Himax Technologies Inc (HIMX) Q4 2019 Earnings Call Transcript

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by and welcome to the Himax Technologies Fourth Quarter and Full Year twenty nineteen Earnings Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker, Miley Bergman, Managing Director of MZ Group.

Please go ahead.

Speaker 1

Thank you so much. Welcome everyone to Himax's fourth quarter twenty nineteen earnings call. Joining us from the company are Jordan Wu, President and Chief Executive Officer and Mrs. Jackie Chang, Chief Financial Officer. After the company's prepared remarks, we will have allocated time for questions in a Q and A session.

If you have not yet received a copy of today's results press 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 I begin with the formal remarks, I'd like to remind everyone that some of the statements in this conference call include statements regarding expected future results financial future results and industry growth and 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 may 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 Himans, demand for end use application products, the uncertainty of continued success in technological innovations, as well as the other operational and market challenges and other risks described from time to time in the company's SEC filings, including those identified in the section entitled Risk Factors in its Form 20 F for the year ended December 3138 filed with the SEC in March of twenty nineteen.

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 2939, 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 scrutiny, including internal auditing procedures and external audits by an independent auditor to which we subject our annual consolidated financial statements and may vary materially from those audited consolidated financial information for the same period. The company undertakes no obligation to publicly update or revise any forward looking statements whether as a result of new information, future events or otherwise. I will now turn the call over to Ms. Jackie Chang, CFO of Himax.

The floor is yours, Jackie.

Speaker 2

Thank you, Myri, and thank you, everybody, for joining us. In today's call, we will first review Himax consolidated financial performance for the fourth 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.

We preannounced preliminary key financial results for the fourth quarter on 01/07/2020, as the revenue, gross margin and EPS of the quarter all exceeded our guidance issued on 11/07/2019. Revenue and gross margin were in line with the pre announced results, while EPS were at high end of the range. For the fourth quarter, we recorded net revenues of 174,900,000.0 an increase of 6.5% sequentially and a decrease of 8.4% compared to the same period last year. Revenues were better than our guidance of flat quarter over quarter. Both Display Driver and Non Driver businesses contributed to the better than guided sales.

Gross margin was 20.6%, exceeding the prior guidance of a slight increase compared to third quarter's 19.5%. A more favorable product mix among small display products, improved WLO factory utilization and higher than expected engineering fees from new project engagements, enhanced the gross margin for the fourth quarter. IFRS profit per diluted ADS was $06 exceeding our guidance of a loss of $03 to $0.45 Stronger sales and improved gross margin both contributed to the better than expected earnings. In addition, we booked a revaluation gain of $3,800,000 from an investment we made in an AI startup during November 2017. The revaluation gain was not included in November guidance.

Non IFRS profit per diluted ADS was $09 exceeding our guidance of a loss of $0.27 to $0.42 Revenue from large display drivers were $57,900,000 up 15.6% sequentially and down 22% year over year. The sequential growth was driven by Chinese panel customers ramping of new LCD fabs and their building of inventories in anticipation of growing demand and price hike in 2020. The revenue was, however, lower than level of the last quarter of twenty eighteen when the production outputs of panel makers reached the peak. Since then, they have cut back their production every quarter to address the overall weak TV demand and industry wide oversupply. Large driver ICs accounted for 33.1 of our total revenues for the quarter compared to 30.5% in the third quarter and 38.9% a year ago.

Revenue for small and medium sized display drivers was $81,100,000 up 5.1% sequentially and up 1.6% year over year. The segment accounted for 46.4% of total sales for the quarter compared to 46.9% in the third quarter and 41.8% a year ago. The sales growth, both sequentially and year over year, was primarily driven by higher automotive and tablet sales, offset by a decrease in TDDI sales for smartphone, although the decrease was less than previously expected. Sales into smartphone were down 22.5% sequentially and down 14.3% year over year. Both the sequential and year over year declines were caused mainly by lower TDDI shipments.

However, on a full year basis, our 2019 TDDI shipments were close to double compared to the prior year as our fulfillment was capped during 2018 due to capacity constraint. Starting 4Q twenty nineteen, our business started to see a major turnaround, thanks to our penetration into more Tier one smartphone OEMs. The industry's rapid rollout of TDDI in mid to low end smartphones and our aggressive move to develop new foundry for TDDI. Jordan will elaborate on this a few in a few moments. The fourth quarter sales of traditional DDICs declined by 20.2% sequentially, but increased 14.3% from last year.

Display drivers for tablet and other consumer products were up 26.5% sequentially, better than our prior guidance of a 20% increase. This was due to customers' inventory replenishment and strong demand from certain brand customers. The fourth quarter sales of tablet and consumer products were also up by 25.8% year over year. Our driver IC revenue for the automotive application was up 23.2 sequentially, better than our guidance of more than 15% increase. It was up 1.9% from the same period last year.

Revenues from our non driver businesses were $35,900,000 down 3% sequentially and 2.6% year over year. Non driver products accounted for 20.5% of total revenues as compared to 22.6% in the third quarter of twenty nineteen and nineteen point three percent a year ago. Gross margin for fourth quarter was 20.6%, up 110 basis points sequentially, but down three seventy basis points from the same period last year. Gross margin outperformed our prior expectation of a slight increase compared to the 19.5% of the third quarter. A more favorable product mix among small and medium sized display driver products improved WLO factory utilization and higher engineering fees from project engagements were the factor behind the sequential increase.

Increased shipment of the WLO product to an anchor customer led to higher capacity utilization of our WLO fabs and therefore better gross margin compared to the same period last year. The year over year decline was largely due to smartphone TDDI ASP erosion arising from increased competition as well as more TDDI shipments for lower end market. Moreover, our large panel driver IC businesses faced headwinds during 2019 when the cost of our COF packaging material went up for capacity shortage and the display industry suffered from a severe capacity oversupply. Our IFRS operating expenses were $37,400,000 in the fourth quarter, down 5.6% from the preceding quarter and down 8.8% from a year ago. The sequential decrease was caused by decreased salary and R and D expenses.

The year over year decreases was also a result of decreased salary and R and D expenses, offset by the increase of depreciation expense. Non IFRS operating expense for the fourth quarter was $36,800,000 down 6.2 from the previous quarter and down 9.5% from the same quarter in 2018. IFRS operating margin for the fourth quarter was minus 0.8%, up from minus 4.7% in the prior quarter and down from 2.8% in the same period last year. The sequential improvement was primarily a result of higher sales, better gross margin and lower operating expenses. The year over year decline was a result of lower sales and gross margin, offset by lower operating expenses.

Fourth quarter non IFRS operating loss was 700,000 or minus 0.4% of sales versus non IFRS operating loss of $7,300,000 or minus 4.4% of sales last quarter and down from 3% for the same period last year. The sequential improvement in year over year declines were for the same reasons stated above. IFRS profit for the fourth quarter was $1,000,000 or $06 per diluted ADS compared to loss of 7,200,000.0 or $0.42 per diluted ADS in the previous quarter and IFRS profit of $8,500,000 or $0.49 per diluted ADS a year ago. IFRS earnings per diluted ADS exceeded prior guidance of per diluted ADS loss of around $03 to $0.45 The better than expected earnings were due to stronger sales, improved gross margin, lower operating expenses and a revaluation gain of $3,800,000 or $0.22 per diluted ADS from a previous investment in an AI startup made during November of twenty seventeen. This was the second revaluation gain we booked for the same investment with the first such gain of $2,900,000 or $0.17 per diluted ADS booked in the same period last year.

The year over year decline was a result of lower sales and gross margin, offset by lower operating expenses. Excluding the revaluation gain, our IFRS loss for the quarter was $2,700,000 or $0.16 per diluted ADS compared to loss of $7,200,000 or $0.42 per diluted ADS in the previous quarter and profit of $5,600,000 or $0.32 per diluted ADS from the same period last year. Fourth quarter non IFRS profit was $1,500,000 or $09 per diluted ADS compared to non IFRS loss of $6,900,000 or $04 per diluted ADS last quarter and non IFRS profit of $8,700,000 or $05 per diluted ADS for the same period last year. Non IFRS earnings per diluted ADS exceeded prior guidance of a loss per diluted ADS of around $0.27 to $0.42 The better than expected earnings were due to the reasons mentioned above. Excluding the revaluation gain, our non IFRS loss for the quarter was $2,200,000 or $0.13 per diluted ADS compared to non IFRS loss of $6,900,000 or $04 per diluted ADS last quarter and profit of 5,800,000.0 or $0.33 per diluted ADS for the same period last year.

Now let's have a quick overview of the 2019 full year financial performance. Revenue totaled $671,800,000 in 2019, a 7.2% decline over 2018. Revenues from large panel display drivers totaled $237,300,000 a decrease of 8.9% year over year, representing 35.3% of our total revenues as compared to 36% in 2018. Small and medium sized driver sales totaled 307,400,000.0 a decrease of 5.6% year over year, representing 45.8% of our total revenues as compared to 45% in 2018. Non driver product sales totaled 127,100,000.0 a decrease of 7.5% year over year, representing 18.9% of our total sales as compared to 19% a year ago.

Gross margin in 2019 was 20.5%, down from 23.3% in 2018. 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 lower end market. Moreover, our large panel driver IC business was impacted by industry wide TV panel oversupply and high material cost. On the positive side, more WLO shipments in 2019 led to improved capacity utilization of our WLO fab and therefore better gross margin. IFRS operating expenses were 156,200,000.0 down $9,300,000 or 5.6% compared to last year.

The decrease was primarily the result of lower salary, R and D expenses and share based compensation despite higher depreciation expense out of our new building. As highlighted earlier, we did not issue RSUs in 2019 like we did in previous years, but granted stock options to employees instead. The fourth quarter stock option related compensation expense was $330,000 IFRS operating loss was 18,300,000.0 a decline of $21,700,000 from 2018 due to lower sales and lower gross margin, offset by lower operating expenses. For the same reason, non IFRS operating loss was $16,400,000 a decrease of $25,400,000 from 2018. Our IFRS loss for the year was $13,600,000 or $0.79 per diluted ADS versus a profit of $8,600,000 or $05 per diluted ADS.

Non IFRS loss for 2019 was $12,100,000 or $07 per diluted ADS, down $25,000,000 year over year. Turning to the balance sheet. We had $112,100,000 of cash, cash equivalents and other financial assets as of the December 2019 compared to $117,700,000 at the same time last year and $128,000,000 a quarter ago. We made an operating cash flow of $23,400,000 during the fourth quarter. The cash position was, however, reduced from last quarter because we repaid $33,400,000 of unsecured borrowings and made a CapEx of $2,700,000 during the quarter.

On top of the cash position, restricted cash was $164,000,000 at the end of the quarter, the same as the preceding quarter and a year ago. The restricted cash mainly used to guarantee the secured short term borrowings for the same amount. We have $57,300,000 of unsecured short term loan at the end of fourth quarter, substantially lower than the $90,600,000 a quarter ago. Our year end inventories as of December 3139 were 143,800,000 down from $157,600,000 last quarter and $162,600,000 a year ago. Accounts receivables at the December 2019 were $164,900,000 up from $157,300,000 last quarter, but down from $189,300,000 a year ago.

Days sales outstanding was ninety days at the end of the year as compared to ninety five days a year ago and eighty six days at the end of the 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 in 2018. Given the unfavorable market conditions and easing of foundry capacity in 2019, we have started to control our inventory level since the first quarter of twenty nineteen. We believe inventory has reached a healthy level. And given the prevailing uncertain market conditions, we will monitor our inventory situation very carefully.

Net cash inflow from operating activities for the fourth quarter was $23,400,000 as compared to an inflow of $2,300,000 for the same period last year and an inflow of $24,000,000 last quarter. Cash inflow from operations in 2019 was $7,700,000 as compared to $4,000,000 in 2018. Fourth quarter capital expenditures amounted to $2,700,000 versus $5,200,000 a year ago and $31,200,000 last quarter. The vast majority of the third quarter CapEx was for the purchase of land, the construction of a new building and WLO capacity expansion. The investment project has been concluded with a final payment of $1,500,000 made in the fourth quarter.

The investment in design tools and R and D related equipment for our traditional IC design business was 1,200,000 in Q4 versus $2,000,000 in Q3. Total capital expenditure for the year was $45,900,000 of which $7,300,000 was design tools and R and D related equipment. In comparison, the CapEx for 2018 was $49,700,000 of which $7,600,000 was for design tools and R and D related equipment. As of December 3139, Himax had 172,200,000.0 ADS outstanding, no change from last quarter. On a fully diluted basis, the total number of ADS outstanding is 172,600,000.

Historically, due to the Lunar New Year holidays, the first quarter has seasonally been the slowest period of the year in terms of sales, often down by more than 10% sequentially. At this time, however, based on our current pipeline, we are experiencing strong sales in the first quarter, brushing aside the seasonal factor. Jordan will elaborate later. However, the coronavirus outbreak currently taking place in China and all over the world does represent a major uncertainty to our operations, especially for the short term. We are working extremely closely with both our customers and suppliers in our joint efforts to mitigate the risks.

We have started to see some downward adjustments of Q1 forecast over the past week or two, mainly from certain China based customer for small sized display drivers and CMOS image sensors, who are still scrambling to restore their operation into order. Our Q1 guidance below has taken into account those downward adjustments. In comparison, we're seeing relatively little impact of forecast from large display customers who are demanding that our supply be uninterrupted by the incident. With mass majority of operations located outside of China, our suppliers are largely unaffected by the coronavirus outbreak. The focus there is primarily the logistic management, including the customs operation in various port in China.

It is worth pointing out that we have very little short term exposure on both customers and suppliers side and in terms of our own operations to Wuhan and the Hubei province, the epicenter of the outbreak. The situation is still evolving. On top of the downward adjustments of forecast we have seen, we have deliberately widened and reduced the low end of the quarter's guidance to reflect the risks associated with the coronavirus outbreak. For the first quarter, we expect revenue to increase between 110% sequentially, an increase of 8.2% to 7.8% on a year over year basis. Gross margin is expected to increase by one percent to 2% sequentially, depending on our final product mix.

IFRS profit attributable to shareholders are expected to be in the range of around minus $0.5 to positive $0.18 per fully diluted ADS. Non IFRS profit attributable to shareholders are expected to be in the range of minus $0.02 point dollars to positive $0.21 fully diluted ADS. I will now turn the floor over to Jordan, the CEO of the company.

Speaker 3

Thank you, Jackie. When we hosted our third quarter earnings call this past November, we were facing trends in the marketplace that created headwinds for us. Specifically, at that time, our performance and forecast reflected challenges we faced in our smartphone TDDI business. This was exacerbated by lower supply of capacity in the LCD industry that negatively impacted our display driver IC sales and margin. As a result, our overall sales and outlook were weak.

Since that time, we have started to see major turnaround in literally all aspects of our businesses. The strength we are seeing in Q1 is expected to extend to Q2 and throughout the rest of 2020. Now we're spending the uncertainty a reason from the coronavirus. We are confident that we will see decent growth across the board for our major product categories in 2020. Now let me take you through each of our major business areas.

Let's start with the large panel display IC For the first quarter, we expect the large display driver IC segment revenue to increase by about 10% sequentially. Sensing strong signs of panel price recovery, panel makers began to replenish their inventory and increase production. Starting the end of Q4 twenty nineteen, our leading Chinese panel customers are particularly active in getting further market share, taking advantage of Korean panel makers ongoing fab restructuring. As the leading IC supplier, Himax is well positioned to benefit from the increased demand coming out of the major Chinese flash display players.

These market trends that began to emerge during Q4 twenty nineteen are expected to drive strong results in Q1 that will accelerate throughout 2020. On the supply side, we reported during the last quarter's earnings call that Himax and some of our major panel customers were already seeing foundry capacity shortage of eight inch silicon wafers for display driver ICs. In anticipation of this, we have strategically prepared to ready our 12 inch foundry as well as associated back end package and testing ahead of our peers to cover the potential age capacity shortfall. Our design project coverage is strong across all leading Chinese panel makers. We are very positive on the business outlook for a large display driver for 2020.

Looking at technology development, the upcoming twenty twenty Tokyo Olympics will be broadcast in eight k resolution. All top tier TV brands have been trying to boost sales for eight k models ahead ahead of the event. At the CES last month, many of these brands showcase eight ks TVs that contain Himax technology. Although the penetration of eight ks TV is still low, we expect this to be a strategic opportunity for Himax as eight k TV sales will boost demands for not just our driver IC, but also coming controller contents. Now let me turn to the small and medium sized display driver IC business, beginning with an update on our smartphone segment.

Our TDDI product roadmap as well as new design wins with end customers and the foundry capacity advantage have positioned Himax to gain market share starting the first quarter and throughout 2020. The smartphone market continues to embrace new technologies and are moving toward higher frame rate displays to enable smoother screen viewing and gaming experience. This will attract the adoption of next generation high frame rate TDDI solutions for which Himax is a leading technology provider. Also, the demand for five g in China is expected to drive worldwide smartphone growth in 2020, which in turn stimulate the growth of TDDI. All these trends will benefit Himax.

However, as indicated earlier, the small display business, the amount which smartphone TDDI is the major item, will be the most impacted by the coronavirus outbreak in the short term. Again, we are working with our customers extremely closely, adjusting our operations to support their short term needs in combating the corona coronavirus outbreak. Regardless of the coronavirus, we are confident that our smartphone TDDI business will grow strongly from last year. The price erosion of TDDI that we have seen over the past year is expected to abate in 2020. This is not only because the new high frame rate products enjoy a higher ASP, but also due to the industry wide tightening of function capacity for TDDI.

As a reminder, during 2018, the high net CDD emphasis was negatively impacted by a severe foundry capacity shortage that resulted in our inability to meet customers' delivery requirements. Although the capacity constraint was resolved toward the end of twenty nineteen, the delay limited our ability to participate in major design in opportunities that would have driven the business in 2019. The actions we took in 2018 to 2019 period to develop enable an additional qualified foundry partner, the head of our peers, combined with our superior technology and customer collaboration, now uniquely position Himax to benefit from a tightening of overall TDDI foundry capacity in 2020. We are well prepared to meet TDDI production demands and continue to move forward with plans to enable additional capacity this year to capitalize on the strong opportunities for smartphone TDDI, as well as other applications such as tablet in 2020. I will elaborate a bit later.

As expected, our traditional discrete driver IC sales into smartphone posted a sequential decline for the fourth quarter. This was primarily due to the traditional discrete driver IC's addressable smartphone market is quickly being replaced by TDDI and AMOLED. As discussed previously, a major development we are seeing in the marketplace is increased utilization of the OLED display for smartphone. This is due to expanded OLED capacity as well as increased demand for under display fingerprint technology that is only available in AI OLED display for the time being. We are encouraged by the progress we have made collaborating closely with leading panel makers across China for AMOLED product development.

We believe AMOLED driver IC will soon become one of the major growth engines for our small panel driver business. In the automotive display segment, the number of displays per vehicle continues to rise as the overall automotive display market is set to increase from 2020 onward, despite that the global car sales are forecast to decline again this year. More importantly for Himax, the market is quickly shifting towards a number of new technologies, including higher resolution, in cell touch, slim border, giant pillar to pillar screen, local dimming for higher contrast, and plus the AMOLED for free form design, all of which are contributing to an increase in market size and demand for automotive display driver ICs. Himax commands more than 30 of the global automotive display driver IC market and is the primary partner for most of the world's automotive panel makers to enable the new technologies above. It is worth mentioning that Himax is also the dominant automotive TDDI technology provider, working as a sole supplier on numerous TDDI design projects across different leading panel makers.

While we expect only small volume shipment in 2020, we anticipate meaningful volume of automotive TDDI as we move into 2021. Turning to the tablet and consumer electronics business. We expect the tablet business to be a major growth area for Himax during 2020, with a significant volume of tablet TDDI shipments starting from Q1. The strong momentum will accelerate into Q2 and throughout 2020. The business growth will be driven primarily by leading non iOS brands, rapid adoption of the newly developed in cell TDDI solutions.

In cell TDDI is quickly becoming mainstream for tablets due to its lower cost and the simplified supply chain as well as faster and easier integration for display manufacturers. At the same time, customer demand is expected to accelerate for these cheaper, slimmer, lighter, and more stylish tablets. Himax is the primary partner for all non iOS tablet in cell TDDI products right now, then we are already making shipments of our new in cell TDDI products for template to a number of leading end customers, some of which include active stylus. Additionally, we continue shipping our traditional display driver IC with COF packaging for larger size tablets with slim bezel design to a leading Chinese brand customer and expect the momentum for this high end design to accelerate throughout 2020. For the first quarter, revenue for the small and medium sized driver IC business expected to increase by around 10 to 20% sequentially.

Now let me share some of the progress we made on the non driver IC business in the last quarter. First, on our WLO business, the fourth quarter shipments were very strong, up by over 20% compared to the same period last year, despite a modest decline from the previous quarter. The momentum led to higher capacity utilization and together with improved production yield helped enhance corporate gross margin for the quarter. According to our customers' shipment forecast, we expect another strong quarter with Q1 shipment volume to double compared with the same period last year. Although the Q4 shipment volume is expected to decline slightly from that of the last quarter.

We continue to make progress with our ongoing R and D projects for next generation products centered around our exceptional design know how and mass production expertise in WLO technology. Next is an update on the three d sensing business. In the smartphone segment, we have advanced our WLO optics solution to cover both structured light and time of flight or ToF three d sensing. We are seeing increasing ToF adoption by smartphone makers for world facing cameras to enable advanced photography, distance slash dimension measurement, and three d depth information generation for AR. In the past few months, we have been actively working with an industry leading ToF three d camera vendor to develop a new and advanced ToF solution targeting Android smartphones.

Leveraging on our WLO technology, we have made great progress providing a partner with spot projector for their reference design, which will be ready for the EV Android smart makers evaluation as soon as Q1 twenty twenty. Our most smartphone three d sensing engagements have focused on smart door lock and industrial automation segments where we provide structure light based three d sensing total solution. We've been collaborating closely mainly with two types of partners, those with industry leading expertise in facial recognition algorithms and those offering application processes with strong AI capability. We have started design projects with several smart door lock end customers. Separately, as we previously mentioned, we are working with partners who wish to take advantage of our three d sensing know how to achieve efficiency improvement and cost reduction in traditional manufacturing.

One market opportunity we are pursuing is shoe factory automation. I'm pleased to report that prototypes of three d sensing enabled automatic robotic cementing system are available right now for production optimization testing. Next on WiseEye, our AI based ultra low power smart sensing solution. The demand for battery powered smart device with AI intelligent sensing is rapidly growing. Our total solution is built on ANZAS unique AI based algorithm on top of Himax's proprietary computer region processor and CMOS image sensor, all equipped with ultra low power design.

Currently, laptop is the market of focus. Himax Wi Fi two point o MB solution provides a laptop ready three in one RGB slash IR slash AI solution, respecting privacy or enhancing security for notebook users. At the CES two twenty twenty, the number of notebook OEMs and ODMs demonstrated our Wi Fi NB solution in their next generation premium notebooks with positive feedback. In addition to notebook, we have also made progress in the display and IoT markets. InnoLux, one of the world's leading manufacturers of tier two LCD displays, has integrated the Himax Enza wide side solution into displays to enable consumer privacy protection in real time.

Also, Chicony, one of the leading ODMs in the world, and ANSA jointly announced the reference design of the world's first battery powered human sensing solution for IoT in December 2019. Both Inalox and Chiconic showcased their products at the CES. Previously, we mentioned that in addition to total solution, Himax is also able to offer ultra low power smart sensing on the basis of individual parts so as to address the market's different needs and maximize the potential opportunities for Himax. I will elaborate on this in the CMOS image sensor discussion below. On CMOS image sensor business update.

CMOS image sensor is another critical part of the WiSight two point o MB solution. Solution. To support the lean camera design and high quality image needed for thin bed or laptops, we have made a two in one sensor that offers the dual capabilities of high quality HD image image capturing and ultra low power, low resolution visual sensing in one single sensor. The industry's first with such 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 to provide context awareness for a better user experience.

Our sensor has also incorporated RGB IR design to enable Windows Hello facial recognition. This two in one CMOS image sensor is currently available for partners slash customers. In addition, we recently announced the commercial availability of the industry first ultra low power and low latency backside illuminated CMOS image sensor solution with autonomous modes of operations for always on intelligent visual sensing applications such as human presence detection and tracking, gaze detection, behavioral analysis, and post estimation for growing markets such as smart home, smart building, healthcare, smartphone, and ARVR devices. We are collaborating with leading partners within the ecosystem to reduce time to market for intelligent edge vision solutions. Notably, we are working closely with Google and have become the relevant design for its world leading TensorFlow Lite AI framework targeting low power edge devices.

For the traditional human vision segments, we see strong demands in notebooks where we are one of the market leaders and have experienced increased shipments for multimedia applications such as car recorders, surveillance, drones, home appliances and 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 air costs, we continue to focus on AR goggle devices and head up display or HUD for automotive. Many of our industry leading customers have demonstrated their state of the art products, including holographic HUD, AR glasses, and LiDAR system with Himax ELCOs technology inside at the twenty twenty CES with positive market feedbacks. Our technology leadership and proven manufacturing expertise have made us a preferred partner for customers in these emerging markets and their ongoing engineering project is AR goggles and SUV for automotive applications.

For non driver IC business, we expect revenue to decrease by single digit sequentially in the first quarter. Aside from the WLO sales, which I just mentioned are expected to be down slightly, the CMOS image sensor sales for multimedia markets have been affected by the coronavirus incident as the operations of many of the customers here are still not totally back in order. That concludes my report for the quarter. Thank you for your interest in Himax. We appreciate you joining today's call and are now ready to take questions.

Speaker 0

Thank you. Our first question comes from Jaeson Schmidt with Lake Street. Your line is open.

Speaker 4

Hey guys, thanks for taking my questions. I just want to start on the TDDI business. It sounds like you're seeing some nice traction given some pricing tailwinds this year. But outside of that, do you think some of the strength is really being driven by overall market growth or share gains as well?

Speaker 3

Definitely, it is driven primarily by our share gains and the market momentum. Certainly, five g is going to help. And and certainly that together with the current the the issue of capacity constraint and also unique position for having a mature and sizable and ready to offer capacity that all these factors combined, I think it's going to add to our strong momentum expected for this year for TDDI.

Speaker 4

Okay. That's helpful. And then just curious if you could comment your thoughts on what channel inventory looks like in the Chinese smartphone market.

Speaker 3

It's a it's a it's a tricky question. You're talking about smartphone. Right? Am I correct? Yes.

Okay. Again, it's a it's a tricky issue because the coronavirus situation, I think, is is making things pretty blurry for us for the time being. Although I think things will get clarified soon. Having said that though, I mean, the the situation is indeed evolving. I think I I would just like to, you know you know you know, probably further elaborate on your question.

I think I I mentioned earlier in my in my prepared remarks that we have taken into account over let me rephrase it. We have discounted already the the the impact coming out of the virus into our guidance. Right? And on top so so what we've seen with company in our guidance, and on top of that, we have further widened our guidance on the lower end just in case because as I said earlier, you know, it's still evolving. And so if you ask me so exactly how much impact the coronavirus is going to have on our q one result, I would say around 10% or even more.

Around 10% or even more of our total sales. And that is primarily coming from small panel, in particular, It's also smartphone TDDI effect. Now I'm sure you all you're going to wonder why smartphone and why not large panel. I think long story short, it is primarily because as many of you knows, the larger the panel size, the less likely the panel makers are going to outsource their module assembly to third parties and vice versa. So so in in the case of TV, it is highly unlikely.

Actually, it is we are not seeing that at all that panel makers are also seeing their module assembly to outsiders. IE panel makers are making their modules themselves. And and smartphone, you know, happens to be the smallest in size in in display in display. So it is the most likely that the module assembly is outsourced to third parties. Some of them are actually designated by end customers.

Now it is the module side of the operation which purchase our ICs, not the front end side. So so right now, what we're seeing is that a lot of small players, specialty module assembly houses who are primarily focusing on smartphone for the reasons I mentioned earlier. They are they are business because they are smaller in size. Their business is not entirely in order. Right?

They are some of them, even the boss or the employees are not even back to the office because of all these constraint created by the virus situation. And also it is a lot more likely to for for for such small smaller module houses to react quickly to any order changes because IC for small panel size accounts for a larger percentage of their total cost. So they are very sensitive to to inventory cost. Quite for large panel, especially very large TVs, I see a couple of very small portion of their cost. So they they there's a concern over there is that they they need to make sure their IC is not secured.

Otherwise, you know, if they continue to produce sale, which they are doing right now, regardless of the virus situation, you know, there will be a a serious shortage, you know, when they are ready to ship. So so that that kind of explains why the smartphone is the the most severely impacted. And again, I think, you know, after discounting about 10% or even more of the impact that we saw over the last two weeks also out of the coronavirus situation. We are we are giving the guidance. And on top of that, we also widening our low end just to accomplish further uncertainty.

Having said that, though, I I we believe this is short term situation. Although, I don't have the crystal ball, so I don't know, you know, how long this so called short term is going to last. But I I I we believe the the market is still there, and the fifth five g is still going to take off. And the smartphone, you know, again, given our, you know, good, you know, pipeline, you know, our our capacity, our our our foundry capacity advantage, our design win, etcetera, etcetera. I think most likely we are going to see explosive growth in in starting June 2.

So so that that is already on top of how we indicated around 10 to 20% sequential increase for q one expected. That that is Okay. Think an extended answer to your question, Jason.

Speaker 4

No. That's that's very helpful. Appreciate that color. And then just last one for me, and I'll jump back into queue. You're expecting some pretty nice gross margin expansion here in q one, sorry, 22% at the midpoint of guidance.

Should we assume that that is the low watermark for the year? Do you still expect gross margin to expand as we progress throughout 2020?

Speaker 3

I certainly believe so. I certainly believe so. We we expect in 2020 that the gross margin to further improve because both smartphone small size and ultralight size foundry capacity are both facing constraint. I mentioned again and again earlier in my prepared remarks. So that is going to provide a good price support.

And also, specifically, for example, TDDI, new products, we're going to enjoy better ASP, known drivers such as a AT Con, for example, you know, where actually it's we we keep saying the penetration is low for ATV, but we do have a major major market position if it's really going to take off. Right? So, again, that is high SP and high margin. So other known driver products as well are are are going to enjoy better SP and margin. So I think we we have a strong level of confidence that 2,019 gross margin is is is extraordinarily is is extraordinarily low, and we certainly expect a good rebound from that in 2020.

Speaker 4

All right. Thanks a

Speaker 3

lot guys. Thank you, Jason.

Speaker 0

Thank you. Our next question comes from Suji Desilva with Roth Capital. Your line is open.

Speaker 5

Hi Jordan. Hi Jackie. Congratulations on the progress here. The TDDI market, it seems like it's a tight supply and firm pricing. How many quarters you think that situation can persist before pricing competition resumes competitively?

Speaker 3

Well, I think right now what we're seeing is the customers and customers included are very anxious about capacity access. So unlike this is a very, very different situation from none of last year. So, you know, I mean, fair enough, we we do have this virus situation. But I think overall, again, we believe the total market size are not going to there could be some, you know, small haircut, although TDDI market share was continued to grow within a year. So I I we we don't think we we think TDI to low market is going to further grow this year, and and that is going to make the situation tighten situation a real issue for for both our direct customers and end customers.

Himax Technologies - Earnings Call - Q4 2019

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