timing controller, OLED and LDDI.

We are going to lead the market, and this is evidenced by the fact that our, you know, customer engagement and design win projects under our belts are far larger compared to any of our peers. Yes, there are price competition, but we, we remain quite confident in any foreseeable future for our leading position to be unchallenged. With the price and cost and namely cost structure, we are for strategic reasons, we, we, we did and still do have a slightly larger inventory level than normal, particularly for DDIC products.

We're not worried about that because, you know, again, you know, we are, we are secured by a lot of design wins, and with those projects or products, you know, expected to enjoy a very long lifetime. We are approaching the end of our inventory destocking process, even for DDIC. With our new order start, certainly, we will certainly negotiate, typically spot deals, you know, volume for price kind of arrangement with our, with, with, with our foundry vendors. So I think you can expect, at least the latest, starting from about end of Q1 or Q2 of next year, you'll see our DDIC cost structure will see a major improvement, because of a new wave of starts, that is likely to see better pricing.

Certainly foundry diversification, I mentioned earlier, is a key area that we are exploring. We are not just diversifying our foundry in Taiwan, we are also diversifying into China, where, you know, China, as we know, is the biggest market in the world for automotive market. The country does favor, you know, local production. For that reason, we are diversifying into China as well. Our moving to China for foundry service has been most welcomed by Chinese foundry players because, you know, they all know, you know, Himax is the lead player in this market. There are, you know, various measures that we take, we are taking to hopefully lower our cost and also to strengthen our, our, our supply chain for automotive market. I hope that answers your question, Jerry.

Jerry Su (Director)

Yes, very clear. Thank you.

Jordan Wu (President and CEO)

Thank you.

Operator (participant)

Again, as a reminder, if you would like to ask a question, please press star one one on your touchtone telephone. Again, please press star one one for any questions. Our next question will come from Donnie Teng of Nomura. Your line is open.

Donnie Teng (VP and Analyst of Greater China Semiconductor and Technology Research)

Thank you, Management, for taking my question. I have only two questions. The first one is regarding to the automotive driver IC. I think you have made a very clear comment on the EV market recovery in China in the second half, and likely customers start to review some of the automotive driver IC inventory. Recently, like some of the leading, you know, auto IDM companies or IC design companies mentioned about some slowdown in terms of some kind of automotive IC demand into the second half. I'm just wondering if you could give us some color on, you know, in terms of the end market, do we have like a majority of the market in China, or we still have some exposure to the overseas market? That's the first question.

Second one is that I think you have mentioned about the cost structure will be improved into the first half next year. I think we have a very good progress in terms of the gross margin recovery already in the third quarter. But in terms of a normalized gross margin, considering the cost structure improvement, could you kind of give us some idea? It's like, for example, where is the normalized gross margin is compared with, like, the COVID period in the 2021 and 2022? Thank you.

Jordan Wu (President and CEO)

Thank you, Donnie. The first question, the simple answer is, given our market share, you should not be surprised that our customer base, in terms of OEMs, covers the whole world, not just China. We, we have mentioned in DDIC, our market share is about 40%. In TDDI, we believe our market share is even higher than that. Just that is a relatively new market, so market statistics are not particularly mature. We, we are not, you know, talking about that number out loud, but we believe based on our internal count, our market share should be higher than that. Low timing, timing controller, our market share is even higher than, than, than TDDI. Again, based on internal count, we believe it is probably 60% or higher.

At LTDI, we are likely to be the pioneer with mass production. The first mass production of the whole world expected to start from this quarter. We do enjoy the leading market share in literally every single technology area for automotive market. Our, our, our end customer base does cover the whole world, you know, all major continents and all major markets. Now, you talk about other IT vendors, their view on the second half. There could be a difference between us and those where there is a panel maker market in between for us, in between ourselves and the Tier 1, where in their case, they may not be the same.

Our, our, our first half, so I believe our first half, the first quarter and second quarter, our, our automotive revenue probably were more hampered compared to those. Our customers are just coming back and try to restock and, and catch up for our supply, which otherwise should have been made in the first half. More specifically, I'll give you some color. TDDI and TCON are well positioned to enjoy very strong growth, high, you know, very decent double-digit growth. Not just quarter-over-quarter, but also first half over second half, and also this year over last year. Okay.

I repeat, for automotive area in TDDI and TCON, both are relatively new markets where we have a leading position, they are in very strong growing stage. We expect to enjoy the decent double-digit growth, not just quarter-over-quarter, but also second half over first half and year-over-year for this year. Also, I can pretty much say the same for next year, too. I think we have good confidence in that because they are relatively new markets. However, for DDIC, where the second half, where we, we reported, third quarter is likely to see a strong rebound from the second quarter. With second half also expect-expected to enjoy a double-digit growth from first half. However, for DDIC, year-over-year, we are likely to see a decline.

We are going to see a decline, DDIC. Given that DDIC is still the biggest component of our overall automotive business, fiscal year 2023 for overall automotive business, we are still likely to see a some decline over last year. I don't know if I'm convincing you guys, but I believe I made it quite clear. Because DDIC is being replaced by TDDI, and also, you know, I talked about governmental policies to incentivize new purchase from China and the U.S., right? Those incentives are provided primarily to EVs, which are predominantly new design models. Given that, given that they are new, they tend to use TDDI and in many cases, double team in TCON as well.

The replacement of TDDI over traditional DDIC, honestly, is probably quicker than we anticipated last year. The replacement, the pace of replacement is faster. But that is not bad news for us, because that means on a per panel basis, our content is higher. And as I mentioned earlier, we do enjoy the even stronger market share compared with DDIC. So I think, so because of this reason, you know, TDDI and the TCON, I think, we feel quite confident that next year, our automotive business will start to see a growth, a decent growth from this year again. Although this year, our overall automotive business is likely to see some decline from last year. Not a severe decline, but some decline.

Your second question is about our, our cost and, and margin profile, I believe. I think I can say in the long term, we, I mean, as a, as a reminder, I, we are not, the intention is not to provide our long-term gross margin guidance, right? Just give a flavor of how we believe our gross margin trend is going to be like as we take a longer term, you know, look at the longer-term horizon. I think it is probably difficult for us to see the same level of very high gross margin during COVID at its peak. We're talking about well over, you know, over 50%. Honestly, it is probably difficult to see in the coming years.

However, whether our gross margin will return to the pre-COVID period, when we typically had some 24%-25% kind of gross margin. I, I don't think so. I'm not that pessimistic either. I think there are could be a lot of reasons to explain that, but I, I will emphasize on Himax specifically in our own situation. I think we, we feel good about our going through a structural change in terms of our product mix and overall company profile. We said earlier in my prepared remarks that our automotive market is likely to account for almost 45% of our total sales this quarter. This was unheard of, you know, whether it's during COVID or pre-COVID. You know, our automotive market at the time was at best 10+% of our total sales.

This high percentage certainly comes from two factors. One, automotive has been growing very fast, and the automotive market for display is likely to outgrow other markets in the coming years. That is very good news for us. Certainly, that 45% high number is also a result of a very sluggish consumer market, right? Which pushed down other, other product contributions. But, in any case, in the long term, our automotive market contribution is likely to be much, much higher than previously. That is what I say, fundamental change. Although the market does enjoy not just higher, but also more stable and more predictable gross margin compared to other markets.

Again, you know, being, having a high, much higher exposure to automotive market in the next few years, I think is a very good news for Himax. We are also investing, you know, aggressively in a few new areas. My auto market covers not just driver IC, but also timing controller, right? I've mentioned, and also our Wi-Fi products is in still very early stage, but we expect to double our revenue for the coming years, and that enjoys the best gross margin among all our product lines. For example, I'll give you another example. You know, e-paper, you know, is turning into color version and, you know, with a fast-growing market potential, and we have a good and major exposure over there as well.

These new markets are likely to drive our cross-gross margin up in the long term. What I cannot tell when, you know, with, with, similar degree of certainty is consumer market, where really there's, there's a poor visibility, not just for, for, for, for the rest of the year, but also into next year. Having said, it's poor visibility doesn't mean it's necessarily bad forever, right? At some point, we certainly hope it will recover. But for now, I think, you know, at least for Himax, visibility for automotive market is quite good and for Wi-Fi is quite good as well. I believe that will improve our long-term margin profile significantly. All right. I hope that answers your question, Donnie.

Donnie Teng (VP and Analyst of Greater China Semiconductor and Technology Research)

thank you so much, Jordan. Sorry to.

Jordan Wu (President and CEO)

Thank you.

Operator (participant)

One moment for our next question. Our next question will be coming from Tiffany Yeh of Morgan Stanley. Your line is open, Tiffany.

Tiffany Yeh (Equity Research Associate)

Thank you. Thanks, management, for taking my questions. I have three questions. My first question is relating to the pricing side. As the management mentioned earlier in the prepared remark and in the Q&A section, that the smartphone and tablets market are seeing some pricing erosion. I'm just wondering, what's the current pricing environment for, like, non-auto TCONs and large display driver ICs like, like TV? Are we seeing, like, severe pricing competition now in the market? This is my first question.

Jordan Wu (President and CEO)

Okay. Okay, quick answer. I think we've, we've seen the worst, and now the market is actually stabilizing. The worst being at a time when everybody suffers from overstock. As we are nearing, I would say, nearing the, the end of the stocking process throughout the whole industry, I think pricing has now become a healthier pricing environment. Certainly that, that is my general comment. As specifically, I think TV is certainly stabilizing, you know, IT, the notebook and monitor are also stabilizing. Automotive market also is holding up. Even tablet, I think it's stabilizing quite nicely.

I think, I mean, from our point of view, the weak spot for now remains to be smartphone, where, you know, we mentioned in our prepared remarks that there are certain, there are still a small group of our peers which they are going through, you know, aggressive stocking price process. Hopefully, you know, towards the end of the year or the next year, that will also, you know, come to an end. I think, I say we have gone through the worst because even our position is healthier. Certainly we are still suffering from low, low visibility throughout the whole industry. What is going to detect our, our, our margin profile for non-automotive markets?

I think that's just for Himax, but throughout the whole industry. You know, the end market demand is still sluggish, so the end customers are definitely going to demand aggressive pricing from us. While our foundry partners, you know, because of low utilization, they are not really enjoying the good profitability either. You know, some of our foundry partners are actually suffering from some losses already. You know, can we, you know, get more aggressive pricing from our foundries, or can we, to help us substantially lower our cost, continue to lower our cost, to support our end customers, or can the end customers, you know, support a more healthy environment because their market may have started to turn around? That is yet to be seen. We, we don't know yet.

As a, a fabless IC design company, our current strategy certainly is not to, just for, for the sake of enlarging our revenue size to, you know to make wafers stars, while knowing, you know, the new wafers may not be, may be loss-making business or not profit, unprofitable business. We our strategy is not to do that and not to compete too aggressively on those markets where, you know, some of our peers are still going through this stocking process. So your question

Tiffany Yeh (Equity Research Associate)

Got it.

Jordan Wu (President and CEO)

Second question.

Tiffany Yeh (Equity Research Associate)

Oh, my second question is, I want to ask about the foundry's node side. Are we seeing any specific foundry node that is still in shortage right now?

Jordan Wu (President and CEO)

No. No.

Tiffany Yeh (Equity Research Associate)

Okay, thank you.

Jordan Wu (President and CEO)

I don't think there is any node that is in shortage right now. I'm not too familiar with the very, very advanced nodes, like, you know, three nanometer, four nanometer, five nanometer. You know, for the space we, we are aware of, the answer is no.

Tiffany Yeh (Equity Research Associate)

Okay, thank you. My last question is regarding the technology side. Could you kindly provide us, provide us your view on the development of Gate on Array driver IC on auto in the next few years? Could you also share the current penetration rate of the GOA driver IC on auto? Thank you.

Jordan Wu (President and CEO)

Well, Gate on Array driver IC has been a very old thing that's been going around for I don't know, maybe more than 10 years, way over 10 years. It's not exactly the theme of the day, so to speak, because customers who can adopt GOA technology has already done so. I'm talking about, you know, across different panels, different applications. You know, Gate on Array, back ages ago, I can't even recall when, was upon a time, a hit to guys like Himax, because all of a sudden, our gate driver market was disappearing. Now gate driver accounted for very, very, like negligible, negligible portion of our business already because of the GOA technology, you know, which has been put in place for many years. It is not really a theme that we discuss about anymore.

Tiffany Yeh (Equity Research Associate)

Okay, got it. Oh, thank you for the color. Thanks again for taking my questions.

Jordan Wu (President and CEO)

Thank you, Tiffany.

Operator (participant)

I'm showing no further questions. I would like to hand the call over to Jordan for closing remarks.

Jordan Wu (President and CEO)

As a final note, Eric Li, our Chief IR Officer, 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.

Operator (participant)

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