Himax Technologies - Earnings Call - Q2 2025

Transcript

Speaker 1

Hello, ladies and gentlemen. Welcome to Himax Technologies Incorporation's second quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Ms. Karen Tiao, Head of IR/PR at Himax. Ms. Tiao, please go ahead.

Speaker 2

Welcome, everyone, to the Himax Technologies second quarter 2025 earnings call. My name is Karen Tiao, Head of IR/PR at Himax Technologies. Joining me today are Jordan Wu, President and Chief Executive Officer, and Jessica Pan, Chief Financial Officer. After the company's prepared comments, we have allocated time for questions in the Q&A section. If you have not yet received a copy of today's results release, please email [email protected] or [email protected]. Access the press release on financial portals or download a copy from Himax's website at www.himax.com.cw. Before we begin the formal remarks, I would like to remind everyone that the summary of the statements in this conference call, including the statement regarding expected future financial results and industry growth, are forward-looking statements that involve a number of risks and uncertainties that could cause the actual event or result to differ materially from what's described in this conference call.

A list of risk factors can be found in the company's SEC filing, Form 20-F, for the year ended December 31, 2024, in the section entitled Risk Factors, as amended. Examples for companies for the year of 2024 financials, which were provided in the company's 20-F and filed with the SEC on April 2, 2025. 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 independent auditors, to which we subject our annual consolidated financial statements and may vary materially from audited consolidated financial information for the same period. The company undertakes no obligation to publicly update or revise any forward-looking statements, such as the result of new information, future events, or otherwise.

On today's call, I will first review the Himax Technologies consolidated financial performance for the second quarter 2025, 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 questions online through the webcast or by phone. We will review our financials on an IFRS basis. During the second quarter, broadening U.S. tariff measures continued to intensify global trade tensions, heightening macroeconomic and demand uncertainty. This was compounded further by the abrupt and significant appreciation of the NZ dollar against the U.S. dollar during the quarter. Jordan will elaborate on the impact of NZ dollar fluctuations on our financials in a moment.

Despite this headwind, we are pleased to report our Q2 gross margin exceeded the guidance provided on May 8th, 2025, while the best revenue and profit came in within the projected range. Second quarter revenues were just at $214.8 million, representing a substantial decline of 0.2%, better than the midpoint of guidance range, which was a 5.0% decline to a 3.0% increase. Gross margin was 31.2%, outperforming our guidance of around 31% and improving from 30.5% in the prior quarters, primarily driven by the favorable product mix. Q2 profit per diluted ADS was $0.095, within the guidance range of $0.085 to $0.115. Revenues from a large display driver came in at $24.9 million, representing a slight decline of 0.6% from the previous quarter.

Both notebook and monitor IC sales declined in Q2, while TV IC sales outperformed guidance with a single-digit sequential increase driven by higher shipments to key customers after several of the few close quarters. Sales of large fender driver IC accounted for 11.6% of total revenue for the quarter, compared to 11.6% last quarter and 16.3% a year ago. Revenues on the small and medium-sized display driver segment totaled $144.5 million, reflecting the sequential decline of 4.0%. However, Q2 automotive driver sales, including both traditional VDIC and PDVI, outperformed our guidance of mid-teen sequential decline, posting only a single-digit decrease quarter over quarter. The sequential decline reflected the combined impact of tariffs and the tapering effect of Chinese automotive software deployment. Nevertheless, automotive driver sales for the first half of 2025 still recorded a 3.2% year-over-year increase, indicating resilience to underlying demand despite global softeners in automotive sales.

Our automotive business, comprising VDIC, PDVI, Tzung-I Li, and OLED IC sales, remained the largest revenue contributor in the second quarter, representing approximately 15% of total revenue. Meanwhile, Q2 smartphone IC sales outperformed our guidance of the mid-teen sequential decline, showing a slight increase from the prior quarter, mainly driven by raw orders from leading customers. Tesla driver sales increased as expected, supported by renewed demand from leading customers, following several quarters of the demand. The small and medium-sized display driver IC segment accounted for 67.3% of total sales for the quarter, compared to 70.0% in the previous quarter and 56.3% a year ago. Q2 non-driver sales reached $45.8 million, a 14.7% increase from the previous quarter. The sequential increase was primarily attributable to the increased shipment of TCON for automotive and monitored products.

Himax Technologies continued to hold undisputed leadership positions with a dominant market share in automotive TCON, particularly in solutions featuring local teaming functionality. Our growing pipeline, now exceeding 200 design wins, is poised to transition into mass production over the next few years. TCON business accounted for over 12% of total sales, with notable contributions for automotive TCON. Non-driver products accounted for 21.1% of total revenues, as compared to 18.4% in the previous quarter and 7.4% a year ago. Second quarter operating expenses were $48.9 million, an increase of 6.9% from the previous quarter and 3.3% from a year ago. The appreciation of the New Zealand dollar against the U.S. dollar in Q2 was the key factor behind the sequential increase.

Similar factors drove the year-over-year increase, though it was partially offset by the decline in employee bonus compensation due to the decline in the annual bonus expenses for the amortized pension of the previous year's bonuses. Excluding the impact of New Zealand dollar appreciation, second quarter operating expenses would have remained flat year over year. Amid ongoing macroeconomic challenges, we remain vigilant in enforcing budget and expense control. Second quarter operating income was $18.1 million, representing an operating margin of 8.4% compared to 9.2% last quarter and 12.2% for the same period last year. Operating profit declined 8.6% sequentially, mainly due to the higher operating expenses, partially offset by the increase in gross margin and gross profit. Excluding the impact of New Zealand dollar appreciation on Q2 expenses, operating income increased slightly compared to the previous quarter.

Operating profit declined 38.1% year over year, primarily due to the lower sales and reduced gross margins. Second quarter FTEX profits were $15.5 million or $0.095 per diluted ADS, compared to $20.0 million or $0.114 per diluted ADS last year, and down from $29.6 million or $0.59 in the same period last year. Turning to the balance sheet, we have $332.8 million of cash, cash equivalent in our financial assets as of June 13, 2025. This is compared to $253.8 million at the same time last year and $201 million a year ago. The sequential increase was mainly driven by a strong positive operating cash flow of $50.5 million in the second quarter. Looking ahead to Q3, we anticipate a decline in cash, cash equivalent in our financial assets, primarily due to a payment of $64.0 million for the annual dividend to shareholders, which was made on July 11.

In addition, subject to a final board decision, we will distribute a total of approximately $13.3 million for employee bonus awards at the end of the third quarter, which includes around $7.2 million for the immediate vested portion of this year's award and $6.1 million for the vested award granted over the past three years. Our quarterly inventory was $134.6 million, higher than the $129.9 million last quarter, but lower than the $203.7 million a year ago. After 10 consecutive quarters of inventory decline from its peak during the industry-wide supply shortage, Q2 inventory has slightly increased but is now still at a healthy level. As macroeconomics uncertainty limits visibility across the ecosystem, we will continue to manage our inventory conservatively. Accounts receivable at the end of June 2025 are $219 million, a slight increase from the $270.5 million last quarter, but down from $242.4 million a year ago.

DSO was 92 days at the quarter end, as compared to 91 days last quarter and 99 days a year ago. Second quarter capital expenditure was $4.6 million, versus $5.2 million last quarter and $4.6 million a year ago. Second quarter CapEx was mainly for R&D-related equipment for our IC design business and the construction in progress for the new preschool near our Tainan headquarters built for employee children. As of June 13, 2025, Himax Technologies had 174.3 million ADS outstanding, declining from last quarter, and on a fully diluted basis, the total number of ADS outstanding for the second quarter was 174.5 million. Now, turning to our third quarter 2025 guidance, we expect third quarter revenue to decrease 12% to 17% sequentially. Our gross margin is expected to be around 30%, depending on our product mix.

The third quarter loss attributable to shareholders is estimated to be in the range of $0.02 to $0.04 per fully diluted ADS. As we have done historically, we will grant employees annual bonus, including RSVUs and cash awards, on or around September 13 this year. Our third quarter guidance of the loss for diluted ADS has taken into account the expected 2025 annual bonus, which is subject to board approval, is now assumed to be around $7.5 million, out of which $7.2 million was invested and is spent immediately on the grant base. As a reminder, the total annual bonus amount and the immediate vested portion are our current best estimates. Only an actual amount could vary materially, depending on, among other things, our Q3 profit and the final board decision for the total bonus amount and its vesting fee.

As is the case for previous years, we invested the annual bonus grant in 2025 to lead to higher third quarter operating expenses compared to the other quarter of the year. In comparison, the annual bonus for 2024 and 2023 was $12.5 million and $10.4 million, respectively, of which $11.2 million and $9.7 million invested immediately. In providing our TSA financial guidance, Q3 expenses related to the employee bonus is estimated to be $8.2 million, representing 4.7% per diluted ADS before tax, comprised of $7.2 million for the immediately vested portion of this year's bonus as stated above, and $1.0 million for the amortized portion of the unvested bonuses from previous years. For the sake of completeness, employee bonus expense in each of the last three quarters was also around $0.8 million. I will now turn the call over to Jordan to discuss our Q3 2025 outlook.

Jordan, the floor is yours.

Speaker 0

Thank you, Karen. I certainly see the surrounding tariff policies persisted across the global economy throughout the same quarter and into July. However, starting in August, the U.S. began clarifying its tariff measures toward most of the countries, including major economies such as Japan and the EU. These developments have helped reduce uncertainty in the global trade environment. That said, less than 24 hours ago, the U.S. government announced plans to impose tariffs of approximately 100% on semiconductor chips imported from companies that do not manufacture in the United States. As the details of the new tariff plan have yet to be released, we are unable to comment further regarding its potential impact at this time. We are closely monitoring the situation and will respond accordingly.

It is worth noting that tariffs have not had a significant direct impact on Himax Technologies' business, as our IC products are not directly exported to the U.S. Instead, they are integrated into panels or modules by customers outside the United States and then sold globally, including into the U.S. market. Only a negligible portion, about 2%, of Himax Technologies' products are shipped directly to the U.S. In the automotive sector, the U.S. recently reached several agreements with the EU, Japan, and Korea. These tariff agreements among the world's major automotive manufacturing and consumption regions help ease market uncertainty, and trade achievements among these markets are expected to gradually normalize.

Notwithstanding these early signs of clarity regarding automotive tariffs, given the timing of the announcements, which were made just days prior to this earnings call, we have not yet received any customer adjustments in demand for automotive ICs in response to the new tariffs. The situation remains dynamic and subject to further observation. Overall, automotive market demand visibility remains low. With customers continuing to adopt a cautious stance by maintaining low inventory levels and delaying new product introductions, as a result, we are maintaining a conservative outlook for the third quarter and continuing our strategy of strict expense controls while actively reducing procurement costs and enhancing supply flexibility. At the same time, we are accelerating the geographic diversification of our foundry and backend vendors to address customers' diversified deployment needs, stemming from geopolitical considerations. This strategy aims to strengthen our global manufacturing's resilience and reduce risks associated with regional concentration.

In the automotive sector, we remain optimistic about our long-term business outlook, primarily driven by the continuous upgrade of smart car fixes. Both displays serve as a key component fueling market growth. With nearly two decades of dedicated experience in the automotive field, Himax Technologies offers the industry's most advanced and comprehensive automotive display IC solutions, spanning LCD to OLED technologies. Himax Technologies holds the number one global market share across all segments of automotive display ICs, with an overwhelming lead over competitors. Looking ahead, we expect continued growth in the automotive VDIC and TCON technologies, both of which are relatively new and advanced display solutions for vehicles. To date, these technologies have been successfully designed in 200 projects worldwide, with just approximately one-third already in mass production, and the remainder expected to enter mass production within the next few years.

In the area of traditional automotive DDIC, although DDICs have gradually been replaced by VDIC panels with touch functionality, traditional DDICs remain essential for applications such as dashboards, HUDs, and rear and side view mirrors, which do not require touch integration. In addition, Himax Technologies has spent years cultivating its automotive OLED business in close collaboration with leading panel vendors. The number of new project engagements is rising rapidly, and starting in 2027, automotive OLED-related growth momentum is expected to accelerate significantly, making it one of our key long-term revenue drivers. Despite limited visibility into the second half of the year, the recent clarification of tariff policies and continued low inventory levels as panel customers provide some positive signals. We will remain prudent in navigating market dynamics by continuing to closely monitor customer demand.

Throughout this ongoing macroeconomic uncertainty, we remain committed to expanding beyond display ICs into new business areas characterized by high growth potential, high added value, and high technological barriers, areas expected to drive our long-term growth. Himax Technologies has been deeply engaged in these fields for one or two decades, establishing significant technical barriers and securing a robust portfolio of key patents. All these efforts begin to bear fruit. They are expected to inject strong momentum into future operations. First, in the WiseEye AI domain, we continue to collaborate with several leading notebook brands such as Dell and Acer, achieving significant results. We expect this growth to continue over the coming years by adding more leading notebook customers and introducing further AI features to the notebook.

In addition, Himax Technologies has made both technological and market breakthroughs in additional battery-powered applications such as small door locks, parameter recognition, and smart home, jointly developing unprecedented and innovative AI applications with top-tier global customers. These applications are mostly battery-powered, showcasing WiseEye's unique advantage in ultralow power computing. Further, a recent major application addition is in AR glasses. Here, WiseEye has gained strong design traction due to the stringent power efficiency requirements of AR glasses. Looking ahead, the WiseEye business is entering the phase of rapid growth after years of customer and education developments, becoming one of our key growth drivers. In the field of co-packaged optics, or CPO, Himax Technologies' proprietary WLO technology plays a critical role. Together with our partner Foci, we have achieved significant breakthroughs in silicon photonics technology, with the first-generation solution being validated by our Acer customers and partners.

We are working toward the goal of entering mass production in 2026. Meanwhile, Himax Technologies and Foci are collaborating with several heavyweight customers and partners to jointly develop future-generation high-speed optical transmission technologies to meet the explosive bandwidth demands of data center and AI applications, while also helping to address the pain point of overheating associated with high-speed transmission. Turning to AR glasses, after years of lukewarm consumer reception, AR glasses are getting extraordinary market attention of late and becoming a segment of strategic importance for Himax Technologies. With the adoption of generative AI and large language models, AR and AI glasses are widely expected by the industry to become the next breakout market. Numerous world-class hyperscalers and specialized AR glasses developers from around the globe are actively investing in the development of new AR glasses, with China in particular leading the way in terms of the number of players.

Himax stands out as one of the few companies in the industry to possess three critical enabling technologies for smart glasses, namely ultralow power, intelligent sensing, micro display, and nano optics, giving it a unique competitive advantage in this emerging field. In intelligent sensing, Himax's WiseEye AI delivers all-day ultralow power contextual awareness, which averages power consumption of just a few milliwatts. It significantly enhances the interactivity and perception of smart glasses while preserving battery life and data privacy. The technology has been widely adopted and successfully integrated into the next generation of smart glasses of multiple customers. In micro display, Himax's LASIK surrounding the airport micro display features 350,000 nits of brightness, exceptional optical power efficiency, and outstanding image quality, all in an extremely compact and lightweight form factor. It is considered the most commercially viable solution, closest to the ideal micro display for see-through AR glasses.

Since its debut at Display Week 2025, the module has drawn strong attention and is soon entering sampling stages with multiple customers. In the field of nano optics, Himax offers proprietary WLO technology for advanced nano optical foundry service to selected customers, developing waveguide solutions which can significantly enhance both light transmission and display efficiency of AR glasses. Looking ahead, we expect revenues from AR and AR glasses-related applications to grow substantially over the next few years, becoming a key driver of the company's mid-to-long-term growth. Lastly, and before I get into comments on specific sectors, regarding foreign exchange, while Himax is a Taiwan-based company, our financial statements are U.S. dollar dominated. Since both of our revenues and quarterly sales are in U.S. dollars, this provides a natural hedge for Himax's trade activities. Additionally, a portion of our operating expenses are also in U.S. dollars, offering further natural hedging.

The non-USD denominated operating expenses primarily include employee salaries and utility costs. Other non-U.S. dollar expenses are mainly corporate income tax. Overall, the impact of currency fluctuations on Himax's financials is relatively limited. Based on internal estimates and around current revenue levels, a 1% appreciation of the NZ dollar against the U.S. dollar will reduce operating margin by approximately 0.15%. Himax's third quarter financial guidance is calculated based on 29.4 NZ dollar against the U.S. dollar, which is equivalent to the daily average of the quarter after the day before the earnings call. With that, I will now begin with an update of the large panel driver IC business. In Q3, large display driver IC sales are expected to decline double digits sequentially. Amid the volatile macro environment, most panel customers demand cautious, adhering to a max-to-order model and maintaining lean inventories in response to emerging demand outlook.

The absence of traditional seasonal shortage momentum, coupled with customers pulling forward purchases in previous quarters, is expected to drive declines across all three product lines in the large panel driver IC segment for Q3. In the notebook sector, we continue to focus on the growing trend among premium models to adopt OLED displays and advanced touch features. This shift is driven in part by the rise of AI PCs and increasing demand for more interactive technologies that enhance user experience, boost productivity, and support creative applications. Himax is well-positioned to capitalize on this trend by offering a comprehensive range of ICs for both LCD and OLED notebooks, including VDIC, TCON, touch controllers, and TVDI. In addition, we are expanding our high-speed surface product portfolio to support faster data transmission, low latency, and improved power efficiency, features that are critical for next-generation displays.

Turning to the small and medium-sized display driver IC business. In Q3, small and medium-sized display driver IC business is expected to decline a single digit from the last quarter. Q3 automotive driver IC sales, including TVDI and traditional DDIC, are set to decline slightly quarter over quarter as customers adopt a cautious stance, delaying orders amid ongoing tariff negotiations. Despite near-term headwinds, global adoption of automotive TVDI continues to expand, fueled by growing demand for intuitive, interactive, and cost-effective touch features in modern vehicles. Himax remains the leader in this market, with cumulative shipments already exceeding 100 million units, representing a market share well above 50%, far outpacing those of our competitors. To date, we have secured around 500 design projects across a wide range of global automotive brands and Tier 1s, spanning entry-level to high-end vehicle models.

Supported by a continuous flow of new project pipelines and widespread design wins, we are well positioned to maintain our growth momentum and reinforce our leadership in the market. While traditional automotive DDIC sales declined in Q3 due to partial replacement by TVDI, the transition remains gradual, as many automotive displays, such as dashboards, SUVs, and rear and side view mirrors, do not require touch functionality and typically have long product life cycles. Himax holds a solid 40% market share in the traditional DDIC and remains the go-to supplier for both legacy and next-generation automotive display applications. Himax also continues to lead in automotive display IC innovation by pioneering solutions across a wide range of panel types that address diverse design needs and cost considerations. For ultra-large touch displays, we offer LCDI, where we led the industry by introducing the technology and commencing its mass production in Q3 of 2023.

Additional LCDI projects with smart portal global brands are on track to enter mass production in the third quarter, with small programs expected to follow as we move into 2026. For smaller displays with tight form factor and budget requirements, we provide single-chip designs that combine TVDI and low volume TCON. This enables advanced low volume in small-sized displays, reduces overall system costs, and improves power efficiency. Meanwhile, Himax is recognized for its dominance in low volume TCON technology, which I will elaborate on in a few minutes. We continue to lead the global automotive display market with a 40% share in DDIC, over 50% in TVDI, and even higher market share in low volume TCON. Moving to smartphone and tablet IC sales, we expect revenues of all segments to decline quarter over quarter as customers pull forward purchases in five quarters. Next for an update on our OLED business.

In the automotive OLED market, we have established strategic partnerships with leading panel makers across Korea, China, and Japan. As OLED technology gains broader adoption for premium vehicles, Himax is well-positioned to become the partner of choice, leveraging our nearly two decades of experience and strong foothold in the automotive display market. Capitalizing on our first-mover advantage, we offer a comprehensive suite of solutions, including OLED ICs, TCON, and on-cell touch controllers. Our automotive OLED driver and TCON solutions began production for EVs of leading car makers a few years ago. We now also offer standardized seats ready for broader deployment. In parallel, we are collaborating with leading panel makers on custom ASIC developments. In addition, our advanced OLED on-cell touch control technology features an industry-leading signal-to-noise ratio, ensuring reliable performance even in challenging conditions such as glass use or weather seekers.

The OLED on-cell touch ICs entered mass production in 2024 and are being increasingly adopted by major global automotive brands for their upcoming car models. Looking ahead, we expect OLED panel adoption in automotive displays to accelerate, starting in 2027. Himax Technologies is well-positioned to be a key beneficiary by locking a new growth engine that further strengthens our leadership in the automotive display market. We have also expanded our comprehensive OLED portfolio into the tablet and notebook markets, covering DDIC, TCON, and touch controllers through partnerships with leading OLED panel makers in Korea and China. Several new projects are slated to enter mass production with top-tier brands later this year. Meanwhile, we are developing new technologies for various features such as active stylus, partial-slim bezel design, and gaming models to further differentiate our products and reinforce our competitive edge.

In the smartphone OLED market, we are making solid progress in our collaborations with customers in Korea and China, with mass production on track starting the end of this year. I would like to now turn to our non-driver IC business updates, where we expect the third quarter revenue to decline double digits sequentially. First, for an update on our TCON business, we anticipate Q3 TCON sales to decrease by double digits sequentially, but increase by single digits year over year. The sequential decline is primarily a result of customers pulling forward inventory purchases of TCON for monitor, notebook, and TV products during the prior quarters, against the backdrop of Chinese government subsidies boosting domestic consumption. In automotive, Q3 sales are set to increase by single digits sequentially, fueled by a strong pipeline of over 200 design-win projects gradually entering mass production.

We believe our automotive TCON business is well-positioned for sustained growth in the years ahead. We continue to lead the industry in the innovation of automotive TCON technology. Our new generation notebook team in TCON offers advanced features such as edge sharpness and high dynamic range ideas for customers looking to upgrade their displays for better panel performance. Switching gears to WiseEye ultra-low power AI techniques solution, the cutting-edge endpoint AI integration featuring industry-leading ultra-low power AI processor, always on single-dimension, and CNN-based AI algorithm at its core. Amid a rapidly evolving AI landscape, WiseEye AI stands out by delivering on-device AI inferencing with industry-leading ultra-low power, merely a few milliwatts, alongside a compact form factor and industrial-grade security, enabling AI functionality in battery-powered endpoint devices.

With always-on sensing and intelligent low-power perceptual input, WiseEye serves as an ideal front end for LLMs, supporting multimodal AI that goes beyond vision, language, audio, and intent to include rich contextual awareness such as motion, proximity, and behavior for smarter, more responsive user experiences. WiseEye adoption is accelerating across diverse applications, including notebooks, tablets, surveillance systems, access control, smart home, and more recently, AR glasses, and many others. On notebooks, following our major design win with Dell, we are pleased to report that Acer has also adopted WiseEye for its latest AI PC. WiseEye is now de-integrated by other leading notebook vendors, with some entering production later this year and expanding further into 2026.

WiseEye's advanced note-hold inferencing capability goes beyond human presence detection, supporting a broad set of intelligent features, including proximity detection and presence awareness alerts, posture revisors, and automatic cursor teleporting to the display the user is viewing. In the surveillance domain, WiseEye AI enhances security systems by combining two key capabilities, namely accurate human-object distinction and event-driven activation. This significantly reduces false triggers, preserving power, and minimizing system overhead. Our performance widely uses conventional PIR sensors that often misidentify motion and unnecessarily activate the high-power consuming net processor and/or image sensor. In addition to the China market, where shipments to leading smart door lock vendors are already underway, we are now partnering with leading door lock vendors worldwide to introduce advanced AI features such as unmanned biometric access, partial recognition, and anti-pinch protection, with several designs slated for mass production starting in 2026.

Recently, we received another competitive demonstration of our ultralow power WiseEye AI for motion sensing through our collaboration with Rebony, marked by the launch of the bBony AI platform. Built on a six-axis gyroscope, bBony AI empowers wearables with advanced on-device capabilities such as motion analysis, posture recognition, and behavior interpretation, all delivered with low latency, exceptional energy efficiency, and a privacy-first design. With WiseEye AI, the bBony AI platform can also interface with LLMs, further expanding its ability to perceive, understand, and interact with complex real-world scenarios. This enables a wide range of real-world applications, including smart healthcare, sports, education, and interactive learning.

Next, for an upgrade on our WiseEye module business, which integrates Himax Technologies' ultralow power image sensor AI processor and pre-trained no-code/low-code AI algorithm, enabling easy deployment across a broad spectrum of applications. Himax Technologies' biometric authentication portfolio complies with EU General Data Protection Regulation, or GDPR, one of the world's strictest data privacy laws, ensuring strong privacy protection and enabling adoption in highly regulated markets. Our partner module has attracted strong interest across multiple industries, rapidly securing design wins in areas such as smart access, workforce management, smart door locks, and more, with some projects scheduled to enter mass production in 2026. To address the growing demand for more flexible access control, we have upgraded the WiseEye PalmVAN suite with multimodal authentication capabilities, combining PalmVAN and facial recognition to enable multi-layer biometric verification, delivering stronger security and greater user convenience.

In the field of AI sensing for AR glasses and AI glasses, we are excited to see WiseEye AI's growing adoption and actively engineering engagements across major tech giants, traditional ODMs, brands, and startups. Smart glasses makers are leveraging WiseEye to enable instant responsiveness for a wide range of AI applications while ensuring extended battery lives. More specifically, WiseEye empowers both outward and inward vision sensing capabilities. For outward vision sensing, it enables environmental awareness and real-time analysis, such as object recognition, navigation assistance, and environmental mapping, significantly enhancing AI interactivity while consuming just a few milliwatts of power. Concurrently, for inward vision sensing, WiseEye tracks eye movements, gaze direction, people's size, and their length to support intuitive user interactions. Multiple projects are underway for customers' next-generation AR and AI glasses, further validating WiseEye as the preferred ultralow power AI solution for emerging wearable applications requiring real-time user environment interaction.

Moving on to our latest advancements in the AR microdisplay technology. Following the debut of our proprietary dual-edge front-lit AR microdisplay at Display Week this May, customers across the board are eagerly anticipating samples of our newly introduced AR solution, targeted for release in September for their new see-through AR glasses projects. This industry-leading solution integrates both the illumination optics and AR glass panel into an exceptionally compact form factor as small as 0.09 cc and weighing just 0.2 grams, while achieving up to 350,000 nits of brightness and one lumen output at just 250 milliwatts maximum power consumption. The luminous breakthrough ensures excellent high-level visibility even in bright ambient conditions. The ultra-compact form factor makes sleek, everyday AR glasses possible. The collaborations with leading global tech companies and specialized smart glasses vendors continue to progress steadily. We'll provide more updates as they come about.

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

Speaker 1

Yes. Thank you, Jordan. Ladies and gentlemen, we are now in the question and answer session. If you would like to ask a question, please press the star key and number one on your keypad, and you will enter the queue. After you are announced, please ask your question. If you find that your question has been answered before it is your turn to speak, you may press the star key and number two to cancel the question. Thank you. In addition to submitting questions via phone, you can also submit questions through the webcast, where the chat box is available on the right-hand side of the screen. Thank you. Please press the star key and number one on your keypad if you would like to ask a question. You may also submit questions through the webcast screen. Thank you. We are now in the question and answer session.

If you would like to ask a question, please press the star key and number one on your keypad. Thank you.

Speaker 0

I actually have a couple of questions related to our CTO status. The questions are about some updates from last quarter, our mass production timetable, next-generation progress, sales contribution, etc. I think I will combine the questions together and provide the answer together. In short, the project is on track. We really don't have a whole lot of progress or update. Together with our partner Foci, we are focused on getting the first-generation product validated. 2025, this year will be a year for engineering validation with only cycle shipments for us. The cycle shipment, certainly in terms of revenue contribution, will be rather limited. In all likelihood, mass production will commence next year. At this point, we will not comment on exactly when in 2026. As far as the new generation is concerned, we are actually developing more than one generation of future products.

Obviously, I cannot give details of the future generation design. What I can say is that these products, when successful, will represent much higher revenue for us on a per unit basis or per FAU basis because our new design will cover a much wider scope of optics inside the FAU, while at the same time enables higher transmission bandwidth and lowers the overall module cost for our customers. I've actually commented on the revenue potential in my last one or two earnings calls, so I think I will just quickly go through that again. This year is next year, 2026 is likely to be the first year of mass production. It's still too early to give a revenue indication for the year because, as I just said, exactly when MP will commence is yet to be determined by our customer.

I've said in the Q&A of last earnings calls that our annualized CTO revenue could reach over $100 million in so-called early stage of mass production. I'm still holding the same view. By early stage, I'm thinking the early stage of MP when only maybe mostly AI switches of data center are equipped with CTO. Naturally, as the technology is more proven, CTO will be adopted by more end customers and penetrate further to also cover XPUs for AI data center. If you look further ahead, I believe automotive and humanoid robot, you know, automotive and humanoid robot are two likely new major markets where advanced high bandwidth AI are also needed. Because our WLO optics is a critical element of co-packaged optics (CPO), we are seeing this business as a major game changer for Himax Technologies. It's something we were certainly committed to for many, many years.

Regarding the question of when this will start ramping up, to me, this is not really a question of whether or even when it will happen, but rather how fast and how much the CPO technology will penetrate. We believe with all its obvious benefits like raising transmission bandwidth and substantially reducing power consumption of data transmission, and all at a pretty low cost compared to those of a complex AI system, the CPO technology has the potential of ramping quickly with high market penetration. Ultimately, this is a decision again to be made by our end customers. What we can do is get ourselves prepared for any ramping plan and, equally important, aggressively push the boundaries of the technology.

Lastly, I think it's important to point out that the progress of collaboration with our customers is not affected and not deterred by the prevailing macro uncertainty or the tariff situation. Our customer/partner is as determined and focused as ever to push this forward as planned. That's my answer to a few questions related to CPO. There's actually another question again about CPO. Can you disclose the number of planned CPO product generations and whether they are currently in preparation for validation? The validation is now being focused on the current generation only, with the next generation going through design and collaboration with Foci, the design and sampling stage. The number of planned CPO product generations, I'm not sure exactly what this means.

Actually, I can tell you there's a longer-term, rather fundamental and important advancement of CPO technology that we are working on, which, if successful, could cover a few generations of products. If it's successful.

Speaker 1

It's going to be a major breakthrough for what we are doing right now. Obviously, I'm not allowed to disclose too much. I guess there's this current generation, which is, I think, validation, your improvement, and so on, is this stage. We are in that for mass production next year. There's the next generation, which are specs coming from the customers' collaboration, close collaboration with ourselves at Foci. They are a future generation for future generation further ahead, technology developments that could fundamentally improve the cost and efficiency of co-packaged optics (CPO). That can cover several generations to come if successful. Why if Himax lose money Q3? We certainly lost, based on our guidance, we are projecting to lose $0.02 to $0.04 a share in Q3. As I just mentioned in my prepared remarks, that is because of our pretty peculiar way of expensing our employee bonuses.

We have been doing that almost 20 years ago, ever since we got listed in 2006. I'm sure for those analysts or investors following us, are already familiar with this. In short, quite frankly, it's our employee bonus or our ICU expenses. Every year, we reach a peak in Q3, with much, much smaller amount during Q1, Q2, and Q4. It has been a pattern for 20 years also because of our approach of issuing employee bonuses whereby we basically announce employee bonus every year at the end of September or 30th of September, right? We are just strictly following accounting rules. I wish we can, based on our accounting practice, move our ICU expenses, even if distributed across four seasons, but we are not allowed to. If you take away the employee bonus, actually, we are going to turn, we can actually turn a small profit during Q3.

We are projecting also positive cash flow during Q3. That's just the way we do our accounting. Naturally, we are not doing well in Q3 overall, as I just mentioned, the automotive, non-automotive, all sectors, limited visibility and tariff and whatnot. I'm not going to repeat that. There's a particular reason for our Q3 reasons. I guess there's no further question at this number of my list. As a final note, Karen, our Head of IR/PR, will maintain investor marketing activities and continue to attend investor conferences. We'll announce the details as they come about. Thank you and have a nice day.

Speaker 2

Yes. Thank you, Jordan. Ladies and gentlemen, this concludes the second quarter 2025 earnings conference. You may now disconnect. Thank you again. Goodbye.