Himax Technologies - Earnings Call - Q3 2019

Transcript

Speaker 0

Good day, ladies and gentlemen, and welcome to the Himax Technologies Third Quarter twenty nineteen Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference call is being recorded. I would now like to introduce your host for today's conference, Miley Bergman with MZ Group.

You may begin.

Speaker 1

Welcome everyone to Himax's third quarter twenty nineteen earnings call. Joining us today from the company are Mr. Jordan Wu, President and Chief Executive Officer and Ms. Jackie Chang, Chief Financial Officer. After the company's prepared remarks, we have allocated time for questions in a Q and A session.

If you have not received a copy of today's results release, please e mail himxmzgroup dot us or access the press release on financial portals or download a copy from Himax's website at www.himax.com.tw. Before we begin with 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 industry growth, are forward looking statements that involve a number of risks and uncertainties that could cause actual events or results to differ materially from those described in this conference call. Factors that could cause actual events or results to differ materially from those described in this conference call include, but are not limited to, general business and economic conditions, the state of the semiconductor industry, market acceptance and competitiveness of the driver and non driver products developed by Himax demand for end user application products the uncertainty of continued success in technological innovations as well as other operational and market challenges and other risks described from time to time in the company's SEC filings, including those risks identified in the section entitled Risk Factors in its Form 20 F for the year ended December 3138 filed with the SEC in March.

Except for the company's full year of 2018 results, which were provided in the company's 20 F and filed with the SEC on March 2839, 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 auditing 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 period. The company undertakes no obligation to publicly update or revise any forward looking statements, whether as a result of new information, future events or otherwise. I will now turn the call over to Ms. Jackie Chang.

The floor is yours.

Speaker 2

Thank you, Mari, and thank you everybody for joining us. In today's call, we will first review the Himax consolidated financial performance for the third quarter, followed by the fourth quarter twenty nineteen outlook. Jordan will then give an update on the status of our business, after which we will take questions. We will review our financials on both IFRS and non IFRS basis. The non IFRS financials exclude share based compensation and acquisition related charges.

Our third quarter twenty nineteen revenues, gross margin and EPS all met our guidance issued on August 8. For the third quarter, we recorded net revenue of $164,300,000 a decrease of 3% sequentially and a decrease of 12.8 year over year. The sequential decline was mainly due to the anticipated lower sales into TV and smartphone segments. Gross margin was flat sequentially at 19.5%. IFRS loss per diluted ADS was $0.42 Non IFRS loss per diluted ADS was $04 Revenue from large display drivers was $50,100,000 down 15.6% sequentially and down 24.5% year over year, clouded by panel makers ongoing inventory correction driven by weak TV demand and industry wide oversupply.

Our large panel driver ICs continue to experience lower shipments and pricing erosion in the third quarter. Large panel driver ICs accounted for 30.5% of our total revenues for the third quarter compared to 35% in the 2019 and thirty five point two percent a year ago. Revenue for small and medium sized display drivers came in at $77,100,000 down 5.6% sequentially and down 9.2% year over year. The segment accounted for 46.9% of total sales for the third quarter as compared to 48.3% in the 2019 and forty five point one percent a year ago. The sequential revenue decrease was mainly due to lower smartphone TDDI and tablet sales, while automotive segment recorded better than expected sales.

The year over year decline was mainly due to lower automotive and tablet driver IC sales. Automotive sales worldwide declined sharply since Q4 twenty eighteen over worries of economic slowdown and trade conflicts. Sales into smartphones were down 7.7% sequentially, but up 32.8% year over year. The sequential decline was mainly due to lower TDDI shipments. As indicated in the last quarter's earnings call, our TDDI sales were challenged by accelerating AMOLED display adoption and rapid ASP erosion caused by increased competition.

On a year over year basis, our TDDI shipment doubled as our fulfillment was capped last year by capacity constraint. Sales of traditional DDICs declined by 1.9% sequentially, but increased 6.4% from last year. Display drivers for tablet and other consumer products were down 16.1% sequentially, better than our guidance of decreased by around 25% because of customers' inventory replenishment and more sales into white box market on the backdrop of a shrinking global paper market. Year over year sales of this segment declined 33.9%. Our driver IC revenue for the automotive application was up 6.1% sequentially.

It was down 19.7% from the same period last year due to the declining auto shipment for the reasons stated earlier. Revenues from our non driver businesses were $37,100,000 up 31.1% sequentially and flat year over year. Non driver products accounted for 22.6% of total revenues as compared to 16.7% in the 2019 and nineteen point seven percent a year ago. The sequential increase was mainly due to higher WLO and CMOS image sensor shipments, offset by lower timing controller sales. Gross margin for the third quarter was 19.5%, flat sequentially, but down three ninety basis points from the same period last year.

The year over year decline can largely be attributed to smartphone TDDI ASP erosion due to increased competition and significantly more shipments of TDDI for the low end market. Moreover, our large panel driver IC businesses continue to experience pricing pressure caused by industry wide TV panel oversupply and high material cost. Nevertheless, the gross margin of the WLO business improved from the same period last year because the increased shipment to an anchor customer have led to higher capacity utilization. Likewise, on a sequential basis, the gross margin improvement delivered by more WLO shipments was offset by the slowdown in sales and downward price trends for smartphone TDDI and large driver ICs. Our IFRS operating expenses were $39,700,000 in the third quarter, up 2% from the preceding quarter, but down 8.5% from a year ago.

The sequential increase was caused by increased salary expenses. The year over year decrease was mainly a result of reduced restricted share units RSU, as we did not issue RSU like we did in previous years. RSU is part of our share based compensation, which we usually reward employees at the end of each September. Non IFRS operating expenses for the third quarter were $39,300,000 up 2.3% from the previous quarter and up 1.2% from the same quarter 2018. On September 2339, Himax's Compensation Committee approved an employee stock option plan of up to 3,000,000 units for the same number of Himax ADSs with exercise price being the fair market value of the grant date.

On September 3039, we granted 2,226,690 units of stock option to certain employees at an exercise price of $2.27 The remaining 773,310 units of stock option can be granted to employees by 09/06/2022, when the current long term incentive plan will expire. For the portion which has been granted, we expect to recognize stock option related compensation expense of $330,000 in each of Q4 twenty nineteen and Q1 twenty twenty, an additional $120,000 in each of Q2 and Q3 twenty twenty. IFRS operating margin for the third quarter was minus 4.7%, down from 0.4% in the same period last year and down from minus 3.5% in the prior quarter. The sequential decrease was primarily a result of lower sales and higher operating expenses. The year over year decline was a result of lower sales and gross margin, offset by lower operating expenses due to reduced RSU expenses as mentioned earlier.

Third quarter non IFRS operating loss was $7,300,000 or minus 4.4% of sales versus non IFRS operating income of $5,400,000 or 2.9% of sales for the same period last year and down from minus 3.2 a quarter ago. The sequential and year over year declines were for the same reasons stated above. IFRS loss for the third quarter was $7,200,000 or $0.42 per diluted ADS compared to loss of $5,200,000 or zero three dollars per diluted ADS in the previous quarter and IFRS profit of $900,000 or $05 per diluted ADS a year ago. Third quarter non IFRS loss was $6,900,000 or $04 per diluted ADS compared to non IFRS loss of $4,800,000 or $0.28 per diluted ADS last quarter and non IFRS profit of $4,500,000 or $0.26 per diluted ADS for the same period last year. Turning to our balance sheet.

We had 128,000,000 of cash, cash equivalents and other financial assets as of September 2019 compared to $102,900,000 at the same time last year and $122,400,000 a quarter ago. The cash position increased $5,600,000 from last quarter due primarily to operating cash inflow of $24,000,000 and additional unsecured borrowings of 13,600,000.0 offset by a CapEx of $31,200,000 On top of the cash position, restricted cash was $164,000,000 at the end of the quarter, almost the same as the preceding quarter and a year ago. The restricted cash is mainly used to guarantee the secured short term borrowings for the same amount. We had $90,600,000 unsecured short term loan at the end of third quarter versus $77,000,000 a quarter ago. Our inventories as of September 3039 were $167,600,000 down from $188,500,000 a quarter ago, but up from $145,800,000 a year ago.

Accounts receivables at September 2019 were $157,300,000 down from $176,200,000 last quarter and $187,600,000 a year ago. Day sales outstanding was eighty six days at the September 2019 as compared to ninety six days a year ago and ninety six days at the end of last quarter. As highlighted in the last earnings call, in response to capacity shortage of foundry and certain packaging material, we had to keep the inventory level higher than usual last year. Given the prevailing uncertain market conditions and easing of foundry capacity, we have started to control our inventory level since the first quarter of twenty nineteen. Net cash inflow from operating activities for the third quarter was $24,000,000 as compared to the inflow of $2,200,000 for the same period last year and outflow of $17,700,000 last quarter.

The quarter over quarter and year over year cash flow change was mainly a result of lower receivables and inventory. Third quarter capital expenditures amounted to $31,200,000 versus $8,200,000 a year ago and $5,700,000 last quarter. The majority of third quarter CapEx totaling 29,200,000.0 consisted of $27,500,000 payments for land purchase and ongoing payment for the new buildings construction and WLO capacity expansion. The remaining $2,000,000 was the investment in design tools and R and D related equipment for our traditional IC design business. By the end of third quarter, we have concluded substantially all the CapEx payments for the new land, building and three d sensing project with just $1,600,000 left to be made in the fourth quarter.

As of September 3039, Himax had 172,200,000.0 ADS outstanding, little changed from last quarter. On a fully diluted basis, the total ADS outstanding are 172,600,000.0. For the fourth quarter, we expect revenue to be around flat sequentially. Gross margin is expected to be slightly up sequentially depending on our final product mix. IFRS loss attributable to shareholders are expected to be in the range of around $03 to $0.45 per diluted ADS based on 172,600,000.0 outstanding ADSs.

Non IFRS loss attributable to shareholders are expected to be in the range of $0.27 to $0.42 per diluted ADS based on 172,600,000.0 outstanding ADS. I will now turn the call over to Jordan.

Speaker 3

Thank you, Jackie. As I mentioned last quarter, 2019 has been a challenging year for Himax. Uncertainty in the global economy continues to overshadow the marketplace, where we are seeing winning demand in all industries that consume display. This, combined with the prevailing LCD industry capacity oversupply, has led to severe pricing pressure for panels, which inevitably affected the sales and margin of display driver IC across all major product segments, including TV, smartphone and automotive. As we look forward, although at this time we had limited visibility, we do not anticipate the business environment to improve in the near future.

Our strategy is to focus on delivering P and L improvement by executing on the technologies we already developed for both driver IC and non driver IC areas. One of our major focus areas for business during 2019 has been TDDI for smartphone. This business was negatively impacted by the severe foundry capacity shortage that occurred during 2018 and resulted in our inability to meet customers' delivery requirements. Although the capacity constraint was resolved towards the end of twenty nineteen, the delay eliminated our ability to participate in major design opportunities that would have driven the business in 2019. While we expect the 2019 smartphone TDDI sales to increase more than 40% against last year, the growth will be below the target we set for ourselves.

Even the outlook for smartphone TDDI remained weak in Q4, we do anticipate a strong rebound for Q1 twenty twenty and robust growth for next year. I will elaborate on this in a few moments. Now let me give you an update for some of our major business areas. Let us start with the large panel driver IC business update. The current market for television sales is weak, driving an overcapacity of LCD display.

As a result, since our last earnings call in August, many large panel makers have cut back their production output. The combination of weak TV sales and reduced production output, as well as relatively high upstream material costs, has put pressure on driver IC demand, negatively impacting our results for the third quarter. For the fourth quarter, we expect business to remain flat sequentially for our large display driver IC segment. At this time, we are seeing continued concern in the industry over display capacity oversupply extending into 2020. Conversely, Himax and some of our major panel customers foresee a potential foundry capacity shortage of eight inches silicon wafers for display driver ICs.

Anticipating the eight inches foundry capacity constraint, we have already prepared to provide 12 inches foundry capacity and back end packaging and testing to cover the potential eight inches capacity shortfall for large panel driver ICs. We are working closely with panel customers as well as our foundry and backend partners to secure production plans for 2020. Our design project coverage is strong across all leading panel makers. This provides us with good ongoing opportunities for 2020. Now let's turn to the small and medium sized display driver IC business, beginning with an update on our smartphone segment.

As stated in the previous earnings call, in 2018, limited thereby capacity constraints, we chose to focus for shipments of smartphone TDDI to higher end full HDs as opposed to HD for higher full HD plus as opposed to HD plus projects in an effort to yield higher revenue and better margin. As we enter 2019 equipped with our newly developed foundry capacity, we expected significant TDDI growth from these full HD plus projects during the second half of the year. Unfortunately, the strong growth from full HD plus projects we expected did not materialize due to accelerating adoption of AMOLED displays, CDI displays, are able to take advantage of under display fingerprint sensor technology. Facing the AMOLED competition, TDDI adoption is shifting more towards mid to low end models with HD plus resolution. Since we chose to focus on Full HD plus in 2018, we passed on many HD plus opportunities and started 2019 with very low market share of HD plus solutions.

As a result, we have not benefited from the shift in the HD plus marketplace. The combined result was weaker than expected smartphone TDDI growth during the first nine months of twenty nineteen and a muted outlook for the fourth quarter. That said, we expect to record more than 40% growth in this segment for the whole year 2019. Since these mistakes, we have worked hard to raise our visibility in the HD plus market and have already begun HD plus mass production with the top tier end customer earlier this year. We have also expanded the HD plus coverage to further customers.

Based on the current pipeline, our Q1 TDDI smartphone shipments will include significant amount of both HD plus and full HD plus products. We anticipate a strong rebound for Q1 twenty twenty and robust growth for the whole of 2020. For the fourth quarter, we expect TDDI revenue to decline by more than 30% from the previous quarter. Regarding TDDI for other applications, our solutions for tablet and automotive continue to make good progress. I will elaborate more a bit later.

While we expect only small volume shipments in 2019, both represent better ASP and margin for our TDDI solutions long term, and the tablet products in particular are expected to deliver strong volumes starting next year. Our traditional discrete driver IC sales into smartphones posted a slight sequential decline for the third quarter versus our original expectation of a substantial decline due to a Chinese smartphone maker's delivery pulling request. Despite this, we continue to see the traditional discrete driver ICs addressable market being quickly replaced by TDDI and AMOLED in smartphone. We expect traditional discrete driver ICs for smartphone to decrease substantially in the fourth quarter of twenty nineteen. Combining TDDI and discrete drivers, our Q4 sales into the smartphone market is expected to decrease by around 25% sequentially.

As discussed earlier, a major development we are seeing is increasing utilization of the OLED display for smartphone, triggered by growing AMOLED capacity and the under display fingerprint technology, which is only applicable in the AMOLED display for the time being. We have been collaborating closely with leading panel makers across China for AMOLED product development. While we do not expect revenue contribution anytime soon, we believe AMOLED driver ICs will be one of the long term growth engines for our small panel driver IC business. In the automotive display segment, the slowing economy and rising concern over tariffs have caused subdued new car sales across all major markets, particularly in China. However, our automotive business delivered a modest sequential growth in the third quarter as reported earlier.

We expect the most positive momentum will carry into the fourth quarter attributable to market share gains of certain of our customers. Q4 sales for this segment will increase by more than 15% sequentially. Looking forward, the overall automotive display market is forecast to increase from 2020 onward as the number of displays per vehicle continues to rise. While we don't expect the same kind of growth that we enjoyed in the past several years. Due to saturation in the automotive space, we believe that by capturing the demand for display specification upgrades, we will deliver automotive sales growth going forward.

The market is quickly shifting towards a number of new technologies, including higher resolution, Ecell Touch, slim border, giant pillar to pillar screens, local dimming for higher contrast, and plastic OLED for free form design, all of which play to our advantage in advanced automotive display technologies. We are working closely with major automotive panel makers and leading Tier one vendors over all of the technologies mentioned above. On tablet and consumer electronics businesses, although the overall market remained weak, we expect the tablet business to increase by around 35% in the fourth quarter, mainly due to measured earlier design wins for high end tablets going to mass production with a number of leading end customers. The design wins include DispressArrive IC with COF packaging for large sized tablets with narrow borders, and our world leading in cell TDDI with active stylus functionality for tablet. Combining tablet and other consumer electronics businesses, we expect sales to increase by around 20% sequentially in the fourth quarter.

The shipment momentum for these high end design wins will carry into next year. For the fourth quarter, revenue for the small and medium sized driver IC business is expected to be around flat sequentially. Now let me share some of the progress we made on the non driver IC businesses in the last quarter. First, on our WLO business, as anticipated, the third quarter WLO revenue increased substantially thanks to a pickup in shipment to fulfill and anchor customers' higher seasonal demand. This sequential shipment increase has led to higher capacity utilization, also resulting in positive contribution to our Q3 gross margin.

Based on the customer's shipment forecast, we expect a slightly lower shipment volume sequentially in the fourth quarter. Next is the three d sensing business update. In the smartphone segment, we have advanced our WLO optics solution to cover both structured light and time of flight, or ToS, three d sensing. Separately, as I reported in the last earnings call, our structured light based three d sensing total solution business targeting Android smartphones front facing applications was unsuccessful. We have since adjusted our structured light based three d sensing development to focus on applications for non smartphone segments that require high level of depth accuracy.

Other customers in smartphone segments almost always require a total solution for three d sensing, also plays to our advantage. Looking at ToF based three d sensing solution for smartphones, where our strategy is to provide WLO optics, we are seeing increasing ToF adoption by smartphone makers for real side cameras to enable advanced photography, distancedimension measurement, and three d depth information generation to enable AR. We are actively pursuing smartphone makers' ongoing ToF three d sensing projects by teaming up with our ecosystem partners. Our non smartphone engagements have been focused on smart door lock and industrial automation segments. We are collaborating closely with industry leading facial recognition algorithms and application process partners to develop new three d sensing applications for smart door lock and have started designing projects with certain end customers.

We are in the process of revamping the solution based on the customer's technical requirements. Separately, we are working with partners who wish to take advantage of our three d sensing know how to automate traditional manufacturing, thereby improving efficiency and reducing costs. Our three d sensing solution for shoe factory automation production line announced in August has gained traction among footwear OEMs, ODMs, and machinery suppliers. Next on WiseEye, our AI based ultra low power smart sensing solution. The demand for battery powered smart devices with AI intelligence sensing is rapidly growing.

Our total solution is built on MSAS unique AI based algorithm on top of Himax proprietary computer vision processor and CMOS image sensor, all equipped with ultra low power design. Currently laptop is the market of focus. Himax's YSIGHT two point zero NV solution provides a laptop ready three in one RGB IR AI solution, respecting privacy while enhancing security for notebook users. The prototype we announced during Computex twenty nineteen has been well received by leading CPU platform providers and laptop end customers who are now actively evaluating the technology. We are expected to demo the mass production version on laptops at the twenty twenty CES.

In addition to providing a total solution for ultra low power smart sensing, we also provide individual parts of the total solution separately to address the market's different needs. For example, the ultra low power computer vision processor we developed as part of the YSci two point zero NB solution can also be used for AIoT applications. This YSci WD1 plus the AI enhanced ASIC platform that we recently announced, can support popular machine learning frameworks for the system customer to develop a wide range of video and audio AI applications where power is a strict constraint and on device memory is limited. Typical applications include smartphone app smart home applications and surveillance systems. On CMOS image sensor business update, CMOS image sensor is another critical part of the WiSight two point o NB solution I just mentioned.

To support the lean camera design and high quality image needed for laptops with thin bezels, we have made a two in one sensor that offers the dual capabilities of high quality HD image capturing and the ultra low power, lower resolution vision sensing in one single sensor, the industry's first with the innovative design. With this sensor, laptop makers can simplify their next generation product design and save costs by eliminating the need for an additional camera in their effort to offer context awareness for better user experience. In addition, our sensor has incorporated an RGB IR design to enable Windows Hello facial recognition. The new CMOS image sensor will be available by the end of twenty nineteen. For the traditional human vision segment, we see strong demand in notebooks where we are one of the market leaders.

They increase shipments for multimedia applications such as car recorders, surveillance, drones, home appliances, and other consumer electronics, among others. Additionally, we seen increased shipments and new design wins in the automotive segment covering before market solutions such as surround view and rear view cameras. Lastly, on airposts. We continue to focus on AR goggle devices and head up displays or HUD for automotive. Our technology leadership and proven manufacturing expertise has made us a preferred partner for customers in both areas for their ongoing engineering projects.

Separately, one of our customers has recently announced an advanced LiDAR solution that utilizes Himax's proven LCOS technology and tailor made manufacturing service. This is another solid evidence of our leadership position in this complex emerging technology LCOS, representing a long term growth driver for us. For non driver IC business, we expect revenue to decrease by around mid single digits sequentially in the fourth quarter. That concludes my report for this quarter. Thank you for your interest in Timex.

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

Speaker 0

Our first question comes from the line of Jason Schmidt with Lake Street. Your line is open.

Speaker 4

Hey guys, thanks for taking my questions. I just want to get a sense of your confidence that some of these headwinds you're seeing in Q4 will start to abate in 2020. And more so, could you just talk about your overall visibility beyond Q4?

Speaker 3

I assume you refer to the, you know, our entire portfolio of businesses. So I'll probably start, you know, I I have to start sector by sector because they they do differ. Firstly, on large panel, I think I I mentioned earlier, you know, the industry is suffering from all capacity, and I think that is that is a consensus among the industry players. So we have we do have limited visibility. And the the the interesting thing is that while the customers are uncertain about the the the demand outlook for next year, they are seeing the risk of, you know, you know, the industries suffering from foundry capacity shortage for driver IC again because large panel in particular depends largely on up to now on eight inch wafer foundry.

Where the eight inch because of a few, you know, new applications with big volume, you know, notably under display fingerprint has consumed a lot of eight inch capacity. So I think it is reasonable to assume that there's a good likelihood we'll see, you know, industry wide tightness again next year for eight inch. So I think we've foreseen this, you know, quite a long time ago. So we started to get ourselves really well prepared for 12 inch that covers both, you know, foundry and the back end. So I I I I will argue we are among the the the pioneers and among the most ready in terms of 12 inch preparation.

So a few of our leading customers are working closely with us to try to secure the production plan for the entire of next year. And this is this is backed by our our pretty comprehensive design portfolio, you know, among leading panel makers. So I think while it is probably too early and and a bit hard to predict the the industry outlook for the the the large panel business next year, I think we are pretty confident about our market share because of the reasons I mentioned. On small panel, firstly, smartphone, you know, we we said it. We repeated again and again in our prepared remarks, but 2019 has not been a good year for us.

I think we've learned the lesson. So I I indicated first quarter, we we we are likely to see a strong rebound, and we are also likely to see a a strong rebound for the entire of next year. That is spec on our, you know, new design pipelines covering both our gen one TDDI products as well as certain project engagements we are having with leading several customers for gen two solutions. So I think, you know, next year will be a year where we try to regain our market share for TDDI. And at the moment, as I indicated in the prepared remarks, I think we have pretty good confidence about that.

On tablet, I think next year will will be a good year for us. Again, tablet has not been a good market for growth for several years already, so we are not seeing anything different for next year. However, it is our value addition by providing new technologies into high end tablets with design wins across literally, you know you know, many of the of the leading tablet makers. That includes notably TDDI in cell design with active stylus. I think active stylus is is gaining popularity.

I I think we should able should be able to take advantage of that nicely next year. So tablet next year, we we do expect a good growth. Likewise for automotive. Automotive this year has been below average year in terms of growth for us, you know, after many years of of wonderful growth, which led us to the number one position in terms of market share worldwide. And we we indicated q three was better than expected and likewise for q four.

I think that is, okay, is an indication of our leading market position. And and next year, some of the new technologies I indicated, there's a long list of new technology for automotive. You know, such new technologies, we will start to see them, you know, taking effect starting next year. So I don't think we were we there's actually a good likelihood we may actually gain a little bit further on market share next year on automotive on top of the the new technology introduction and mass production. I think automotive hopefully next year will will will not be too bad either.

Although economic uncertainty continues to be to to overshadow the industry as as we all all all aware. And so that kind of covers the driver IC IC and unknown driver. I think timing controller is a is a similar story to large display driver IC, so I I won't repeat that. And CMOS image sensor is likely to see another strong growth, you know, in notebooks, double digit growth in notebooks as well as as well as automotive and and multimedia businesses. WLO, we we are counting on one anchor customer right now as we said that repeatedly.

So I I will not comment on the on the on the the prospect of WLO for next year because that is that kind of implies a direct implies the the anchor customers outlook for us. But I think I I would just make two comments. One, we start anchor customer. We continue to enjoy good relationships, and we are actually working very closely together on a few programs which will take off at some time in the in in the future. And also another major focus of our WLO business is to diversify into other customers.

And we mentioned all of the current short term focuses has been WLO techno WLO optics to support ToF three d sensing for Android market. So we are I think we are making good progress together with our ecosystem partners. Although that being a new market, you know, I'm sure many of you guys also heard about the the design traction that the industry is seeing in terms of applying TOF technology to facing cameras to enhance their camera features. So we we are seeing the same. So we are actively participating in that.

But in terms of the volume outlook, I think it's probably too early to tell at this point. I think we're updating due course. And the the the last couple of areas I want to cover is our known areas our our new areas. Firstly, on on what we call wide side or ultra low power total solution. Our first focus is notebook.

And I I mentioned, you know, we are expected by by, you know, leading brand names to demo a real solution, a mass production version solution at CES, which is around the corner. And in the same time, we are actually, you know, engaging technical, you know, collaboration. So we are hoping that soon after CES, we will start to have some, you know, real kick off in in in in mass production projects, but the design will take time. So I would I would I would I I I would I I think my best estimate would be some early small volume mass production, hopefully, end towards the end of next year with volume production the year after, starting with leading brand names, premium models. And our target is to take the premium model into a mainstream model in 02/2022.

So in that area, we we are we are offering a total solution of m's algorithm, our w one ASIC processor, as well as the CMOS image sensor, the the the two in one CMOS image sensor I mentioned. And our our wide side total solution is likely to see some volume production as well in in AIoT next year. Again, that is something I have to, you know, give you update due course. Lastly, on three d sensing, our total solution. The the they are they are in a very short term focus, there are two areas.

One is smart door lock, and the other one is industrial manufacturing automation. In terms of smart lock, we do have design in customers. We are working to improve the the performance to I mean, firstly, let me just say, know, smart door lock is is a concept is a new concept, which is really getting popularity, getting momentum. But there are different ways to unlock your doors. Now the industry is trying to take advantage of three d sensing technology and try to use that technology for door unlock, which is will be the most convenient and also offers a high degree of safety.

Now the industry is still working on that. I think we are among the pioneers. Nobody can claim, you know, three d sensing is already a mature solution for three d facial recognition unlock at this moment. Although I think we are just crossing the last slide, we are very, very close to to reach that point. And if that is successful or or I should say in the meantime, you know, other applications require requiring similar technical requirements will be things like ATM machines, product POS device, point of sales device, etcetera, right, who are of similar range of distance requiring, you know, high level of security, facial recognition, and so on.

Right? So we'll be working on that on those next year. So I think it's too early to predict the volume indication or timing for next year for next year at this point. But hopefully, you know, we can give you better update next quarter or two. The industry automation or or manufacturing is actually a very interesting concept.

A concept we announced first in August. We've actually attracted a lot of interest from the brand names, from shoe shoe, know, footwear makers, brand names, all leading ODMs, and even shoe equipment, shoe manufacturing equipment vendors. Now there are very active technical engagement or assessment going on at this moment. In the meantime, there are two possible business models that we are discussing with our potential customers. One is of loyalty model, I e, you know, each time you you use our you you you you take a photo, the three d photo.

You know, we charge on a number of times the photo is taken in your shoe manufacturing process. And the other type is more straightforward, you know, straight buy out of of of the device. But although I'm not going to, you know, tell you in public, you know, exact, you know, number of sales price, but I can tell you that in the second, you know, business, you know, model, the kind of price we're talking about is more similar to the industrial equipment rather than the kind of the the consumer electronics component kind of price you are you are used to. So my best guess is that the first half next year, will be able to make some sales. Although starting with small volume, people are likely to have a few equipments of our devices installed in their different manufacturing premises and tried it and get comfortable with it for a few months before, hopefully, you know, more significant orders will come through.

So, again, we have to give you more updates on that. So I I hope that that kind of covers all areas, and that that kind of covers give you a good insight into our business outlook for next year.

Speaker 4

No, I really appreciate all that color. I'll jump back into queue. Thank you.

Speaker 3

Thank you, Jason.

Speaker 0

And I'm not showing any further questions. I'll now turn the call back over to Mr. Jordan Wu, President and oh I'm sorry. We do have a question from Jerry Su with Credit Suisse. Your line is open.

Speaker 5

Yes. Hi Jordan. Thanks for taking my question. I just want to get your thoughts on the TDDI opportunities for next year. I think you have mentioned that there are some design activities or design wins that you have secured.

So I'm just wondering for 2020, what do you think of the industry's overall shipments? And what's high max opportunities? Or if you can give us what's your target run rate, I think that will be very helpful. Thank you.

Speaker 3

Jerry, I I I'm afraid I'll be a bit reluctant to give you a run rate forecast for such a long period of time because, you know, one year is a long time as you know, you know, in our business. And I think I don't want to I don't want to keep a premature indication of of of the so called run rate, you know, some number indication, you know, so to speak. I I can I can tell you with confidence that I we indicated q one will will see a strong rebound? I think q two visibility remains positive. The the the tricky part of this industry is that as as we all know, now the cell phone makers are highly concentrated their business.

So you are talking really talking about just a handful of leading makers, and you and then with those DD makers, they only have a few a few a small number of major phone programs each year. So you hit one of those one of a few of those programs or you don't. That makes a huge difference. And so what I can tell you, though, is that we are penetrating. So but before that that is the on the on the end end smartphone device makers level.

And on the panel makers level, for the TDDI provider, need first, we need to get into the panel makers technology platform for which I think we have achieved a very good success among, particular, Chinese panel makers. So from those panel makers, we will then start to engage together with panel makers, the end device makers. And also another another point which makes early predict prediction difficult is that the gen two the gen two technology. Gen two technology, we talk about a few technologies, but right now, it appears that only the high refresh rate or what we call 120 hertz or ninety ninety hertz kind of solution is getting traction because of, you know, the requirement for smartphones targeting gaming or, you know, five g, you know, high refresh rates. Having said that, though, this techno this TDDI or inside technology will be competing up against the AMOLED.

So we are we are one of the pioneers in in terms of providing such TDDI, and we are working together with both panel makers and and and device makers. But, again, you know, success or failure or success or lack of success in a number of major projects can make us stop the the the picture very, very different. So I'm afraid we will have to give you, you know, updates further down the road. Having said that, though, I I can tell you capacity is much, much less of a concern for us at the moment and certainly and and that doesn't mean next year the industry will not suffer again from capacity shortage, but I think we are much better prepared this time than in 02/2018. So I think, know, many of our customers, including end customers right now turn to us also because of this reason.

So we are feeling good about 2020, but I'll be reluctant to give early indication on numbers. Got And

Speaker 5

then next on pricing. I don't know what you are seeing on pricing in the recent months because you have mentioned that previous one or two quarters, they have seen some pricing pressure. I'm just wondering how should we think about the TDI pricing maybe in 4Q and also in 1Q next year?

Speaker 3

I think pricing pressure still remains in this quarter, but we are seeing signs of easing in pricing pressure effective because of the reasons I mentioned, you know, the the the seemingly rising concern of capacity tightness. So when, you know, you see, you know, a device makers come in, you know, you know, proactively to guys like us and asking for capacity securement and, you know, and such and such discussion or even, you know, signing of contracts and so on. You you you you know something is happening. And when that happens, you know, certainly, naturally, the pricing pressure will be will be softened. But I think pricing pressure comes mainly from the the competition of AMOLED because in cell display has to compete with AMOLED.

And also, certainly, among the TDDI, you know, solution providers ourselves. So and and and also, you know, the the the the the industry right now, you're already talking about two mainstream resolutions, four plus and HD plus. Used to be four HD plus enjoys better pricing, and that is why we kind of give out HD plus when we suffer from capacity constraint last year. But in terms of margin, think, you know, both are reaching, you know, similar kind of level. So we are not seeing much of a difference.

And again, our strategy has turned and we are focusing on both rather than just one because we are now fully backed by capacity. So I think next year pricing pressure, I I I can't say is going to go go away because the competition continues. Right? And smartphone outlook is not looking, you know, looking very, very promising. I mean, certainly with the five g coming and all that.

But I think the one thing that can change the picture is the capacity situation.

Speaker 5

Got it. And then speaking of capacity, I think previously we have secured some wafer capacities, you know, before, you know, I think early in the year. But given the slower ramp up or shipments of your, you know, of the TDDI, I'm just wondering, will there be any impacts on those wafers or commitment you have made to the foundries?

Speaker 3

We have actually recently engaged and confirmed the the the 2020 production plan or key foundry partners. So I think that should not be an issue for Himax.

Speaker 5

Okay. Thank you, Jordan.

Speaker 3

Thank you, Jerry.

Speaker 0

Thank you. And I'm not showing any further questions. So I'll now turn the call back over to mister Jordan Wu, president and CEO for closing remarks.

Speaker 3

Jackie, our CFO, will remain maintain investor marketing activities and continue to attend investor conferences. We'll announce the details as they come about. So thank you and have a nice day.

Speaker 0

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