Q3 2020 Himax Technologies Inc Earnings Call
Hello, Ladies and gentlemen, welcome to the Himax technologies Inc. third quarter 2020 earnings conference call. At this time of participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time.
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I will now like to turn the conference over to your host Mr., Mark Schwartzberg from MZ group.
Welcome everyone.
Onto Himaxs third quarter 2020 earnings call joining us from the company today are Mr., Jordan, Wu, President and Chief Executive Officer, Ms., Jessica Pan Chief Financial Officer, and Mr., Eric Lee Chief IR PR officer after.
After the Companys prepared comments, we have allocated time for questions and acuity.
Session. If you have not yet received a copy of today's press release.
Please email H.I.M.X. at MZ group Dot U.S. access the press release on financial portals or download a copy from Himaxs website at Www Dot Himax dot com Dot tw before.
Before we begin the formal remarks.
Next I'd like to remind everyone that some of the statements in this conference call, including statements regarding expected future financial results and industry growth are forward looking statements that involve a number of risks and uncertainties that could cause actual events or results to differ materially from those described in this conference call.
Factors that could cause.
Actual events or results to differ materially from these described in this conference call include but are not limited to general business and economic conditions. The state of the semiconductor industry market acceptance and competitiveness of the driver and non driver products developed by Himax.
Demand for end use application.
Application products the uncertainty of continued success in technological innovation as well as other operational and market challenges and other risks described from time to time in the company's Esiason filings, including those risks identified in the section entitled risk factors in its form 20 cash.
For the year end December 30, Onest 2019 filed with the FCC in March 2020.
Except for the Companys full year.
2019 financials, which were provided in the company's 20-F filed with the FCC on March 26 2020.
Financial information included in this conference call is unaudited.
Consolidated and prepared in accordance with FRS 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 our sub.
Which are subject.
Our annual consolidated.
<unk> and financial statements and May vary materially from the audited consolidated financial information for the same period.
The company undertakes no obligation to publicly update or revise any forward looking statements, whether as a result of new information future events or otherwise.
I would now like to turn the call over to Mr., Eric Lee Eric.
David the floor is yours.
Thank you Mark and thank you everybody for joining us.
My name is Eric Lee and I'm, the Chief Hi, RPL through through.
Joining me today are Jordan, Wu, our CEO and Jason how can our CFO.
On today's call we.
First review the high mix consolidated financial performance for the third quarter followed.
Followed by the fourth quarter Twentytwenty, although.
Sure Dan will then give an update on the status of our business.
After which we were tech question.
We we view all fine insurers.
Both I FRS and Denali, Hi Fi spaces.
Now I ESI financially if school was share based compensation and acquisition related charges.
In addition to impact of COVID-19, which remained harsh in many parts of the.
The word.
The per loan you as China trade pension and sanction.
Turning on to the market.
And the resulting in a new market dynamic during the third quarter.
The on thieving stay at home economic.
Created new demand, but push foundry Cup.
Okay constrained to a more severe level.
Despite these challenges we continued to ask you efficiently and that delivers strong result in the changing environment.
We preannounced preliminary key financial results.
For the third quarter on October six for the revenue gross margin and EPS for exceeding the guidance issued on August six 2020.
Today.
All reported result, full revenue gross margin and EPS all in line.
Hi, with the pre announced the result.
For the third quarter we.
We recorded net revenue of.
Off $239.9 million for income.
Increased of 28.3% sequentially and an increase of 46.1%.
Thanks.
They are to the same period last year.
The 28.3% sequential increase of revenue exceeded our guidance of an increase of around 20% quarter over quarter.
Display driver of TV Teva light.
Awful and automotive, that's where those Cmos image sensor all contributed banter then guide this sale.
Gross margin was 22.3%.
Exceeding the prior guidance of flat to slightly down from 21%.
The mind of the second quarter.
Hi, as far as profit per diluted adss was 4.9% exceeding our guidance of around two cents to 2.8 cents.
Strong sales and improved gross margin contributed to.
Fathers' day expected on these results.
The EPS increase was however, offset by the highest few expense, which was higher than where we were lot indicated our locked only it's cool okay.
We raised the highest few amount to be.
Word the team for the better than expected financial results.
We will elaborate on this in few minutes.
No I advised profit per diluted adss was 7.3%.
Exceeding our guidance of around 3.5% to four.
The only three cents.
Revenue from large display driver was $55.7 million down.
Down, 6.3% sequentially and up 11.3% year over year.
The sequential decline was.
It's driven by significantly lower shipment of monitor IC.
Due to account customers inventory correction following a demand hike in the first half.
If combining the first three quarter of 2020.
Our sales into.
Non interest income in steel increased 22.1% from last year.
The demand for monitors remains robust and we expect a strong rebound in the fourth quarter.
Offsetting monitor third quarter Weeklys walk the Sir.
Through marriage in TV and the notebook sales.
TV segment revenue increased 17.6% sequentially.
Reflecting strong consumer spending and the home entertainment demand.
Panel makers to building off.
And Terry in anticipation of higher TV panel prices also contributed to the sequential increase.
He was no surprise.
Our notebook sales recorded the highest growth among large display product increasing 31.5%.
In quarter over quarter. Thanks to the continued demand for Taylor work and the E learning with panel customers seemingly still sitting on low inventories.
Large panel driver IC accounted for 23.2% of total revenue.
For the quarter.
Compared to 31.8% in the second quarter of 2020, and 30.5% a year ago.
Small and medium size the safe driver recorded a very strong third quarter.
With revenue of.
$151.6 million.
Up 53.5% sequentially and up 96.6 year over year.
Cdti for both tablet and smartphone post an extra ordinary sales growth in Q3.
The automotive segment.
We delivered a decent low teens sequential growth amidst.
Declining automotive market worldwide.
Small and the medium size segment accounted for 63.2% of total sales for the quarter.
Compared to 52.8% in the second quarter of 2020, and 46.9% a year ago.
Our smartphone sales.
The best performing product category of ore in Q3.
Reached a quarterly record.
Hi of $63.3 million.
Up to 153.6% sequentially, and a 100 and the 1.2% year over year.
It represented more than 26% of our total sales in Q3.
Our smartphone sales were up 155.7% sequentially and up a 193.7% from the same period last year.
The significant sequential growth.
Also a continuation from Q2.
When the product category already grew 69% from the previous quarter.
However.
As mentioned in our last earnings call. The growth was captured by an industrial wide wafer foundry shortage.
Our smartphone and the tablet.
The PTT IC share the same pool of foundry capacity and the we were and still are unable to meet all the demand for these products.
The Q3 trends in smartphone cdti, reflecting customers' aggressive new product launch clients.
And with our key DDIY solutions.
As well as our ability to price our products higher to reflect the type wafer foundry situation.
Amie, the economic downturn and legal after over all smartphone consumption.
Oems.
We are pushing more for budget handsets using TFT LCD screens.
Instead of more expensive ammo lay this place.
Sales of traditional smartphone DD IC also surged by 147.8% sequentially.
And.
Up 5.3% from same period last year with demand from key brand customers.
We believe.
Such strong sales of traditional smartphone TD IC, we're a short term rebound.
The product category is quickly being replaced.
Waste by CPI in the ammo late as we have repeatedly indicated.
Revenue for tabloid posted our third consecutive record high with Cree Q3 sales growing 26% sequentially and the 336.
0.4% year over year.
The quarterly revenue reached $53.7 million accounting.
For more than 25% of our driver IC revenue.
We expect our tablet segment sales.
To continue to grow as overall market demand for tabulate remain robust for more homeworking and online education needs and the TDD administration interval in market continue to pick up.
Our total ITD ATI has the leading much.
Okay position at the time.
NTT is quickly become mainstream for Android tablets.
Third quarter tablet TDD as sales increased over 75% sequentially.
And were better than our guidance of a 20% increase.
This month, the second consecutive quarter of increasing tabulated GPI shipment seeing the initial mass production in the first quarter of 2020, and we are firmly in the leading position among peers.
However.
As mentioned above.
The sequential growth was prepared by tight foundry capacity as we couldn't ship, a NOLA, but enough to meet all customer demand.
Revenue, our traditional display driver IC for tablets also.
Also delivered 20.3% sequential gain.
Growth and was up 164.5% year over year in the third quarter. Thanks to a strong order from both leading brand and the Whitebox names.
Our third quarter driver IC revenue for automotive was.
Up 13.2% sequentially and up 3.9% year over year, despite a sluggish Scott sluggish global automotive market.
The sequential growth was all to a large extent to the aggressive pursuit.
<unk> market share again.
China Chip panel maker customers to push we are a major supplier.
This customer are comfortable with Himax, leading technology and the proven production broker, which support them in their effort to rent our production.
Consistently.
With global automotive demand is showing signs of recovery.
We expect to see robust and sustainable growth in Q4 and into 2021.
Jordan will elaborate on this in a few minutes.
Third quarter revenue from our non driver business was $32.6 million up 13.3% sequentially, but down 12.1% year over year.
The sequential increase was mainly a result of higher engineering fee income.
And the increased shipment of the chicken for higher frame rate and the high resolution display as well as the Cmos image sensor product with demand coming from notebook and IP camera applications.
However, the increase in sales was offset by a tick.
Decrease in W are all shipments to anchor customers.
Non driver products accounted for 13.6% of total revenue as compared to 15.4% in the second quarter of 2020 and the 22.6%.
10, a year ago.
Gross margin for the third quarter was 22.3% up a 130 basis points sequentially and up 280 basis points from the same period last year.
The sequential increase was.
Was contributed by a favorable product mix.
We have more shipment of better margin product such as satellite.
And automotive IC, Hi, engineering fee income and the resale of certain product whose value has been return of previously in accordance with.
With our inventory management protocol.
Weighing on gross margins quick.
Square lower W Ell shipment, which decreased factory utilization.
And the increased shipment for smartphone IC, which register a lower gross margin.
When copper average.
Gross margin increased 2.8% from last year. Thanks.
Thanks to a more favorable product mix with more shipment of tabulate and the T com high engineered fee income and the resale of region or product.
Likewise.
Again was offset by lower dollar euro and the higher smartphone shipments.
Our is our highest operating expenses were $44.2 million in third quarter.
Up 17.4% from that.
Hitting quarter and up 11.4% from a year ago.
The sequential expense increase.
Was caused mainly by $4.8 million of ice view that immediately invest a portion of the total RSU grant could.
Which was high.
Higher than the 3 million.
Dollars guided.
On the last earnings call to beneficially compensate com employees from better off profit.
The one point.
$8 million additional RSU expense.
We present 0.9 cents lower in after tax EPS.
The increase the salary also contributed to the higher operating expenses.
The year over year increase.
Was a result of increased size view.
Okay.
And your practice, we reward employees with an annual bonus at the end of September, which always least need to a sequential increase in third quarter, our five operating expenses.
Compared to other quarter of the year.
This year.
Hi, Sue grant totaled $5 million out of which $4.8 million was vested immediately and the expenses.
In the third quarter.
No I advise the operating expenses for the third quarter were.
$38.9 million up 4.8% from the previous quarter, but down the.
0.9% from the same quarter in 2019.
I emphasized operating margin for the third quarter was 3.9%.
Third.
Up from 0.9% in prior quarter and up from minus 4.7% in the same period last year.
The sequential increase was mainly due to higher sales.
And the better gross margin, but offset.
By higher operating expense.
Yes.
The year over year improvement was primarily a result of higher sales and improved gross margin.
Third quarter, non I Advize operating profit was $14.7 million or 6.1% of sales.
Cents higher from now I have the highest operating profit of $2.1 million for 1.1% of sales last quarter.
And from minus 4.4% from same period last year.
I emphasize profit.
Sales for the third quarter was $8.5 million or 4.9 cents per diluted adss.
Compared to a profit of $1.4 million or 0.8 cents per diluted EPS in the previous quarter.
And last off to seven point.
And $2 million or 4.2 cents per diluted adss, a year ago.
Third quarter non-GAAP.
Gross profit was $12.6 million or 7.3 cents per diluted adss.
Compared to now I Advize profit of.
$1.7 million or one cents per diluted adss last quarter.
And the non eisai to loss of $6.9 million or four cents per diluted adss for the same period last year.
Turning to that.
Poland sheet.
We had $142.9 million of cash cash equivalents and other financial assets.
As of the end of September 2020.
Compared to a $128 million at the same time last year and 100 and December.
$7.1 million a quarter ago.
The higher cash balance was mainly a result of an operating cash inflow of.
$33.5 million during the quarter.
Restricted cash was 180.
And the $4 million at the end of the quarter compared to a $164 million of the preceding quarter and a year ago.
The restricted cash is used to guarantee the short term unsecured borrowings for the same amount.
We will.
The pace.
Total of 16, meaning dollars short term unsecured borrowings during the quarter.
In the in the meantime, the restricted cash deposit was reduced by the same amount.
Separately.
During this quarter.
We entered into a new 10 year unsecured loan agreement of $60 million.
And the repay all short term unsecured borrowings totaling $58.4 million.
As a result, we had a $16 million of loan.
Turn on secured loans.
As of the end of Q3.
Of which six meaning was current portion.
There was no more short term unsecured loans.
Of end of the quarter compared to $58.4 million.
A quarter ago, and the $90.6 million at the same time last year.
Not only have we strengthened our balance sheet by replacing all shotton unsecured borrowings with 10 year loans.
We also managed.
To secure favorable favorable term.
Off new long term long so that the additional interest payments are minimal.
Accounts receivable as of the end of September 2020 or $221.1 million.
From 200.
Turning to six.
Point $1 million last quarter.
And the 157.3 million dollar a year ago.
Dsos was 99 days at the end of the quarter as compared to 86 days a year ago and a 101.
At the end of last quarter.
Inventory.
Uh huh.
September 30, Twentytwenty $125.7 million down from a $161.5 million last call.
Operator, and a 167.6 million dollar a year ago.
The much lower inventory level in Q3.
Was the result of strong customer demand amid tight foundry capacity.
Why we were continue to pursue.
Call, an aggressive inventory build our strategy.
Our inventory position will likely remain as such low level in the foreseeable future.
Given the severe foundry capacity shortage prevailing in the marketplace.
Net cash.
Flow from operating activities for the third quarter was $33.5 million.
As compared to an inflow of $24 million for the same period last year, and an outflow of $9.2 million last quarter.
The court the quarter capital expenditures amounted to $1.2 million.
Versus $31.2 million, a year ago, and the zero point $7 million last quarter.
The third quarter Capex was four point.
Fee related equipment for our IC design business.
As of September 30.
Twentytwenty Himax has.
172.4, meaning adss outstanding.
Little.
Changed from last quarter.
On a fully diluted basis, the total amount of adss outstanding.
$173.4 million.
Now turning to our first quarter guidance.
For the quarter.
We expect further revenue growth from the already high level Q3 in most of our business sectors.
Gross margins sure see a major uptick and that could reach a quarterly historical high for us.
For the fourth quarter we.
Fact revenue to increase by around 10% sequentially.
Gross margin is expected to be around 29%, which depends on final predominantly.
With the increase in revenue and margin growth in first quarter.
The income should increase sequentially.
To further reward employees they will they will be another three meaning.
Of cash bonus in the first quarter, which will be expensed immediately.
This represents 1.4 cents lower.
Our EPS.
Hi, as ice profit a.
Attributable to shareholder is expected to be in the range of around.
15 cents to 16 cents per fully diluted adss.
Now I Advize profit attributable to shareholders is.
He is expected to be in the range of 15.1 cents to 16.
0.1 cents.
The diluted adss.
I will now turn the call over to Jordan Jordan the floor is yours.
Thanks.
Thank you Eric.
Before we walk through each of our major product segments I would like to briefly comment on the background for upbeat Q4 gross margin guidance and our view on the sustainability of the higher margin.
First off.
Gross margin expansion has always been at the top of our agenda that we're surely you work hard towards continuous profitability improvement.
The upbeat Q4 gross margin guidance is mainly a reflection of the tight foundry capacity, which results in better pricing.
More.
Favorable product mix.
The foundry industry appears to be going through a structural change in the supply demand dynamics for the mature process nodes, both eight inch and 12 inch.
We believe the current tightness is likely to persist through over the next few.
Five years.
Major volume applications, such as display driver IC 40, Dia enable that PM IC for Fiveg smartphone.
Yes that is able to upgrade in resolution just to name a few.
Significantly expanding in were consumption and.
Competing for the same pool of mature nodes part of the industry has no major expansion plan in sight for such capacity.
As Eric mentioned, we are experiencing major foundry supply shortage in quite a few of our measure.
Business areas, including.
The T.D.R. and D. Icicle smartphone tablet and automotive applications is worse Cmos image sensor.
For next year's flavored demands, we have secured with our foundry partners a capacity, which is already larger than our total shipments for this year.
On top of that we are developing additional capacities for various product areas within EM to further our available Hungary poor for the next few years.
Some of this new capacities were stopped making contributions next year.
We will report the progress in due course.
Another important factor will continue this gross margin improvement will come from the number of our non driver products, which are either already rolling production and look on track to grow in size, such as timing controller and ultra low power.
Yeah.
Or where we new additions to our revenue streams, such as the Whitehall solution and that we won a sick children.
Okay gross margin expansion will continue to be one or major business goals for next year and beyond.
Now, let us start with an update on the large panel driver IC business for the fourth quarter. We expect large display driver IC revenue to increase by high single digit sequentially. This.
This is due to the extension of strong demand derived from persisting homeworking.
And the distance education.
Resulting in.
Growing monitor and notebook demands.
We expect that these a sequential increase or around 20% in the monitor segment in the fourth quarter.
As for notebook, we anticipate even stronger momentum in Q4.
Increase in more than 75% quarter over quarter.
We have active design activities in high end monitor and new generation low powered notebooks, where we provide not only our driver IC barroso timing controller.
Especially incoming monitors and even the notebook.
We anticipate more market share gains from the design wins of our leading display driver IC or T com.
This component customers.
With respect to TV.
We expect mid single digit sequential decline.
In the in the fourth quarter.
Owing to a correction to a surge in TV demand in the previous quarter.
Recently, we saw top tier TV brands with aggressive promotional tactics in 8-K TV in.
In anticipation of major sporting events like assuming across many countries. After a long long time.
Our market, our AK TV display drivers that having centralized fees have been widely adopted by multiple leading and customers.
It is worth highlighting that we have been developing and delivering timing controller products for many years and this segment already represents more than.
To say the work although revenues.
It is applied in a wide range of products, such as TV monitor notebook and automotive.
Our technology not only provides higher resolution higher frame rate have better image quality.
We can also enable lower power in.
Products were proud consumption is critical.
The margin and ASP of the timing controller products.
Much higher than those of the spray drivers and we expect this segment to be an extensive long term growth opportunity.
Our T. car revenue in the first quarter while limited.
In power capacity shortage in IC packaging due to competing demands from Fiveg chipsets.
It's on track to increase by more than 20% sequentially.
This will represent more than 40% increase annually.
Now, let's turn to the small and medium sized it's Pedro.
Driver IC business, beginning with an update on the smartphone segment.
Our TV product roadmap as well as new design wins and new.
Production plans opposition high Maxwell to gain market share throughout.
Total and 29 to 2021.
As I mentioned on the last earnings call. The pandemic has weighed on the global smartphone shipments significantly due to supply chain disruption at the beginning of the year follow.
Followed by a lackluster consumer demand.
However.
The smartphone market has.
Has regained some momentum in Q3 in.
In the momentum seems to have carried into Q4.
On the backdrop of a rebound in smartphone market. Our smartphone PDR revenue is projected to have like to have nice high teens sequential growth in the fourth quarter, although foundry capacity.
Remains the major growth constraint.
Traditional display driver IC for smartphone after a temporary spike in Q3 is set to decline double digits in Q4.
As stated before a mall and technology has advanced.
To become the mainstream this play for high end smartphones.
Himax is highly committed in this field much progress has been made by collaborating with leading panel makers across China.
Our development started from smartphone and extends to wearable typically in automotive with shiny.
Nice panel makers.
We believe it will that display driver IC or become one of the major growth engines for small and medium panel driver IC business from two though is by the way.
Tablet has been on has been wonderful.
Our comp sales contributors throughout 2020.
In the fourth quarter. It is on track for another sequential growth of over 20%.
As mentioned on previous earnings call.
For consumers.
Patrick TDD offers a lighter weight and.
Dimmer and more stylish design.
As well as improved cash accuracy with added option for active stylus, specifically geared towards high quality, writing and Troy.
Hi, Max is a pioneer in the tablet TDR technology and let the market.
For mass production in the first quarter of 2020.
At present, we are the dominant supplier for the 30 or they didn't enjoy damage.
Typically TDD represents a tremendous upside potential for himax. Thanks to his higher ASP more units of TDR.
In each separate the Nols for smartphones.
We expect a sequential increase of around 80% for tablets EBITDA in the fourth quarter.
As the penetration of in cell touch into tablets continues to accelerate.
Two.
To expand and strengthen our position in the market for next generation models. We are working on new designs with resolution and accuracy upgrades targeting larger size type lease from key customers.
For traditional VDI CBORD.
Patrick we spec low teens sequential decline for Q4.
Parts sales to be up more than 50% compared to the same period last year due to.
The booming tablet demand arising from homework in a remote learning.
The demand for traditional TV I see.
Civil tablet is also being eroded by in sales leader, but at a more moderate pace then therefore smartphone.
Turning to the automotive sector.
As the panel desire car continuing to grow in both number and size.
The demand for automotive driver IC, we are positioned for healthy growth in the coming years.
Although the global car demand has been badly hit by COVID-19, especially in the first half of the year.
The market is showing signs of gradual recovery study in Q3.
All the multi bases, which enjoy a higher gross margin.
Experiencing a solid rebound lately with carmakers crushing in for inventory replenishment.
After quite a few sluggish quarters.
The demand for commodities.
I see.
For more sophisticated.
Higher performing displays has continue is rising trajectory.
Advanced new features such as in cell touch local dimming.
Skate topology connection and point to point high speed interface.
Brain functions.
Been adopted with Himax being the primary partner for major automotive panel makers and tier one players to enable this new technologies.
With this new technology is on track for more shipments starting in 2021, we're confident.
Our automotive segment is hitting another inflection point with a strong and positive long term outlook.
For the fourth quarter revenues for small and medium sized sorry.
Drive IC business is expected to increase by around mid teens.
Mid teens up sequentially with demand continuing to surpass supply.
Capacity shortage remains a major factor that negatively impacts our capabilities to make more shipments to customers.
In consideration of capacity constraints, which.
Which may not be.
The results shortly we often have to strategically prioritize the production of products for those customer models, where we are the key supplier for end or enjoy better profitability.
Now, let me share some of the progress we've made on an entre.
Advisory businesses in the third quarter through.
First on the W or business.
The fourth quarter that we all revenue declined sequentially as a result of lower shipments to an anchor customer.
Our DARBU all factory, we're continuing to manufacture the anchor customers for legacy products.
Going forward.
We saw exceptional technologies of W will enable imprint in manufacturing and differentiated optics design.
We have been engaged by multiple customers slash partners to develop further generation.
To develop.
Future generation products, covering a wide range of applications, such as Pos threed sensing with guys for cargos biomedical devices and others.
Next is an update on the Threed sensing business.
Huckabee next generation Android.
Smartphones, we are collaborating with leading laser and Pos since our vendors to develop the new war facing three D sensing camera whereby.
We provide.
Provide optical components and all projectors, which are critical for the performance of the whole tiered solution.
For our non smartphones recently engagements, where we provide a socialite based threed sensing total solution are attractive markets range from small log facial recognition based payment business access control too.
Medical inspection device.
A number of recent design wins were entered into mass production soon.
Our current activity. We also offer a market leading street decode basic to those customers, who wish to design their own structure like Threed sensing solution.
Here, we have had quite a few.
New.
Design wins from customers profit in China rest easy payment market.
We have some shipments already starting in the fourth quarter.
We are also working with customers for industrial robotics, smart door locks and home security bulk, which carry great potential.
For us really fancy business in the future.
Now switching gears to the wayside smart sensing solution as I mentioned on the last.
A couple of earnings calls.
In order for Wi Fi technology to reach its maximum potential we.
Has adopted the flexible business model whereby.
Mission to a total solution, where we provide processor image sensor and algorithm. We also offer low key parts initially.
In order to address the customers different needs and widen our mark.
Which.
For the total solution offering our current focus applications include notebook TV, though Bayer Sawlog and air Conditioner Esso.
As we continue to work on new solutions to cover further as device AI markets.
In partnership with leading players in their respective industries a number of these solutions are slated to enter mass production in 2021.
For the other type of business model, where we only offer a key parts.
Our technology, our strategy is to actively participate in the ecosystem.
Good luck.
Yes by the world's leading AI and cloud service providers.
In addition to the collaboration with Google on VR Tensorflow light for Microcontrollers that we announced previously.
We are making another major bricks through by partnering with another world leading cloud service provider.
With the business focus more towards our healthcare financial services government retailer industrial manufacturing.
Separately to further lower the technical barrier for using our Wi Fi solution, we team up with a leading online store specialize in easy.
The development tours for machine learning on edge devices.
We are extremely excited about the rapid business progress and believe our wise I offerings will become a major contributor to our peer in there in the near future.
Sure.
Now turning to our Cmos image sensor artist.
Business update we continue to see extremely strong demand for Cmos image sensors for IP camera and notebook by actual shipment has been badly capped by the foundry capacity available to us.
Separately our.
Our industry first two in one Cmos image sensor blood support.
With RSV mold for video conferencing, and ultra low power mold for facial recognition has penetrated the desktop ecosystem for they are more stylish superscreen bezel designs, we expect to have small volume shipments towards the late 2020 with more to come.
In the next year.
Regarding ultra low power always on Cmos image sensor, which targets in battery powered.
Always on applications.
We are getting.
Promising feedbacks.
And detailed adoptions from customers in there.
Areas markets, such as car recorders.
Surveillance smile electronic meters drones home appliances, Entergy made electronics.
In Q4.
The Crs revenue is expected to be flat sequentially, although demand is much stronger than that okay.
Again, our ship and is.
Capped by foundry capacity constraint.
For non driver IC business, we expect revenue to decrease by low single digit sequentially in the fourth quarter.
That concludes my report for this quarter. Thank you for your inventories in Himax. We appreciate you joining today's call where we.
Now ready to take questions.
As a reminder, ladies and gentlemen asked the question you wanted to press Star one on your telephone and to withdraw your question press the pound key.
Please limit yourself to two questions and the interest of time.
Our first question will come from line of Christian Gebara from Baird.
You may begin.
Hi, guys and congratulations on the result.
Given the capacity that you are secured for next year as well as your own capacity plans what type of revenue do you think this is going to say.
Goals for 2021.
We are.
I said earlier in my prepared remarks, we'd have a secured with all their foundry partners.
By the way.
Well arrangements.
Many of which are legally binding.
It capacity total capacity covering.
All type of products that has already.
Being higher than our actual shipments made during this year.
Okay. So let it.
Our starting point so that is not enough for us that is not going to be.
Now that the circles of certified our our our expected demand for next year. So in the meantime, we are developing quite aggressively so can we defer in foundry partners covering different product areas to expand our campus.
Basically but.
I have to say that.
Such developments certainly started to take Brian you started actually quite sometime ago, but.
This is not something that you can you can turn around overnight by so I think additional capacity on top of the.
I see we have already secured we sell foundry partners.
You will see I mean for example in Q1. The addition will be rather limited.
[music].
And there will be some contribution from Q2 and more Q3. Furthermore, in Q4 and even more.
Probably much more.
Going forward right so it.
Third aggressive.
Effort. However, it has to be a gradual process and again the the capacity sold height. Nowadays I mean, you guys all know price so we.
We just have to accept the reality.
And manage our customers manage our products.
Prioritize our production and in the meantime continue to develop new factories, and new capacities and we it's fair to say, we are making good progress and right now, but we are seeing this fall for our sales the most severe.
We are basically three areas the first area be some.
Smartphone.
And.
Typically the which share the same pool.
And.
Our strategy, given our very high market share in Android TV.
Our heavenly market right now so.
We tend to give.
If more favorable location to heavily over smartphone to be honest, because we carry very heavy responsibility.
Dealing with still the end customers in particular Quinn in many many cases, we actually the sole source. So if we stop.
Yes.
If we if we can ship enough then is a big problem for them.
Fire in our our our our customers for smartphone facility I tend to have.
Better.
Operation for multiple sources.
And so that is the first.
The area of.
Of.
Of foundry tightness.
And.
Again, we are working rather aggressively with at least two maintaining foundry partners.
Developing new coverage piece and again.
We are hoping to see.
Rio contribute.
Lesion sometime next year.
But I mean, the fully actually happens I really can't comment much further than that but we're certainly before in due course, the second major area of shortages is automotive display driver is an area, where we enjoy a very good market share probably more in the world with around some.
Sandy so the 30 some percent of mortgage global market share right now.
And.
The shortage starting from.
Starting from early Q3.
Yes.
Very very severe and looking into next year is that.
Looking.
To probably get worse, Eva and again, we have secure with a very solid arrangement with our foundry partners to meaningfully in rush hour capacity available to us.
Next year compared to the shipments are actually shipping of this year and on top of that we.
Uh huh.
Hopefully we can announce fairly quickly fairly soon we are around.
Arranging that made the additional major increase of capacities for our.
Automotive.
Longer term and it is something that is so badly needed Doug.
Not a pressure inquiries you know.
You know from not just panel maker customers, but also appeal as in many of them.
And many of them will wish to enter into some kind of arrangement to secure their supply.
Even though we are we are the major.
Bigger major provider of the market right now and the third area, which is.
Relatively small in our our business contribution.
But the the shortage is probably the most severe cmos image sensor.
This year as we all know because of the Cobi situation.
As you know there is a huge those southern surge in demand for PC camera because people tend to use their notebook for four weeks for TV coverage as notebook with is relatively poor camera resolution people elect you are.
Get the PZ camera connected.
So there's a southern southern surge in demand that we simply cannot meet the.
The demand and we have us southern customers, who are major major players in there.
PC camera market so.
It is relatively small for us overall, but.
But the the shortages quite fit.
This year. So we are we are preparing all aspects to try to grow our capacity, but again no miracle is not this is going to happen and certainly in Q1, we don't expect any meaningful increase in capacity.
Okay, that's very useful and then just as a quick follow.
What are the implications for ASP.
For the west so for this quarter and for next year.
Our apple to Apple basis to reflect the foundry capacity type.
Certainly we are able to raise always be.
The.
In a degree that it does certainly various you know unit holders always though.
The different degrees of tightness.
In capacity so the sectors that I just named tend to ER, we tend to enjoy.
No better ASP ASP increase compared to those sectors that I didn't mention just now primary large panel display drivers right. Although they are still tight but they are not they are not in severe shortage, let me put it that way so so.
So I think we have very.
Very good visibility in Q1 unusually good visibility in Q1.
With customers all line up.
They appealed and whatnot.
And I I can say, we saw a fairly good confidence.
Gross towards the needed the hoped.
Have I think the visibility is quite good.
Longer term, it's certainly hard to tail.
It's going to depend largely on the on the development of Cobiz situation right. We all know, though we nobody has an answer.
I think the.
Well that is something beyond our control what we can control our sales that you saw.
It's a aggressive decitabine as design wins engagement at this moment when taking taking advantage that we are one of the largest players in the marketplace and ER.
And the other companies is very tight right. So.
I think we have met.
Tremendous progress.
Occurs.
Across different product segments.
For it for new design ins and design wins and our engagement has reach out.
Much more compare.
Compared to the past not.
Not just panel.
Panel makers, but also too.
System makers.
And product.
In direct customers. So I think that longer term is going to be a major plus for us.
Historically, our engagement we saw show in customers typically are more too.
Because our technology discussions that technology engagements now a lot of it it's also about business.
So that I think that is a that is a very important side benefit because of the of the of the tightness or I guess what.
Our thing I. Appreciate your question I think I will elaborate a little bit one last thing here is that.
But I do believe we do have a very good.
Solid visibility longer term is automotive.
Sector.
Our many for three reasons really.
One of our major value customers are growing their market share.
In a big way, so we get to enjoy because our our.
Not share with them individually is very very high.
Much higher than our average.
In the world right. So when they are growing their market share we.
Look at the benefit so we we do support of aggressive in this effort.
And secondly is a it's a it's a it's the pick up of TBD.
In penetration in volatile market Oh, we are the pioneer in a world in introducing it.
I'd like to auto auto panels, or our must first must production actually took place at the towards the end of last year to.
2018.
But more meaningful contribution or revenue contribution starting from this year, but this year, it's still small.
We all know how.
How you know automotive market works, if you pick the design cycle takes a long time, so next year youre going to see many many times the size of this year.
Many times could be as much as coastal 10 times.
No and Tdf automotive probably starting from next year.
We tend to see a case, some meaningful contribution to our top and bottom line.
And ER and we expect further penetration non stop is a one way street going forward with the penetration into one of these major major good news for us because.
One.
Our design in coverage of design win coverage is is.
It is very very good.
In a moment and ER and secondly.
TV ever all though our enjoys much better ASP and gross margin.
They are too.
The display driver volatile and certainly also compares on TV.
For for tablet or smartphone right. So that is a second reason TDR penetration.
And the reason I mentioned earlier already we are you know entering two major.
And aggressive loans on capacity expansion plan together with our partners coverage goals.
Traditional display driver IC for auto and over the years. So for these three major factors I think.
You know I think we are really at the at the impression 0.4444 or.
Auto.
Business.
We have enjoyed.
We enjoy many years of growth I can recall, how many many years of sequential growth.
Our.
For the whole business.
Before seating.
The break.
In Q.
Kind of.
In 2018 so.
Second our 2018 two.
So our second half 2018 to first half 2019.
Right and I think we we led the market it's in India in Siena recovery starting from Q3.
And in Q4 this year I just mentioned in my prepared remarks is looking very solid the growth rate.
And so again I think this is this is where vessels to embark on the major long term growth for auto sector and the good news is auto has always been for many.
Many many years the highest gross margin for the segment for US. So this is very exciting news for us.
Sorry for the very low end, so I thought I'd take take take the opportunity to elaborate a little bit.
And that said that's very useful thank you very much. Thank.
Thank you Christian.
And our.
Next question will come from the line of Donnie tank from Nomura you.
You may begin.
Oh, Thank you Jordan I really couldn't management team for taking my question and congratulations on the very strong guidance.
My first question is regarding to a the guidance.
So could you.
Liberals lindeman more or quantify how do you come out with the like 10% sales growth in fourth quarter by breaking down into maybe roughly shipment and ASP growth if possible. Thank you.
I'm afraid I can't really give floor too much specifics on.
On revenue and SP girls, but again I can't give you a broad idea.
As fee growth come primarily from TV, the IPO for smartphones and tablets as well as automotive.
Right no specialties sectors and while for our for large panel I think as.
He has a has sustained in a solid level, but I can say they enjoy a major girls.
Like for those other sectors.
And so for large panel the market is the foundry situation is tight right now in shortage as such.
No I think that is.
That is kind of the background, but.
[music].
Why I mean, we guided for about 10%.
Our sales growth for Q4, I think that is where we are I think that is quite solid and I think.
Our first the car.
TV is probably the only the only major sector that is.
Set to decline a little bit probably mid teens mid mid single digit because our TV makers after quarter, coupled with very good seasons. They are enter into our into some kind of inventory correction period.
But other than that.
I mentioned for monitor.
Our first three quarters combined very strong compared to last year, but the third quarter. There was a major deep.
We don't see that as a witness enough event rather for monitor it is really customers inventories.
Adjustment. So Q4, we are seeing a major rebound.
And notebook also you know you know this is kind of close to 100% kind of increase.
Sequentially.
And certainly the the biggest growth.
ER will come from.
Our.
After it.
For four more in kind of revenue contribution.
Tablets.
We're continuing to grow in penetration and we dominated market the market right. So Q4.
For tablet will be up something.
Seemed like 80%.
And with with with the SP contribution because.
Percentage of LTE vehicles into our core IC, which enables the active stylus and.
But for which we enjoy better SP and better margin.
My goal would be up high single digit again, you know demand.
The man this is much higher than our supply.
Major capacity constraint.
But the good news is we.
We are we continue to gain market share in smartphone although under such.
Difficult situation as it comes.
Foundry and automotive I mentioned, you'll be up more than 20% sequentially.
We are very very happy with the more of a rebound.
In the in the midst of Greeley.
Really a pretty bearish market for automotive worldwide.
And.
So let me kind of give you a flavor of.
The remaining major revenue contributions, meaning monitor notebook smartphone peppery and older with a measure with the only major decline.
Second being TV, which is only.
Shall.
To be down like this.
Single digit on.
So it's across the board pretty even the growth.
Thank you Jordan I have a follow up under this kind of situation are you considering to raise price further in first quarter, including large display.
Driver IC or.
Race again on a TDD.
As you just mentioned.
I think we have to respond to the market and our competitors are small, but I think in all likelihood the answer is yes.
But we will just have to wait we'll have to continue to.
To observe the market and manage the customer and we'll see.
But I mean, certainly the likelihood of our lowering our SP I think is very very low.
I see.
And my second question is regarding to the gross margin.
Two.
I think this kind of a 29% level will be a new norm or.
Yes.
If your foundry partners have already so the wafer price in fourth quarter, yet or or some of them will well now raised the price on till first quarter next year. Thank you.
They certainly has already raised their price.
Prices.
For Q4, two very large degree and certainly and also our Bakken supplies for especially for testers.
Hi, it's all timing controller, the packaging as well.
ER and ER.
Your question whether this.
This 29% ish kind of gross margin will be a new norm, we certainly hope so and certainly we.
We have all the intention is to keep it this way and to actually grow from here.
Further next years and B you know for the reasons I mentioned I think you know.
One.
Foundry tightness for mature nodes technology appears to be a.
The long term thing.
And a two hour hour.
Our capabilities to grow.
Additional capacity actually.
It's going to enhance our our enhanced.
It's going to help our defending our margin as well because customers were well.
We'll be happy to cargo Himax more there's less because we do have a upside for them to grow.
And Theres the ER.
[music].
We have very good solid.
Design win.
Across the board.
I just mentioned covering not just direct customers bottling dairy customers studies very helpful.
I'm I'm talking about.
No.
On T.V. accrue all the way to automotive so I think this is ray.
In.
Development.
And lastly, you no longer term.
I just want to emphasize again the importance of our new product areas such as Ah why side I think that will be very excited is.
This long term is it doesn't you would have far less public education that bottom line because.
Those are the module will be much much higher.
For such products and supporting our timing controller, we have seen it it's all within expectation we've seen very.
Healthy growth this year and I think the growth is.
Likely who is going to continue into next year.
No.
So.
Yes. The short answer is yes, we intend to defend such a level.
The level of margin and try to even improve improve.
Improving further for next year.
Thank you Jordan I have a follow up is that when you said, although most of the foundry partner has a half raised the price.
Studying.
Wafer in base oil based costs I am just curious that im not sure whether you have some foundry partners.
We have a wafer in Seoul sold the actual price wafer price how should be more installations.
We were out.
Output.
Output, we accounting wise.
Well, when we say they've raised the price.
For us it is the increase in our cost of goods cells.
Meaning you know inventory already it's that level out.
And that's OK thanks to the shipment we make so we are talking about a Q4 yields yes less.
Michael we are referring to when we talk about foundry raising their their prices.
No they they raise their prices.
Last year the year on because the foundry production there so.
Probably the profit quarter of the time right.
Yes.
Uh huh.
If there are any.
So.
Inventory write off in fourth quarter as well as the quarter.
Certainly there are always inventory write off each quarter, but I think.
Largely thanks to our.
Efforts over the last year or two.
Two.
Josh tighten our inventory management.
I think we are able to.
Our.
Lower though our overall inventories right right now each quarter and on top of that.
It is just lucky coincidence that the.
The market.
So tight.
That.
Inventory now it is actually.
Now only or it is a profit in the sense that we feel we are inventory levels right now, it's too low running too high and the.
The REIT our requirement is much less than otherwise.
So two factors our much improved inventory right.
Inventory management.
Hello procedure.
Secondly.
The.
The tightness of the market and I I mentioned, probably twice in my prepared remarks that.
The incident in certain circumstances.
They are so then goes that we have exactly according to the arguments or inventory management protocol, which has been going on for many years right where recent now certain products. While of course, we see a capped right we're not going to solve them away, although accounting wise there.
We must decrease in price in cost or the cost has can in some cases decreased to zero, but because of tightness of the market. We are able to scale those products. So that that certainly is a very high margin, but volume but the.
Revenue contribution wise is mediamath is quite small.
They are such incidents.
So each as a reflection of.
How tight the market is right now.
Yes.
Thank you so much older and congratulations again.
Thank you Bonnie.
Thank you and our next question comes from the line.
From Jerry Su from Credit Suisse, you may begin.
Yes.
Hi, Thank you for taking my question.
First question.
Being on the PDP.
Can you talk little bit about pets beyond.
Glenn it's hard to quantify.
Net income.
I've heard some of the industry all your peers, what a panel makers are interested to on to adopt TTR.
No book I know, some other applications, which area, you're seeing more opportunities and what's the entry barrier there.
I think ER given the current tightness Gulf.
Capacity.
For.
For smartphone and tablet already.
I really don't feel there's much true for notebook in the foreseeable future for us off because.
We do.
The technology and the flaw tdf, what noble used to happen, it's going to have flow rather see me the ice.
I see compared to those fall out at least as you would imagine right.
I think though for US three D. I mentioned already so I'll just repeat.
Very briefly I think.
Automotive is the major growth area automotive head for different reasons.
Asking for for two two is asking for for the.
Same border or like the displays snaps. It is really a fourth reserves one quickly.
Really haven't been like the Sun life's varies very very bright.
You will feel better that the consumer can see a better with a with a in sales. Its claim because you don't feel kind of politician additional layer of class on couple of your panel right.
Right now you appears to be even more.
Vincent reason for infill and CBD is that.
Auto displays are getting much larger in size and much higher resolution and people are talking about experience such as what they call Peter to Peter displays we are talking about in some cases above.
50 inch 60 inch even 70 inch kind of displays automotive.
So.
So putting we want to make up.
The display so so big.
You do need to adopt the technology, because we seem to in sale you don't have to.
Hello.
The trouble of while on the Soleil glass, which is ER positive play on top of the already completed.
Images display.
And if you the third day of clubs the bond deal if we score strong.
Is going to damage.
The already finished.
Image display, which is very expensive as he will be measured and and when you have its place. So large it's very difficult to bone, especially when in automotive.
When you met you were making such a large display you need to enable for they called free.
Yes, I mean, the displays under straight.
Piece of glass soda unmatched upon the process even harder so it is now proven to be a necessity.
When the display size growth to a certain level.
Level, you do have to pay for Colombia and now are.
Onto fourth largest display for automotive.
It's looking to be a major trend so I think that.
Again, we are the leader in that space and.
We are very excited about this development so I think.
Automotive application is going to be import.
Alton.
For the industry and certainly for Himax.
Okay. Thank you.
Then my second question is about.
The and all that kind of I see thank you mentioned in the prepared remarks that Shakespeare.
You are expecting to see some.
More revenue contribution song.
One can you elaborate a little bit more about which carry a lower.
Let's see yes.
Faster growth or for Himax to faster penetrate into.
He said wearable or should we think about that that should be smartphone.
Also on our beside beyond the Chinese panel makers any opportunities to get into the Korean panel makers Im all set thank you.
Oh, Thank you Gerry.
I don't want to comment too much.
Especially I can cover.
Cover too much.
Nothing before it happens so again I want to repeat we are very committed to this so we are not going to be absent from this very important on the market.
Oh, you you have mentioned quite a few applications, meaning a wearable old coal smartphone and tablet we are you know.
And we have.
We saw good high quality salty or major engagements.
We start rate ER panel makers and direct end user customers you need to resolve them.
ER, which while were into mass production earlier than others I eat.
I think it's probably.
Maybe a bit premature to pale Sony Vue would allow us to.
To elaborate further when it happens, but I can say Oh, certainly we're hockey team must production sodium next year and a major contribution certainly hopefully will come of smartphone that is quite obvious.
Hello by type of it and then that wearable Oh total will be the lowest right.
But I think I can't I'd onto a solid recovery than before it actually happens, but I think we are very very close to us. So.
A major breakthrough so.
I see.
Okay and then.
About the Oh no.
Kind of customers I'd say are you seeing some opportunities that penetrate into a Korean customers.
I can't comment on that [laughter], two customer specific you know because they are really just one for large panel and the wonderful small panel when it comes to the Korean panel makers device.
I think that would be 12 years, if I make any comments, whether all the oh, sorry about that.
Oh, okay.
Okay.
That's fine.
Great. Thank you.
Thank you Terry.
Thank you and I'm not showing any further questions in the queue I'd like to turn the call back over to management for any closing remarks.
Okay, all right fine.
Final no directly our chief financial Officer will maintain investor marketing activities.
And continue to attend Investor conferences.
So with.
We will announce the details as they come about.
Thank you and have a nice day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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