Q1 2022 Himax Technologies Inc Earnings Call

May 12, 2022

[music].

Hello, Ladies and gentlemen, welcome to the high Mach technologies incorporated first quarter 2022 earnings conference call.

This time, all participants are in a listen only mode.

Later, we will conduct a question and answer session and instructions will follow at that time.

You require any further assistance please press star zero.

A reminder, this conference is being recorded.

I would now like to turn the conference over to your host Mr. March Weinberg from MZ group.

Thank you operator, welcome everyone to <unk> first quarter 2022 earnings call joining us from the company are Mr. Jordan, <unk>, President and Chief Executive Officer, Ms. Jessica Pan Chief Financial Officer, Mr. Eric Lee, Chief IR or PR officer.

After the company's prepared comments, we've allocated time for questions in a Q&A.

If you've not yet received a copy of today's results release. Please email hei annex at MZ group that U S. Access the press release on financial portals or download a copy from imax's website at Www Dot IMAX Dot com tw.

Unless otherwise specified we will discuss our financials based on non Ifr's measures you can find the related reconciliations to ifr us 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.

Our 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.

A list of risk factors can be found in the company's assets.

Form 20-F for the year ended December 31, 2021 in the section entitled Risk factors as may be amended.

Except for the company's full year of 2021 financials, which were provided in the company's 20-F filed with the SEC on March 23 2022.

The financial information included in this conference call is unaudited and consolidated and prepared in accordance with IRS accounting such.

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 statement, 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 the floor is yours.

Thank you Mark and thank you everyone for joining us.

Name is aric, Li Chief IR PR, He says hi, Max.

On today's call I will first review <unk> consolidated financial performance for the first quarter of 292, followed.

Followed by our second quarter 2022 outlook.

Jordan will then give an update on the status of our business after which we were tech question.

Historically, all quote her skills are seasonally low point of the year.

So the lunar new year holidays this year starting from February .

Additional factor postal weight.

Many new lockdown in China to contain the spread to all of our combat rent and the.

Graphical conflict, you're dropping in Ukraine.

It's causing major disruption to our supply chain.

Despite these additional challenges our first quarter revenue gross margin and EPS were all in line with our guidance range issued on February 17 2022.

First quarter net revenues of $412.8 million decreased eight 6% sequentially.

We've seen our guidance of down 5% to 9%.

Yes, Q1 sales were up 33, 6% on a year over year basis.

Our gross margin came in at 47% a decrease from the record high of 51, 8% in the fourth quarter last year, but we are seeing our guidance of around 46% to 48% now.

No.

It's a profit per diluted ads was.

While 69 seven cents, a midrange of the guidance of 67 to 73 cents, but significantly after 81 point.

5% for same period last year.

<unk> profit per diluted ads.

While 63 66.3 cents.

The midpoint of the guidance of 63 point fight to 69.5 things.

Significantly up to 73, 1% year over year.

Revenue from large display driver was $110.6 million in.

In Q1, a decrease of 11, 5% sequentially.

Increased a person's mentally 60% year over year T.

<unk> revenue was flat sequentially anchored by high end large sized TV shipments to key account.

Despite the first quarter being a seasonally low period and to continue with the softer TV demand.

After consecutive quarters of strong growth.

<unk> monitor in the notebook ICC all decreased sequentially as we guided.

On the backdrop of slowing end market sales to.

However, both gross nicely year over year basis, a reflection of our leading position across high end display and the premium models.

Large panel driver IC accounted for 26, 8% of total revenue for this quarter compared to 27.7% in the first quarter of 2021 and 22, 6% a year ago.

Moving on to our small and medium sized display driver segment.

<unk> was $258.5 million a decline of mid single digit sequentially increase of more than 25% year over year.

Robust sales growth in our automotive segment for the past several quarters continued during Q1.

Automotive IC sales increased more than 30% sequentially and more than 170% year over year.

Our E paper sales increased more than 15% sequentially in Q1, despite a human heart at the end of the quarter caused by stateside Lockdowns in China.

Small and medium sized driver IC segment accounted for 62.6% of total sales for the quarter compared to 61.2% in the previous quarter and 66, 1% a year ago.

In Q1, the automotive driver segment became our single largest your largest revenue contributor representing over 25% of the total sales.

We expect this upward trend in automotive contribution to continue throughout 'twenty to 'twenty two.

The revenue growth in automotive driver IC, while specs by comprehensive design win coverage across the panel houses tier wings and the car makers alongside increased capacity for both discrete D D IC and the T D D I.

Automotive D D IC sales, which is still a predominant portion of our automotive IC revenue.

Enjoyed it decent first quarter growth up more than 20% sequentially with demand continuing to I'll pass the supply.

Our T D D. I, if automotive we reached and in practice in an impressive milestone with over 3 million illness shipped during the first quarter plus we previously guided.

Given our leadership position in automotive IC driver IC comprehensive product offerings and growing vehicle display market. We expect the center sustainable robust growth in our automotive business with further market share losses.

Share gains on top of all fast I'm spending market.

After many quarters of consecutive growth.

Our Q1 tabular revenue slightly declined off a high base.

Faith five mid single digit.

However, tap of the revenue was up low teens.

For the year basis due to strength, our TPG icl's, which grew low single digit fond of proactive adoption of all leading non I O S tackling them.

We maintained our leading market share position.

I owe a tablet market with us just the radio T D D I penetration.

<unk> leading brand name.

In line with all guidance.

First quarter smartphone revenue declined at double digit sequentially.

Muscle market continued to be challenged by sluggish demand unexpected lockdown in China, and the Geopolitik KOL attention.

Resulting in significantly reduced the demand visibility had panel houses and OEM, which has started to reduce the inventory.

But as we mentioned on last quarter on last quarter call. We expected a portion of the first quarter decline due to our strategical initiated production season four.

Key customers, new designs, which led to less production output during Q1.

First quarter at all non driver.

Revenue came in bathrooms than expected at $43 $7 million, a sequential decrease of votes.

Bob around 25% year over year.

The better than expected result was driven by higher shipment of our ultra low power AI image sensing total solution to the notebook market.

Our T com business was slightly down mid single digits sequentially, but increased more than 50% year over year <unk>.

Refraction off batter mix told worst high improve area such as the four K 8-K T V.

All nature, though Paul notebook and automotive T com.

Non driver product in Q1 accounted for 10.6% of total revenue.

Compared to 11, 1% in the fourth quarter of 'twenty, 'twenty, one and 11, 3% a year ago.

Non <unk> gross margin for the first quarter was 47% a decrease from 51, 8% of last quarter, but much higher than 40.2% over the same period of last year.

As we previously discussed there were two primary factors that adversely impacted our margin profile.

First our cost of goods sold for Q1 reflected the higher foundry price from the previous quarter.

The expedited customer orders for which we enjoyed premium prices decreased in Q1 due to market softness.

<unk> gross margin was also 47% for the quarter.

Our non <unk> operating expenses for the first quarter was $44 million down nine 3% from the previous quarter, but up 12, 3% a year ago.

As a reminder, this.

<unk> operating expenses decreased what's caught up by a one one time cash bonus at the end of December last year to further reward employees for our last year's remarkable financial results.

The year over year increase what caused mainly by the increase to salary and R&D expenses.

Hi, S operating expenses was $51.5 million for the first quarter down 8% from the preceding quarter, but up 35% five years ago.

The higher the figures were mainly due to the change of annual bonus compensation.

We award to employees at the end of September each year.

The turnkey 'twenty, one annual bonus compensation, including ice views and the cash awards totaled $74 $7 million out of which $24 $8 million Walk me. This all exhausted and the recognized in the third quarter of 2021.

The remainder will be equally vast it in three tranches at the first second and the third anniversary of the grant date.

The remaining compensation expenses will be recognized on a straight line basis.

The divesting period of each tranche.

The first quarter and al I S.

Operating income was $149 $9 million or.

36, 3% of sales.

41, 1% of sales in the last quarter and to 27.5%, obviously off a year ago.

Now <unk> after tax profit was 121 $9 million or 69.7 cents per diluted a T S.

Decreased from $148.4 million or 84 nine.

Per diluted ads last quarter.

But significantly higher than $67 $1 million or 38.4 things for the same period of last year.

Turning to the balance sheet, we have the $447 $1 million of cash cash equivalents and other financial assets as of March 31st.

<unk> 22, compared to 240, <unk> 45 point.

You mean in dollars at the same time last year, and the $364 $4 million a quarter ago.

The higher cash balance was mainly from 72 million of operating cash inflow.

During the quarter.

And the payments received from our customers for the purpose of securing their long time chip supply.

We had a $51 million of long term unsecured long cut off at the end of Q1 of which $6 million while current portion.

Our quarter end inventories.

March 31, 2022 while $253 $1 million $498 $6 million last quarter, and <unk> hundred $14.9 million.

A year ago.

Accounts receivable at the end of March 2022 was $442.2 million up from 410 point too many dollars last quarter, and <unk> $289 $1 million a year ago.

DSO was 96 days at the quarter end.

Peer to 84 days, a year ago, and 97 days for last quarter.

First first quarter.

Capex expenditures were $3 6 million versus its to me and for both last quarter and a year ago.

First quarter Capex was mainly for R&D related equipment and the in house test or for all of our IC design business.

Just prior to today's call, we announced an annual cash dividend of $1.25 per ADR.

Totally foresee major lead $217 $9 million and the payable on July till 'twenty to 'twenty two.

The payout ratio is 50% of named Park net profit of last year, which is lower than our average payout ratio historically.

Relatively low payout ratio reflects our decision to reserve sufficient working capital.

In the light of macroeconomic uncertainties.

And to facilitate our anticipated growth for the next few years.

We are grateful for the continued support of our shareholders, but we continue to ask cute our business objectives, and the striped to deliver sustainable long term growth.

As of March 31st 2022, Hi, Max had 174.3, a D S outstanding unchanged from last quarter.

Fully diluted basis total numbers of 80 S. All spending for the first quarter was 174.8 minutes.

Now turning to our second quarter 'twenty two guidance.

We expect second quarter revenue declined 16% to 20% sequentially.

<unk> gross margin is expected to be around 43% to 45%.

Pending all defined.

The final program mix now.

<unk> profit attributable to shareholders is expected to be in the range of 45 to 50 cents per fully diluted yes.

I F F.

Profit attributable to shareholders is estimated to be in the range of 41.5 to fourth.

$46.05 per fully diluted ads.

I would now I would now like to turn the call to Jordan children before.

Thank you Eric.

Looking ahead to the second quarter.

Most all of geopolitical and macroeconomic.

And kind of any pandemic related factors are creating challenges in <unk>.

Pairing our near term outlook.

The war in Ukraine.

Rajeev inflation, it really looked out throughout China.

Significantly impacted the supply chain and consumer electronics demand.

Leading to a particular the normal business environment.

Murky, although visibility leading to smaller and shorter demands focus by leading global brands.

False.

Starting at the end of Q1 panel makers began taking aggressive measures you may have.

Tempt to quickly reduce the IC inventories.

Yes.

Against that backdrop.

Of challenging market conditions and short term uncertainty.

Second quarter, we expect a sequential decline in gross margin.

Mainly because our cost of goods sold this quarter represents pricing from previous quarters, when foundries, where steel raising their prices.

We also have some.

<unk> price adjustment in support of our normal automotive customers Amit so.

The math worldwide.

However, we suppose phone I'm sure you haven't taken pricing already stabilized.

Cost of goods sold will be until the second half we're likely continue its upward trend over the first half of the year.

Yeah.

As COVID-19 induced lockdown begin to fade and supply chain disrupt disruptions are alleviated visibility will improve and ultimately lead to a rebound in market demand.

We anticipate Q2 sales to be the low point of this year.

For full year.

Despite the murky short term market condition, we remain upbeat Apollo <unk> fourth.

2022.

Supported by the auto multi pieces into new revenue streams, which all enjoy solid business visibility.

We now expect our 2022 full year sales to state <unk>.

Approximately the same high level of 2021.

For the automotive business, regardless of the macroeconomic concerns we are talking to each sales to double from last year, which already more than doubled from the year before.

Meanwhile, backed by strong order pipeline.

As for low power.

Image sensing and OLED business to new streams.

Poised to deliver an impactful contribution.

The increased contribution of these key sectors.

So has the added benefit while improving our long term product mix in terms of both probably module business visibility.

We start I will begin with an update on the.

Large panel driver IC business.

For the first for the second quarter plus display driver IC revenue is projected to be down double digits sequentially due to production disruptions in the midst of China's sloped house, coupled with weakness in consumer demand.

The outlook for large large sized struggle IC pieces permit smoky smell the racing TV sales through immediate chromebook.

Chromebook sales.

TV and notebook IC sales are expected to decline double digits sequentially.

Second quarter due to customers' inventory control.

You're supposed to sluggish global demand and reduce business visibility.

We expect military sales to also be class sequentially, reflecting the overall market softness in the second quarter.

Yet.

On a year over year basis sales are expected to increase by more than 60%.

It demonstrates our leading position across major customers for their higher end displays and premium Mallika models.

All our PDT tool for total solutions covering display driver IC first T cons.

Turning to the small and medium sized display driver IC business.

Second quarter revenue is expected to decline mid teens sequentially.

Sales for automotive are foreseen to be flat sequentially and up more than 110% year over year.

Small wholesales, all set to decline single digits sequentially.

This will typically ties 50 to be claimed by double digit both due to our customers' efforts to reduce their near term inventory.

The result of the sudden deterioration of full cost visibility from their customers on the pit truck of China's ongoing severe lockdowns, we could've microeconomic environment.

It is slowing.

And market demands.

Yes.

Now for a quick update on each of the major sectors, you know small and medium sized display driver IC pieces.

First on the automotive segment.

Eric mentioned earlier.

Oh overtook other sectors to become our largest revenue contributor during Q1.

Representing over 25% of total sales.

To elaborate a lot of success in this core segment.

If the market either.

The multi display driver technology with a 40% global market share.

We post a comprehensive product portfolio, we smoky leaderships ranging from traditional D. D. I see two new technologies, such as T. D D. A novelty means T com.

The OTT and OLED.

Despite a strong consumer demand the global car market continues to suffer from ongoing key component shortages and port congestion.

In automotive sales worldwide.

However, the increase in the number of size and sophistication of displays you said vehicles involved.

Evolving at a rapid rate.

Oh, indicating much more driver IC content per vehicle.

We are uniquely suited to continue as we expand our footprint in this lucrative market.

By secure.

Secures a mother year foundry capacity and customer purchase agreements.

Whereas shoal design coverage from all major panel houses pier ones automotive Oems.

Additionally, we are the pioneer of less production for TV.

Technology.

Is essential.

Lost sized interactive stylish and curved automotive displays.

Okay.

<unk> still in early stage.

<unk> deployment for Automotives market.

Already achieved a milestone of almost 3 million units shipped in Q1 alone.

While continuing to see rapid increases in <unk> coverage across a broad range of automotive customers across the world.

The upcoming vehicle models.

In addition.

OTT I, which caters to larger then so the inch displays.

Culprits sophisticated touch feature we smother chip design architecture.

Another promising product, which we expect to see tremendous long term results studying film to southern 20th Street.

We expect to double our automotive sales again in 2022.

On top of the already strong 2021 sales girls.

111%.

Yeah.

For the second quarter, we expect the automotive TVD ice sale of PV IC sales.

The second quarter, we expect the automotive <unk> sales, which I'll steal much larger than local TVT I am OLED can.

We flipped.

To slightly up sequentially.

But up more than 90% year over year.

All told the total ICL put was adversely impacted by fit maintenance at one of our major foundry suppliers at the end of the first quarter.

To maintain this was long overdue because of the heavy back look of unmet demand.

While we expect the automotive TD IC output to increase quarter over quarter for the rest of the year.

The severe foundry capacity shortage continues to be a constraint for automotive D. The ICP space.

Q2 sales for automotive TVD I expect it to decline single digits sequentially as a side effect from the Russia and you planned the war in Chinese City look those which have led to postponement of.

So the new projects plus production timetable.

Nevertheless, we still see extraordinary business momentum into the second half of 2022 for automotive D. D D.

We are well prepared in terms of secured long term foundry capacities for the multi facility.

Pushes one trick ponies exponential growth throughout 2022.

The foreseeable future.

Yes.

Next regarding smartphone and tablet business.

The smartphone market continues to be depressed by excess inventory full panel makers odm's and fronts.

Pandemic induced logistics and supply chain disruptions also weakening market sentiment, while a rising inflation adversely affects wholesale disposable income leaving.

Leading to a prolonged replacement cycle at the consumer end.

Okay. This spec dropped we expect Q2 smartphone IC pieces to down single digits sequentially.

Full tablet, we expect sales to fall double digits sequentially from the high base in the first quarter.

Driven by these slowdown in orders as our customers that just their inventory.

In addition, the musk production timetables for some of the new large sized type lease were postponed due to trying to look at those.

We started said we believe the pandemic has fueled the secular shift towards three multi work are you learning that consequently, you will keep tablet mezz above.

The pandemic levels.

<unk> penetration continues to rise for tablets.

Push on moving towards larger size displays pilot for them, particularly.

Active stylus features where we see expanding adoption.

Hi, Max steel has the leading position in lung I always type of it market with decent market share.

As soon as spreads we can cover this.

We expect our sales momentum to rebound from panel makers replace replenishing inventory and preparing to launch new models.

We therefore remain positive, even though Q3 business outlook with a high likelihood of sequential repo from the trough of Q2.

Turning to the EPA puts all the pieces. So another product you know small and medium sized driver play out.

E vapor piece as you said to grow more than 20% sequentially.

Is there anything around 2% of total sales in Q2.

The phenomenal sequential growth stems from an increase in demand to our leading customer that's worth catch up shipments that were delayed last quarter due to logistic disruptions from the lockdown in China.

On a year over year basis, ebay, where business is expected to increase significantly by around 300%.

Due to a growing number of awarded projects.

Leading customers for their ASIC product shipment.

We continue to collaborate with world class people customers for certain <unk> projects, we see inquiries R&D effort is spent on next generation products towards larger size higher resolution and colored.

The paper displays.

Backed by a long term supply agreements and lasting partnerships with industry leading customers.

To capture a significant market share.

Ever expanding E reading and E signage markets throughout 2022.

Next for an update I'll handle that.

In partnerships with major Korean.

And Chinese panel makers you various applications.

We continue to queue up for AMOLED driver IC development.

Oh, Hey, Moelis solution for tablet has commenced must production starting this quarter.

Clearly, we provide both AMOLED driver and T controller solutions and all of the social supplier for a global leading type of customer.

We are working to secure additional capacity to meet the customer's product launch schedule and designed with all of them.

In addition, our fiscal AMOLED driver and <unk> for automotive display successfully ramped up for a customer's flagship E V model in Q1.

Concurrently the number of awarded projects with worldwide Covid conventional carmakers and EDI vendors you see increasing.

As for smartphone, we continue to commit R&D resources to AMOLED driver IC.

Uh huh.

Through arrangements with top tier customers.

In the light of serious constrains, all AMOLED display driver capacity in the next few years, we have secured meaningful capacity in this area. We saw our secured capacity fully booked up by leading panel makers.

Finally for air molded television notebooks sectors. We are encouraged by our progress in the last few quarters with designs are met for leading customers and panel houses next generation products.

In the second quarter or more of that business, including T content driver you suspect it to a colorful around 4% of total sales.

Slated for strong growth in the next few years.

Now, let me share some of the progress we've made on the non driver IC businesses.

So I think that was an update on timing controller.

We anticipate.

Q2, pecan sales to grow low single digits sequentially. The result of higher shipments of tea console monitor all that.

The type of it.

Automotive sectors.

The consumer market continues to expand these appetite towards advanced displays for a mutual enjoyment and diverse video at the attainment.

After years of commitment and all the effort, we have successfully positioned ourselves to worse.

Hi in areas, including full K AK TV high.

<unk> give me monitor low power notebook local dimming T com for automotive as well.

First OLED full type of it and automotive.

These high end areas not only warrant much higher content value only per panel basis, but also represent the highest barrier to entry for customers.

As the OLED displays get traction in the market due to technological advances.

Advantages.

We have been collaborating closely with special pillow houses to joint develop an industry, leading Ebola type it display solution.

We provide both a M. All the T con and drivers we spoke commencing mass production in Q2.

Additionally, we extended our telecom product reach from higher end type it into notebooks sector.

Uh huh.

Currently we are initiating projects jointly with panel makers for next generation premium notebook.

We are optimistic about the long term potential for all telecom business and continue to look to secure more capacity from a foundry partner in pursuit of the Grilles.

Yes.

Switching gears to the ultra low power, Yeah give me a sense in total solution Cushing culprits high rates Ultra low policy most image sensor.

Poetry, AI processor and C N N paste yeah awkward.

On April 14th.

Our wholly owned subsidiary Enzo announced but you sort of evolutionary innovative AI based did you essentially that's all she was adopted in a range of sales new notebook models the.

The Wi Fi AI image sensing solution, we shrunk the Enzo Agua reason on high mix proprietary ultra low power AI processor, and they always image sensor.

Fish's always all.

Ultra low power contextually aware, we shouldn't AI.

The solution can detect user engagement levels based on presence will fence Fisher direction.

Yeah.

This contributes to pay the laptop power management maximizing battery life and ultimately enhancing the types of the laptops usually experience.

We are thrilled by this deployment.

And anticipate continuous smoky pretty.

Information as we engage in them.

Discussions with worldwide notebook friends and platform partners quoted a number of design projects are increasing as we speak.

Another area, we are gaining momentum and we saw a total solution.

The automotive meet a region or a oh.

Hey, I'm, sorry, an education.

Well, we have seen adoption across the continents over the over the past few quarters.

With greater focus on sustainability and environmental.

<unk>.

More countries are devoting resources towards that towards a.

Preservation and our year to implement intelligent water conservation.

Technology.

And even pay these highlights ultra low power image sensing technology ease of ideal fit for this market.

Oh, Paul efficient AI solution installed over the existing traditional water meters.

Automatically collect quarter consumption data with AI operating locally on the device itself provide.

Providing entirely detection.

No more leakage.

So far we have received most of the inquiries from China.

Our AI total solution has been widely adopted by numerous customers covering a wide geographical area.

Some of these projects were slated for mass production starting in Q1 by subsequent subsequently delayed due to the pandemic resurgence.

In addition to China, we also see a growing number of <unk>.

Worries from other countries in Asia, and Europe as far as India.

Any indication that our solution.

He used to use and affordable for this application.

The a M. A reputation is expected to stop generating sales in the near future.

The rapid advancement of AI over the past few years has expanded both the function and popularity of AI applications that are now finding their way into nearly every business sector.

For ultra low power Oh, you mean sensing solution, we have seen a wide range.

Variety of successful use cases.

The options are.

In areas such as.

Panoramic videoconferencing.

Smart parking fitness equipment, smart agriculture, and medical inspection among others.

It's the illustration.

In the area of smart agriculture, and environmental protection.

Solution was adopted by seat studio.

In Iot a playful enabler into there.

L T into the wild product launch, we expect to see many more of these types of engagements.

Most production in some of these.

Our exciting new channels.

Lastly, I would like to give you an update on our optical related product clients covering W. O L closer and through these things.

On our last earnings call I provided a brief overview of our optical technology roadmap and applications.

This market is.

Short Timex is as a.

Forefront of this exciting early stage industry.

Kevin.

I think to us the developed technologies for many years in collaboration with leading companies in the Spa.

Page.

We believe our optical technologies individually or combined will play a key role in the they believe met ours.

VR devices.

Now to provide an update on our progress this quarter.

Chris.

<unk> will display I'm pleased to report that our new <unk> design wins for our protect our products.

From a leading global player.

For yeah, glosses currency would have several jointly with them projects underway.

Tech names some of which you know cutting edge Fronded close Michael display for their next generation products.

Oh from the Doe close Michael displayed fishes.

Lightweight smartphone pick too high illumination, and four RGB color display characteristics, making.

Making it ideal for future losses.

Next on Julian too faced centrally enforced really Cheshire control with several slash fee up projects underway with industry leaders.

I mean to achieve immersive and precise control of fee free just showed with initiatives.

Moving onto <unk> <unk> were being encouraged by some of the leading display companies for the adoption of <unk> technology enables immersive three D naked eye displays free of motion sickness for monitor notebook and medical applications.

Bustle <unk> scanning and reconstruction.

Creating a virtual wars involved Houston a piece.

Sue said I'll say, it's a three D image, including Overtask objects and other environmental surroundings is releasing.

<unk> scanning device is required for the purpose of generally generating this three D images.

Currently we have a few projects underway, we speed in a virtual option companies, whose <unk> scanning devices adopt teammates for poetry, there were three D sensing architecture.

Truly construct three D virtual objects or a real time basis.

As I mentioned last quarter.

Middleburg development is still in early stage.

Timex is well positioned with years of research and development, our strong product portfolio.

Uh huh.

Production history, and key partnerships to capitalize on this growth in the years to come.

For non driver IC business, we expect revenue to be up low single digits sequentially in the second quarter.

That concludes my report for this quarter. Thank you for your interest in high mix.

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

At this time, if you would like to ask a question Press Star then the number one on your telephone keypad.

Please limit your question to one question and one follow up.

Yeah.

Your first question comes from the line up Donnie Teng from Nomura. Your line is open. Please ask your question.

Well, Thank you Jordan and Air report, taking my question.

My first question is regarding too.

I'll comment on the sales pattern into the second half so.

Just curious.

I know second quarter, it looks like to be a deep.

For the recovery third quarter fourth quarter math, if you are seeing like more like a shipment driven.

Or more like the Asps recovery. That's my first question. Thank you.

I think it's primarily shipments right but.

Tony I think.

We actually mentioned.

We feel confident that we should be able to achieve at least the flu.

But 72 total revenue versus the high level of last year.

Now how do we arrive at that.

Number and how do we get our confidence I guess is another way. So that's what I said in your question.

Hum.

Actually if you.

We can't conceptually develop products into two groups.

<unk> been the ones with high visibility.

They are.

Automotive, obviously timing controller, which is very strong visibility.

And also.

The second group.

Oh, sorry.

The first group the first school because these two product.

Product wise.

Very strong limited visibility.

And also we have two major.

New revenue stream.

For I've been.

AMOLED drivers.

Disney products.

Also ultra low power AI.

Since.

This.

New revenues, we should be there.

The year before.

No.

So that is the first group right.

They enjoy good visibility.

Because of the nature of our our product in the industry off because of the fact that they are actually new pregnant streams.

We are always the sole source to provide the who are the customers is launching new products. So the visibility for that business place actually quite good.

No. They are also the second group of products, which are primarily older contributed tonics the Tvs computers Stifel.

Right.

Honestly, they although visibility currently is slower than usual.

Great. So.

But if I if I if I if I take my exist.

The fishing position from my customer for the first group.

And I.

In the lumber into my whole year's projection.

If I if I assume.

My whole year revenue to be flipped.

Compared to last year.

Then that implies the second group I E. The low visibility group.

Revenue essentially you represent.

The materials.

But from from a year over year basis.

The number.

I mean, obviously no visibility being low visibility that means we don't have liquidity of companies, there's one way or the other however, the good news is that if we.

We actually recently.

Analyzed customers.

Our inventory level rather thoroughly.

And particularly our inventory level towards the end of the second quarter.

The second group of products.

And when it comes to easy conclusion that the pillow customers' inventory towards the second quarter.

The unusually low.

So while I don't have a crystal ball to predict when and how you know what the China, <unk> slopestyle or whatever but.

Given the fact that our panel customers shipment during Q2, the low season.

Actually.

Suzie dull but.

They are making regular shipments without major disruption while the inventory control has resulted in is very very unusually low inventory level towards the end of the quarter, but give us the confidence that there's a good likelihood.

We must see a good rebound from.

From Q3 or at least for the second half so.

So what I'm trying to say is equally predict the whole year revenue to be flat he actually implies.

The second group there'll be stability.

Chinese group.

To suffer from a pretty severe decline year over year wire, we actually seen very promising signs that you may actually do better than that.

So we are actually targeting or let me say, we actually believe the.

Uh huh.

The flat revenue.

This year.

Versus last year will be a little target for us for this year.

And that is basically all notices.

I'm pretty sure within a month or two with visibility for the second group will be mushy hedged.

And there are a lot of discussions going on with the customers.

We got at the moment.

And lastly, let me just call it the first group.

We not only have good visibility from customers although visibility.

We are.

We either.

Very strong position or the social supervisor.

Those products and we are very much spec by.

First Street Cup of tea support and last but not least.

All of this.

Products Coincidentally.

Suffering from capacity shortage and that means a lot.

Supply.

We'll still be.

Lower than the demand.

For the second half and that is another reason why we feel very confident about the visibility of the first group.

So I'll list them.

To put in theory, but it's not the ASP, but primarily.

Based on our assumption.

Yeah. Thank you Jordan is very comprehensive.

The follow up should be on the gross margin side, because it seems like you are right.

Positive from a volume recovery and potentially as we have mentioned the first group of products.

Losses appear to you as well.

For the ASP side or fault boundaries, a cost perspective.

Are we able to like.

Sure.

Has the cost to customers or to negotiate a new price with foundries or what kind of a normalized gross margin.

You are expecting for the second half.

Okay.

Well, thank you Tony.

To follow my previous analysis of the second group versus the the first physical presence second group the high visibility and no visibility.

One little high visibility area are we.

We are not certainly not low enough price.

In any meaningful way because of the symbol fits that.

You know we are already very strong position and as I said earlier.

Demand still outpaces supply and so there's no reason for us to low oil prices.

The second group low visibility is harder to say to be honest no. If I look at the supply side.

We've been through this.

Half year, two full quarters of Oh.

Oh.

Uh huh.

A rising cost of goods cells.

But leased directly to our gross margin erosion. So if you look at our second quarter's guidance I can tell you our guidance.

Gross margin decline is pretty much the same as what.

Expected.

Cost of goods sales increase percentage wise right now.

So how is the cost of goods sold going to be like.

In the second half.

I think we are seeing very much a foundry prices have stabilized and the fact that these that our Q1 Q2 those are prices fixed much earlier, but because of the production lead time, but we are making shippers.

Of those of those products.

Where are the prices will actually fix wachovia when the funds re prices or on its way up.

Certainly.

Oh.

But I mean foundry people also realize the fact that market is soft right now the debate this week so.

Sure.

Through our discussions with sponsors we have not seen.

We are not expecting any meaningful voluntary price increase the central pit.

And if anything I think we and our peers would try to get a better price for the second half I mean, certainly a lot of negotiation going though I cannot make any promises, but I think that is a trend.

<unk>.

So that is on the cost side and only.

On the.

Only only our pricing side.

Let's talk about the high visibility group already we're not going to lower our price and the selectivity.

Some areas, we may be able to raise a price a bit I think only second group is how to prepare the low visibility group.

Right now.

Even during Q2.

Very very bottom season.

He and theirs.

More amount of selective for the small amount of off price.

Price, though have been offered to us but.

They are in the very limited scope.

What happens is that I think everybody all customers included recognize the fact that.

If you look ahead into next year over year the year after a full.

Full mature processes the foundry capacity.

So you're likely to be tight.

And.

You mentioned those are you're right.

Towards the middle of the year.

Our customers' inventory levels.

<unk>.

Could be.

Much lower than normal. So this factors combined I think.

I don't expect any major price fluctuation.

For the second group, even during the second half.

<unk>.

And so if you ask me, whether we'll be able to pass through the additional costs I think there'll be no subsidy issue as possible additional costs, because I said earlier and you still got half the course decided likely to continue to rise.

So I guess, our gross margin for the second year will depend largely on our final product mix.

Obviously, it's harder to predict.

Actually given the fact that the as I mentioned in the second group.

The slower meaning.

The revenue the actual revenue that should all complicated.

Lower than that.

And then Oh all of our numbers right now.

But I think all of them.

As a conclusion, we don't expect.

Gross margin in Q.

The two reals.

In any material way from the level of Q2 or Q1 I think.

May I ask one last follow up is that once the sales breakdown you are expecting for the group one group to the suite.

Okay.

46.

<unk> four.

To page six.

Great. Thank you so much.

Again to ask a question press Star then.

Small correction.

Two six being the first half that's the actual number.

And in the second half the first group will outgrow the second group based.

Based on what current Patricia pipeline. So the first group will rise to somewhere around 45. So it's gonna be 45 to 40 against 55, so the whole year will be 40 plus something.

Okay, 50, plus something.

Okay.

Yeah again to ask a question press Star then the number one thing a telephone keypad.

Your next question comes from the lineup garrison from Credit Suisse. Your line is open. Please ask your question.

Hi, Thanks for taking my question.

My first question is regarding your I think.

I don't think that's mentioned.

Uh huh.

You talked about the inventory level at your customer has been a it could be a go to a pretty low level by end of this quarter, but when we look at inventory level in Q1, I think even three has increased another 25% possible Q and then more than doubled from a year ago. So how are you.

How should we think about your inventory exiting the second quarter are you taking any further.

That's cool.

Cool.

Control your inventory or you are comfortable with your current inventory levels.

Thank you Jared.

Let me just say Ah.

He saw.

You still have a good idea to compare the inventory levels lower sales last year, because last year was unhealthy.

In the sense that we had no literally no finished goods inventory and our customers are choosing us for shortage like almost 80 basis right from everywhere. So last COC inventory was unusually low and actually unhealthy low.

If you look at our history.

Let's say, we look at the past five years, excluding last year right last five to 10 years.

Our inventory days, meaning inventory compared to cost of goods sold.

Yes.

The range is in between 92.

If you live in 10 days.

And if you look at our Q1 and Q1 is why aren't you at Paul Davis.

Slightly on the upside, but still within that range right. So.

So we are not worry about our Q1 inventory because.

Particularly given the fact that we are we still feeling that.

The capacity the capacity will remain short at this next year or two.

Now.

The expected deep of a Q2 revenue our end of Q2 inventory will still be higher than those of the.

First quarter.

But but I said earlier on the other hand, our customers inventory level, even though it will be lower than usual. So I think oh, we are hoping you know in Q3 or Q4, all inventory level with the two vectors come by we'll get back to a more normal status.

For now we are watching our inventory level like we are moving to.

I myself military all your inventory level at this weekly basis. So.

So I'm not worried we are watching it very closely but there is nothing to indicate that we are.

We are reaching a unhealthy level.

So to speak and in fact, we we think it's probably still appropriate that we.

We take a slightly more aggressive in the inventory preparation.

<unk> approach.

The normal given the our.

Our our view is that.

The foundry capacity in any foreseeable future will still remain tight.

Okay. Thank you that's very helpful.

And then just to follow up on your comments on the foundries.

Yes, if the foundry.

<unk> Hi, it's complete remain tight for the next few.

A few years.

The foundry pricing well enough, but the increase in the second half, especially I think.

In the past few days, we have saw the news about one of the largest foundry in the world has been raising the price.

What kind of timeframe, but what is your view on the foundry pricing.

You may be interested perhaps also next year.

Do you expect.

You know, even if it's going to be flattish.

Later in the year it could further increase in demand.

I know you were talking about.

So, let's just say just say T a C.

You know its public because he probably and we got a notice as well.

Apparently they didn't notice the same time to every customer.

Starting at the beginning of next year, they're going to raise their price by 6%.

Actually fold material no that is no we are.

Uh huh.

Ironically, it is actually very good news for high mix.

Because.

TSMC in immature no. They are actually just playing catch up full price right now I mean, it is common market knowledge that TSMC is less expensive.

<unk>.

They priced the mature node wafers less than literally all of their peers.

So.

I'm not going to comment on advanced nodes, where tsmc's cleaners, either filenet mature nodes TSMC position, it's not as dominant as their position in the advanced nodes, they actually playing catch up.

Uh huh.

And our our our our exposure to TSMC compared to our peers.

Lowest meaning we are using other foundries.

More heavily.

Compared to our peers.

Actually implies that.

Historically, our compared to our competitors or a cost burden is actually higher right.

No. The reason why I say good news for us.

It's really about you know comparing with our competitor is mainly because we are hoping.

Through TSMC raising their price there'll be able to squeeze out.

We cut the mens and.

You know I just mentioned the first group against second group right.

A good portion of the second of the first groups, especially the OLED.

Sure.

Nazis play all that products the.

The ultra low power sensing products, we are using TSMC heavy duty.

We are suffering steel.

The big time from shortage and we are hoping.

Through tsmc's raising their price they get to squeeze though some of them. We got the message that we can enjoy better supply.

We actually will come such price increase.

Whether we use the therapy.

Besides we'll pass it along to our customers at our call, but I think.

At the moment.

To get more supply what TSMC is far more important than price now.

I'll get back to a question you know so TSMC.

TSMC has been able to raise their price does that mean.

The whole industry would follow suit.

And they are playing catch up and I think everybody knows that so.

I'm, certainly hoping that I don't believe.

Other foundries for their mature notes will follow TSMC price hike for the price hike because they've already had their price hike mascioli at all.

And I mean, okay.

It really recognize.

You know that.

Market demand is soft.

Uh huh.

Foundries customers guys like us.

Having a harder time, passing on the cost to our customers because there's only so much the customer can take so I think for the industry to remain healthy in the long term.

In my discussion we saw.

Different boundaries I think the consensus is.

<unk>.

So far to me that our.

People are just going to stay put on pricing for those for the remainder of the year.

I mean, unless there's a major market rebound right.

Then maybe another story because again.

The.

The funds in the foreseeable future at least I think of this.

One to two years.

For mature nodes.

We'll still be tight.

Okay.

Okay. Thank you then maybe just one other question if I may.

Regarding.

The current.

Competition landscape what are you seeing.

For the competition coming from.

The Chinese fabless.

Fabulous I think especially joined the foundry supply constraint on you. This kind of environment do you think Chinese fabless.

Pardon me to come in and then create more volatility or take share from the existing driver IC all payers. Thank you.

I think.

There is no straight simple answer to cover all sectors it varies depending on the sector.

For example, automotive well Yep Yep, we will enjoy the best position.

Very very little if any Chinese prisons each.

Much harder.

Much higher entry barrier.

Takes much longer to tools see even any revenue contribution right. So I think for.

Well, there's two reasons that is not the priority so we feel.

This all starts from there.

Sure.

For consumer electronics I think.

Are there precedent is much less in the areas of notebook and monitor.

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