Q2 2022 Himax Technologies Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Hello, Ladies and gentlemen, and welcome to Hi, Mark Technologies, Inc. Second quarter 2022 earnings conference call. At this time all participants are in a listen only mode. Later, we conduct a question answer session and instructions will follow at that time.
You will need to press star one one on your phone again that is star one one on your phone to ask a question.
As a reminder, this conference call is being recorded I would now like to turn the conference over to your host Mr. Mark Schlossberg from MZ group.
Please go ahead.
Thank you and welcome everyone to the IMAX second quarter 2022 earnings call joining us from the company are Mr. Jordan, <unk>, President and Chief Executive Officer.
MS Jessica Tan Chief Financial Officer, and Mr. Eric Lee Chief IR PR Officer Dr.
After the Companys prepared comments, we have allocated time for questions in a Q&A session.
If you have not yet received a copy of today's results release. Please email H I M axe at MZ Group got U S. <unk>.
The press release on financial portals or download a copy from imax's website at Www Dot IMAX dot coms that GW.
Unless otherwise specified we will discuss our financials based on non <unk> measures.
You can find the related reconciliation on our website before we begin formal remarks I'd like to remind everyone that some of the statements in this conference call, including statements regarding expected future financial results and industry growth are forward looking statements that involve a number of risks and uncertainties that could cause actual.
All events or results to differ materially from those described in this conference call.
The risk factors can be found in the company's SEC filings form 20-F for the year ended December 31, 2021 in the section entitled Risk factors as may be amended.
Except for the Companys full year of 2021 financials, which were provided in the company's 20-F and filed with the SEC on March 23rd 2020 to the financial information included in this conference call is unaudited and consolidated and prepared in accordance with Ifr S accounting.
Such financial information is generated internally and 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.
Company undertakes no obligation to publicly update or revise any forward looking statements.
As a result of new information future events or otherwise.
I'll now turn the call over to Mr. Eric Lee Eric the floor is yours.
Thank you Mark.
And thank you everyone everyone for joining US My name is Eric Lee Chief <unk> Officer, a high Max on today's call I will first review high mass consolidated financial performance for the second quarter 2000 times to follow.
Follow by our third quarter 2017 to Aldo.
Jordan will then give an update on the status of our business after which we will take questions.
The second quarter presented a challenging business environment.
Yet we continue to.
Diligently focused on navigating these obstacles.
We're positioning ourselves for long term sustainable growth.
That's that's the rating interest rate hikes to compact rising inflection on.
Im going rolling breakdown, Lockdowns in China, and Russia, Ukraine in Ward County.
Two click business piece and the reduced consumer confidence.
The gaumy visibility of our end customer led to reduced in the short term forecast along with the most stringent inventory control across the board from brands to a panel harvest.
We revised our guidance on June 22000 tons at schuh to better reflect the soft conditions.
Our second quarter revenues gross margin and EPS were all in line with the updated guidance range.
Second quarter net revenues of $312 $6 million.
Kris at 24, 3% sequentially, but were within our updated guidance of a decline of 22% to 27%.
Our gross margin came in at 43, 6%.
<unk> from 47% last quarter, but within our initial guidance of around 43% to 45%.
Now <unk> profit per diluted ads.
<unk> was 43 nine.
An upper range of the updated guidance of 40 to 45.
Hi.
<unk> profit per diluted ads was <unk> 44 cents.
At high end of the updated guidance of $36 five to 41 five.
Revenue from large display drivers was $68 $6 million in Q2.
A decrease of 38% sequentially.
TV and notebook IC revenues were down double digits sequentially due to customers' inventory control on the backdrop of slowing end market sell through and the reduced sufficient visibility.
Monitor ICD sales declined sequentially in Q2 by increased more than 100% year over year for the six months ended June 30.
2022.
Two a substantial shipment growth.
For high end area such as.
Please remain on the line your conference will resume shortly.
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So it was some interruption they'll connectivity, but we are using.
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Rick.
Okay.
Thank you Mike.
So on top of it starts on the revenue for our largest lease rate drivers. So all revenue from the large display driver was <unk> eight points takes a million dollars in Q in Q2, a decrease of 38% sequentially TV and notebook IC revenue were down double digits.
Sequentially.
Due to customers' inventory control on the backdrop of slowing end market sell through and the reduced a bit central visibility.
Monitor IC sales declined sequentially in Q2, but increased to more than 100% year over year for the six months.
Ended June 32022.
Thanks to substantial shipment growth for high in area, such as the high frame rate give me monitor.
Large panel driver IC sales accounted for 22% of total revenues for this quarter compared to 26, 8% last quarter and 23.
A year ago.
Moving onto our small and medium sized that explained driver segment revenue was 200, and a $1.6 million a decline of 22% sequentially.
Our automotive business.
Not the case in Q1 was once again the largest revenue contributor in the second quarter.
Banking over 30% of total chaos we.
We expect this upward trend in automotive sales contribution to continue throughout 2022.
Meanwhile, for AAM Olathe is one that we successfully piloted the production of our total solution covering DD IC and the telecom for the premium tablet for a global leading them.
Both the supplier.
Our ammo later Tonight.
Second quarter accounted for more than 4% of total sales.
It's more in the media side to drive the IP segment accounted for 64, 45% of total sales for the quarter.
Compared to 62, 6% in the previous quarter, and a 63, 1% a year ago.
The automotive IC sales in Q2.
Low teens sequentially, but the market was adversely impacted by logistical harder dose growth on <unk>.
Right.
By China Lockdowns.
However.
Year over year basis.
Promotive Ice's bill for the quarter were up almost 100% thanks to broad design win coverage in the bathroom program mix.
Our automotive IC sales in the first half, we're up 130% year over year, despite macroeconomic headwinds and the supply chain disruption.
Second quarter smartphone and tablet revenues, both declined double digits sequentially.
Panel inventory across the panel, how big Oems and Ann Brian remain scarp only high against the backdrop of continued sluggish demand.
Both the smartphone and tablet driver IC sales represented almost <unk> ratings in the second quarter.
Our <unk> business grew more than 100% sequentially in the second quarter stemming from increasing demand by our leading customer along with the cash op shipments that were delayed last quarter due to logistical disruption from lockdown in China.
Second quarter non driver of revenue was $42.4 million slightly down for a quarter ago.
Our telecom business was flat sequentially.
Pardon.
Good morning.
Right.
Supported by increasing telecom shipment for Automotives.
Oh late for tablet and high end displays.
Telecom business represented over 8% of our total sales in the second quarter.
Non driver per das in Q2 accounted for 35% of total revenues as compared to 10, 6% in the previous quarter and a 13, 5% a year ago.
<unk> gross margin for the second quarter was 43, 6% a decrease from 47% of last quarter and a 47, 5% over the same period of last year.
As we previously reported there were two primary factors that adversely impacted our growth our margin profile.
Price adjustment in support of our non automotive customers amidst soft demand worldwide.
Second our cost of goods sold for Q2 reflected the higher foundry prices for the previous quarters.
<unk> gross margin was also 43, 6% for the quarter.
Our non <unk> operating expenses for the second quarter were 45, meaning dollars up two 1% from the previous quarter and up 14, 4% a quarter ago.
Yeah.
From a year ago.
The sequential increase what's called the many by increased R&D expenses quite year over year expenses increased because of a higher salary and R&D expenses.
<unk> operating expenses were $52.6 million.
For the second quarter up two 1% found the preceding quarter and up 32, 9% from a year ago.
The higher <unk> figures were mainly due to the tranche of annual bonus compensation, which we award to employees at the end of September each year.
The 2021 annual bonus compensation, including <unk> and the cash are worse.
$74 $7 million out of which $24 $8 million, what immediately rock physics and recognized in the third quarter of 2021.
The remainder will be equally locked it in three tranches and the first second and the third anniversary of the grant date.
The remaining compensation example will be recognized on a straight line basis over the vesting period of each tranche.
The second quarter at all <unk> operating income was $91.5 million or 29, 3% of sales.
Third 36, 3% of sales in the last quarter, and the Thursday, 8% upscale bar a year ago.
<unk> after tax profit was $76 8 million or 43, 9%.
Look at the Ats decreased $121 $9 million or 69.7 cents per diluted ads last quarter.
Turning to the balance sheet, we had $461.6 million of cash cash equivalents and other financial assets as of June 32022.
Compared to 2000 $270.4 million at.
At the same time last year, and the 447 $1 million.
<unk> ago.
The higher cash balance was mainly from $91 million.
Operating cash neutral during the quarter.
And.
Payments received strong customer to secure their own type shifts supply.
We had $49 $5 million of long term unsecured loans.
And Q2 of.
Of which $6 million the current portion.
It was worth noting that our cash balance at the end of the third quarter royalty is substantially reduced.
Following the annual cash dividend payout of two $217.9 million in July .
Okay.
And you'll give a bunch of one dollar and a quarter per avs is equivalent to 50% of last year's net profit.
The payout ratio was lower than our historical average, reflecting argued featuring two reserved cash in light of macroeconomic uncertainty.
Our quarter end inventory at all.
At June 32.
2022 were $337 $3 million up from $253 $1 million last quarter and upfront Hungary 34 point, so many dollars a year ago.
Our high inventory level reflected the abrupt drop in demand trigger.
<unk> Street customer inventory control due to the blockage and market demand and the re deal with predictability, which led to growing customer inventory, particularly in consumer electronics.
The hot in demand adversely affected our sales and in turn costs are elevated inventory level plus our production always begins mark this is lance.
Accounts receivable at the end of June .
22022 was $371 million down from $442.2 million last quarter.
Up from $329 million a year ago.
DSO was 93 days at quarter end.
As compared to 88 days, a year ago, and 96 days from last quarter.
Second quarter capital expenditures were $2 $5 million versus $3.6 million last quarter, and one point for many dollars a year ago.
The second quarter Capex was mainly for R&D related equipment for our IC design business.
Okay.
June 32022, IMAX has 174.3, meaning ADF outstanding unchanged from last quarter.
Fully diluted basis total number of ads outstanding for the second quarter was 174 point a minute.
Now turning to our third quarter 2022 guidance, we expect.
Third quarter revenue to decrease 35% to 39% sequentially.
<unk> gross margin is expected to be around 35, 5% to 37, 5% depending on final product mix.
Now <unk> profit attributable to shareholders.
Expected to be in the range of 11, six to 15 point big fan per fully diluted ADR.
The third quarter <unk> profit attributable to shareholders is estimated to be in the range of two to 4.2 expense per fully diluted.
Similar to our usual practice, we will grant employees I knew bornemann, including <unk> and to cash award.
All are wrong September 30 this year.
The third quarter guidance for <unk> <unk> profit per diluted ADR has taken into account the expected 2022 annual bonus which subject to board approval.
Now assumed to be around $14 million, although quitch $17.6 million or <unk> <unk> per diluted atheist, whether it be adapted and expand immediately on the grant date.
Okay.
Neither the total annual bonus amount and.
The immediate.
Lastly, the portion.
Our current best estimates.
Only as the extra amount could vary materially depending on among other things our Q4 profit.
And the final board decision for the total bonus amongst.
That thing scheme.
Husky is a case for previous years, we expect the annual bonus grant in 2022 to lead to higher third quarter <unk> operating expenses compared to other quarters of the year.
In comparison.
The 2021 annual bonus totaled $74 $7 million out of which $24 million work best date EMEA vehicles.
Okay.
Yeah.
As a side note regarding proposed dose resolution regarding the company's L key IP.
Long term incentive plan.
At this year's annual General meeting to be held on August 15, 2022, we'd like to clarify that the proposed is to extend the duration of the company's VP LTE IP for another three years.
Greater than to initiate a new plan.
As mentioned earlier, the grinch and annual bonus including cash in the ICU to employees.
Of wrong to temporary 30 every year to award them for their devotion to the company.
The east evicting LTE, IP, which was initiated.
In 2011.
The ratio of our years and thereafter, you stand at a call for all of his time at annual General meeting in the past few years, where it's Mike again on September six 2022 therefore.
Therefore.
The plant extended again this year.
Sure.
New claim initiated.
For this year's annual bonus we were be able to grant only cash to employees at the end of September and Duluth is due.
But the other means of compensation.
We believe <unk> is an important incentive for employees to focus on long term skill set to help the companies.
Okay.
All the end of June this year among the total number of <unk> M. Also rise to ordinary shares of the existing LTE IP.
49% have already been granted with the remaining 51% deal valid to award all employees. If the plant is extended.
I would now turn the call over to Jordan Jordan the floor is yours.
Okay.
Thank you Eric.
Several macro level factors continue to present significant headwinds to our business.
I also saw the visibility as we enter the second half of the year.
Yeah.
Tickets high inflation correctly to the rising interest rates. In addition to the ongoing war and potential for more China City Lockdown.
Have caused widespread disruption to demand.
Faced with frozen demand piled up inventory and eroding panel prices.
Brands are downsizing their panel procurement plants.
Consequently.
Panel makers or initiated downward extended fab utilization.
Good luck with rigorous IC inventory hubs.
The southern Port in demand together with the lens of our production and the time has led to elevated inventory level for Q3.
We're in the midst of this inventory offloading cycle, we have mentioned the cut impactful new orders we saw suppliers.
Over the contracts that we entered with foundries I haven't <unk> suppliers.
When the industry experienced.
I'll try this unprecedented demand in 2031 may encourage houses.
<unk> purchase orders on muscle field.
Quantum is negotiation with suppliers are still going as we seek ways to increase flexibility in executing agreements.
Such as the <unk> charges.
Have already been Victor Bock.
Q3 guidance.
The predominant factor for the Q3 gross margin contraction.
Yes.
While we are certain about the current business environment could turn it around we believe inventory will peak in Q3, as we curtail our new wave of stores and our customers continue to restock uptake inventory digestion.
Okay.
On the revenue front.
We believe the growth will be restored in Q4 posted by healthy demand for automotive and integrity segments, where there is better visibility.
Yet <unk>.
IC sector is set to remain sluggish for the remainder of the year.
Against the backdrop of challenging market conditions, we expect our Q4 gross margin.
<unk> is still under pressure because the cost of goods sold still reflect high priced it from previous quarters.
Our inventory offloading could lead to selling prices erosion.
Okay.
However, the sequential decline in <unk> gross margin will likely be modest.
Yes, there you still saw the price support from a few product areas, notably automotive telecom and molded.
Yeah.
Which altogether now comfortable multi 40% of our total sales.
Automotive sales.
Especially <unk>.
Our strong first quarter rebound from the <unk> of Q3.
From a longer term perspective, we are very optimistic about the multi pieces and continue to look to expand our leading market position.
Okay.
I will begin with an update on the large panel driver IC business.
Our third quarter loss of display driver IC revenue is projected to decline by double digit sequentially.
It below what we typically see a seasonal basis.
Customers imposed tight inventory control measures to reduce near term inventory due to continuous deterioration of forecast visibility.
With their customers.
The outlook.
For large sized driver IC business remains soft with moderating TV sales through and muted chromebook sales.
Monitor customers exercised strict inventory.
Inventory control.
Q3 monitor notebook and TV sales are expected to decline double digits, reflecting the overall market softness.
Reduced business visibility and destocking pressure from our customers.
Now turning to the small and medium sized display driver IC business.
In the third quarter revenue is expected to decline double digits sequentially.
Our Q3 automotive driver IC sales.
<unk> to be down double digits sequentially as customers Destocking inventory.
In related during the second quarter when production was severely disrupted by the widespread use of balance in China.
However.
The extent of the sequential revenue decline of automotive is likely to be less than loss suffered by other product areas acquirer fitness visibility into Q4 and next year I'll also much better for automotive features.
Okay.
Indicated earlier, despite the Q3 decline, we expect automotive driver IC sales proceeds strong business momentum in Q4.
With TVD icos outgrowing lows of DDI steep.
We expect automotive <unk> business will continue to be a key driver of high margin grows for high mix for many quarters to come.
In the meantime, smartphone and tablet driver IC sales.
Declined double digits.
As a result of the ongoing deterioration of forecast visibility.
As our customers prolong their efforts to reduce inventory.
The backdrop of soft demand and weaker macro environment.
No update on it.
Each of the major sectors in our small and medium sized display driver IC pieces.
First on the automotive sector.
As Eric mentioned earlier automotive snow is our largest revenue contributor.
Set to represent almost 75% of our global sales in Q3.
We are poised to sustain our leading position in the global market share as we offer the most comprehensive multi product portfolio <unk>.
And from traditional DB Ics tool technologies, such as TD Bank local dimming T Con LPTA in a moment.
Additionally, we are the pioneer of mass production for DVD. It technology that is essential for large sized in the actives stylish and curved automotive displays.
<unk> is still in early stage of deployment for automotive market.
It is on track to be a fast growing segment.
Okay.
We are glad to report that we expect our automotive TDI two reached a milestone of over 10 million units cumulatively shift.
<unk> Street.
<unk> adoption rate.
For a full automotive has been advancing at a rapid pace.
I Wouldnt coverage continues to quickly expand with panel makers tier ones and local brands.
Meanwhile, China government.
Our recently created incentives to stimulate more in EV sales.
<unk> accelerated the adoption of high end automotive displays pledging culprit in sales cdti.
Automotive sales growth for 2100, <unk> might be less than previously predicted.
The growing reliance automotive electrification and smoke heavy smoke and smart cabin.
Tastes semiconductor account values are increasing.
Rapid to be per vehicle.
We will be a key beneficiary of these trends I expect to see sustainable growth in the automotive market on top of the already.
So 2021 days.
Next <unk>.
Regarding smartphone integrity businesses.
Both product lines declined double digits sequentially.
<unk> stated.
Okay.
We start to set our shipments for high enabled it had good quarterly to provide both television and.
T Con to 70 these brands.
The rice with momentum, we expect it to us in the foreseeable future.
Okay.
It's all smartphone despite being awarded a growing number of projects like Brent customers.
Much of our shipments to key customers for next generation designs.
Hi, Fred rate Ultra Slim peso.
High resolution features.
That being postponed in the midst of the excess inventory you pulled out all the models on the pitch chocolates frozen.
End market demand.
Turning to the paper it's driver business.
Another product in our small and medium sized driver lineup.
Our <unk> business is expected to decline double digits quarter over quarter due to customer's downsizing their business plans.
So.
Because you will use phonics market.
If the world continues to transition towards great MSG uncovered footprint reduction, we expect long term demand for paper to endure.
Therefore, we continue to collaborate with all cost customers well southern AC projects, we see increased R&D efforts spent on their next generation products.
Toward larger size higher resolution colored.
Colored E type of displays.
We have to recall that one of our E paper 86 in collaboration with <unk>, Inc. For their latest epoch solution was awarded Best Choice Award Computex 2022.
The ASIC enables fast handwriting speak for your type of display.
While also greatly improving the average latency of the display.
Reduce power consumption.
Characteristics. The critical next generation you pay per devices.
Next for an update on AMOLED. It will continue to queue up for AMOLED driver IC development jointly with major Korean and Chinese panel makers in various applications.
In the third quarter and modest sales are expected to increase more than 50% sequentially. We small AMOLED. It's full of tablet models commenced in mass production.
This quarter.
Alright.
Our AMOLED business, including T calling driver.
<unk> is expected to amount to more than 8% of total sales in Q3.
Slated for strong growth in the next few years.
As a reminder, we provide both AMOLED driver in <unk> and <unk>.
The sole source supplier for a global leading typically customer.
In addition, the number of awarded projects.
Our flexible AMOLED driver T con for automotive.
Increasing with worldwide conventional carmakers and MTV vendors.
Finally, we are making good progress with leading panel houses for the development of AMOLED displays drivers will smartphone television and novel applications.
In light of serious constraints on the capacity for smartphone AMOLED display driver you know that's a few years we have secured.
To provide for more supply most of the capacity for the future.
Yes.
Now, let me share some of the progress we've made on the non driver IC businesses.
Starting with an update on timing controller.
We anticipate Q3, <unk> sales could decline double digit sequentially.
Chris shirts by lower shipments for TV monitor notebook buckets.
Yet.
<unk> shipment volume volatility so mortgage sectors.
TUI Joey decent growth.
We expect these two areas to see accelerating design momentum in the coming quarters.
Our cutting edge automotive being.
Local immune T. Con has won numerous awards and potential and penetrate into Oems tier one common acres.
Okay.
Premium new car models, with some of which already convincing months production.
We anticipate more than 50% year over year sales growth for automotive <unk>, which represent about 2% of total sales.
Quarter, we saw additional product projects stated hope ego volume shipment starting in 2000 tonnage Street.
For a more tepid T con.
As reported earlier in the second quarter, we successfully commenced the mass production of our corporate solution.
The impulse T content driver to support it he didn't heparin brand is a social supplier in their newly launched Patrick model.
Additionally, we are undertaking new design development supporting even larger panel sizes with small and then customers.
We expect to gain traction with small shipments to key customers in coming quarters.
Optimistic about the long term potential for our telecom business, we have secured capacity from our foundry partners in pursuit.
Gross.
Yes.
Okay.
Switching gears to the ultra low power AI, even 15 Colo pollution.
Could you incorporate climates ultra low power Cmos image sensor, our proprietary AI causes and CRM based yeah I agree.
Well, the <unk> sensing business or notebook, we continue to support sales production ramp up in the range of their new models.
The number of other the knit top vendors at Seaview crippled players they are all.
Also shown interest.
AI total solution.
To further product use cases for next year.
Generation notebooks.
This in addition to presence to go away.
Outlook Detections.
We are developing a variety of steel.
Context aware AIC shoes for next generation Smart notebook.
<unk> notebook market.
Okay.
Our AI image sensing solution.
Feature and also low power tiny Edinburgh vision AI.
Many form factor.
It's a perfect fit for the resource constrained and battery power the endpoint applications.
New AIA area pushes snow ardently explored by AI communities.
Automatic meter reading or.
Sure.
Each one of our successful show paces to the endpoint.
Sure.
AIA total solution has been adopted by several Chinese vendors and shipments.
Slated to begin in the second half of this year after some delays caused by Cvs.
<unk> thousand China.
We have also kicked off projects jointly with squawk, all authorities utility companies retail OEM Oems or Iot network providers from China, Japan, Europe , and India over the past few quarters.
Our pollo efficient.
Solution can operate with a battery pack almost five years.
Easy to install over the existing conventional water meters, Gloria time auto consumption redox and detection of economic piece such as water leakage.
Okay.
We also see the expanding adoption of our tiny email based endpoint AI solution you knew.
In areas such as sure.
Mike Parkin.
Kipp show endoscope that more broadly in areas of automotive.
Small is small home agriculture and environmental conservation.
In Smart office, we have several projects ongoing with although it's obvious automation Oems.
Low power AI solution is used for meeting room human presence detection.
And people counting.
I am too cheap for lighting and temperature control.
Well environmental conservation, we're collaborating with seats still deal this impulse.
Fixed.
IL.
Julian to the organizing the event of Iot into the Wild contest for sustainable Planet 2022.
And into Costa AI experts around the world to take whole different.
Real World Environmental challenges.
We're excited by the submission.
Relatively newly added product line has generated a expect to see increasing sales contribution throughout 2022 and beyond.
Lastly, I'd like to give you an update on the optical related product lines, covering <unk> <unk> and <unk>.
Okay.
Okay.
<unk> continues to work on strengthening optical related technologies are the same.
Better position.
Positioning ourselves to capture the vessel opportunity presented by the future of the Med Albers.
Equipped with exceptional know how and he has a proven track record for months production.
Hi, Max is creating that hero enable the next generation mid levers related to vacations.
Currently we have multiple intensive collaborations ongoing with award leading <unk>, who are aggressively investing in this emerging field with a lot of potential.
Now to quickly go over a few recent updates.
Chris.
Close Michael display we continue to have steady John collaboration we still didn't take nims and Oems for their next generation products.
Glasses.
We offer a leading edge strongly to <unk> micro display less vicious lightweight small form factor and full color with the unique characteristics of high illumination and low power consumption, which are critical for the success of future glasses.
Okay.
We have received promising feedback thus far.
And we'll report more progress in due course.
Moving on to the updates for <unk> gesture control for Q&A interface.
<unk> technology is deployed in those three D camera to even policy.
Our perceptions.
More precise gesture control.
Technology that can be applied to current.
Goggles.
<unk> III gesture recognition.
Plus for an update on <unk> scanning and Recon and road construction project.
Three D sensing technology is deployed full customers release, Kevin device for the purpose of generating in real time.
Our digital twins ever Tomorrow.
D environments around each.
The collaboration is underway and we expect to be to begin engineering deals from the end of 2022.
One of the opportunities in optical admit huggers.
It products is the best.
It is still very much in the evenings.
We are optimistic about its potential.
<unk>.
And continue to work to position our strong optical product portfolio <unk>.
Future growth in the years to come.
Okay.
For non driver IC business, we expect revenues to decline double digits sequentially in the third quarter.
That concludes my report for this quarter. Thank you for your interest in Hi, Max We appreciate Youre, joining todays call and we are now ready to take questions.
Okay. Thank you as a reminder to ask a question you will need to press star one on your telephone. Please standby we compile the Q&A roster and we do ask that you limit yourself to two questions again, we ask that you limit yourself to two questions.
And one moment for questions.
Okay.
Okay.
Okay.
One moment for questions.
And our first question comes from Jerry Xu from Credit Suisse. Your line is now open.
Okay. Thank you thanks for taking my question.
Petroleum.
Ask you about.
Okay got it.
On the wafer capacity.
I think this has wafers has been turning less staff.
Most of the.
No I think except for the <unk> related so what is your.
Kevin.
The structure of these contracts with the wafer foundries are you able to renegotiate all in one year terms.
Sure.
Or you are pretty much are forced to oxy.
Kicked application and then perhaps the operator pay some penalties.
So to the foundry suppliers, that's the first question.
And then the second question more on regarding the comment about a fourth quarter for the revenue of total auto rebound.
I know you've mentioned that automotive and tablet.
But can you give us more color about what you think a tablet business by the fourth quarter Christy.
Thank you.
Thank you Jerry.
Firstly on <unk>.
That's actually.
Our LTE its actually cover most of the.
Foundry, but also <unk>.
To some degree.
Again the soil.
Some are expiring towards the end of the year, but that is a small portion compared to the total.
I've said in my prepared remarks.
We are negotiating indeed.
Everybody people.
People are getting bigger and better picture quality.
The Theres still 10 prospects of the market.
I mean this.
Leif holding me to elaborate so I think.
And our.
Our partners together, we are working.
<unk>.
As I said in our prepared remarks to hopefully increase the predictability of our execution of those contracts.
The.
So we are not saying we are going to cancel the agreements.
We're going to walk away from the agreement.
Firstly, I mean, certainly as a company we can still honor the agreements and secondly, we feel.
Look.
Into a longer term horizon time horizon.
This culture will still be very important for our long term growth.
I think only.
Only mutually.
And the spending basis, we're working to hopefully.
Okay.
Inquiries for PDT for our execution of these contracts.
Bill.
I want to repeat because this is an important in our Q3 guidance we have for a factor.
The potential penalties incurred by these agreements clearer.
Our our our new wafer starts.
Will be less than.
That would be the.
The minimum required.
According to the agreements so those have been factors.
Loss.
Those charges represent the predominant portion of our Q3 margin.
Construction.
So in short I guess.
Renegotiating, but we will continue to honor.
Both of those contracts.
And I think.
Hopefully.
And if everything goes as planned without any major surprises I think hopefully Q4 such charges.
<unk> to us.
We will be less than those of Q3 for.
For the simple reason that.
<unk>.
Uh huh.
Our application space on wafer starts.
So if you look back.
In Q2.
Towards the end of Q2, Theres, a stubborn treated in market demand.
So everybody was that keyed by surprise.
That's when we started to push outbreaks right.
But that was already too late because all of the tier two new levels. Thus will come out in Q3 and that explains why our Q3 inventory reached the peak.
Certainly.
Okay.
Sure.
We have must reduce the newer stuff.
Starting from the end of Q2 and also in Q3 and that is one reason.
And that is the main reason why.
The charges, although LTE. It will peak also in Q3, because our new lowest cost will be the minimum.
But in Q4 hopefully.
One as I said, hopefully there'll be some negotiations.
So that rules will be.
Retail compromised.
And also.
After.
Up to.
After all customers' digestion of inventory hopefully in Q in Q.
Q4, we will be able to selectivity selectively.
Start omni waivers and Thats certainly unit sales were lower.
The LDH houses.
And Thats certainly.
Well it very much depends on the outlook of Q1.
The visibility is still limited I really can't comment too much on.
<unk> <unk> in Q1, but that is the plan.
It looks to be.
The most likely scenario now and.
And your second question is about our Q4 revenue.
Staying.
There's a good chance of rebound from Q3.
Especially supported by automotive and tablet.
Visibility now appears to be.
Decent now.
All sectors, although I must state other than our air molded or AI and a few like new.
Areas with revenue distribution are relatively small.
Although these few fixed sectors I must say for TV panel smartphone et cetera, the visibility remains limited.
Automotive.
Therefore, she copied in Q3.
That's what we said right in.
Two there's a sudden widespread siggi lockdowns in China, and so the inventories that our customers.
In Q2, which was supposed to be used in Q2.
Our used and therefore, they're consuming those even points.
During Q3.
Explained our our people.
Automotive IC shipments in Q3, but.
Okay visibility <unk> gradually show for Automotives.
We believe.
Our customer inventory level.
The effect was normal towards the end of Q3 and in Q, starting Q4, it will be.
We expect to EPS.
Normal, but I think it will recover.
A great deal bronchial suite slots.
And very similar to the story for tablet.
Having said that our.
Tablet, we have suffered from two quarters of <unk>.
Pretty significant sequential declines already.
And our customers really just running out of.
Inventory is let me see so Q4 will be a process already stopped.
Having said that I must say.
In terms of longer term, either political or tablet for us.
The visibility certainly is lower than that.
<unk>.
Okay. Thank you.
Very clear thank you.
Thank you gentlemen.
Thank you and again, if you would like to ask a question that is star one one again, if you'd like to ask a question that is star 111.
One month, the Q&A Register.
I'm showing no further questions I would now like to turn the call back over to Jordan for closing remarks.
Okay.
Sure.
As a final note Eric Lee, our Chief <unk> Woodman for any additional marketing activities.
Continuing to our paint Mr conferences.
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