Himax Technologies - Earnings Call - Q3 2020

Transcript

Speaker 0

Hello, ladies and gentlemen. Welcome to the Himax Technologies Incorporated Third Quarter twenty twenty 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. Please be advised that today's conference is being recorded.

I would now like to turn the conference over to your host, Mr. Mark Schwalenberg from MZ Group.

Speaker 1

Welcome, everyone, to Himax's third quarter twenty twenty earnings call. Joining us from the company today are Mr. Jordan Wu, President and Chief Executive Officer Ms. Jessica Pan, Chief Financial Officer and Mr. Eric Lee, Chief IRPR Officer.

After the company's prepared comments, we have allocated time for questions in a Q and A session. If you have not yet received a copy of today's press release, please email himxmzgroup dot us, access the press release on financial portals or download a copy from Himax's website at www.himax.com.tw. Before we begin the formal remarks, I'd like to remind everyone that some of the statements in this conference call, including statements regarding expected future financial results and industry growth, are forward looking statements that involve a number of risks and uncertainties that could cause actual events or results to differ materially from those described in this conference call. Factors that could cause actual events or results to differ materially from these 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 use application products, the uncertainty of continued success in technological innovation, 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 end December 3139, filed with the SEC in March 2020.

Except for the company's full year of 2019 financials, were provided in the company's 20 F and filed with the SEC on 03/25/2020, the financial information included in this conference call is unaudited and consolidated and prepared in accordance with IFRS accounting. Such financial information is generated internally and has not been subjected to the same review and scrutiny, including internal auditing procedures and external audits by an independent auditor to which are subject are annual consolidated financial statements and may vary materially from the audited consolidated financial information for the same period. The company undertakes no obligation to publicly update or revise any forward looking statements whether as a result of new information, future events or otherwise. I would now like to turn the call over to Mr. Eric Li.

Eric, the floor is yours.

Speaker 2

Thank you, Mark, and thank you, everybody, for joining us. My name is Eric Li, and I'm the Chief IRP Officer. Joining me today are Jordan Wu, our CEO and Jason Pen, our CFO. On today's call, we will first review the Himax consolidated financial performance for the third quarter, followed by the first quarter twenty twenty 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. In addition to impact of COVID-nineteen, which remained harsh in many parts of the world, the prolonged U. S.-China trade tension and sanctions brought turbulence to the market and the resulting in new market dynamic during the third quarter. The unceasing stay at home economic created new demand, but push foundry capacity constraint to a more severe level.

Despite these challenges, we continued to ask you efficiently and deliver strong business results in the changing environment. We preannounced preliminary key financial results for the third quarter on October 6 for the revenue, gross margin and EPS, all exceeding the guidance issued on 08/06/2020. Today, our reported results for revenue, gross margin and EPS are all in line with the preannounced results. For the third quarter, we recorded net revenue of $239,900,000 an increase of 28.3% sequentially and an increase of 46.1% compared to the same period last year. The 28.3% sequential increase of revenue exceeded our guidance of an increase of around 20% quarter over quarter.

Display driver of TV, tablet, smartphone and automotive, as well as CMOS image sensor, all contributed better than guided sales. Gross margin was 22.3%, exceeding the prior guidance of flat to slightly down from 21% of the second quarter. IFRS profit per diluted ADS was $0.49 exceeding our guidance of around $02 to $0.28 Strong sales and improved gross margin contributed to the better than expected earnings results. The EPS increase was, however, offset by the ISU expense, which was higher than what was indicated on our last earnings call, as we raised the ISU amount to reward the team for the better than expected financial results. We will elaborate on this in a few minutes.

Non IFRS profit per diluted ADS was $0.73 exceeding our guidance of around $0.35 to $0.43 Revenue from large display driver was $55,700,000 down 6.3% sequentially and up 11.3 year over year. The sequential decline was driven by significantly lower shipment of monitor ICs due to customers' inventory correction following a demand hike in the first half. If combining the first three quarters of twenty twenty, our sales into monitor segment still increased 22.1 from last year. The demand for monitors remains robust and we expect a strong rebound in the fourth quarter. Offsetting monitors' third quarter weakness was a surge in TV and notebook sales.

TV segment revenue increased 17.6% sequentially, reflecting strong consumer spending and home entertainment demand. Panel makers' building of inventory in anticipation of higher TV panel prices also contributed to the sequential increase. It was no surprise that notebook sales recorded the highest growth among large display products, increasing 31.5% quarter over quarter, thanks to the continued demand for telework and e learning, with panel customers seemingly still sitting on low inventories. Large panel driver ICs accounted for 23.2% of total revenue for the quarter compared to 31.8% in the second quarter of twenty twenty and thirty point five percent a year ago. Small and medium sized display driver recorded a very strong third quarter with revenue of $151,600,000 up 53.5% sequentially and up 96.6% year over year.

TDDI for both tablet and smartphone posted extraordinary sales growth in Q3. For the automotive segment, we delivered decent low teens sequential growth amidst a declining automotive market worldwide. Small and medium sized segment accounted for 63.2% of total sales for the quarter compared to 52.8% in the second quarter of twenty twenty and forty six point nine percent a year ago. Our smartphone sales, the best performing product category of all in Q3, reached a quarterly record high of $63,300,000 up 153.6% sequentially and 101.2 percent year over year. It represented more than 26% of our total sales in Q3.

Our smartphone TDDI sales were up 155.7% sequentially and up 193.7% from the same period last year. The significant sequential growth was the continuation from Q2 when the product category already grew 69% from the previous quarter. However, as mentioned in our last earnings call, the growth was capped by an industrial wide wafer foundry shortage. Our smartphone and the tablet TTD IIC share the same pool of foundry capacity that we were, and still are unable to meet all the demand for these products. The Q3 strength in smartphone TDDI reflected customers' aggressive new product launch plans with our TDDI solutions, as well as our ability to price our products higher to reflect the tight wafer foundry situation.

Amid the economic downturn and lackluster overall smartphone consumption, OEMs are pushing more for budget handsets using TFT LCD screens instead of more expensive AMOLED displays. Sales of traditional smartphone DDIC also surged by 147.8% sequentially and were up 5.3% from same period last year with demand from key brand customers. We believe such strong sales of traditional smartphone DDIC were a short term rebound as the product category is quickly being replaced by TDDI and AMOLED, as we have repeatedly indicated. Revenue for tablet posted a third consecutive record high, with Q3 sales growing 26% sequentially and 336.4% year over year. The quarterly revenue reached $53,700,000 accounting for more than 25% of our driver IC revenue.

We expect our tablet segment sales to continue to grow as overall market demand for tablet remain robust for more home working and online education needs. And the TDDI administration in tablet market continue to pick up. Our tablet TDDI has a leading market position at a time when TDDI is quickly becoming mainstream for Android tablets. Third quarter tablet TDDI sales increased over 35% sequentially and were better than our guidance of a 20% increase. This marked the second consecutive quarter of increase in tablet TDDI shipment since the initial mass production in the first quarter of twenty twenty, and we are firmly in the leading position among peers.

However, as mentioned above, the sequential growth was crippled by tight foundry capacity as we couldn't ship enough to meet all customer demand. Revenue of traditional discrete driver IC for tablet also delivered 20.3% sequential growth and was up 164.5% year over year in the third quarter, thanks to strong order from both leading brand and the white box names. Our third quarter driver IC revenue for automotive was up 13.2% sequentially and up 3.9 year over year despite a sluggish global automotive market. The sequential growth was all, to a large extent, to the aggressive pursuit of market share gains by China's panel maker customers to which we are a major supplier. These customers are comfortable with Himax lithium technology and a proven production record, which supports them in their effort to ramp up production swiftly.

With global automotive demand showing signs of recovery, we expect to see robust and sustainable growth in Q4 and into 2021. Jordan will elaborate on this in a few minutes. Third quarter revenue from our non driver business was $32,600,000 up 13.3% sequentially, but down 12.1% year over year. The sequential increase was mainly a result of higher engineering fee income and increased shipment of the TEACOM for higher frame rate and high resolution display, as well as CMOS image sensor product with demand coming from notebook and IP camera applications. However, the increase in sales was offset by a decrease in WLO shipments to anchor customers.

Non driver products accounted for 13.6% of total revenue as compared to 15.4 in the second quarter of twenty twenty and twenty two point six percent a year ago. Gross margin for the third quarter was 22.3%, up 130 basis points sequentially and up two eighty basis points from the same period last year. The sequential increase was contributed by a favorable product mix of more shipment of better margin product such as tablet and automotive IC, high engineering fee income and the resale of certain products whose value has been written off previously in accordance with our inventory management protocol. Weighing on gross margins were lower WLO shipment, which decreased factory utilization, and the increased shipment for smartphone ICs, which register a lower gross margin than corporate average. Gross margin increased 2.8% from last year, thanks to a more favorable product mix with more shipment of tablet and TCOM, higher engineering fee income and resale of return of products.

Likewise, the gain was offset by lower WLO and higher smartphone shipments. Our IFRS operating expenses were $44,200,000 in third quarter, up 17.4% from the preceding quarter and up 11.4% from a year ago. The sequential expense increase was caused mainly by $4,800,000 of ISU, the immediately invested portion of the total ISU grant, which was higher than the $3,000,000 guided on the last earnings call to beneficially compensate employees from better or profit. The $1,800,000 additional RSU expense represents $0.09 lower in after tax EPS. The increased salary also contributed to the higher operating expenses.

The year over year increase was a result of increased RSU. As an annual practice, we reward employees with an annual bonus at the September, which always leads to a sequential increase in third quarter IFRS operating expense compared to other quarters of the year. This year, the ISU grant totaled $5,000,000 out of which $4,800,000 was vested immediately and expensed in the third quarter. Non IFRS operating expenses for the third quarter were $38,900,000 up 4.8% from the previous quarter, but down 0.9% from the same quarter in 2019. IFRS operating margin for the third quarter was 3.9, up from 0.9% in prior quarter and up from minus 4.7% in the same period last year.

The sequential increase was mainly due to higher sales and better gross margin, but offset by higher operating expenses. The year over year improvement was primarily a result of higher sales and improved gross margin. Third quarter non IFRS operating profit was $14,700,000 or 6.1% of sales, higher from non IFRS operating profit of $2,100,000 or 1.1% of sales last quarter, and up from minus 4.4% from same period last year. IFRI's profit for the third quarter was $8,500,000 or $0.49 per diluted ADS, compared to profit of $1,400,000 or 0.8¢ per diluted ADS in the previous quarter and loss of $7,200,000 or $0.42 per diluted ADS a year ago. Third quarter non IFRS profit was $12,600,000 or $0.73 per diluted ADS compared to non IFRS profit of 1,700,000 or $01 per diluted ADS last quarter and non IFRS loss of $6,900,000 or $04 per diluted ADS for the same period last year.

Turning to the balance sheet. We had $142,900,000 of cash, cash equivalents and other financial assets as of the September 2020 compared to $128,000,000 at the same time last year and $107,100,000 a quarter ago. The higher cash balance was mainly a result of an operating cash inflow of $33,500,000 during the quarter. Restricted cash was $104,000,000 at the end of the quarter compared to $164,000,000 of the preceding quarter and a year ago. The restricted cash is used to guarantee the short term secured borrowings for the same amount.

We repaid a total of $16,000,000 short term secure borrowing during the quarter, and in the meantime, the restricted cash deposit was reduced by the same amount. Separately, during this quarter, we entered into a new ten year unsecured loan agreement of $60,000,000 and repay all short term unsecured borrowers totaling $58,400,000 As a result, we had $16,000,000 of long term unsecured loans as of the end of Q3, of which $6,000,000 was current portion. There was no more short term unsecured loans as of end of the quarter compared to $58,400,000 a quarter ago and $90,600,000 at the same time last year. Not only have we strengthened our balance sheet by replacing all short term unsecured borrowings with ten year loans, we also managed to secure favorable terms of new long term loans so that additional interest payments are minimal. Accounts receivable as of the September 2020 were $221,100,000 up from $206,100,000 last quarter and $157,300,000 a year ago.

DSO was ninety nine days at the end of the quarter as compared to eighty six days a year ago and one hundred and one days at the end of last quarter. Inventory of 09/30/2020 were $125,700,000 down from $161,500,000 last quarter and $167,600,000 a year ago. The much lower inventory level in Q3 was a result of strong customer demand amid tight foundry capacity. While we will continue to pursue an aggressive inventory build up strategy, our inventory position will likely remain at such low level in the foreseeable future. Given the severe foundry capacity shortage prevailing in the marketplace.

Net cash inflow from operating activity for the third quarter was $33,500,000 as compared to an inflow of $24,000,000 for the same period last year and an outflow of $9,200,000 last quarter. The quarter capital expenditures amounted to $1,200,000 versus $31,200,000 a year ago and $700,000 last quarter. The third quarter CapEx was for R and D related equipment for our IC design business. As of 09/30/2020, Himax has 100 and 72,400,000 ADS outstanding, little change from last quarter. On a fully diluted basis, the total amount of ADS outstanding was $173,400,000 Now turning to our first quarter guidance.

For the quarter, we expect further revenue growth from the already high level of Q3 in most of our business sectors. Gross margins should see a major uptick and could reach a quarterly historical high for us. For the fourth quarter, we expect revenue to increase by around 10% sequentially. Gross margin is expected to be around 29, which will depend on final product mix. With the increase in revenue and margin growth in first quarter, net income should increase sequentially.

To further reward employees, there will be another 3,000,000 of cash bonus in the first quarter, which will be expensed immediately. This represents 1.4 lower in EPS. IFRS profit attributable to shareholders is expected to be in the range of around $0.15 to $0.16 per fully diluted ADS. Non IFRS profit attributable to shareholders is expected to be in the range of $0.01 $51 to $0.01 $61 per fully diluted ADS. I will now turn the call over to Jordan.

Jordan, the floor is yours.

Speaker 3

Thank you, Eric. Before we walk through each of our major product segments, I would like to briefly comment on the background for our upbeat Q4 gross margin guidance and our view on the sustainability of the higher margin. First off, gross margin expansion has always been at the top of our agenda and we'll surely work hard towards continuous profitability improvement. The upbeat Q4 gross margin guidance is mainly a reflection of the tight foundry capacity which results in better pricing and more favorable product mix. The foundry industry appears to be going through a structural change in the supply demand dynamics for the mature process nodes, both eight inches and 12 inches.

We believe the current tightness is likely to persist throughout the next few years. Major volume applications such as display driver ICs for TDDI and AMOLED, PMIC for five gs smartphone, CIS that is ever upgrading in resolution, just to name a few, are significantly expanding in wafer consumption and competing for the same pool of mature nodes, while the industry has no major expansion plan in sight for such capacity. As Eric mentioned, we are experiencing major foundry supply shortage in quite a few of our major business areas, including TDDI and DDIC for smartphone, tablet and automotive applications, as well as CMOS image sensor. For next year's wafer demands, we have secured with our foundry partners a capacity which is already larger than our total shipment for this year. On top of that, we are developing additional capacities for various product areas with an end to further our available foundry pool for the next few years.

Some of these new capacities will start making contributions next year. We will report the progress in due course. Another important factor for continuous gross margin improvement will come from a number of our non driver products, which are either already involved in production and look on track to grow in size, such as timing controller and ultra low power CIS, or will be new additions to our revenue stream such as the Wi Fi total solution and the WE1 ASIC chip. Again, gross margin expansion will continue to be one of our major business goals for next year and beyond. Now let us start with an update on the large panel driver IC business.

For the fourth quarter, we expect large display driver IC revenue to increase by high single digit sequentially. This is due to the extension of strong demand derived from persisting home working and business education, resulting in growing monitor and notebook demands. We expect a decent sequential increase of around 20% in the monitor segment in the fourth quarter. As for notebook, we anticipate even stronger momentum in Q4, increasing more than 75% quarter over quarter. We have active design activities in high end monitor and new generation low power notebook where we provide not only our driver IC but also timing controller.

Especially in gaming monitors and e learning notebooks, we anticipate more market share gains from the design wins of our DD display driver IC and T Con with key components and key customers. With respect to TV, we expect mid single digit sequential decline in the fourth quarter owing to a correction to a surge in TV demand in the previous quarter. Recently, we saw top tier TV brands with aggressive promotion tactics in eight ks TVs in anticipation of major sporting events resuming across many countries after a long lockdown. Our eight ks TV display drivers and timing controller ICs have been widely adopted by multiple leading end customers. It is worth highlighting that we have been developing and delivering timing controller products for many years and this segment already represents more than 5% of our total revenues.

It is applied in a wide range of products such as TV, monitor, notebook and automotive. Our technology not only provides higher resolution, higher frame rate and better image quality, it can also enable lower power in products where power consumption is critical. The margin and ASP of the timing controller products are much higher than those of display drivers and we expect this segment to be an extensive long term growth opportunity. Our TCAR revenue in the fourth quarter, while limited by capacity shortage in IC packaging due to competing demands from five gs chipsets, is on track to increase by more than 20% sequentially. This will represent more than 40% increase annually.

Now let's turn to the small and medium sized display driver IC business, beginning with an update on the smartphone segment. Our TDDI product roadmap as well as new design wins and new production plans all position Himax well to gain market share throughout 2020 and into 2021. As I mentioned on the last earnings call, the pandemic has weighed on the global smartphone shipments significantly due to supply chain disruption at the beginning of the year, followed by a lackluster consumer demand. However, the smartphone market has regained some momentum in Q3 and the momentum seems to have carried into Q4. On the backdrop of a rebounding smartphone market, our smartphone TDDI revenue is projected to have nice high teens sequential growth in the fourth quarter, although foundry capacity remains a major growth constraint.

Traditional display driver ICs for smartphone after a temporary spike in Q3 is set to decline double digit in Q4. As stated before, AMOLED technology has advanced to become the mainstream display for high end smartphones. Himax is highly committed in this field. Much progress has been made by collaborating with leading panel makers across China. Our development started from smartphone and extends to wearable tablet and automotive with Chinese panel makers.

We believe AMOLED display driver IC will become one of the major growth engines for our small and medium panel driver IC business from 2021. Tablet has been one of our top sales contributors throughout 2020. In the fourth quarter, it is on track for another sequential growth of over 20%. As mentioned on previous earnings call, for consumers, tablet TDDI offers a lighter weight and slimmer and more stylish design as well as improved touch accuracy with added option for active stylus specifically geared towards high quality writing and drawing. Himax is a pioneer in the Tecra TDDI technology and led the market for mass production in the first quarter of twenty twenty.

At present, we are the dominant supplier for literally all leading Android names. Tablet TDDI represents a tremendous upside potential for Himax, thanks to its higher ASP and more units of TDDI chips in each tablet than those for smartphones. We expect a sequential increase of around 80% for tablet TDDI in the fourth quarter as the penetration of in cell touch into tablet continues to accelerate. To expand and strengthen our position in the market for next generation models, we are working on new designs with resolution and touch accuracy upgrades, targeting larger size tablets from key customers. For traditional DDIC for tablet, we expect low teens sequential decline for Q4, but sales to be up more than 50% compared to the same period last year due to the booming tablet demand arising from home working and remote learning.

The demand for traditional DDIC for tablet is also being eroded by in cell TDDI, but at a more moderate pace than that for smartphone. Turning to the automotive sector, as the panels inside the car continue to grow in both number and size, The demand for automotive driver IC is well positioned for healthy growth in the coming years. Although the global car demand has been badly hit by COVID-nineteen, especially in the first half of the year. The market is showing signs of gradual recovery starting Q3. Our automotive ICs, which enjoy higher gross margins, are experiencing a solid rebound lately with carmakers rushing in for inventory replenishment after quite a few sluggish quarters.

The demand for automotive display IC for more sophisticated and higher performing displays has continued its rising trajectory. Advanced new features such as in cell touch, local dimming, cascade topology connection and point to point high speed interface bridging functions are being adopted with Himax being the primary partner for major automotive panel makers and Tier one players to enable these new technologies. With these new technologies on track for more shipments starting 2021, we are confident that our automotive segment is hitting another inflection point with a strong and positive long term outlook. For the fourth quarter, revenues for small and medium sized driver IC business is expected to increase by around mid teens sequentially with demand continuing to surpass supply. Capacity shortage remains a major factor that negatively impacts our capabilities to make more shipments to customers.

In consideration of capacity constraints, which may not be resolved shortly, we often have to strategically prioritize the production of products for those customer models where we are the key supplier and or enjoy better profitability. Now let me share some of the progress we've made on the non driver IC businesses in the third quarter. First, on the WLO business. The fourth quarter WLO revenue declined sequentially as a result of lower shipments to an anchor customer. Our WLO factory will continue to manufacture the anchor customer's legacy products going forward.

With our exceptional technologies of WLO, in nano, in printing manufacturing and the fractional optics design, we have been engaged by multiple customers slash partners to develop further generation to develop future generation products covering a wide range of applications such as ToF, three d sensing, waveguides for AR goggles, biomedical devices and others. Next is an update on the three d sensing business. Targeting next generation Android smartphones, we are collaborating with Speeding Laser and ToF sensor vendors to develop the new world facing three d sensing camera, whereby we provide optical components and or projectors, which are critical for the performance of the whole TOF solution. For known smartphone three d sensing engagements, where we provide a structured light based three d sensing total solution, our target markets range from smart door lock, facial recognition based e payment, business access control to biomedical inspection device. A number of recent design wins will enter into mass production soon.

Alternatively, we also offer a market leading three d decoder ASIC to those customers who wish to design their own structured light three d sensing solution. Here we have had quite a few design wins from customers targeting China's rest e payment market with some shipments already starting in the fourth quarter. We are also working with customers for industrial robotics, smart door lock and home security, all of which carry great potential for our three d three d business in the future. Now switching gears to the Wi Fi smart sensing solution. As I mentioned on the last couple of earnings calls, in order for our Wi Fi technology to reach its maximum potential, we have adopted the flexible business model whereby in addition to a total solution where we provide processor, image sensor and AI algorithm.

We also offer low key parts individually in order to address the customer's different needs and widen our market reach. For the total solution offering, our current focus applications include notebook, TV, doorbell, door lock, and air conditioner as we continue to work on new solutions to cover further edge device AI markets. In partnership with leading players in their respective industries, a number of these solutions are slated to enter mass production in 2021. For the other type of business model where we only offer key parts, our strategy is to actively participate in the ecosystem led by the world's leading AI and cloud service providers. In addition to the collaboration with Google on their TensorFlow Lite for microcontrollers that we announced previously, we are making another major breakthrough by partnering with another world leading cloud service provider with a business focus more towards healthcare, financial services, government, retail and industrial manufacturing.

Separately, to further lower the technical barrier for using our WiFi solution, we teamed up with a leading online store specializing in easy development tools for machine learning on edge devices. We are extremely excited about the rapid business progress and believe our Wi Fi offerings will become a major contributor to our P and L in the near future. Now turning to our CMOS image sensor business update. We continue to see extremely strong demand for CMOS image sensors for IP camera and notebook, but our actual shipment has been badly kept by the foundry capacity available to us. Separately, our industry first two in one CMOS image sensor that supports RGB mode for video conferencing and ultra low power AI mode for facial recognition has penetrated the desktop ecosystem for their most stylish super slim bezel designs.

We expect to have small volume shipments towards late twenty twenty with more to come in the next year. Regarding ultra low power always on CMOS image sensor, which targets in battery powered or always on applications, we are getting promising feedbacks and design adoptions from customers in various markets such as car recorders, surveillance, smart electronic meters, drones, home appliances and consumer electronics. In Q4, the CI's revenue is expected to be flat sequentially, although demand is much stronger than that. Again, our shipment is kept by foundry capacity constraint. For non driver IC business, we expect revenue to decrease by low single digits sequentially in the fourth quarter.

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

Speaker 0

Our first question will come from the line of Tristan Gerra from Baird. You may begin.

Speaker 4

Hi guys and congratulations on the result. Given the capacity that you secured for next year as well as your own capacity plans, what type of revenue do you think this is going to support for 2021?

Speaker 3

We are I said earlier in my prepared remarks, we have secured with our various foundry partners by different way of arrangements, many of which are legally binding. A capacity, a total capacity covering all type of our products that has already been higher than our actual shipments made during this year. Okay. So that is our starting point. And certainly, that is not enough for us.

That is not going to be that is not going to satisfy our expected demand for next year. So in the meantime, we are developing quite aggressively, again, with different foundry partners covering different product areas to expand our capacity. But I have to say that such developments certainly is not starting to date, right? It started actually quite some time ago. But this is not something that you can turn around overnight, right?

So I think additional capacity on top of the capacities we have already secured with our foundry partners. You will see I mean, for example, in Q1, the addition will be rather limited. And there will be some contribution from Q2 and more Q3 and furthermore in Q4 and even more, probably much more going forward. Right? So it's a it's a aggressive effort.

However, it has to be a gradual process. And again, the the capacity is so tight nowadays. I mean, you guys all know, right? So we just have to accept the reality and manage our customers, manage our products, prioritize our production and in the meantime, continue to develop new foundries and new capacity. Then we it's fair to say we are making good progress.

And right now, what we are seeing is for ourselves, the most severe are basically three areas. The first area being smartphone and tablet TDDI, which share the same pool. And our strategy, given our very high market share in Android TVDI tablet market right now, so we tend to give more favorable allocation to tablet over smartphone, to be honest, because we carry a very heavy responsibility dealing with those end customers in particular when in many, many cases, we are actually the sole source. So if we stop, if we reduce, if we catch it enough, then it's a big problem for them. Our customers for smartphone PDT tend to have better preparation for multiple sources.

And so that is the first area of of of foundry tightness. And, again, we are working rather aggressively with at least two main new foundry partners developing new capacities. And, again, we are hoping to see real contribution, you know, sometime next year. But, I mean, before it actually happens, I really can't comment much further than that, but we are certainly reporting due course. The second major area of shortage is is automotive.

This space driver It's an area where we enjoyed a very good market share, probably number one in the world with around some 20%, 30% some percent of market share right now. And the shortage starting from starting from early q three has been very, very severe. And looking into next year is looking to probably get worse even. And again, we have secured with a very solid arrangement with our foundry partners to meaningfully enlarge our capacity available to us next year compared to the shipment, our actual shipment of this year. And on top of that, we are hopefully, we can announce fairly quickly, fairly soon.

We are arranging additional major increase of capacities for automotive longer term. It's something that is so badly needed. We got the pressure inquiries from not just panel maker customers, but also tier one and many of them. And many of them wish to enter into some kind of arrangement to secure their supply, given that we are the major provider of the market right now. And the third area, which is relatively small in our business contribution, but the the shortage is probably the most severe, which is CMOS image sensor.

This year, as we all know, because of the COVID situation, you know, there's a huge there's a sudden surge in demands for PC camera because people tend to use their notebook for video for teleconferencing. Their notebook, which is relatively poor camera resolution, People like to get the PC camera connected, right? So there's a sudden surge in demand, and we simply cannot meet the demand. And we have certain customers who are major, major players the PC camera market. So it is relatively small for us overall, but the shortage is quite severe.

So we are preparing all aspects to try to grow our capacities. But again, no miracle is going to happen and certainly in Q1, we don't expect any meaningful increase in capacity.

Speaker 4

Okay. That's very useful. And then just as a quick follow-up, what are the implications for ASPs for the rest of for this quarter and for next year?

Speaker 3

On an apple to apple basis to reflect the foundry capacity tightness, certainly, we are able to raise our ASP. The in a degree that it doesn't certainly varies, you know, in accordance with the the the the the different degrees of tightness in capacity. So the sectors that I just named tend to we we tend to enjoy, you know, better ASP ASP increase compared to those sectors that I didn't mention just now, primarily last panel display drivers. Right? Although they are still tight, but they are not they are not in severe shortage.

Let me put it that way. So So I think we have very good visibility in Q1, unusually good visibility in Q1 with customers all lined up with their appeals and whatnot. And I can say with a fairly good confidence, you know, across towards the whole first half, I think the visibility is quite good. Longer term, it's certainly harder to tell. It's going to depend largely on the development of COVID situation, right?

We all know that and we nobody has the answer. I think the while that is something beyond our control, how we can control ourselves is aggressive design win and design win engagement at this moment. When taking advantage that we are one of the largest players in the marketplace and the capacity is very tight, right? So I think we have made tremendous progress across different product segments for new design ins and design wins. And our engagement has reached out much more compared to the past, not just panel makers, but also to system makers and product indirect customers.

So I think that longer term is going to be a major plus for us. Historically, our engagement with such end customers typically are more towards technology discussions, technology engagements. Now a lot of it is also about business. So I think that is a very important side benefit because of the tightness. I guess one last thing, I appreciate your question.

Think I will elaborate a little bit. One last thing is that I do believe we do have a very good solid visibility longer term is automotive sector, mainly for three reasons really. One, our major target customers are growing their market share in a big way. So we get to enjoy because our market share with them individually is very, very high, much higher than our average in the world, right? So when they are growing their market share, we get a benefit.

So we do support them aggressively in this effort. And secondly, it's the pickup of TDDI in penetration in the auto market. We are the pioneer in the world in introducing TDDI to auto panels. Our first mass production actually took place at the towards the end of last year, 2018. But more meaningful revenue contribution started from this year, but this year is still small.

We all know how, you know, automotive market works. It it takes a the design cycle takes a long time. So next year, you're going to see many, many times the size of this year. Many times could be as much as close to 10 times. You know?

And TDDI for automotive probably starting from next year, we can see a a a some meaningful contribution to our top and bottom line. And we expect further penetration, nonstop. It's a one way street going forward with TDDI penetration into HOTCOM. And that is major, major good news for us because, one, our design win coverage of design win coverage is is very, very good at the moment. And and secondly, TDDI for auto enjoys much better ASP and gross margin compared to the display driver for auto and certainly also compared to TDDI for tablet or smartphone.

Right? So that is the second reason TDDI demonstration. And the third reason I mentioned earlier already, we are entering to major and aggressive long term capacity expansion plan together with our partners covering both traditional display driver IC for auto and also TDDI. So for these three major factors, think, you know, I think we are really at the at the impression point for for for for auto business. We have enjoyed we had we enjoyed many years of growth.

I can't recall how many, but many years of sequential growth for auto business before hitting a break in kind of in twenty eighteen second half twenty eighteen to half twenty eighteen to first half twenty nineteen, right? And I think we let the market in seeing a recovery starting from Q3. And in Q4 this year, I just mentioned in my prepared remarks, it's looking very solid, the growth rate. And so again, I think this is we're about to embark on a major long term growth for auto sector. And the good news is auto has always been for many, many years, the highest gross margin product segment for us.

So this is very exciting news for us. Sorry for the very long answer. I thought I take the opportunity to elaborate a little bit.

Speaker 4

That's very useful. Thank you very much.

Speaker 3

Thank you, Christian.

Speaker 0

And our next question will come from the line of Donnie Tang from Nomura. You may begin.

Speaker 5

Thank you, Jordan, Eric and management team for taking my question and congratulations on the very strong guidance. My first question is regarding to the guidance. So could you elaborate a little bit more or quantify how do you come out with like 10% sales growth in fourth quarter by breaking down into maybe roughly shipment and ASP growth if possible? Thank you.

Speaker 3

I'm afraid I can't really give too much specifics on on revenue and ASP growth. But, again, I can give you a broad idea. ASP growth come primarily from TDDI both for smartphone and tablet as well as automotive. Right? Those shortage sectors.

And for for large panel, I think ASP has has sustained in a solid level, but I can say they enjoy major growth like for those other sectors. And so for large panel, the market is the foundry situation is tight, but it's not in shortage as such. So I think that is kind of the background. But why I mean, we guided for about 10% sales growth for Q4. I think that is we are I think that is quite solid.

And I think firstly, TV is probably the only major sector that is set to decline a little bit, probably mid single digit because TV makers after quite a couple of good seasons, they are entering into some kind of inventory correction period. But other than that, I mentioned for monitor, first three quarters combined very strong compared to last year, but the third quarter, there was a major dip. But we don't see that as a weakness in demand rather for monitor. It is really customers' inventory adjustment. So q four, we are seeing a major rebound.

And notebook also, you know, you know, is is kind of close to 100% kind of increase sequentially. And certainly, the the the biggest growth will come from tablet for in kind of revenue contribution. Tablet TDDI continue to grow in penetration and we dominate the market, right? So Q4 TDDI for tablet will be up something like 80%, right? And with ASP contribution because the full percentage of those TDDI goes into what we call IC, which enables the active stylus.

And that's that's for which we enjoy better ASP and better margin. Smartphone will be up high single digit. Again, you know, demand is is much higher than our supply. So that is the major capacity constraint. But the good news is we continue to gain market share in smartphone, although under such difficult situations in terms of foundry.

And automotive, I mentioned, it will be up more than 20% sequentially. We are very, very happy with the auto rebound the midst of pretty bearish market for automotive worldwide. And so that kind of give you a flavor of the main major revenue contributions, meaning monitor notebook, you know, smartphone, tablet, and auto with a major with the only major decline in TV, which is only is only. So it's across the board pretty even the growth.

Speaker 5

Thank you, Jordan. And can I have a follow-up? Under this kind of situation, are you considering to raise price further in first quarter, including a large display driver ICs or raise again on TDDI as you just mentioned?

Speaker 3

I think we have to respond to the market, right, and our competitors move. But I think in all likelihood, the answer is yes. But we just have to sit wait. We have to continue to observe the market and manage the customer and we'll see. But I mean, the likelihood of our lowering our ASP, think, is very, very low.

Speaker 5

I see. And my second question is regarding to the gross margin. Do you think this kind of 29% level will be a new norm? Or may I ask if your foundry partners have all raised the wafer price in fourth quarter yet? Some of them will not raise the price until first quarter next year?

Thank you.

Speaker 3

They certainly have very raised their prices for q four to a very large degree and certainly and and also our back end suppliers as well, especially for testers and for timing controller, the the packaging as well. And your question whether this this 29% ish kind of gross margin will be a new norm. We certainly hope so and certainly we have all the intentions to keep it this way and to actually grow from here further next years and beyond for the reasons I mentioned. I think, you know, one, foundry tightness for mature nodes technology appears to be a long term thing. And two, our capabilities to grow additional capacity actually is going to enhance our our our enhanced it is going to help our defending our margin as well because customers were be happy to call on Himax more than less because we do have upside for them to grow.

And thirdly, we have very good solid design win across the board. I just mentioned covering not just direct customers, but also indirect customers. That is very helpful. I'm I'm I'm talking about, you know, from TV, you know, all the way to automotive. So I think this is very exciting development.

And lastly, you know, longer term, I I just want to emphasize again the importance of our new product areas such as Wi Fi. I think that will be very exciting. It's long term. It's certainly it will have less top line contribution than bottom line because margin will be much, much higher for such products. And certainly, our timing controller, we have seen it is all within expectation.

We have seen very healthy growth this year, and I think the growth is likely who is going to continue into next year and beyond. So yes, the short answer is yes. We intend to defend such level of margin and try to even improve it further for next year.

Speaker 5

Thank you, Jordan. Can I have a follow-up? Is that when you said that all the most of your foundry partner has raised the price, is that in like wafer in base or wafer out base? Because I'm just curious that I'm not sure whether if some foundry partners

Speaker 3

We were in.

Speaker 5

Wafer in. So so the actual price wafer price high should be

Speaker 3

Sorry. Sorry. We were out. We were output. We were output.

We, accounting wise, when we say they raise the price to us, it is the increase in our cost of goods sold, meaning in our inventory already, it's over out. That is related to the shipments we make. So we are talking about the q four COGS. That's what we are referring to when we talk about foundry raising their their prices.

Speaker 5

So they they raising

Speaker 3

their prices much earlier on because the foundry production, there is probably about a quarter of lead time, right?

Speaker 5

Yes. Is there any result of the inventory write off fourth quarter as well as third quarter?

Speaker 3

Certainly, there are always inventory write off each quarter. But I think largely, thanks to our efforts over the last year or two to much tighten our inventory management. I think we are able to lower our overall inventory right right now each quarter. And on top of that, it is just a lucky coincidence that the market is so tight that Mhmm. Inventory now, it is actually not only well, it is a problem in the sense that we feel we are inventory level right right now is too low rather than too high, and the the write down requirement much less than otherwise.

So two factors, our much improved inventory, right, inventory management internal procedure. And secondly, the timings of the market. And I I I mentioned probably twice in my prepared remarks that in certain in certain circumstances, there are certain goods that we have according to our inventory management protocol, which has been going on for many years, right? We have written down certain products, while the goods we still kept, right? We're not going to throw them away, although accounting wise, they may need much decrease in price in cost or the cost has can, in some cases, decrease to zero.

But because of tightness of the market, we are able to sell those products. So that that certainly is a very high margin, but volume but the revenue contribution wise is is minimum. It's quite small, but there are such instances. So it's just a reflection of how tight the market is right now.

Speaker 5

Yes. Thank you so much, Jordan. Congratulations again.

Speaker 3

Thank you, Darling.

Speaker 0

Thank you. Our next question will come from the line from Jerry Su from Credit Suisse. You may begin.

Speaker 6

Hi. Thank you for taking my question. First question regarding on the TDDI. Can you talk a little bit about what's beyond tablet, automotive, etcetera? I think we have heard some of the industry, your peers or the panel makers are interested to adopt TDDI on notebook and also other applications.

Which area are you seeing more opportunities And what's the entry barrier there?

Speaker 3

I think given the the current tightness of capacity for for smartphone and tablet already, I really don't feel there's mushroom for notebook in the foreseeable future, first off, because we do have the technology. And if TCF or notebook is to happen, it's going to have rather similar ICs compared to those for tablet as you only mentioned. Right? I think for us, TDI, I mentioned already, so I'll just repeat it very briefly. I think automotive is the major growth area.

Automotive has a different reason. It's not asking for for to to it's asking for further, you know, same folder or or or light display. It's not it is really for two reasons. One, when the the the ambient light, the sunlight is very, very bright, You feel better. The the the consumer can feel better with the with the in cell display because you don't feel kind of addition additional layer of glass on top of your panel.

Right? And right now, it appears to be even more convincing reason for in cell and TVDI is that auto displays are getting much larger in size and much higher in resolution. And people are talking about extremes, such as what they call pillar to pillar displays. We are talking about, in some cases, about 15 inches, 16 inches, even 17 inches kind of displays for automotive. So when we do want to make the display so so big, you do need to adopt in cell technology because within the in cell, you don't have to have the trouble of funding a certain layer of glass, which is cost display on top of the already completed image display.

And if you the the third layer of glass, the bonding, if this goes wrong, it is going to damage the already finished image display, which is very expensive, basically we imagine. Right? And and when you have display so large, it's very difficult to bump, especially when in automotive, when you make you are making such a large display, you need to enable what they call free form design, meaning the display is not a straight piece of glass. So that makes the bonding process even harder. So it is now proven to be a necessity.

Now when the display size grow to a certain level, you do have to have TDDI. And now to for larger market. So very excited excited about this development. So So I we think TDDI for automotive application is are going to be important for the industry and certainly for Himax.

Speaker 6

Okay, thank you. And then my second question is about the AMOLED driver IC. I think you mentioned in the prepared remarks that you're expecting to see some more revenue contribution Can you elaborate a little bit more about which area we'll see faster growth, I mean, or for Himax to faster penetrate into, is it wearable or should we think about it as a smartphone? And also beside beyond the Chinese panel makers, any opportunities to get into the Korean panel makers and OLED?

Thank you.

Speaker 3

Thank you, Jerry. I don't want to comment too much, especially I can't cover too much specifics before it happens. So again, I want to repeat, we are very committed to this. So we are not going to be absent from this very important long term market. You you have mentioned quite a few applications, meaning our wearable, auto, smartphone, and tablet.

We are in all of them. And we have good high quality, solid major engagements with direct panel makers and indirect end user customers in literally all of them. Which one will enter mass production earlier than others? I I think it's probably a bit premature to pay off. So if you would allow us to to elaborate further when it happens.

But I can say, certainly, we are targeting mass production starting next year. And the major contribution, certainly, hopefully, will come from smartphone. Right? That is quite obvious, followed by tablet, And then then where also will be the lowest. Right?

But I I think I I can't I don't want to start to come with them before it actually happens, but I think we are very, very close to some major breakthroughs. So we'll see.

Speaker 6

Okay. And then about the panel customers, are you seeing some opportunities of penetrating to the COVID OLED customers?

Speaker 3

I can't comment on that. It's too customer specific, you know, because they are really just one for large panel and one for small panel. When it comes to the career panel makers, if I I think that will be too obvious if I make any comments one or the other. Sorry about that.

Speaker 6

Okay. That's fine. Okay. Thank you.

Speaker 3

Thank you, Jerry.

Speaker 0

Thank you. And I'm not showing any further questions in the queue. I'd like to turn the call back over to management for any closing remarks.

Speaker 3

Okay. As a final note, Eric Li, our Chief IRP Officer, will maintain investor marketing activities and continue to attend investor conferences. So we'll announce the details as they come about. 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.