Himax Technologies - Q2 2024

Transcript

Operator (participant)

Hello, ladies and gentlemen. Welcome to the Himax Technologies Second Quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode, and later we will conduct a Q&A session, and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Mr. Eric Li, Chief IR/PR Officer at Himax. Eric, please proceed.

Eric Li (Chief of Investor Relations and Public Relations Officer)

Welcome, everyone, to the Himax... My name is Eric Li, Chief IR/PR Officer at Himax. Joining me today are Jordan Wu, President and Chief Executive Officer, Jessica Pan, Chief Financial Officer. After the company is prepared to comment, we have allocated time for questions in the Q&A session. If you have not yet received a copy of today's result release, please email [email protected] or [email protected]. As as the press release on financial portals or download a copy from Himax website at www.himax.com.tw. Before we begin the formal remarks, I'd like to remind everyone that some of the statements in the conference call, including statements regarding expected future financial results and the industrial 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 filing from 20-F for the year ended December 31st, 2023, in the section entitled Risk Factors, as may be amended. Except for the company's full year 2023 financials, which were provided in company's 20-F and filed with the SEC on April 2nd, 2024. 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 certain internal auditing procedure 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. On today's call, I will first review the Himax consolidated financial performance for the second quarter 2024, followed by our third quarter outlook. Jordan will then give an update on the status of our business, after which we will take questions. You can submit your question online through the webcast or by phone. We will review our financials on an IFRS basis. We are delighted to announce that Q2 revenue surpassed guidance, while gross margin and profits were in line with the guidance range issued on May 9th, 2024, despite the prevailing economic headwinds. The better-than-expected financial result primarily stemmed from resumed order momentum across most of our product lines.

Second quarter revenues registered $239.6 million, an increase of 16.5% sequentially, exceeding our guidance range of an 8%-13% increase. Gross margin came in at 32%, in line with our guidance range of 31.5%-33.5%, up from 29.3% of the previous quarter and 21.7% same period last year. The sequential growth was driven by cost improvements and the favorable product mix, along with increased sales in the automotive IC and the Tcon product lines, both of which have higher than corporate average gross margins.

The substantial improvement in gross margin from the same period last year was primarily due to one-time early termination expense paid to foundry partners, which eliminated minimum fulfillment requirement constraints and high wafer costs set during the severe industrial capacity shortage. Consequently, our new wafer starts are no longer bound by these restrictive terms. Additionally, we can now leverage diverse foundry source for optimal operational efficiency and significant improved cost structure, thereby maintaining our product competitiveness. Q2 profit per diluted ADS was $0.169 at the top end of the guidance range of $0.13-$0.17. Revenue from large display driver came in at $39 million, reflecting a sequential increase of 24.7%.

The increase was predominantly driven by customers restocking in TV and monitor IC after several quarters of muted demand, as well as increased order in preparation for shopping festivals. Both TV and monitor IC sales posted sequential double-digit increases quarter-over-quarter. In contrast, Q2 notebook IC sales declined slightly following strong restocking in the previous quarter. Sales of large panel driver IC accounted for 16.3% of total revenues of the quarter, compared to 15.1% last quarter and 19.3% a year ago. Small and medium-sized display driver segment revenue reached $158.8 million, marking a sequential increase of 10.1% and the surpassing of guidance due to stronger than anticipated sales in the TDDI products for automotive, smartphone, and tablet.

In Q2, automotive driver sales, encompassing both traditional DDIC and the TDDI, increased by a decent high teen sequentially, and more than 50% year-over-year. Despite expectations of weakening electric vehicle demand, both automotive DDIC and the TDDI sales experienced sequential growth in Q2, thanks to our robust design wins pipeline in TDDI and the customers' continuous restocking momentum in DDIC since end of Q1. Our automotive business, comprising driver, T-Con, and OLED sales, remained the largest revenue contributor in the second quarter, representing over 47% of total sales. Meanwhile, Q2 tablet IC sales slightly increased sequentially, surpassing guidance of a decline, fueled by leading customers and new model ramp ups. Conversely, smartphone driver sales declined as expected during a subdued festival season, characterized by sluggish demand.

The small and the medium-sized driver IC segment accounted for 66.3% of total sales for the quarter, compared to 69.5% in the previous quarter and 63.9% a year ago. Second quarter non-driver sales reached $41.8 million, up 30.6% from the previous quarter, due to a resurgence in orders for our T-Con product for TV, monitor, automotive, as well as OLED tablet. Our automotive local dimming T-Con, where we dominate the market, has been swiftly adopted by major panel makers, Tier 1 suppliers, and the car manufacturers worldwide, boasting well over 100 design win projects, with only a small number of design wins having commenced the mass production.

This momentum is further fueled by the rapid expansion of project awards across continents, positioning us for strong growth, mirroring the success we have achieved in automotive TDDI. T-Con business represented over 10% of our total sales in the second quarter. Non-driver products accounted for 17.4% of total revenues, as compared to 15.4% in the previous quarter and 16.8% a year ago. Second quarter operating expenses were $47.3 million, a decrease of 6.7% from the previous quarter, and a decline of 11.1% from a year ago. The sequential decrease was primarily driven by decreases in R&D expenses. The year-over-year decrease was primarily due to reduced R&D expenses and a decline in the annual bonuses for the amortized tranches of the previous year's bonuses.

Amid ongoing macroeconomic challenges, we are strictly enforcing budget and expense controls to manage these conditions. Second quarter operating income was $29.3 million, or 12.2% of sales, compared to -0.9% of sales for the same period last year, and 4.8% of sales last quarter. Both the sequential and year-over-year increases were primarily due to higher sales and an improved gross margin. Second quarter after-tax profit was $29.6 million, or $0.169 per diluted ADS, compared to $12.5 million, or $0.071 per diluted ADS last quarter, and $0.9 million or $0.005 in the same period last year.

The after-tax profit for the first half was $42.1 million, or $0.241 per diluted ADS, a significant increase from $15.8 million, or $0.091 for the same period last year. Turning to the balance sheet, we have $253.8 million of cash, cash equivalents, and other financial assets at the end of June 2024, compared to $277.4 million ago, a quarter ago, and $219.5 million at the same time last year. The sequential decrease in cash balance was primarily due to customers refund for their deposits made during the industry-wide capacity shortage, along with a strategic investment of approximately $16 million in FOCI through private placement.

The cash balance reduction was partially offset by an operating cash inflow of $26.9 million during the quarter. Compared to the operating cash inflow of $56.7 million in Q1, the sequential decrease was mainly attributable to reduced sales over the preceding two quarters, leading to lower receivables. Additionally, the increase in accounts payable in Q2 was a result of higher Q1 wafer stocks, as we anticipated larger shipment volumes in Q2. Other significant operating cash outflows in Q2 included annual income tax payments. Looking ahead to Q2 to Q3, we anticipate a decline in cash, cash equivalents and other financial assets, primarily due to a payment of $50.7 million for annual dividend to shareholders.

We also expect to distribute a total of approximately $30.7 million for employee bonus awards at the end of this quarter, which include around $11.3 million for the immediately vested portion of this year's award, with the actual amount subject to the final board decision, and $19.4 million for vested awards granted over the past three years. Our quarter-end inventories as of June 30th, 2024, were $203.7 million, similar to $201.9 million last quarter, indicating a well-managed and balanced inventory level. Accounts receivable at the end of June 2024 was $242.4 million, up from $212.3 million last quarter, and $239 million a year ago.

DSO was 99 days at the quarter end, as compared to 93 days last quarter and 90 days a year ago. Second quarter capital expenditure were $4.6 million versus $2.7 million last quarter and $2.9 million a year ago. The second quarter CapEx was mainly for R&D-related equipment and in-house tester for our IC design business. As of June 30, 2024, Himax had 174.7 million ADS outstanding, unchanged from last quarter. On a fully diluted basis, the total number of ADS outstanding for the second quarter was 175.1 million. Now, turning to our third quarter 2024 guidance, we expect third quarter revenue to decrease 12%-17% sequentially.

Gross margin is expected to be around 30%, depending on product mix. The third quarter profit attributable to shareholders is estimated to be in the range of $0.015-$0.045 per fully diluted ADS. As we've done historically, we will grant employees annual bonus, including RSUs and cash awards on or around September 30th this year. The third quarter guidance for profit per diluted ADS has taken into account the expected 2024 annual bonus, which, subject to board approval, is now assumed to be around $12.5 million, out of which $11.3 million 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 estimates only, and the actual amounts could vary materially, depending 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 2024 to lead to higher third quarter operating expenses compared to other quarters of the year.

In comparison, the annual bonus for 2023 and 2022 were $10.4 million and $39.6 million, respectively, of which $9.7 million and $18.5 million vested immediately. In providing our Q3 financial guidance, the Q3 expense related to employee bonus is estimated to be $14.2 million, compared to $11.3 million. The immediately vested portion of this year's bonus, as stated above, and the $2.9 million, the over time amortized portion of the previous year's unvested bonuses. For the sake of completeness, employee bonus expense in each of the last three quarters was also around $2.9 million. I will now turn the call over to Jordan to discuss our Q3 outlook. Jordan, the floor is yours.

Jordan Wu (President, CEO, and Director)

Thank you, Eric. Given the prevailing macroeconomic uncertainty, customers remain conservative, causing panel makers to take a cautious stance and strictly control production to maintain low inventory levels. This is adversely impacting IC demand, leading to our conservative third quarter forecast. During the second quarter in the automotive market, car makers initially anticipated a sales boost due to promotional activities and government subsidies, especially in China. Consequently, we saw a major uptick in the second quarter IC sales, along with the aggressive discount campaigns of car makers. However, these intense campaigns did not generate the anticipated sales growth and may have even triggered consumers to hesitate in purchasing new cars, leading to disappointing car sales in China for the second quarter and resulting in excessive inventories throughout the supply chain.

As a result, our panel customers have begun to scale back their IC procurement in Q3 to manage inventory, inventory levels. In comparison, the automotive makers in Europe and the U.S. have remained relatively stable since last year, without experiencing the dramatic fluctuations seen in China. As a leader of the automotive display ICs, we serve a diverse range of brands worldwide, with sales evenly distributed across all major markets. However, since China is the world's largest automotive market, commanding over 30% of the global sales, fluctuations in China do have a substantial impact on our business. Moving forward, we will navigate the current challenging business environment through close collaborations with panel makers and Tier 1 suppliers, meticulously managing our wafer stocks and closely monitoring customer demands.

The automotive IC business is Himax's largest revenue contributor, accounting for over 47% of our total sales in Q2, significantly higher than our peers. Despite the recent challenges, we remain optimistic about our automotive IC business and are committed to the long-term innovation and development of our automotive products. The automotive display market remains on solid footing, with a positive growth trajectory, driven by versatile innovations and technology advancements. Advanced and fancier displays are increasingly becoming a major selling point for car makers, driving the automotive display market towards a mega trend of expanding quantities, sizes, and sophistication. As a leading player in the automotive IC market, Himax is well positioned to be the key beneficiary of the trend. We command a 40% global market share in traditional automotive DDIC, and hold an even larger share in both the automotive TDDI and novel dimming T-Con markets.

In addition to offering the most comprehensive range of automotive IC products for LCD panels, we are actively expanding into the automotive OLED panel market, forming strategic partnerships with leading panel makers in Korea, China, and Japan to develop comprehensive solutions encompassing DDIC, T-Con, and touch control ICs. This proactive approach positions us to navigate industry shifts and capitalize on the anticipated widespread adoption of OLED displays in the higher end vehicles, further solidifying our market leadership. During the quarter, we announced two substantial strategic investments. First, in an effort to strengthen the long-term partnership with Source Photonics, we, as a strategic investor, acquired a 5.3% equity stake through private placement. The partnership integrates Himax's wafer level optics, or WLO...

and forces optical fiber know-how to create innovative world-leading, Linear Drive Pluggable Optics or LPO, and co-packaged optics, or CPO solutions. For advanced multi-chip modules, required for the fast-growing cloud AI and high-speed computing markets. This collaboration not only highlights the application versatility of the WLO technology and Himax's market leadership, but also underscores the significant potential of our WLO in advancing LPO slash CPO technology, which is vital for the advancement of cloud AI and high-speed computing. Separately, we invested in US-based Obsidian Sensors, whose revolutionary high-resolution thermal imaging sensors meet the growing, demand of, thermal imaging across various industries, including automotive, security, surveillance, drones, and military. This investment broadens our portfolio of imaging sensors, which, when meshed with our ultra-low power WiseEye AI, enable enhanced sensor fusion possibilities for endpoint AI applications.

The Obsidian investment positions us at the forefront of machine vision AI applications, delivering high effectiveness, particularly in harsh environments and completely dark scenarios. As we look ahead, our focus remains on enhancing profitability, strengthening operational resilience, and improving adaptability to the evolving market. We continue to optimize our cost structure and reinforce our supplier diversification strategies for foundries as well as packaging and testing. At the same time, we remain committed to stringent expense control, set to further reduce operating expenses compared to last year. For reference, we achieved a 4% year-over-year reduction in operating expenses in 2023. With that, I will now begin with an update on the large panel driver IC business.

In Q3, we anticipate a double-digit sequential revenue decrease for large display driver ICs, primarily due to subdued medium TDDI sales, set to decline double-digit and single-digit respectively. Following substantial order replenishment in preparation for shopping festivals in the previous quarter. Procurements from our leading panel customers have become more conservative due to sluggish market conditions, driven by worse-than-expected shopping festival sales. However, local IC sales are poised for a decent increase, bolstered by robust order replenishment from our leading panel customers. Looking ahead in the notebook sector, we have made a strategic effort to position ourselves to capitalize on the anticipated rising demands for two new market areas, namely LCD displays equipped with touch features and OLED displays. Both expected to enjoy decent penetration in premium notebook and the upcoming AIPC markets.

Leveraging our industry leadership in TDDI solutions for tablet market, we are working closely with the LCD panel customers in the development of in-cell LCD TDDI and new generation T-CON solutions for LCD displays. Concurrently, we have made significant strides in all the technology for notebooks in strategic partnerships with leading panel makers in Korea and China, developing state-of-the-art touch controllers, DDIC, and T-CON solutions. Some of the projects above, including in-cell TDDI for mainstream LCD notebooks and touch, and T-CON and DDIC for all that notebooks, are slated for mass production in the second half of this year with leading panel makers. We are optimistic that the notebook segment will act as a strong growth catalyst for Himax as we move into 2025.

Turning to the small and medium-sized display driver IC business, we anticipate third quarter revenue to decline low teens sequentially, impacted by our customers' destocking measures, especially for the Chinese market, as I just mentioned. Automotive revenue in Q3 is expected to decrease high teens sequentially, following high teens growth of both DDIC and TDDI in Q2. That being said, through the first 9 months of the year, our automotive driver IC sales are still set to grow mid-teens year-over-year, driven by continued expansion of TDDI adoption across all major end customers. We have secured over 450 TDDI design win projects, with only approximately 30% currently in mass production, indicating significant growth potential going forward.

Meanwhile, a trend is emerging where more customers are opting for Himax's TDDI or LTDI, along with our local dimming T-Con, as their standard development platform for creating new automotive displays of various sizes. This growing adoption of more of our automotive IC offerings also signifies an increase in content value for Himax on a per panel basis. Himax is widely recognized as the leader in the automotive display IC market, offering the industry's broadest range of products from traditional DDIC and TDDI to advanced technologies such as local dimming T-Con, LTDI, and OLED. We are committed to continuously enhancing our product portfolio to meet customers' diverse and evolving needs.

Our newly introduced TDDI, incorporating local dimming T-Con in one chip, exemplifies this commitment to providing customers with more options, as the new solutions is ideal for smaller panels that usually require only 1-2 ICs for cost considerations, while still equipped with advanced touch and low dimming features. Turning to smartphone IC sales, we expect a decent double-digit increase sequentially, thanks to new product launches by key customers during the quarter. In contrast to the positive outlook in smartphone business, Q3 tablet sales are projected to decline sequentially, as end customers prolong their replacement cycles in response to challenging economic conditions. Next, for an update on our OLED business.

For the automotive OLED market, we have formed strategic alliances with leading panel manufacturers in Korea, China, and Japan, leveraging our leadership in automotive LCD technology and all the design expertise. These partnerships further strengthen our presence in the market. We offer a comprehensive suite of all the solutions for automotive, including TDDI, DDIC, T-Con, and on-cell touch controllers, ensuring complete coverage of customer requirements. Notably, our meticulously engineered OLED on-cell touch controllers set a new standard, boasting an industry-leading touch signal-to-noise ratio of over 45 dB, greatly enhancing sensitivity. This allows automotive displays to maintain proper functionality under challenging conditions such as glove wearing and wet finger operations. We are pleased to share that our OLED on-cell touch controller for automotive has entered mass production this quarter.

With additional projects set for mass production soon, we anticipate sales of our OLED on-cell touch controller to further bolster our revenues starting in 2035. Beyond the automotive sector, we have made notable advances in the tablet and notebook sectors with top OLED panel manufacturers in Korea and China. Our comprehensive OLED product offerings, encompassing DDIC, T-Con, and touch controllers, have led to several new projects that are on track to enter mass production later in the year. Regarding smartphone OLED, the current market drawdown of our customers has prompted us to revise our production timeline to next year. Despite these challenges, we are actively collaborating with customers in Korea and China, and have several verification and partnership projects currently in progress. I would like to now turn to our non-driver IC business update.

First, for an update on our T-Con business. We anticipate a double-digit sequential decline in Q3 T-Con sales as customers pull forward their inventory purchases during the prior quarter, particularly for monitor application. However, our automotive T-Con business is expected to achieve a decent double-digit growth in Q3, despite the current headwinds in the automotive market, fueled by the shipment of new projects from previously secured design wins. Since only a small portion of the secured design wins are currently in mass production, we anticipate significant growth potential for our automotive T-Con business in the coming years. While ongoing weak macroeconomic conditions continue to subdue demand in consumer electronics, some of our newly developed T-Con ICs for all the tablets and ePaper displays are starting to show promising results.

In the tablet segment, we are expanding our product lineup and strengthening our position in the high-value added OLED market, building on our early success in the tablet OLED market. For the relatively growing ePaper market, we recently made a joint announcement with E Ink, the global leader in ePaper market, to unveil T2000, a state-of-the-art, next generation color ePaper T-Con. ePaper stands out for its energy efficiency, consuming power only during screen updates. Leveraging Himax decades of expertise in image display processing and T-Con design, the T2000 T-Con accelerates screen updates for better viewing experience, while greatly reducing power consumption of the ePaper display. Additionally, the T2000 features an exclusive handwriting processing accelerator, enabling seamless, nearly lag-free handwriting, while boosting prompt display responsiveness on ePaper displays without requiring an SOC.

It also enables richer and more vibrant colors, enhancing the display's visual appeal across a broad spectrum of E Ink's color ePaper platforms. The collaboration opens new possibilities for color ePaper applications in e-readers, ePaper, digital signages, and more. Switching gears to the WiseEye ultra low power AI sensing solution, a cutting-edge endpoint AI integration featuring industry-leading ultra low power AI processor, always-on CMOS image sensor, and advanced CNN-based AI algorithm. In the fast-changing AI landscape, WiseEye AI technology stands out for its expertise in on-device, tiny ML microcontroller solutions, characterized by remarkably low power consumption, operating at just single digit milliwatts, making it possible to add AI functionalities to battery-powered endpoint devices.

Our WiseEye technology is creating new opportunities for companies such as Desman, China's leading high-end smart door lock vendor, who introduced the world's first smart door locks with 24/7 sentry monitoring and real-time event recording. With advanced AI features achieved while still maintaining over six months of power of battery operation. Our collaboration with Desman has sparked increased interest from other, door lock vendors across various continents to develop innovative, value-added AI features such as parcel recognition, smart anti-pinch, protection, and biometric access. Notably, some of our customers are currently evaluating our newly introduced WiseEye palm vein solution, which offers effortless keyless and highly secure biometric access for, entry control. WiseEye palm vein is part of our WiseEye AI module business, integrating Himax WiseEye 2 AI processor, AOS image, CMOS image sensor, and, our proprietary palm vein authentication algorithm.

We see growing traction and extensive engineering activities for this contactless biometric authentication solution that can authenticate an individual's identity in under 100 milliseconds, while consuming just a few milliwatts of power. This represents a significant breakthrough in security technology by enabling biometric authentication in battery-powered devices. With outstanding accuracy and robust liveness check capabilities, palm vein authentication significantly reduces the risk of duplication compared to conventional fingerprint or face recognition, making it an ideal choice for indoor security, login authentication, and other access control applications. WiseEye Palm Vein upholds robust security standards while offering best-in-class power efficiency, making it the only solution suitable for battery power devices. We are collaborating with vendors across various sectors globally, including door lock, access control, notebook, and automotive.

While just launched at the beginning of the year, WiseEye Palm Vein has already been successfully adopted by a U.S. customer for smart security, and is set to commence mass production starting the end of this year. We believe, WiseEye Palm Vein will profoundly impact the security industry and unlock new opportunities for battery power devices across various use cases. To broaden, WiseEye AI's market reach and short-term customer development cycles, we also provide seamlessly integrated plug-and-play WiseEyemodules and no-code, low-code AI development platforms, featuring, diverse context-aware AI algorithms that customers can reprogram or fine-tune with minimal effort for real-world use cases. Our recent announcement with NVIDIA TAO exemplifies this approach, whereby our WiseEye, module customers targeting AI deployment on resource-constrained endpoint devices, can easily optimize and quantize, deep learning models with pre-trained, enterprise-ready AI models and tools offered by NVIDIA.

This facilitates rapid democratization of endpoint AI applications using cost-effective, production-ready AI modules for various use cases. Additionally, in response to growing AI-driven demands towards machine vision across various environments, we recently made a strategic investment in Obsidian Sensors, a San Diego-based company renowned for its revolutionary, high-resolution low-cost thermal sensors, offering unmatched versatility by detecting heat differences even in complete darkness, measuring temperature, and identifying distant objects. This investment extends our image sensor portfolio beyond optical sensors to include thermal sensors, a valuable complement to our product suite, which is now widened to cover harsh sensing conditions, such as heavy fog or complete darkness. Moreover, this strategic investment promises synergy of the two companies with our WiseEye AI, aggregating data from both optical and thermal imaging sensors for a truly holistic view of the environment beyond human vision.

In addition, we are engaged in ongoing engineering collaborations that leverage Himax's IC design resources and know-how. We believe by integrating the strengths of Himax and Obsidian, we can seize new opportunities in the expanding sensor and AI markets across industrial, defense, security, consumer electronics, and automotive sectors. As an illustration, the U.S. National Highway Traffic Safety Administration issued a new rule in April 2024, mandating that automatic emergency braking, or AEB, including pedestrian AEB, or PAEB, be implemented starting in 2039. This regulation aims to significantly reduce rear-end and pedestrian crashes. Similar rules are increasingly being mandated by regulatory authorities worldwide. The novel ADAS and AEB systems, integrated with Obsidian's thermal sensors, provides clear vision in low light and adverse weather conditions such as fog, smoke, rain, and snow.

This ensures better driving safety and security, underscoring the trend and significant potential demand for thermal imaging sensors. Last, on WO. During the second quarter, we made a strategic investment in FOCI, a Taiwan-based global leader for silicon photonics connector through a $16 million private placement, resulting in a 5.3% equity stake. This collaboration highlights the immense potential of our WO technology/CPO, which are crucial for further advancing high-speed AI and HPC technologies. Our partnership integrates FOCI's proprietary LPO/CPO connector technology with Himax's nanoscale wafer level optics know-how to create industry-leading optical transmission solution, catered for the most advanced management modules, which demand enhanced bandwidth, improved data rate, minimized signal loss, reduced latency, and lower energy consumption, all for accommodating future generation needs of generative AI and HPC.

Currently, in close collaboration with world-leading AI semiconductor players and foundry partner, we are working closely with FOCI on LPO/CPO development for products that meet customers' near-term production goals. LPO, CPO technology is crucial for furthering generative AI and HPC, and will continue to evolve rapidly to meet the explosive demand in these areas. We are committed to advancing the technology with FOCI, ensuring our solutions stay at the cutting edge and align with the multi-year roadmaps of our AI chip and foundry partners slash customers. We believe this will generate new, long-lasting revenue stream for Himax. We'll provide further updates as they become available. As FOCI is a company listed on the Taipei Exchange, the stock price and resulting, quote-unquote, "fair value" reflected on our books change each day.

These fluctuations have been and will continue to be recognized by way of changes in owner's equity as a balanced item, not affecting our profit and loss. As an illustration, based on the close of FOCI's stock price as of the end of June 2024, we made a, quote-unquote, "gain" of $9.6 million on our $16 million FOCI investment. However, the said, quote-unquote, "gain" was not recorded as an investment profit in our Q2 financial statements, and instead was booked as an increase in owner's equity. Likewise, upon disposal, the resulting investment gain or loss will also be recognized as a change of equity through retained earnings, thus not affecting our profit or loss at the time of the disposal either. The accounting method we chose reflects our long-term commitment to the FOCI investment.

With over a decade of experience in WO, Himax has developed diverse designs across a broad spectrum, including 3D sensing, AR/VR devices, biomedical inspection, and optical communication, just to name a few. These technologies have been widely adopted by some of the world's most prominent tech companies, with cumulative shipments reaching more than 600 million units. We anticipate WO playing an even more decisive role in the next generation optical technology landscape. Thanks to its versatile, high precision, lightweight, and small form factor characteristics that are not feasible with alternative technologies. In addition to the progress made in LPO, CPO, we are seeing an increase in engineering projects with globally recognized leaders who are leveraging our WO expertise for the upcoming AR/VR devices, underscoring the widespread recognition of our technology. For non-driver IC businesses, we expect revenue to decline high-teens 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 are now ready to take questions.

Operator (participant)

Thanks very much, Jordan. And ladies and gentlemen, we are now in Q&A session. If you would like to ask questions, please press star key and one on your telephone keypad. After your name is announced, please ask your questions. To cancel your questions, just press star key and number two. Thank you. Now, please press star key and one if you would like to ask questions. Thank you. The first one to ask questions, Donnie Teng, Nomura. Go ahead, please.

Donnie Teng (Equity Research Analyst)

Oh, thank you, Jordan, for taking my question. My first question is regarding to the automotive business. So I think we have started to see some positive signs back in April, and I remember we were pretty positive, you know, back in June and even entering into July. But guidance looks like to be a little bit disappointed, and you just mentioned about, you know, customers digesting the inventories quickly. Just wondering when exactly you are seeing this kind of weakness from the customers, and also because in middle of July, there has been a news in China that, you know, Chinese government asking EV companies to check their localization rate in terms of the component and IC procurement.

Wonder if there is any issue there, you know, whether we will be, like, retired by the Chinese EV makers or it's not the case? Thank you.

Jordan Wu (President, CEO, and Director)

Thank you, Don. You are right, in that we were more positive last quarter when we had our conference call than the present moment. I think the reason behind it, I've already explained in a lot of detail in my prepared remarks, i.e., the fluctuation in Chinese market is the main factor causing the difference in our view. As it turns out, our customers were overly optimistic for their second half outlook entering into Q2, and they were apparently sourced to too much IC inventory. Now they are going through the de-stocking process.

And also, we also mentioned in our prepared remarks that the U.S. and European markets are relatively stable compared to China. Now, if you look at the Q3 prospect, and also if we look further into Q4, so the over-procurement in Q2 and the de-stocking in Q3 kind of explains our changing position in our outlook. Now, the real question is, how is this going to go going forward? And I think, I mean, certainly for the longer term, like next year, we remain still pretty positive about the outlook, which I will probably cover in a few minutes. Now, more importantly, what is the near term in Q4?

I'll tell you the truth, our internal forecast, which were the result of collective forecast coming from various customers globally, including panel makers and Tier 1s and OEMs. Q4, as of today, the projection remains pretty positive, with actually a decent double-digit growth compared to Q3. However, we are keep toning down our Q4 automotive prospect right now. Given the very reason I'm talking about last week, also, the global turmoil in financial markets, which might impact the consumer confidence in their major, you know, big-ticket spending, such as buying new cars. So, but we are uncertain, and we are giving the short period of time, because the major financial turmoil across the global financial market really occurred only last week.

So there's no time for us to get feedback from our customers. I suspect there's no time for our customers to get good feedback either from the market. We are, like, taking a wait-and-see attitude. In fact, as of today, our outlook for Q4, based on our forecast book, is still pretty positive. When the sentiment turn, I would say probably beginning of this quarter, only very recently, but we did see a steady kind of slight pullback of customers for forecast, you know, almost week by week. Slightly but steadily, and that is certainly not a very promising sign.

Now, on your concern of, China localization, yes, indeed, they've made announcements and set targets to, further localize their IC supply for, for China's automotive sectors. But as far as we are concerned, in our IC, which is, our automotive IC, which is, display ICs, we, I wouldn't say that would not be a threat, because any competition is a threat. But, I think our leading edge is now so significant that, I can't see any impact, of, Chinese, competition in, in the near term or in the foreseeable future. And, compared to consumer electronics, as we all are very aware of, automotive, ICs are much harder to replace.

And, you have to go through a much lengthier ecosystem, and let alone the various, you know, requirements, higher standards of safety, and other requirements. So, Chinese localization certainly more conservative outlook for Q3 or going forward into Q4. In fact, next year, if anything, we believe our market share, especially for those new technologies such as TDDI or all that actually starting next year, we are likely to see some ramping, early ramping. I think, if anything, we believe quite confidently, our market share of automotive display ICs will further rise from this year's level.

There's no reason for us to believe next year's automotive market will continue to be very bearish. I mean, I think it's too early for us to form a very solid view for next year, but there's no indication of signs that people's spending on cars will necessarily decrease, given the fact that economy is going through some troubles. But I think, you know, governments authorities, the Feds of different countries are likely to take measures to encourage consumption and boost their GDPs. Car spending happens to be a major item if the government wants to boost their GDP.

So I think, again, I'm not providing a solid outlook for next year, but I just want to say there's no reason for us to believe next year will be a bad year for automotive market. I hope that addresses your question.

Donnie Teng (Equity Research Analyst)

Great. Thank you, Jordan. And my second question is regarding to CPO. So could you maybe elaborate more on, you know, on what's the timeline of this CPO product? When should we expect to see some, you know, more volume contributions? And how confident you are, how confident you are is like to ramp up this business in the mid to long term? Thank you.

Jordan Wu (President, CEO, and Director)

Precise timeline, I'm bound by NDA of my partners and customers, so I'm afraid I cannot give you very, very specific date or timetable. But I can tell you what we are working on right now, the design is targeted for mass production. It is not, it is certainly not a R&D concept, a R&D project. It's not. Actually, we're way past that stage. I mean, certainly we did that before, years before, but we're way past that stage, and we are now pushed towards mass production ASAP. That's what I can tell you. And in fact, we expect to see some small but very early results, hopefully, by the end of this year. But that's minimal.

But, next year, you know, if everything goes as planned, there will be steady ramping. And, the confidence they will meet to long term, I would say very confident. I think, we all know about this, this hunger for more processing power, because of generative AI, right? And we are all very aware of the issues there, you know, the challenges to further increase your bandwidth, your processing power, your processing speed, and... but, there are all kind of issues, including power consumption, heat dissipation, and all that, right? And I would say CPO is a relatively low cost and relatively easy.

I'm not saying it's easy, but it's relatively easy fix to all these issues. And also, also cost-wise as well, because right now, if you analyze the most advanced, you know, HPC ICs or, you know, GPU ICs, they have very big processing power, but they are bottlenecked right now is actually the transmission with the outside, the transmission of the IC. The IC can process a lot of power, data, you know, high bandwidth, super high bandwidth, very fast, and still, the bandwidth is expected to expand exponentially over the next few years. Now, with the advanced packaging, it's going to, the expansion is going to be, you know, faster and faster.

However, the real bottleneck right now is their transmission capability, their transmission bandwidth, which is limited because now they are relying on metal wire to do the transmission. And we all know there's no secret. To really improve that, you just need to replace your metal wire with fiber optics, and that's exactly what we're trying to achieve, right? That we're trying to help to resolve. And so if you can successfully replace your metal wire with fiber optics, right away by a hugely, and thereby also as a major side benefit, you also reduce your power consumption, because the thermal loss will become much less, and you increase your data accuracy, et cetera, et cetera, right? So I would say it's you know, everybody in the ecosystem is very keen to making sure that this happens ASAP.

And when it happens, because as I mentioned, right, it's a relatively cheap and easy fix to their solutions. So I don't see any reason why this should not be adopted across the board, you know, to cover as many of the ICs as possible. Now, I'm only talking about ICs which demand very high bandwidth, right? Which demand very high bandwidth. And our goal, our role, is to building on the foundation of today, to continue to help expand the transmission bandwidth, right? And we have a roadmap together with partners, our customers, to really pretty dramatically expand the transmission bandwidth very substantially. I'm talking about by many, by multiple times over the next few years.

You know, some of these projects are already in experimental stage, in the earliest experimental stage or more mature experimental stage. But what I'm trying to tell you is that the first generation, upon mass production, will greatly expand the transmission bandwidth of those ICs already, with further solutions expected to be available in rather, you know, short time span, with multiple times improvement in our transmission bandwidth. So I think this is really an exciting opportunity for us, for WO. I mean, it was a surprise when we realized, you know, a long time ago, that our WO can actually be utilized to tackle this issue.

But as we dig further and further, we realize this, this is actually a very, very perfect solution, a very perfect fix for the, the data transmission, bandwidth issue that is, now, faced by, this AI, technology advancement. Any further questions from Donnie or others?

Donnie Teng (Equity Research Analyst)

Sure. Thank you, Jordan. Very helpful.

Jordan Wu (President, CEO, and Director)

Thank you.

Operator (participant)

Ladies and gentlemen, we are still in Q&A session. If you would like to ask questions, please press star key and one on your telephone keypad. Thank you.

Jordan Wu (President, CEO, and Director)

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