Himax Technologies - Earnings Call - Q4 2021

Transcript

Speaker 0

Hello, ladies and gentlemen. Welcome to the Hemex Technologies Inc. Fourth Quarter and Full Year twenty twenty one Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session.

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Mark Schrohlenberg from MC Group.

Speaker 1

Thank you. Welcome, everyone, to Himax's fourth quarter and full year twenty twenty one earnings call. Joining us from the company are Mr. Jordan Wu, President and Chief Executive Officer Ms. Jessica Pan, Chief Financial Officer Mr.

Eric Lee, Chief IR, PR 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 results 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. Cw. Unless otherwise specified, we will discuss our financials based on non IFRS measures.

You can find the related reconciliation to IFRS on our website. 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 results or events to differ materially from those described in this conference call. These factors include, but are not limited to, the effect of the COVID-nineteen pandemic on the company's business, general business and economic conditions in the state of the semiconductor industry, market acceptance and competitiveness of the driver and nondriver products developed by the company, demand for end use applications, products, reliance on a small group of principal customers, the continued success in technological innovation, our ability to develop and protect our intellectual property, pricing pressures, including declines in average selling prices, changes in customer order patterns, changes in estimated full year effective tax rate, shortage in supply of key components, changes in environmental laws and regulations, changes in export license regulated by export administration regulations, EAR, exchange rate fluctuations, regulatory approvals for further investments in our subsidiaries, our ability to collect accounts receivable, and manage inventory and other risks described from time to time in the company's SEC filings, including those risks identified in the section entitled Risk Factors in its form 20 f for the year ended 12/31/2020 filed with the SEC as may be amended.

Except for the company's full year of 2020 financials, which were provided in the company's 20 f and filed with the SEC on 03/31/2021, 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 we subject our annual consolidated financial statements and may vary materially from the audited consolidated financial information for the same period. The company undertakes no obligation to publicly update or revise any forward looking statements, whether as a result of new information, future events, or otherwise. I will now turn the call over to Mr. Eric Li.

Eric, the floor is yours.

Speaker 2

Thank you, Mark. Thank you, everybody, for joining us. My name is Eric Li, and I am the Chief IRPL Officer. Joining me are Jordan Wu, our CEO and JCPen, our CFO. On today's call, I would first review the Himax consolidated financial performance of the fourth quarter and full year 2021, followed by the first quarter twenty twenty two outlook.

Jordan will then give an update on the status of our business, after which we will take questions. Our fourth quarter revenue was at the upper end of guidance range. While gross margin and EPS both exceeded the guidance issued on 11/04/2021, The fourth quarter revenues, gross margin and EPS all reached new records. Full year 2021 revenues surpassed $1,500,000,000 along with record gross margin and EPS. For the fourth quarter, we recorded a net revenue of $451,900,000 an increase of 7.4% sequentially and an increase of 63.9% compared to the same period last year.

Gross margin was 51.8%, an increase from the already high level of 51.7% in the third quarter and above our guidance of around 50%. Non IFRS profit per diluted ADS was 84.9¢, exceeding the estimates of 78¢ to 83¢. IFRS profit per diluted ADS was 81.5¢, higher than guidance range of 74.5¢ to 79.5¢. Revenue from large discrete driver was a $125,000,000 in q four, up 6.3% sequentially and near double year over year. Monitor revenue came in better than expected, up more than 30% sequentially, ahead of our prior guidance of a more than 20% increase due to accelerated orders for high end monitor from certain end customers.

Notebook sales continued strong growth momentum, delivering double digit sequential growth as a result of strong shipment of high end products toward leading notebook vendors. As expected, the fourth quarter TV IC revenue was down single digit sequentially on the backdrop of sluggish global TV market. In some cases, where TV customers who borne shipment liability to us and suffered business headwinds, under mutual consent, we redirected their vacated foundry capacity towards IT displays where demand stays strong. It was through such efficient operating execution that we were able to achieve sales growth for the large display driver business despite the slow TB market and further reinforce the business relationship with strategic customers. Large panel driver IC accounted for 27.7% of total revenues for this quarter, compared to 27.9% in the 2021 and '20 3.3% a year ago.

Small and medium sized display driver saw resilient sales with revenue of $276,600,000 up 9.6% sequentially and up more than 50% year over year. The automotive segment has repeatedly been the fastest growing sector among our small and medium sized display driver segment, with sales up more than 20% sequentially this quarter. It's worth highlighting that the e paper business, another product in our small and medium sized driver line up and one of the decent margin, enjoyed more than 80% sequential growth in Q4. Small and medium sized driver IC segment accounted for 61.2% of total sales of our quarter, compared to 59.9% in the previous quarter and 64.5% a year ago. In Q4, smartphone, tablet and automotive driver businesses contributed about the same sales, with automotive significantly outgrowing the other two segments, a trend that we believe will continue over the next few years.

The fourth quarter smartphone sales reached $91,300,000, up double digit sequentially and up more than 30 compared to the same period last year due mainly to higher shipments to key customer despite the outbreak of COVID nineteen variants weighing down the worldwide smartphone market. The smartphone segment represented around 20% of our total sales in q four. Our supply for smartphone was still limited by the total capacity accessible to us, where we could only support shipments to select end customers. Amidst a slow tablet market, our tablet revenue reached $85,800,000 a decline of single digit sequentially, but up around 30% year over year. The decline was caused by shrinking traditional DDIC shipments, while TDDI sales were slightly better than record level in Q3 and represented the eighth consecutive quarter of growth since initial production from the first quarter of twenty twenty.

We maintained our leading market share position in the non IOS tablet market with associated TDDI penetration among leading name brands. Tablet revenue in the quarter accounted for 19% of total sales. Our first quarter revenue for automotive set another record amounting to $89,100,000 up more than 20% sequentially and up more than 130% year over year. Thanks to our strong shipment in high end DDIC product, rising TDDI shipment, as well as market share gains across numerous automotive customers. As panel inside vehicles continue to grow in quantity, size, and include more advanced features, we expect to see sustainable, robust growth in our automotive business.

Fourth quarter revenue from our non driver business was $50,300,000 slightly down sequentially and up around 50% year over year. We are pleased to report that our ultra low power AI image sensing total solution successfully entered into mass production in Q4 last year for a major tech name over a mainstream application. We reached this major milestone just one year after we delivered the first samples, a remarkable achievement and illustration of the robustness of our AI solution. CMOS image sensor sales were up mid teens, while TCOM business decreased by low teens sequentially as a result of slow demand in TV and Chromebook. However, on a year over year basis, T COM sales were up more than 70%, a reflection of our leading position across four ks, eight ks TVs, gaming monitor, and low power notebook.

Non driver products in Q4 accounted for 11.1% of total revenues, as compared to 12.2% in the 2021 and twelve point two percent a year ago. Now ISIS gross margin for the fourth quarter suspended at high level of 51.8%, a continuation from 51.7% of last quarter, and greatly increased from 31.2% of the same period last year. The higher gross margin was the reflection of better mix towards high end products area and a more favorable IC pricing environment resulting from tight foundry capacity. IFRS gross margin was also 51.8% for the quarter. Our non IFRS operating expenses for the fourth quarter was $48,500,000 up 9.1% from the previous quarter and up 11.5% from a year ago.

The sequential increase was a result of a one time cash bonus at the December to further reward employees for the remarkable financial results, while the year over year increase was caused mainly by increased salary. ISR's operating expenses were $56,000,000 for the fourth quarter, down 18.2% from the preceding quarter, but up 27.9% from a year ago. The difference was mainly due to annual bonus compensation, which we award employees at the September each year. Reflecting the higher sales and better gross margin, The fourth quarter non IFRS operating income was $185,500,000 or 41.1% of sales, versus 41.2% of sales in the last quarter. Again, the Q4 operating income reached a historical high.

Now IFI's after tax profit was $148,400,000 or 84.9¢ per diluted ADS, a new record high and an increase from $138,900,000 or 79.5¢ per diluted ADS last quarter. Now let's have a quick review on the 2021 full year financial performance. Revenues totaled $1,547,100,000 in 2021, representing 74.4% growth over that of 2020. The ongoing efforts of the pandemic, coupled with the foundry capacity shortage, created a challenging operating environment, yet also provided favorable conditions for IC vendors such as ourselves with overall market demand far outpacing supply. Among our three major product categories, small and the medium sized display drivers posted the highest growth of 86.8% in 2021, with sales totaling $963,500,000 We saw extraordinary business momentum, particularly in tablet and automotive sales in 2021, as the leading non iOS tablet brands all adopted our tablet TDDI solution.

And automotive displays continued to evolve at rapid rate in the number, size, and sophistication. Automotive sales enjoyed the highest growth among all product lines in 2021, up more than 110%, while sales for tablet IC, our top sales contributor in 2021, grew 77%. Smartphone and e paper sales were up more than 8523%, respectively, in 2021. Revenue for large panel display drivers totaled $397,900,000 in 2021, representing annual growth of 65.3%. During the pandemic, the surge in IT demand our notebook display IP sales significantly, up more than 370%, whereas monitor display sales increased more than 30%.

TV sales were also up by more than 40% despite the dip in worldwide TV shipments during the second half of the year. Non driver product sales totaled $185,700,000 an increase of 42% from last year. The increase was mainly from TEACOM sales, more than doubled AMETS' growing needs for high frame rate and high resolution displays. CMOS image sensor business, severe capped by capacity constraints throughout the year, was up mid single digit from the strong demand in notebook and web camera for work from home and online education. This annual sales increase was offset by WLO, Wafer Level Optics, as the legacy product of a major customer gradually decreased.

Now, IFRI's gross margin in 2021 was 48.5%, greatly increased from 24.9% in 2020. The increase was mainly a reflection of more favorable IC pricing and the product mix resulting from the tight foundry capacity, as well as increasing contribution from high margin product lines, especially in automotive notebook drivers and TCOMs. Non IFRS operating expenses were $171,500,000 up $15,200,000 or 9.7% due to higher salary expenses. And a cash bonus we awarded our employees at the December. Despite the anti dollar appreciation against the US dollar during 2021, the currency such as fluctuations to Himax were of limited impact as we accounting as our accounting was US dollar denominated, the same as the bulk of our buying and the selling activities, thereby creating a new natural hedge.

The stronger NT dollar in 2021 did contribute to around $4,600,000 of operating expenses increase as we paid the salary of the Taiwan based employees and much of the Taiwan local incurred expenses in NT dollars. Yet, the non IFRS operating expenses ratio of 2021 was reduced to 11.1% from 17.6% in 2020, indicating our consistent and prudent management of operating expenses. IFRS operating expenses were $203,600,000 up 40,700,000 or 25% compared to last year. The increase came mainly from the portion of the annual bonus compensation we employees at the September each year. Reflecting higher sales and better gross margin, non IFRS operating income was $578,300,000 or 37.4% of sales, an increase of $513,700,000 from $64,600,000 in 2020, for the same reason, but partially offset by increase of annual bonus compensation.

IFRS operating income was $545,000,000 in contrast to $57,900,000 in 2020. Our non IFI's net profit for 2021 was $463,600,000 or 265.1¢ per diluted ADS, up 411,200,000 from $52,300,000 or 30.2¢ per diluted ADS in 2020. IFSI's net profit for the year was $436,900,000 or 249.8¢, up $389,800,000 from $47,100,000 or 27.2¢ per diluted ADS in 2020. The upswing in income was a result of better sales, higher gross margin, along with well managed operating expenses. Turning to the balance sheet.

We had $364,400,000 of cash, cash equivalents, and other financial assets as of 12/31/2021, compared to $201,400,000 at the same time last year, and $250,800,000 a quarter ago. The higher cash balance was mainly from a $182,200,000 of operating cash inflow during the quarter and the payment received from customers for the purpose of securing their long term chip supply, partially offset by payments we made in order to secure our long term foundry capacity. Restricted cash was $154,100,000 at the end of Q4, compared to $156,800,000 a quarter ago and $104,000,000 a year ago. The restricted cash was mainly used to guarantee the short term secure borrowings for the same amount. We had $52,500,000 of long term unsecured loans as of end of Q4, of which $6,000,000 was current portion.

Our year end inventory were $198,600,000 up from $160,900,000 last quarter and up from $108,700,000 a year ago. Amidst tight foundry capacity, where demand still outpasses supply, we continue to pursue an aggressive inventory build out strategy. The vast majority of our inventory position now is comprised of working processed goods, while finished goods are promptly shipped as soon as they are available. Accounts receivable at the December 2021 was $410,200,000 slightly up from $400,900,000 last quarter and up from $243,600,000 a year ago due to higher sales. DSO was ninety seven days at the quarter end as compared to one hundred days both a year ago and from last quarter.

Fourth quarter capital expenditures were $2,000,000 versus $1.2100000.0 last quarter and $800,000 a year ago. The fourth quarter CapEx was mainly for R and D related equipment and in house testers of our IC design business. Total capital expenditure for the year was worth $7,600,000, mainly for design tools, ID related equipment, as well as in house tester of our IC design business, as compared to $5,800,000 in 2020. As of 12/31/2021, Himax had 174,300,000.0 ADS outstanding, unchanged from last quarter. On a fully diluted basis, total number of ADS outstanding for the fourth quarter was 174,800,000.0.

Now turning to our first quarter twenty twenty two guidance. Coming off of the record revenue results from Q4 twenty twenty one, we expect first quarter revenue to decline 5% to 9% sequentially, yet still better than off season sales we typically experience during the Lunar New Year season with fewer working days. The guided range implies a year over year increase of 33% to 39% in revenues. Now, IFI gross margin is expected to be around 46% to 48%, depending on the final product mix. Now, ISIS profit attributable to shareholders is expected to be in the range of 0.67 to zero seven three dollars per fully diluted ADS, down 21% to 14% sequentially, but up 74% to 90% year over year.

IFRS profit attributable to shareholders is estimated to be in the range of 63.5 to 69.5¢ per fully diluted ADS. I would now like to turn the call over to Jordan. Jordan, the floor is yours.

Speaker 3

Thank you, Eric. Our spectacular results in 2021 were achieved thanks to macro level tailwinds, our efforts to secure solid capacity and a steadfast focus on optimizing product mix and solidifying strategic customer relationships. All these factors contributed to the record sales and profit margins. Now as we look ahead into 2022, against the backdrop of the industry wide foundry capacity shortage, which is expected to extend well into 2022. The visibility into certain areas of consumer electronics is rather limited, with global consumption potentially impacted by the ongoing COVID-nineteen pandemic, port congestion, worldwide inflationary pressure, and worries over geographical conflict.

However, we are upbeat about our year ahead growth prospect backed by a few product areas, notably the automotive and ultra low power AI image sensing businesses, which we feel confident will stay strong regardless of the macroeconomic concerns. We anticipate these two product areas, both with good gross margins will outgrow other product lines in 2022. Robust demands for our traditional automotive driver IC is backed by strong foundry capacity support, while automotive TDDI is on track to experience exponential growth throughout 2022 and beyond. We expect to reach 10,000,000 units cumulative shipments in automotive TDDI in as soon as the second quarter of this year. In the first quarter of twenty twenty two, our automotive product sales, including traditional driver IC, TDDI, T Con and OLED driver are expected to represent more than 25% of our total sales.

As a contribution of automotive revenue grows, it will better position our long term product mix in terms of both profit margin and business visibility. Meanwhile, we are highly encouraged by the early success we have seen with ultra low power AI image sensing business last last last last far after a leading customer adopted it for mainstream application. We expect to see more design wins awarded across broad customer base and a high variety of applications leading to robust sales growth for this new high margin product line. Now let me quickly address the ongoing foundry capacity shortage. We expect the supply demand balance to continue throughout 2022, especially on the mature nodes that we are primarily anchored to.

Himax has been proactive in this regard, continuing to pursue new partnerships and agreements to increase our available capacity and achieve our 2022 business goals. In the meantime, we entered contractual agreements with the vast majority of panel makers and in some instances select leading end customers who either prepay or make a deposit to secure their long term chip supply which in turn also improves our business visibility. While pricing has stabilized recently on both the foundry and customer sides, we guided for a modest sequential decline in gross margin for the first quarter due to a couple of factors. First, our cost of goods sold this quarter represents pricing from the previous quarter when foundries were still raising their prices. Second, in the fourth quarter we benefited from expedited orders from customers who pay the premium and we have since seen a decrease in such orders during the first quarter.

On a year over year basis, however, our first quarter margin will still be substantially higher. Looking ahead into 2022, backed by more secure foundry capacity than last year and advanced product portfolio, we are well positioned to continue to grow our top line and we'll continue to work towards maintaining a high gross margin, one of our major long term business goals. We're in, we anticipate further revenue and profit growth in 2022. With that, now let us start with an update on the large panel driver IC business. Historically, the first quarter has seasonally been the slowest of the year due to the Lunar New Year holidays.

In addition, we are seeing softness in certain market segments and intensified China local competition. Nevertheless, Himax is armed with a diversified and comprehensive product offering covering TV, monitor and notebook, which provides us with the flexibility to take actions in tandem with our customers and suppliers to direct production towards the sectors with stronger demand. For the first quarter, large display driver IC revenue is projected to be flat to slightly down sequentially, but this will represent an increase of around 70% year over year. Despite the low season, TV IC sales are expected to be around flat sequentially in the first quarter, anchored by high end and large size TV IC shipments to key accounts. Conversely, we expect both monitor and notebook IC sales to drop from last quarter due mainly to panel customers' inventory adjustments in response to the slowing sales momentum after consecutive strong quarterly increases.

Foreseeing the continuation of the prevailing foundry shortage and the demand for advanced displays to remain strong, We continue to move towards higher end markets while providing advanced driver ICs and T cards for a one stop shopping experience, focusing on higher end displays and premium models for the respective video end customers in TV, monitor and notebook markets. We are also supporting further future upgrades for customers' next generation products, including high speed interface, low power consumption, higher refresh rates, ultra large sized, high aspect ratio, and curved view design. All these will help boost our profit margin and represent a high barrier of entry that differentiates us from China local competition. We remain positive on our last display driver IC business for 2022. Now let's turn to the small and medium sized display driver IC business.

In the first quarter, revenue is expected to slightly decline by mid single digit sequentially by increase around 30% year over year. Sales for automotive drivers again are poised to post another quarter of strong growth, up over 30% sequentially, while tablet sales are expected to be down mid single digit and smartphone IC business to decline double digit sequentially. Now let's review these three major product segments within the small and medium sized display driver IC business. First, on automotive sector. Order backlog and secured multi year foundry capacity provide good long term visibility for Himax in the automotive driver IC business where we have a leading global market share of 40%.

Act by strong design win coverage with all major panel houses and numerous carmakers alongside a enlarged capacity. We expect the automotive sector to be our number one sales contributor starting 2,022. We are now targeting to couple our autumn automotive sales again in 2022 on top of the already strong 2021 sales, which went up more than 110% from the year before. For the first quarter, our automotive driver IC sales are expected to grow over 30% sequentially, an increase of more than 170% year over year. More specifically, we expect the Q1 automotive DDIC sales, still much larger than those of TDDI and AMOLED, to grow over 20% sequentially on its own, accounting for more than 20% of our total sales.

Now we're standing the decent growth, we are still suffering from a severe foundry capacity shortage for automotive DDIC, which is the area with the most severe shortage for us right now. The automotive TDDI, where we are much better positioned, much better prepared in terms of foundry capacity. It's set to outgrow DDIC going forward. Currently, we are leading the market with hundreds of design win TDDI projects across the board with world leading panel makers, tier ones, and automotive OEMs with just a small portion of them already in mass production. We announced earlier that our gen two automotive TDDI, which we started ramping as recent as q three last year, achieved 1,000,000 units during the first quarter of shipment alone.

The Gen two automotive TDDI has become the mainstream product shortly after introduction to the market and already dominates our shipments right now. Our automotive TDDI shipment reached around 1,400,000 units in the fourth quarter last year, and we expect to ship considerably over 3,000,000 units in Q1 this year. Automotive TDDI brings us not only much higher content value on a per panel basis, but it's also harder to compete compete in for late commerce. Automotive TDDI, still a relatively new technology, has become a major growth engine for us with the accelerating momentum expected to carry over throughout 2022 and the years ahead. Looking at the automotive display industry trends, the car market continues to embrace sophisticated display technologies and caters to interactive stylish and curved designs with ever improving display resolution and image quality.

There is also a shift towards more and larger size displays per vehicle than ever before, all indicating much more driver IC demands. Himax is the market leader in automotive display driver business covering the entire spectrum of products and technologies, including the industry's most comprehensive traditional DDIC product offerings, as well as leading solutions for new technology areas such as TDDI, low dimming TCOM, LTDI, and OLED. For automotive TDDI, it's a technology that is essential for large sized, stylish, and curved automotive displays. We pioneer the mass production of the new technology back in 2019 and have shipped cumulatively millions of units since. We continue to dominate new project design wins with direct and indirect customers across the continents.

For larger than 30 inches, slim and curved automotive displays, we again industry by introducing cutting edge LTDL technology that strives for seamless incorporation of sophisticated touch features with smart chip design architecture. We are encouraged by the progress made in recent quarters, having increased design win coverage across panel makers and engaged more TOS and OEMs for them to incorporate our LTDI into their new vehicle models. Some of them are slated for mass production starting the first half of twenty twenty three. With the commencement of TDDI mass production and LTDI thereafter, we are confident that our overall market share in the automotive display driver market will continue to rise in the coming years. Next on smartphone and tablet businesses.

Expect Q1's smartphone ID business to decline double digit sequentially, challenged by slowing sales in the global smartphone market. Inventory held in stock by smartphone makers and last but not least, longer production cycle of a new product, a factor which is specific to Himax by only during this quarter. In Q1, amidst the worldwide smartphone slowdown, we strategically initiated a product transition plan for key customers next generation new designs that support higher frame rate ultra slim bezel and higher resolution features. The new generation products is designed with more masking layers and therefore requires longer production time, which during the first quarter of production will lead to less output. The product's output is expected to be back to normal starting from the second quarter.

Our tablet sales are expected to decline mid single digit in Q1 due to worldwide tablet market adjustment from a high level. However, our TDDI sales akin the seasonality are expected to be up single digits sequentially in the first quarter, benefited by the proactive adoption by all leading non IOS tablet names of our TDDI solutions. We continue to see an acceleration in TDDI penetration for tablets following surgeon needs for larger size displays, higher frame rate, and active stylus features. As the dominant tablet driver IC supplier for literally all non iOS tablet vendors, our TDDI solutions continue to gain traction and are adopted broadly in customers next generation tablet products. Among all, we are seeing fast expanding education tablets for our tablet TDDI with active stylus feature has been widely adopted by several leading Chinese players.

Turning to the e paper driver business, another product in our small and medium sized driver lineup. Our e paper business, which currently only represents a small portion of total sales, is set to grow by more than 100% sequentially and more than 240% year over year in Q1 driven by the early ramp up of projects with leading customers and backed by long term supply agreements. We are collaborating with four leading e paper customers for certain ASIC projects on their next generation products. This consolidates our market presence in the emerging e reading and e signage segments from 2022 and onward. Next, for an update on AMOLED.

Himax continues to gear up for the AMOLED driver's development in partnership with major Chinese and Korean panel makers. In Q1, our flexible AMOLED driver and TCOM for automotive application successfully ramped up for customers' flagship EV model. The number of awarded projects for our automotive OLED ICs is growing with further EV vendors. In addition, our OLED for tablet is expected to commence production in the second quarter of this year with Chinese panel makers. As for smartphone, we continue to commit R and D resources to AMOLED driver ICs through engagement with top tier customers.

In view of serious constraints on OLED display driver capacity in the next few years, we have also secured meaningful capacity for smartphone OLED drivers. Now let me share some of the progress we made on the non driver IC businesses. Let's start from the timing controller. We anticipate q one t count sales to decrease single digit sequentially as a result of weaker demand in TV and Chromebook novel sectors. However, on a year over year basis, T Con sales will be up around 50%.

We are optimistic about the long term growth prospect of the TCAM business where we have successfully positioned ourselves for higher end and higher value added areas including four keight ks TV, gaming monitor, and low power notebook in view of the consumers' pursuance of various new types of entertainment for film, television, and gaming. Additionally, we extend our TCAM product reach into automotive and gaming TV markets. Markets. Our cutting edge automotive logo dimming TCON has won numerous awards and penetrated into OEMs and Tier one carmakers' new premium models, with some of them slated for mass production starting in the second quarter of twenty twenty two. In the gaming TV market, we are also leading the industry by introducing the world's first two eighty eight hertz eight ks TV T Con in collaboration with major TV panel makers.

We believe the T Con segment will be one of the driving forces for our non driver business moving forward. Now switching gears to the ultra low power AI image sensing total solution, which incorporates Himax ultra low power CMOS image sensor, our proprietary AI processor, and CNN based AI algorithm. As reported earlier, the sizable order for a top tier NAM customers' mainstream application successfully entered mass production in q four last year, marking another impressive milestone for our new AI business within just one year since our initial release. We will give further details after the end customer's official announcement. We have also made good progress on this mainstream application with other leading vendors where the number of design in projects is increasing as we speak.

In addition to the success story I just mentioned, the second application we expect to see significant volume is in automatic meter reading or AMR, where our AI total solution has been widely adopted by numerous customers across a wide geo geographical area in China. Our power saving AI cameras deployed over the existing installed base of traditional water meters enable the water meter to automatically collect consumption data with AI operated locally on the edge. The device transmits only bite sized metadata to the server for billing and in time detection of normal consumption or leakage, eliminating the need for manual reading. The battery pack has a lifetime of over five years, with the outperforming conventional AMR solutions, which usually are in a bulky form with large battery packs and with our local AI capability have to transmit massive image data to the cloud to perform meter reading. We already seen accelerated deployment of our AI solutions to a wide range of applications, including notebook, home appliances, utility meter, automotive, battery powered surveillance camera, panoramic video conferencing, and medical, among other things.

Moreover, new design sockets are all the way as we look to leverage the collaboration with leading cloud service partners, such as Microsoft Azure and Google TensorFlow on their edge to cloud platform to drive further adoption on applications such as smart home, smart office, healthcare, agricultural retail, and factory automation. Last but not least, we are seeing numerous design in activities of our AI solution for Endoscope, an area we are extremely excited about that may represent an extraordinary game changer for the health examination industry. We report more detail in due course. We are very encouraged by the traction this relatively new product line has generated in a short amount of time and expect to see increasing sales contribution throughout 2022 and beyond. Lastly, given the recent surge of interest in the metaverse immersive technologies, I'd like to give an update on our optical related product lines to which we have committed years of R and D efforts.

Our LCOS, WLO, and three d sensing, three separate optical related technologies may individually or combined play a key role in enabling metaverse devices. To help users transit and connect seamlessly between AR slash VR devices and realize the right display and three d technologies are vital. AR glasses consider one of the ideal displays for metaverse applications. Feature vision augmentation onto the real world environment where users see through the glasses with virtual objects and or digital twins of realized objects projected by AI engines onto the glasses. For this, Himax showcases fronted Aerocos microdisplay, one of the tiniest display modules that offer a significantly brighter a higher bright a higher brightness, lighter weight, and lower power consumption, all making the technology ideal for AR headsets.

To further enable AR glasses, we offer WLO waveguide that propagates light patterns from the air hole displays in a predefined path towards the eyes. Furthermore, for virtual objects reconstruction or this digital wind formation, Himax provides industry's leading WLO and three d decoding technologies, which are essential in enabling both structured light and TOF or time of flight three d sensing. The three d sensing technology, when combined with image sensors, can also enable three d based gesture recognition, eliminating the need for handheld controllers, enhancing perception of the environment, which making the ideal technology for contactless interface for AR, VR devices. In all these technologies I just mentioned, we have a market leading position with our technology already embedded in various products of quite a few of the biggest tech names in the business and have shipped hundreds of millions in volume with proven production, with proven, product development and manufacturing track records over the years. While Metaverse is still years away from mass volume deployment, Himax is at the forefront of these key technologies to enable the industry and we are ready to bring the Metaverse to life through partnerships with tech industry's leading players who are aggressively investing in the space.

We will not miss the next big thing and are ready to seize the opportunities ahead. We will report additional progress in this new arena as it continues to develop. For non driver IC business, we expect revenue to decline high teens sequentially in the first quarter. That concludes my report for this quarter. Thank you for your interest in Himax.

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

Speaker 0

And our first question coming from the line of Tristan Yarra with Baird. Your line is open.

Speaker 4

Hi, good evening. I'm trying to reconcile the commentary that you had on the call about panel inventory adjustments and also some weakness in smartphones with supply expected to remain tight. So if you could help us understand I understand that you're improving your mix. But are you expecting those panel inventory adjustment to basically adjust very quickly? In which case then is the reason why you expect your supply to remain tight?

Is any other factors that I should considering to reconcile it to?

Speaker 3

Thank you, Tristan. I understand your question is directed towards only smartphone. Am I correct?

Speaker 4

Well, even overall, because I figure it is panel inventory adjustment eventually it can have an impact on the overall demand even though you mentioned that. Actually, I think the commentary that you had for panel inventory adjustment was if I if I heard well, in the large panel driver IC business.

Speaker 3

Right. Okay. Well, firstly, on smartphone, I mean I mean, I think everybody understands the market is ready to this slow globally. Having said that though, I think we are relatively immune from the slow market in the sense that we have relatively small exposure to the smartphone market with our sales currently only about 20% going to smartphone and limited ironically limited by capacity as we reported repeatedly, right, in the past. And and I will admit, I don't have very good visibility on smartphone when, as you correctly mentioned, you know, customers do have inventory pile up.

However, again, we we mentioned before our pool of capacity for smartphone and tablet is the same pool. It's the same thing. Right? So with the same limited amount of capacity available to us, we still have to have to make the choice of supporting tablet over smartphone because in tablet, we simply have a much higher market share with customers relying upon Himax a lot more than smartphone. So on a combined basis, in these two sectors, which is, you know, about 40% of our total sales, more than 40% of total sales combined, we are still running at a pretty serious shortage.

Although and so so I guess the the it's it's when I when we say the the market visibility is limited, I think if I speak to the customer across the board, whether it's smartphone tablet or TV or monitor or notebook, I think other than the very exception of automotive where we remain super positive, the the the shortage there is severe and we just, you know, are begging our foundries and the customers are begging us to ship more. Right? So if I put that aside, all other sectors, I would I would say, when I talk to customers across the board, nobody while nobody has a very upbeat growth prospect year over year, no one is also predicting a major decline either. And and that is a reflection of low visibility that we just, you know, iterated. However, on this level of demand, last year, we, as well as the whole the the the the whole industry, was running at a pretty severe shortage.

And we are also seeing no major capacity increase, right, at least throughout the entire 02/2022. Right? So last year, there was a shortage. This year, it is a highly highly unlikely demand is going to shrink in a meaningful way. So I think that is why as well as our peers are and our foundry partners as well, in fact, are saying, you know, the shortage is likely

That doesn't and and certainly, I think, you know, we if if there is if there should be a demand recovery, whether it's q two or the second half, I think shortly certainly will become more severe and vice versa, which, again, we have limited visibility. We just have to watch the market very closely. I don't know if that answers your question, Tristan.

Speaker 4

Yeah, no, I certainly appreciate the color. And then for my follow-up, I'm looking at the gross margin implications. Implications. So it sounds that as wafer pricing continues to go up, you weren't able to offset that or fully offset that in Q1 and thus, you know, that brings basically a little bit of a sequential decline in gross margin. Given what you've mentioned about demand and supply, do you think that you have the ability to have pricing match further wafer price increases throughout the year given the supply constraint that you've mentioned?

Or do you think that the inventory adjustment will prevent you from having pricing that will match your higher cost beyond Q1?

Speaker 3

I think firstly, we are not seeing major or meaningful further price increase of foundry from this point over, at least not in this year. Right? So our higher cost in this quarter is a reflection of the the pricing which took place in q four compared to q three. Right? So this is how our office is goes.

Right? We we negotiate a price. We agree a price with a foundry. We then place order, and they start fabrication process for us, which typically will then take three months and you pass a little bit for back end. So that becomes the shipment.

So q four, we will start becomes the q one shipments. Right? So the new prices we agree with foundry during q four become our cost for q one. And q three foundry price was higher than that of q three. Sorry.

Sorry. Let me repeat. Q four foundry price was higher than that of q meaning our Q1 shipping costs will be higher than that of Q4. I don't know if that is clear. And that explains why we have this short term decline in gross margin, a little bit of decline.

Because our customers are basically telling us, hey, you know, you have upped your prices a lot last last year. And now the market is slowing down and we we really cannot accept for the price up. So although our foundries are also telling us the same thing. Right? They are saying, well, it looks like the market cannot stop furthermore price hikes.

So although the foundry is saying the same thing to us, however, the price hike that took place in q four already was building into our q one cost, and that explains the the the a little bit of squeeze in our gross margin. Now going forward, again, I when I talked to all my foundry partners, no one is projecting further meaningful foundry price this year for the simple fact that, you know you know, if they raise the price for the the market may not be able to stop it given the overall market environment right now. However, despite the slow market, our customers are not squeezing us hard for price down. Why? Because our customers like us and like our foundry partners, we are all still worried about the overall tightness of our foundry capacity.

So we are kind of reaching a balance. How long the balance is going to last? I have no idea. As I said, if for the second half, the we we see a rebound in demand, then it will be good news for us and vice versa. Right?

So I think it's too early to tell. However, I think we are a lot more confident on our top line growth this year than gross margin, which is last year was 48.5% is pretty high level. So whether we can further expand on the 48.5% of last year, I have no, you know, total confidence. But we also don't think we will depart too much from that if if we have to go a bit a little bit lower. So with higher top line growth and a little bit uncertainty on gross margin, we still remain pretty good confidence confidence on our top bottom line as well.

I think that's a big picture of a quick summary of the full picture of our 2022 outlook.

Speaker 4

Great. That's very useful. Thank you very much.

Speaker 3

Thank you, Tristan.

Speaker 0

And our next question coming from the line of Jerry Su with Credit Suisse. Your line is open.

Speaker 5

Thanks for taking my question. Hold on. Just want to follow-up on your comment on gross margin. As you mentioned that foundry is not less likely to further increase the price in this year. And then I think you also mentioned that the automotive product will the largest contribution of your revenue.

So with this dynamic, does that mean that your gross margin actually could at least hold at, you know, the current 46 to 48% level, you know, if the end demand does not change too much.

Speaker 3

I think that's a fair assumption. Yes. I mean, given, you know, all other things pretty much staying or close to the current level. I think our mix is high likely to improve given the fact that we are very confident about our automotive sector outgrowing the others, while automotive in general enjoys better margin than the rest. So given all other factors being similar to the current level, then yes.

I think there's a good chance that we may actually sustain or improve our gross margin from this point onward.

Speaker 5

Okay. Got it. Hello? Then just a quick Yeah. Thank you.

Just a quick follow-up on the Q1 guidance for the non driver because I think you have guided non driver, but you only mentioned that timing control is declining single digit. I'm just wondering, you know, what is causing the, you know, the non driver business to see, you know, a double digit decline. Well, you know, what's the missing point here?

Speaker 3

I think TCON, there's a there's a short term sequential decline. Right? The Chromebook TV, you know, being soft, etcetera. You you know the story. Right?

So having said that, I think we are very confident about our TCOM growth for this year, year over year, I think overall. Because, you know, we mentioned, you know, we have positioned ourselves much better right now compared to a year ago when whether it's TV, notebook, and monitor. We are focusing on higher end products and having a stronger and more direct relationship with end customers. Right? So we are fairly confident about TCAM growth.

Also, in addition to that, our bundle sales approach, I think it's going to play play a role here as well. Bundle sale means means T con bundled together with driver IC. Right? It's a total solution. So so so we are saying T con sequential decline in this quarter will be a short term phenomenon.

For the whole year, we still remain confident. I think the you are saying the decline for non driver overall, the missing point, I think is in CMOS image sensor primarily. A little bit on WLO where, you know, our major customers, their legacy products is declining in volume, but that is playing much less impact on us now than before. CIS were the we have a major market share in notebook, and notebook short term demand is not good. Although notebook, I think if I may comment a little bit on CIS outlook for this year, for the notebook market is undergoing a major upgrade in CMOS in their camera from HD to full HD.

Right? So that is good news for us. So we are going to benefit, especially especially starting from second half of the year from this trend. Having said that, I think webcam, which was a major contributor last year because of the COVID situation. And, you know, when you can upgrade your your your your notebook, you you buy a new webcam to support your video conferencing.

Right? So so there was a major major surge in demand last year, but with COVID, you know you know, hopefully, you know, leaving us the work hand demand is likely to decline. Right? So so I think we are we are building in that that assumption into our CIS forecast and that result in a slower CIS. And also, you know, in q one, we do we do we do see the trend of our webcam having declined in projection.

Speaker 5

Okay. Got it. Thank you for the color. And then maybe just one last question. I think you spent some paragraph discussing the coverage.

The question is actually more related to the different display technology. You know, as I think in the previous couple of years, I've been shipping the alcohol for some of the AR glasses. But I think more recently, we can see that some of the, you know, display technology has been shifting to, you know, OLED silicon and also potential. I just want to know from your point of view, if you look at the LCOS versus the other two technology, do you think that you have, you know, enough confidence or breakthrough that can bring LCOS back to the become the mainstream in the next couple of years?

Speaker 3

Thank you, Jeremy, for the question. I think you correctly mentioned we have been in AR glasses for many, many years. Right? And we are certainly I mean, know that we are the pioneer in providing a key technology for to enable AR glasses, which is microdisplay. Right?

So we are in the products of, you know, literally all of the most notable AR glasses products so far. Although none of them have been a commercial success as we all appreciate. Now I think the the the lessons learned across the whole industry, us included, and most most importantly, customers through all these years is that we have finally come to a good consensus as to what what kind of products or technology required is required to for the for the for the industry to put forth for put forward a a a a glasses, which is attractive enough for general public. Right? So I'm not talking about, you know, fancy technology.

See, I'm just talking about Right? Firstly, you need to to have a safe design, fancy design. Right? Similar to your sunglasses with this with similar shape and weight even.

Right? And and that is the first requirement. Very important. Secondly, you need to have audio display in full color, and then it's finished to provide over a decent image quality, and certainly affordable price. And lastly, but very importantly, a decent large enough size of field of view, FOV.

So all these are the required areas for a product, which hopefully will really attract the attention of general public. And our products together with our end customers in the past, you know, they missed many of such criteria. Right? So throughout all these years, I think the industry has finally come to this that this is the target we are shooting for. So can we provide the technology?

And then I I can tell you with a good degree of confidence that so far as of today, we can't. But we feel we are getting very, very close. That's the key message we want to deliver. So back to your question, you know, how does our air cost compare to other competing technologies for AR glasses? AR glasses, by definition, is a see through glasses device.

Right? I you need to have what we call microdisplays. Displays which are tiny, and and and they have to sit on the side near your your your ears. Right? Because they can sit in the front because that will block block your side of view.

Right? So they can sit in the side. Since they are sitting on the side, they need would need some optical mechanism, including waveguides to lead the light, the image into your front. Right? So those are the basic fundamental requirement.

It doesn't matter how pocket optic display you use. You have to pass this you have to go through this requirement. So so so again, to achieve this basic requirements and also the target the target specs, right, the the target objectives of the of the of the general consumers. Most very importantly for microdisplay, you're talking about size, brightness, power consumption, and cost. You know, they all we we now have a good consensus.

What kind of party we need to make to need to achieve to achieve size, brightness, and power consumption cost. Firstly, on size, which is the most important because without the right size, you just cannot make a fancy glasses. And that you go back to previous failures. Right? So size is the utmost, most important criteria.

To achieve the the right size, really, you are talking about for microdisplay, you can have two two different types. One is what we call self illuminating type. The other one is not. The importance of self illuminating type is that because it's self illuminating, meaning you don't need a external optical engine to enable the the the the the illumination. Right?

And once you have an external optical engine, the size, you fill the criteria already. So you are already out. Right? So for cell illuminating technologies, you already narrowed down your candidate to three types, meaning AMOLED. Micro micro micro OLED.

Sorry. Micro OLED. Micro LED and our front lead. I emphasize front lead is very important because other types of LCOS are not say we do many, our other LCOS. Front lead as a module because we are we are putting our LED alongside the alongside the microdisplay.

And so from the from the customer's point of view, our display module is very similar in size and weight compared to micro LED and micro OLED other cell illuminating technologies. Right? So only these three types are self illuminating, and they can only they can pass the first criteria, most importantly, the size. Now the second problem is the brightness. The second biggest problem is brightness of the microdisplay.

Why? Because I mentioned your your microdisplay is sitting on the side. They need to pass the lights through our waveguide in the front. Waveguide, there are a couple of mainstream technologies. You know, how we operate now, WO is certainly

But, you know, regardless of which type of technology you talked about for what we guide, the light efficiency is very poor. 5% is now people's very, very difficult target right now, 5% light efficiency. Meaning, you are wasting all most of your light, the vast majority of your light through the traveling in the optical mechanism. But the QMB requires certain brightness to see the display. Right?

So how do you how do you how do you resolve the issue in each of your microdisplay being very, very bright? Right? So so this second criteria, again, is very, very is is vital. Right? So from this second criteria's point of view, in our view, micro OLED is already out because micro OLED right now, it need the it needs to improve its brightness by several orders of magnitude.

Magnitude. It's just unassuming in any foreseeable future in our view. Right? Because it's just simply too dark. So the other so now you are living with our display, which has enough brightness and also micro LED.

However, for micro LED, indeed, they can project with enough brightness. But micro LED can have only monochrome color in the display. So to make color this the color display, right, I mentioned that's a fundamental requirement as well. They need RGB three panels combined. And when you have RGB, you are failing your size test.

Okay. And, also, you are failing your power consumption test, not to mention your cost test. So while there are talks about customers using micro LED from our insiders point of view, I think they have such hurdles and challenges that are just inconceivable to to get around in any foreseeable future. Now finally, back to our own front need, of course, microdisplay. Admittedly, we introduced a kind of technology years ago year years ago, but we kind of slowed our development over the cup last couple of years.

Why? Because the market was simply not there. However, we never stopped talking to our customers. Now with this renewed and very vibrant interest of metaverse recently, we are seeing a very renewed interest in our IO course again. So they are customers who are trying to utilize our existing from the LCOS product in their next generation design, which admittedly is not ideal.

Right? They they don't exactly pass all the factors I I just mentioned. However, there are also customers who are taking a longer term approach, and they are working with us starting from specs discussions and code joint developments for a idea from the because it's that really fit the field, you know, of all criteria I just mentioned. And we are really confident the technology is there. We just need a little bit of time and resources to make it happen.

So that is I I I apologize for slightly lengthy response, but this is a complicated issue. And I appreciate you asking the question and giving me the opportunity to explain it.

Speaker 5

Very detailed question and help us to understand a lot about difference between the technologies. Thank you.

Speaker 3

Thank you, Jerry, for the question.

Speaker 4

Our

Speaker 0

next question coming from the line of Johnny Chen with Nomura Securities. Your line is open.

Speaker 6

Hi, Jordan, Eric. Thank you for taking my question. I just have two very short questions. The first one is that it sounds like back in late last year, originally, I think we were relatively positive on the first quarter outlook. And then maybe after this one to two months, the market has been a bit weaker than expected.

So just curious about that. What kind of products in that has been weaker than what you have seen maybe before one, two months ago? For example, it's like smartphone or tablet or any other applications that you are seeing or weaker than expected demand in the past one to two months? And secondly, it's regarding to the gross margin again. So I remember that automotive driver IC gross margin should be higher than corporate average.

So I'm just curious that if looking at the fourth quarter gross margin and the first quarter gross margin, does automotive driver IC gross margin all higher than corporate average in these two quarters or it's also declining a little bit in the first quarter? Thank you.

Speaker 0

Firstly,

Speaker 3

on the first quarter outlook, I think your impression about, like, slowing the market demand, I think we kind of get a similar feeling. I think it's primarily from smartphone. And and, again, automotive remained very strong. And TV, I think, is slow. Although we feel there are talks about, you know, customers absorbing their inventory and hopefully starting from q two or the second half, there will be renewed demand coming from TV.

In IT, the visibility is not great in a sense that, you know, end customers are revising up their forecast rather they are they are staying on the sideline, but they are not revising down their forecast either. Right? So I think your impression of slowing down forecast may be primarily driven by smartphone. Your second question about automotive. I think gross margin and related to automotive, I think in I think certainly automotive is gross margin higher than our average.

And I think more importantly, the visibility is much better as well. Visibility, not in terms in terms of just sales forecast, but also in terms of pricing. Right? I I cannot say I have very strong visibility for TV monitor, notebook, or other things, but I can say with good confidence, there'll be the video pricing for auto. So I think that's an important factor.

And, also, overall, I think in q one, for example, large display driver, I think based on our guidance, it's going to be about flat, while overall guidance is slower. Right? And large display driver has lower gross margin compared to last year compared to small smartphone or tablet or old certainly auto. So I think that also explain partially the the lower gross margin on top of the the the explanation I gave to Tristan earlier.

Speaker 6

Okay. I've got it. So just just to clarify. So in terms of the ranking of the gross margin is like auto, the highest, right, and and followed by largely, like, small, medium driver IC and lastly, express driver IC. Is that correct?

Correct. Okay. Thank you so much, Jordan.

Speaker 3

Thank you, Darling. Okay. Bye.

Speaker 0

And I'm showing no further questions at this time. I would now like to turn the call back over to Jeremy for any closing remarks.

Speaker 3

As a final note, Eric Lee, our chief IR PR officer, will maintain investor meeting, marketing activities, and continue to attend investor conferences. We will announce the details as they come about. Thank you, and have a nice day.

Speaker 0

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.