Q3 2022 Himax Technologies Inc Earnings Call
Yeah.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Yeah.
Hello, Ladies and gentlemen, welcome to the Hi next Technologies, Inc. Third quarter 2022 earnings Conference call.
At 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.
As a reminder, this conference call is being recorded.
I would now like to turn the conference over to your host Mr. Marx Wallenberg from MZ group.
Yeah.
Welcome everyone to the high Mac's third quarter 2022 earnings call.
Joining us from the company are Mr. Jordan, <unk>, President and Chief Executive Officer, Ms, Jessica Pan Chief Financial Officer, and Mr. Eric <unk>.
He chief <unk> Officer.
After the company's prepared remark comments, we've allocated time for questions in a Q&A session. If you've not yet received a copy of today's results release. Please email <unk> annex at MZ group.
Access the press release on financial portals or.
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 <unk> measures you can find the related reconciliation 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 are forward looking statements setting.
That involve a number of risks and uncertainties that could cause actual results or events to differ materially from those described in this conference call.
A list of risk factors can be found in the company's SEC filings form 20-F for the year ended December 31.
21 in the section entitled Risk factors.
As may be amended.
For the company's full year of 2021 financials, which were provided in the company's 20-F and filed with the SEC on March 23 2022.
The financial information included in this conference call.
And consolidated and prepared in accordance with Ifr S accounting.
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.
Which we subject our annual consolidated financial statements and May vary materially from the audited consolidated financial information for the same period.
The company undertakes no obligation to publicly update or revise any forward looking statements, whether as a result of new information future events or otherwise.
I will now turn the call over to Mr. Eric Lee Eric the floor is yours.
Thank you Mark and thank you everyone for joining.
My name is Eric Lee Chief <unk> Officer, a high Max on today's call I will first review <unk> consolidated financial performance for the third quarter of 2022.
Followed by our fourth quarter 2022, although.
Jordan will then give an update on the status of our business after which we were text question.
Our third quarter revenues and the EPS beat the guidance why are gross margins at the mid range of the guidance issued on August 11, 2022, despite macro headwinds continuing to challenge our business.
Third quarter net revenue of $213 six meaning.
Decreased to 31, 7% sequentially, but exceeded our guidance of a decrease of around 35% to 39% sequentially.
The increase of sales momentum in our small and medium sized display driver segment contributed to the faster than expected.
No.
Gross margin came in at 36, 3% a decrease from 43, 6% last quarter.
Mid range of the guidance range of 35, 5% to 37, 5%.
Non <unk> profit per diluted ads was <unk> 17 think beating our.
<unk> of 11 610 to 15 16.
<unk> profit per diluted ads was.
<unk> for Afib.
Exceeding our guidance of zero to.
Two four.
Im sorry, <unk> two for two things.
Revenue from large display driver was $41 $3 million in Q3, a decrease of 39, 8% sequentially and below what we typically see seasonal basis.
Customers across the board from brand to append on houses continued to imposed stringent inventory contour majors on the backdrop of a slowing.
End markets.
And the Destocking pressure.
Our guided all three large display driver sectors, covering TV monitor and notebook.
<unk> double digit sequentially.
Large panel driver IC sales accounted for 19.3% of total revenue for this quarter compared to 22% last quarter and 27, 9% a year ago.
Moving on to our small and medium sized display drivers secondly.
Revenue was 141 $4 million.
A decrease of 29, 9% sequentially.
Primarily a result of the pre launch inventory reduction effort of our smartphone and tablet customers.
Smartphone and the temporary driver IC sales contributions.
I personally made totally equal in the third quarter.
Despite the.
Challenging macro environment, we continue to gain traction with our leading driver solutions being adopted by more customers for <unk>.
Their next generation product.
Hudson yards titration, all proprietary tabulate TDI solutions. Once again was adopted by solving for their latest at premium <unk> and the two in one laptop per square, our TDI support larger size.
High frame rate displays and high prestige and active stylus features.
Taylor, most tosh channels in the market to offer superior touch sensitivity.
Meanwhile, for AML lay business, our global leading customer had more air or late premiums heavily model commence mass production this quarter.
There, we provide the total solution covering DDI and E com.
They are sole source supplier.
In the third quarter, our am OE sales, including TD IC entity com were up more than 45% sequentially and accounted for more than 8% of total sales.
Q3, automotive business was once again the largest revenue contributor.
Presenting over 35% of total sales, however, Q3 automotive sales declined double digits sequentially with guided.
Customer continued with strict inventory control of majors to destock from the accumulation jewelry in China Lockdown in the previous quarter.
On a year over year basis.
Promotive IC sales increased more than 80% for the nine months ended September 32020 to a result of our comprehensive per Doc covering and increasing design wins for our automotive TDI.
For our paper business.
Another product in our small and medium size to drive a lay off.
Sales declined double digit quarter over quarter due.
Due to customer's downsizing their annual business plans amid a weak consumer electronics market.
Small and medium sized driver IC segment accounted for 66, 2% of total sales for the quarter.
Peer two or 64, 5% in the previous quarter and 59, 9% a year ago.
Third quarter non driver revenue was $13 nine meaning dollars down 26 point 26, 9% from a quarter ago.
We expect it.
Our telecom business was down double digits sequentially pressured by lower shipment for TV monitor and notebook market.
Yes telecom shipment for automotive enjoyed decent growth and we anticipate it is business momentum to assess the rate in the coming quarters.
Telecom business represented more than 7% of our total sales in the third quarter.
Non driver products in Q3 accounted for 14.5% of total revenue compared to 13, 5% in the previous quarter and the 12, 2% a year ago.
Now <unk> towards the margin for the third quarter. It was 36, 3% a decrease from 43, 6% of last quarter.
As we previously reported that in.
Kurt the charges agreements.
Agreement, we entered with foundries and the backend suppliers, both securing capacity.
Or is the predominant factors.
Virtually impacted our margin profile in the third quarter.
Price erosion because of inventory Destocking also contributed to the margin contraction.
<unk> gross margin was 36% for the quarter.
Howard.
Operating expenses for the third quarter.
First $6.7 million slightly up by three 8% from the previous quarter and 5% from a year ago.
The sequential increase was caused mainly by increased salary expenses prior year over year expenses increased because of higher inventory I'm, sorry, higher salary and R&D expenses.
<unk> operating expenses were $72 9 million.
For the third quarter up 38, 5% from the preceding quarter and a six 4% a year ago.
The higher <unk> figures were mainly due to the change of annual bonus compensation, which we award employees at the end of September each year.
The 2022 annual bonus compensation, including ICU and the cash are worth what in line with guidance. We mentioned on our last earnings call that totaled $39 $6 million.
Out of which $18 $5 million or $8.05 per diluted ads was.
It was immediately vast paid and recognized in the third quarter of 2022.
The remainder will be equally validated in three tranches. The first second third anniversary of the grant date, the remaining compensation expenses will be recognized on a straight line basis over the vesting period of each tranche.
Third quarter non <unk> operating income was $30 9 million or 14, 5% of sales versus 29, 3% of sales in the last quarter and a 41, 2% of Astellas.
Year ago.
No.
<unk> after tax was $29 8 million or 17.
<unk> per diluted ads.
Decreased from $76 $8 million or 43 nine.
Diluted <unk> last quarter.
Turning to the balance sheet, we had $227 $9 million of cash cash equivalents and other financial assets.
September 32022, compared to $258 million at the same time last year, and the 461 $46 million a quarter ago.
Our cash balance at the end of third quarter substantially declined following the annual cash dividend payout of $217 nine meaning dollars in July .
We had a 48, meaning dollars of long term unsecured loans.
End of Q3 of which $6 million.
The current portion.
Our quarter end inventory as of September 32022 was $410 1 million dollar fund.
337, $3 million last quarter, and upfront $169 million a year ago.
The elevated inventory level reflects the abrupt drop in the demand triggered by the street customer inventory control due to sluggish and customer demand.
The murky visibility.
The excess customer inventory particular in consumer electronics had.
Diversely affect hit ourselves.
<unk> E high inventory level.
Our production always begin sponsor.
Accounts receivable at the end of September 2020 to $253 $3 million down from $371 million last quarter, and the Florida $409 million.
Go.
DSO was 74 days at quarter end.
That's compared to 100 days, a year ago, and 93 days from last quarter.
Third quarter capital expenditures were.
$3 $4 million versus $12 $5 million last quarter, and a $2 $1 million a year ago.
The third quarter Capex was mainly for R&D related equipment for our IC design business.
As for September 32022, <unk> had $174 four meaning ADF outstanding litho changed from last quarter.
Fully diluted basis.
Total number of outstanding for the third quarter was $174 7 million.
Yeah.
Now turning to our fourth quarter 2022 guidance.
We expect.
Fourth quarter revenue to increase 4% to 8% sequentially.
Non <unk> gross margin is expected to be around 31, 5% to 33, 5% depending on the final product mix.
Now <unk> profit attributable to shareholders is expected to be in the range of 21 to 24 cents per fully diluted yes.
The fourth quarter <unk> profit attributable to shareholders is estimated to be in the range of $17 eight to <unk> <unk> per fully diluted EPS.
Attributable to gain from disposal also long term capex in the third financial arrangements.
I will now turn the call over to Jordan to discuss our Q4 outlook Jordan the floor is yours.
Thank you Eric.
The near term economic outlook appears bleak.
Phase of elevated utilization.
Rapidly rising interest rates.
Or heard in the market. So long, we still going full out from China City, Lockdowns and geographical geopolitical conflicts.
For the display application market.
Grants are downsizing their panel procurements, which consequently triggers panel makers to further lower fab utilization.
Against this backdrop, our business visibility remains limited, especially in consumer the consumer centric products.
As we continue to.
Right through this inventory Offloading cycle, we are cautiously managing our new wafer starts trying to strike a balance between inventory level foundry contract fulfillment.
The silver lining.
The amount of <unk>.
The automotive segment quarter visibility is relatively better.
It allows us to continue to maintain new orders.
Our foundry partners and bigger suppliers.
Continuous orders in such segments, coupled we saw successful negotiation with suppliers were reduced the incurred charges in Q4 from contracts.
To secure capacity as compared to the third quarter.
Okay.
Charging them by our current business pipeline and production plan.
Believe inventory level has reached the peak at the end of the third quarter.
Looking into Q4, our gross margin is still under pressure due to price erosion from high inventory Offloading further cost of goods sold remained high as the inventory was sourced when funds III.
And ticket prices or.
Still at high levels.
Despite the soft demand we remain upbeat about topline growth from several revenue streams that we consider our high visibility group.
Notably.
The multis.
OLED <unk>.
Timing controller, and the way sie AI image sensing.
In the automotive business, we expect <unk> sales momentum to pick up starting in Q4 from this trial in the third quarter.
Volatile multi pdi's C. However, customers are still in the process of offloading their inventories accumulate.
Intended for the second quarter production, which will severely disrupted by the widespread China Lockdowns.
We believe our 2022 full year automotive business growth will reach around 50%. Despite the challenging environment, I expect growth and momentum, especially with what TV.
To extend into 2023 for another stellar year of strong growth.
Separately <unk>.
So AI image sensing.
And AMOLED business.
<unk> to deliver an impactful contribution next year.
We expect <unk> sales to grow nicely backed by strong business pipelines from a wide variety of new AI applications adoptions.
Among our AMOLED deployments.
For smartphone will commence as a new sales stream next year.
Top of the current air molded for tablet.
The module sales.
The benefits.
From the increasing contribution from this higher visibility segment is twofold.
First overall corporate visibility improves.
They are waiting.
Increases.
Second.
The gross margin for this segment is above our corporate average lending support to a more sustainable higher margin profile for us.
We expect these.
Groups combined to account for more than 50% of total sales in Q4.
<unk> contribution waiting will continue to increase for years to come.
Yes.
With that I will begin with an update on the large panel display IC business.
Our first quarter loss display driver IC business.
Is projected to be flat sequentially.
Hello base up to three consecutive quarters of decline.
Yet on a year.
Year over year basis. This is still a double digit decline as we price for a disappointing year end holiday season.
On a positive note, we do see TV panel prices showing signs of stabilization as customers have started to replenish inventory, particularly in midstream models, leading to positive momentum.
TV driver sales, which are set to increase single digits sequentially in Q4.
Conversely, the downward trend at Sigma.
Segment lingers on.
Further declines expected in both notebook and monitor sales in the fourth quarter on the first drop of customers continuous tight inventory control measures the sluggish column.
Turning to the small and medium sized display driver IC business.
In the fourth quarter.
Revenue is expected to increase by single digit sequentially.
Our Q4 automotive driver IC sales are anticipated to be flat sequentially. Following double digit decline in Q3 as customers look to restock inventory.
Sales of automotive activity.
Host to grow by double digit horizontals for traditional driver IC are set to decrease single digit from last quarter.
The business visibility for automotive segment into next year remains much better than those of consumer centric products.
Smartphone driver IC revenue, you said to be slightly down sequentially, a result of Lindsay.
Tori Offloading cycle of MIT soft demand and limited visibility across those channels.
Tablets driver IC revenue, however is projected to increase double digits sequentially.
Driven by record throughput by reclaiming replenishment momentum from leading customers.
Now for a more detailed update on the automotive segment.
An area, which has more resilient demand is less vulnerable to the macro headwinds.
As we have previously discussed automotive driver sales are now our largest revenue contributor.
Set to represent over 35% over total sales in Q4.
The demand trends for automotive interiors continue to favor more stylish and diverse designs.
Made possible, we see increasing quantity and size of panels equipped with advanced display technologies.
As a leader in automotive display IC market with not only offer the most comprehensive automotive product portfolio in the industry.
Ranging from traditional <unk> to new technologies, such as TDI local dimming T Con COPD.
But we also the preferred partner that panel customers like to work with especially those looking to focus more on growing the auto multi pieces in <unk>.
Order to compensate for the soft.
Consumer electronic businesses.
As the pioneer of mass production for automotive TDI have effect by rapid expansion of automotive <unk> adoption, we expect automotive to eds sales will be one of the primary driving forces for our long term business growth for years to come.
The automotive TDD technology.
Essential for large sized interactive stylish and curved automotive displays.
To date, we have acquired more than 200 automotive <unk>.
Yeah.
Project Awards with only a small portion currently must production in.
We employ an enormous growth opportunity ahead.
Our <unk> design win coverage continues to quickly expand with panel makers Tos and <unk> brands.
Meanwhile, the Chinese government continues to support the <unk> industry.
We stimulus programs.
Which may accelerate adult the adoption of premium automotive displays that adopt TBD.
Moreover, we are well positioned with suppliers in support of our automotive segment grows leveraging die.
Divert funds resources for optimal operational efficiency benefit.
Furthermore, we are the first in the industry to launch the cutting edge OTT.
Our large touch and display driver integration.
Automotive display solution.
Specially designed for the next generation extra large sized automotive displays push out typically larger than 30 inches.
The <unk> attacks.
Topology technique, allowing up to 30 chips seamlessly connected.
Support of extra large sized display.
High precision touch sensitivity.
Creating a high entry barrier for potential competitors.
This was featured at CES 2022 earlier this year by one of our key customers who showcased.
<unk> inch in cell touch display power of our high Ltvs solution.
More design collaborations are underway.
And worth debut in 2023 in some of the most.
<unk> automotive vehicles.
Yeah.
Next.
On smartphone and tablet business.
For smartphone.
Much of our shipments to key customers for their next generation new designs have been delayed or missed.
Theory team.
Meant.
For the tablet shipments out of the rise full premium models.
High end <unk> and <unk>.
Advanced payable that hybrid solution.
Which we offer both DDI CMT come to certain leading brands.
Q4 sales will those premium tablet solutions are expected to increase more than 100% sequentially.
And we believe momentum et cetera into next year supported by demand for advanced specifications and higher end displays.
Turning to the pay per driver business.
<unk> business is expected to increase double digits quarter over quarter.
Stemming from increases in shipments over loss size display to a leading customer as their sole supplier.
We expect long term demand for both <unk> and.
E signage to endure.
E reader demand is fueled by our growing E learning market alone, we see increasing reading material.
Material over the Internet.
He signage market is also on an upswing upstream.
The product is being more widely used.
<unk> warehousing smart retail and many other fields to replace traditional signage.
We continue to collaborate with world, leading customers for certain ASIC and telecom projects with increased R&D efforts spent on their next generation products towards larger size high resolution and colors newspaper displays.
Thanks for an update on am OLED.
We continue to queue up for AMOLED driver IC.
Development jointly with major Korean.
And Chinese panel makers in various applications.
Q4 automotive.
Q4, a modest sales are set to increase by double digits sequentially.
Sent over 9% of total sales.
Our AMOLED business, including T content driver is slated for strong growth in the next few years.
For a more of a tablet products, we provide both AMOLED driver in telecom and other sole source supplier for one global leading brand.
For automotive OLED display.
We continue to win project awards for our flexible AMOLED driver in telecom with both conventional car makers and vendors.
Finally, we are making good progress with leading panel houses for the development of AMOLED display drivers for smartphone TV and mobile applications.
We expect to start shipping smartphone AMOLED drivers around middle of 2000 and for the Street.
As a reminder for smartphone AMOLED display driver, we already have secured meaningful capacity and can you continue to look to expand it moving forward.
Yeah.
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.
Q4, <unk> sales to increase by high teens sequentially bolster.
Bolstered by higher shipments of automotive products for both LCD and AMOLED displays.
For the AMOLED display market, we successfully commenced production of AMOLED T cons for tablets and Automotives.
We also met the good progress strategically with leading panel makers on anvil as notebook T Con.
Which features advanced Edp, one five provides.
Providing higher resolution higher refresh rates as was improved image quality to.
To the notebook.
Next on LCD display of Automotives.
Our position remains unchallenged in automotive T con for local dimming technology.
Which not only enhances display contrast for better viewing and driver safeguards under various ambient light conditions.
Also provides effective policy with critical for Evs.
Larger size displays.
We see us Australia.
Work on this high entry barrier technology, we have won numerous awards for various Oems tier ones and carmakers premium new car models.
Some of which have already commenced mass production.
We anticipate Q4 automotive pecan sales to increase more than 80% year over year.
Represent around 2% of total sales in the fourth quarter with additional projects slated for meaningful volume shipments starting in 2023.
Additionally, we are undertaking new design developments supporting even larger panel sizes and higher resolution.
More than customers.
We expect to gain traction with small shipments to key customers in upcoming quarters and are optimistic about the long term potential for our telecom business, we secured capacity from our foundry partners in pursuit of long term sustainable growth.
Now switching gears to the <unk> solution.
Push incorporates highlights for clarity also low power AI processor.
Cmos image sensor.
CNN based AI algorithm.
Yeah.
For WSI business for notebooks will continue to support a range of sales new models.
<unk> remains a key supplier for leading edge offshore power ultra low power AI processor and always on Cmos image sensor.
In order to capture the vast market opportunity presented in the emerging local AI application market will have extent extended deployment of in house development of new algorithms to advance our AI capabilities.
Partnering with leading notebook CPU players aiming to expand our partnerships with leading global laptop names to propel the business forward.
In addition to features such as human presence.
Good way and onlookers.
Actions.
We are also working on a variety of reached.
New AI features and use cases to product.
Possibly applications with end customers for next generation Smart notebooks.
Yes.
The size of our notebook.
Highly integrated WSI total solution, featuring ultra low power tiny MRO vision AI in a tiny form factor is a perfect fit for many resource constrained and battery powered endpoint applications.
Anyway area.
Now at the entity explored by our communities.
Our success for example worth highlighting.
One successful example, or highlight is the strong adoption with meaningful shipments of our AI solution in autonomous automatic meter reading.
Our policy efficient AI can help existing conventional water meters operate with a battery pack for over five years for real time order consumption readout.
Detection of.
<unk>.
Economic fees, such as water water leakage.
Attracted by the simplicity of installation superb low power performance.
Others of water authorities utility companies.
OEM and ODM.
Or Iot network providers across the globe.
Have commenced joint development projects with us.
Moreover, we have additional WSI AI.
Customer engagement in areas such as video conference week device.
Sure by capacity.
Medical capsule endoscopy.
Automotive.
<unk> office better return.
Valence.
Just to name a few.
These are order shipment is anticipated within the next few quarters.
As we focus on scaling adoption.
In this relatively untapped market.
We continue to build alliances with numerous partners and communities to make our AI solution more.
Accessible.
To that end during the upcoming CES.
2023, several of our proprietary ultra low power voice AI solutions will be showcased jointly with our ecosystem partners and customers in various applications, including smart home smart agriculture, and so whether it's just to name a few.
Also on display will be applications embedded we saw heavy CMC module.
Our solution that offers numerous pre trend machine learning modules.
Machine learning models.
With a plug and play design that makes it possible to drastically reduce the significant entry barrier for AI or systems developers in deploying computer vision and machine learning AI capabilities to the endpoint devices.
We welcome all interested parties to stop by to learn more about our AI product line and see them in action.
Finally.
We recently announced the divestiture of our fully owned subsidiary Endesa visual sense.
As we mentioned in our press release, the transaction will not affect the existing business with scale.
The divestiture does not change our ausiello power lifestyle.
<unk> business model.
We will continue to develop.
All algorithms and work with third party algorithm partners.
Furthermore, we are more committed than ever to strengthening our wildlife product roadmap and retaining our leadership position in offshore low power AI processor and image sensor for endpoint AI applications.
As a demonstration of this commitment.
CES 2023, we will also debut our next generation AI processor code named W. E T.
The debate to AI processor features.
<unk> cortex, CPU and ethos MCU risk.
Recess of central control interfaces.
Industrial grade security.
And cryptography engines.
A multi layer of power management architecture to offer a superb tiny email computing performance Fatima energy efficiency embracing cloud security and privacy assurance.
The <unk> AI processor offers 40% peak power savings.
30 fold.
Eva speed.
Employing over 50 times.
Efficiency on a per insurance basis compared to the first generation <unk>.
<unk>.
Which is already leading the industry about AI processes for similar modest tuck in markets.
Several leading desktop names and CPU players have shown strong interest.
We need to process.
To support diverse AI features of the next generation Smart notebooks.
We are very excited about the potential for <unk> and believe we are well positioned to capture the vast endpoint AI opportunities presented.
Lastly, I would like to give an update on our optical related product lines, including <unk>.
It's really essentially.
<unk> is one of the few companies in the technology industry with optical design capabilities and years of proven track record of mass production.
We continue to work on strengthening our optical related technology suite.
While collaborating with some of the worlds largest technology companies that are deeply committed to investing in.
Is development.
We're positioned to play in enabling growth in this exciting new industry.
<unk>.
Now to quickly review some of our recent progress.
First on a leading edge from these aircrafts micro display features lightweight small form factor and full color with unique characteristics of high illumination and low power consumption.
One notable highlights in Q3 is a design win with a partner for new AIG collapses resolve.
From these aircrafts Michael displays.
CIS.
Hearing impaired.
People through all deal to text translation.
That is projected onto the glasses on a reserve basis.
Small volume shipments commenced during Q3.
In addition, we also started shipments of strong leader across mobile display in Q3, four customers assisted reality type hands free multi device.
Below a process line of sight to assist workers to access real time information.
Moving onto an update obviously remains of essentially we are seeing increasing adoption of optical components in <unk> sensing technologies that enables new ways people interact with AI and VR applications.
On the <unk> gesture control, our <unk> technology is deployed to empower <unk> perception sensing for precise controller free gesture recognition in VR devices.
The collaboration is ongoing with a leading player with promising progress with volume production expected during 2033.
On the <unk> scanning for object reconstruction.
Our <unk> technology, which incorporates both our <unk> project is really the colder.
<unk> is being deployed by leading customers release scanning device for the purpose of generating real time digital twins.
Over time and through the environment surrounding the ultimately help users transit.
In connect seamlessly between physical and digital worlds.
While still early in the life cycle for the optical and medical related products. The ongoing commitment by the world's technology leaders alongside expanding interest in this potential.
Just this.
Neil.
This next generation technology is poised for significant growth in the years to come.
We are excited that <unk> is at the forefront of optical innovation for this.
NASA industry and believe it has potential to be a long term growth driver for our business.
For non driver IC business, we expect revenue to increase high teens sequentially the first quarter.
That concludes my report for this quarter. Thank you for your interest in <unk>. We appreciate you joining today's call and we are now ready to take questions.
If you'd like to ask a question at this time. Please press star one one on your telephone.
Again that is star one one if you'd like to ask a question.
Our first question comes from the line of Donnie Teng with Nomura. Your line is now open.
Yeah.
Hi, Thank you for taking my question can you hear me.
Yes, very well.
Thank you Jordan so congrats on a very strong.
Our results and guidance.
First question is regarding to gross margin.
I think you have mentioned like foundry saw lowering the price as well.
And I think we have seen some of them are lowering the price quite aggressively.
But at the same time I think our customers are still asking us to lower the price as well.
So I think it's pretty dynamic, but wondering if you could kindly comment now.
When do you think the gross margin will be the lowest point into next year and how should we expect the reasonable gross margin.
Next year. After you know the foundries oil price and also we lower our price to our customers. Thank you.
Yeah.
Thank you Tony.
It's an interesting question.
Dynamic and evolving.
You are right to say that the foundry.
Yes.
Is kind of lowering their price.
Although they are in.
In doing so they do expect volume from customers any change.
Now the thing is.
We are burdened we as the industry and highlights include the we are burdened with Crs in the high inventory meaning.
Sure.
Our.
Our capability to keep.
Significant orders to foundry right now is quite limited.
So I think.
So actually I think on a negative note.
You are likely to see across the industry.
Gross margin continued to be under pressure because we are just offloading our inventory.
<unk> or sourced previously at a higher cost.
As a matter of really how phones that you saw in their price right now.
Sure.
So that is the major issue however for the.
For the products.
The industry enjoys better visibility.
Certainly we continue to place new orders two boundaries. However, the foundry also well this so on those areas typically always sees that.
<unk>.
They are price down.
Is would that become less aggressive because they now actually you do have to continue to place order because you don't have much inventory burden.
The market prevents visa.
Feasible.
This strong.
So I think.
Uh huh.
And for <unk> specifically.
For next year I mean.
We will say first off its too early to comment on the whole years.
Gross margin because the macro uncertainty.
You know what I'm talking about listeria.
You still causing the market right. So so I think still too early to comment. However, I think we are.
Are still quite confident on how we called the.
The strong visibility group.
In my prepared remarks, and we also mentioned the same as last quarter.
They are basically four major things in the next few years.
We'll call high visibility group, namely automotive business in general and timing controller business.
More of that business and lastly, our Psi ultra low power AI business.
And.
This fall.
Segments together account for is going to account for about 50% over 50% of total sales. So they are pretty significant.
And they all.
They all they are all projected to enjoy better growth next year than our corporate average.
<unk> are projected to enjoy better gross margin is lower than our corporate average.
So I think that is our positive note.
So mixing the negative and positive together what is going to be the outcome for next year I think is in Detroit.
However, I do believe after this inventory destocking cycle is complete.
Yeah.
Hopefully it will be.
Within two to three quarters from now.
This destocking cycle is complete.
Think we were emerge.
<unk> position, a better company gross margin wise.
Supported by these so-called high visibility group of <unk>.
<unk>.
So that will be my.
A long answer to you.
<unk>.
Thank you Jordan very helpful and.
Yeah.
Maybe a housekeeping question is like.
Last two years I think most of the semi in the company.
The higher loss of.
Talents and employees.
Buffets, mostly facing.
Quickly deteriorating.
Outlook in the past few quarters.
I'm wondering do you have any expectation on managing the opex into 2023.
Where you can.
Control of Opex or you would just we should model lines the similar opex as this year.
I think that will be referred a fair assumption for your modeling purposes.
Think that is.
Right now the.
The plan.
Which is not to increase our.
No advice opex.
No advice opex.
Certainly.
<unk> <unk> with lot depends largely on our profitability as you know our ICU.
Goes in line with our.
Our profitability.
Now.
Sure.
How do we do that I think.
Okay.
Hi.
So called high visibility group for those product lines, we do need to continue to invest.
However, we were.
We are likely to.
In a recoup our organization so that.
Those people working on other product areas many of them will be channeled through to support those product areas that is one thing that is a major thing that as a way to control our head count knowing that actually the business without visibility is poor.
And.
So so on select areas I think we will continue to invest and expand but we just have to do that.
More smartly.
Okay.
Proceeds is to re channel some of the people from.
Other areas into those focus areas.
And.
We are still in the process of finalizing our BP for next year.
It's very dynamic that otherwise certainties.
I think.
Also considering.
Inflation wishes.
Which is creating pressure pressure for.
Which increase.
Across the industry.
On the top of the fact that Taiwan is there.
Hi Tech engineers are staying quite in hot demand. So we have to remain competitive.
For such titles, so again I think.
The bottom line given the highest.
The low visibility for the business our turkeys too.
Keep it flat.
Opex expense next year compared to this year.
Steer.
<unk>.
Continuing to invest in those especially for those high visibility group product lines.
Almost.
Jordan Congrats on the strong results I'll back in queue.
Thank you Tony.
As a reminder, if you'd like to ask a question at this time. Please press star one one on your telephone.
We have a question from the line of Tiffany <unk> with Morgan Stanley . Your line is now open.
Yeah.
Okay.
Good evening, Jordan Me Eric.
Davidson.
Yes, loud and clear.
Okay. Thank you. Thank you for taking my question.
My first question will be about a future question Glenn.
Could you. Please let us know whether you will leverage <unk> Chinese foundries in the future.
Thank you.
I have a follow up question. Thank you.
Okay.
We have we.
We have been using Chinese foundries, although.
Our.
The vast majority of our foundry suppliers come from Taiwan and also.
A bit from Korea as well.
Anna.
Is a new source of supply.
We do intend to collaborate with Chinese foundries.
Now.
And the spending.
U S China tension at the moment right. So I think on the one hand.
I mean, our Chinese customers too.
Love to see our using more Chinese foundries.
On the other hand.
I mean, even though Chinese customers that all.
Other other other international customers.
They do need to target non China customers.
So while some others for many of those non China customers.
I mean.
C&I uncertainty again.
This.
Our intention the prevailing tension between China and U S.
Alright, so they need to.
They need to hedge.
Okay Chinese foundries, so I think.
I think.
Okay.
The good news is is that for guys like us China is such a big.
Foundry phase it doesn't matter, how you strategize your foundry.
Position you.
I'm talking about my customers or even end customers.
I really get away with.
Utilizing.
Or depending.
On Taiwan as yourself answering.
Our place.
So I think.
Leaves us with.
Pretty good position, so I think.
Going looking forward.
We are going to continue to.
Sure.
Color on Taiwan is our primary source of foundry supplier.
Continuing to.
Expand our China and Korean foundry basis.
Okay.
You may clear.
Alright, that's possible.
Can you let us know.
Sure.
Question two.
Many Taiwanese and Korean foundry.
Uh huh.
I don't have the data right in front of me right now but.
We do.
<unk>.
They are they are product considerations.
Just areas.
Sure.
Right.
Korean boundaries are quite suitable southern area.
They build capacity, we do have a track record of our technology and that is suitable for us Likewise force China by in China.
Now <unk>.
Actually.
The fourth quarter.
Quite a diversified line of.
Product areas covering.
Smartphone.
Sure.
Smartphone tablet.
Towards lesser extent television.
And.
And monitor.
Yes.
Our.
Social supply automotive.
Primarily Taiwan almost exclusively Taiwan.
And for example, our sensor tayo.
Taiwan Korea.
So it's.
I don't I don't exactly quantify them bye bye bye.
Potentially.
Our our sourcing because I look at it more on a product and technology perspective.
And if you like.
And a follow up with you for a more.
Number breakdown.
Okay. Thank you.
My second question is yes.
Thoughts on the economy and Chinese competitors.
Could you address whether you see any impact on this next one please.
New Chinese components.
Okay.
Could you also share your claim.
Jean Marc.
I would think.
Thank you.
Yes. Thank you.
Stephanie.
It's a fair question I think.
China has always wanted to localize.
<unk> is a directive from the from the government.
For years, so it's nothing new to us.
So.
Throughout the years they have.
Been dealing with Chinese competition, all the time and certainly the.
This is being intensified over the last few years, because again Chinese government has given it another push.
So regardless, we are still doing our best to support China customers.
Both in terms of technology and service and capacity and whatnot and we are actually view by.
Many of them buy a vast majority of that is their strategic partners as well I think it's.
The fact that China wants to localized small doesn't mean they would.
<unk>.
Foreign suppliers outside suppliers.
So our strategy is to.
Upgrade our technology and our offering and.
No.
And tried to possible dominance in in certain applications for example, automotive.
Our our.
Our position remains quite dominant in Chinese competition.
Phil.
Having a hard time trying to get it because.
The qualification process of card technology requirements and.
And.
And the willingness for adoption.
From an.
And end user customers.
Or higher.
There is a much higher even for Chinese tier ones, because many Chinese tier ones. They still have to deal with international end customers even for.
Beginning with our end customers.
Much of the.
Noah and customers still want better quality and better technology support.
So.
That is one thing in automotive.
We are.
We are working very hard to safeguard our position and in the meantime.
Excluding Chinese competition.
We have seen Chinese competition.
Most severe.
From.
Two segments TV and smartphone.
Yes.
Both segments.
Sure Juan.
Common.
Sure.
Common characteristic switches.
Both have four.
Sure.
In both.
Local Chinese and brands too.
To master a major market share globally.
So is a push from the end customer.
Makers get too.
Have a.
Uh huh.
Aegean position in terms of introducing Chinese IC vendors today and customers' products.
Whereas if you look at notebook and monitor in comparison.
Chinese end customers presence is less compared to the two sectors I mentioned earlier.
Youll see less Chinese competition, I'm, not saying this will last forever, so im saying automotive will be the most difficult not just for <unk> across the board.
It's just also a sector, where IMS enjoys the best position.
And followed by <unk>.
Notebook and monitor where the.
<unk>.
And customers.
I'll have Steve.
It's still pretty much international dominance.
And lastly.
TV and <unk>.
Smartphone.
Chinese customers too.
Together command a pretty.
Sizable market share.
So.
Okay.
That is one thing and the other thing is.
Our diverse diversified into.
New business such as our optics.
Such as our waste side.
Really the whole competition is not really an issue.
As such we are dealing with individual.
Customers, we are competing in international markets. So this.
China factor is relatively small in those areas.
I hope that addresses your.
Question.
Yes.
Yes, yes very clear.
Alright. Thank you so much for answering my questions and congrats on.
Paulson guidance and I'll be back. Thank you. Thank you.
Thank you Tiffany.
Again, if you'd like to ask a question at this time that star one one.
Well pause for any additional question.
I'm showing no further questions in queue at this time I would like to turn the call back to Jordan <unk> for closing remarks.
As a final note Eric <unk>, our Chief <unk> Officer will maintain investor marketing activities and continue to attend investor conferences.
We announced the details as they come about thank you and have a nice day.
Okay.
This concludes today's conference call.
Thank you for participating you may now disconnect.
Yes.
Yeah.
[music].
[music].
Hello, Ladies and gentlemen, welcome to the IMAX Technologies, Inc. Third quarter 2022 earnings Conference call.
At 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.
As a reminder, this conference call is being recorded.
I would now like to turn the conference over to your host Mr. March Wallenberg from MZ group.
Yeah.
Welcome everyone to the IMAX third quarter 2022 earnings call joining.
Joining us from the company are Mr. Jordan, <unk>, President and Chief Executive Officer, Ms, Jessica Pan Chief Financial Officer, and Mr. Eric Lee Chief IR Officer.
After the company's prepared remark comments, we've allocated time for questions in a Q&A session. If you've not yet received a copy of today's results release. Please email <unk> annex at MZ group.
Access the press release on financial portals or.
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 <unk> measures you can find the related reconciliation 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 are forward looking statements.
That involve a number of risks and uncertainties that could cause actual results or events to differ materially from those described in this conference call.
A list of risk factors can be found in the company's SEC filings form 20-F for the year ended December 31.
21 in the section entitled Risk factors.
As may be amended.
For the company's full year of 2021 financials, which were provided in the company's 20-F and filed with the SEC on March 23 2022.
The financial information included in this conference call.
And consolidated and prepared in accordance with Ifr S accounting.
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.
Which we subject our annual consolidated financial statements and May vary materially from the audited consolidated financial information for the same period.
The company undertakes no obligation to publicly update or revise any forward looking statements, whether as a result of new information future events or otherwise.
I will now turn the call over to Mr. Eric Lee Eric the floor is yours.
Thank you Mark and thank you everyone for joining us.
My name is Eric Lee Chief <unk> Officer, a high mix on today's call I will first review <unk> consolidated financial performance for the third quarter of 2022.
Followed by our fourth quarter 2022, all books.
Jordan will then give an update on the status of our business after which we were tech question.
Our third quarter revenue and the EPS beat the guidance.
Quiet gross margins, what's at the midrange of the guidance issued on August 11, 2022, despite macro headwinds continuing to challenge our business.
Third quarter net revenue of 213.6, meaning.
<unk> decreased to 31, 7% sequentially, but exceeded our guidance of a decrease of around 35% to 39% sequentially.
The increase of sales momentum in our small and medium sized display driver segment contributed to the bathroom expected.
No.
Gross margin came in at 36, 3% a decrease from 43, 6% last quarter by the mid range of the guidance.
Range of 35, 5% to 37, 5%.
Non <unk> profit per diluted ads was <unk> 17 think beating our guidance of 11 six to 15 16.
<unk> profit per diluted ads was <unk>.
For a fan exceeding.
Exceeding our guidance of zero to two.
Two four.
I'm, sorry point too thin to four point too thin.
Revenue from large display driver was $41 $3 million in Q3, a decrease of 39, 8% sequentially and below what we typically see on the seasonal basis.
Customers across the board from brand to kind of halted continued to imposed stringent inventory control majors on the backdrop of slowing.
Market.
And the Destocking pressure.
Our guided all three large display driver sectors, covering TV monitor and notebook were down double digit sequentially.
Large panel driver IC sales accounted for 19.3% of total revenue for this quarter compared to 22% last quarter and to 27, 9% a year ago.
Moving on to our small and medium sized display driver segment revenue was 141 $4 million a decrease of 29, 9% sequentially.
Primarily a result of the pre launch inventory reduction effort of our smartphone and tablet customers.
Smartphone and tablet driver IC sales contributions.
Our upholstery mentally equal in the third quarter.
Despite the.
Challenging macro environment, we continue to gain traction with our leading driver solution.
<unk> adopted by more customers for their next generation product.
Hudson yards titration, all proprietary tabulate TDI solutions. Once again was adopted by solving for their latest premium tablet and the TUI, one laptop where power tdi's of course larger size.
High frame rate display and high prestige and active stylus features.
Ala Moana touch channels in the market to offer superior touch sensitivity.
Meanwhile, for AML lay business, our global leading customer had more am or late premiums heavily model commence mass production this quarter.
We provide the total solution covering DDI and that he'd come.
They are sole source supplier.
In the third quarter, our am or late sales, including DDI fee entity comp were up more than 45% sequentially and accounted for more than 8% of total sales.
Q3, automotive business was once again, the largest revenue contributor representing over 35% of total sales. However, Q3 automotive sales declined double digits sequentially as guided.
Customer continued with strict inventory control of majors to destock from the accumulation jewelry in China Lockdown in the previous quarter yet.
Yet hungry.
On a year over year basis, automotive IC sales increased more than 80% for the nine months.
And at September 32022, as a result of our comprehensive per Doc hovering and increasing design wins for our automotive <unk>.
For our E pay per business.
Another product in our small and medium size to drive a lie off.
Sales declined double digit quarter over quarter due.
Due to customer's downsizing their annual business planed amid a weak consumer electronics market.
Small and medium sized driver IC segment accounted for 66, 2% of total sales for the quarter compared to a 64, 5% in the previous quarter and a 15 nine 9% a year ago.
Third quarter non driver revenue was $39 million.
<unk> 26 point 26, 9% from a quarter ago.
We expected our telecom business was down double digits sequentially pressured by lower shipment for TV monitor and notebook market.
Yet T car shipment for automotive enjoyed decent growth and that we anticipated its business momentum to assess the rate in the coming quarters.
Telecom business represented more than 7% of our total sales in the third quarter.
Non driver approved off in Q3 accounted for 14.5% of total revenue compared to 13, 5% in the previous quarter and the 12, 2% a year ago.
Now <unk> margin for the third quarter. It was 36, 3% a decrease from 43, 6% of last quarter.
As we previously reported the incurred the charges from agreements, we entered that with foundries and the backend supplier both securing capacity.
The predominant factors.
<unk> impacted our margin profile in the third quarter.
Price erosion because of inventory Destocking also contributed to the margin contract contraction.
Gross margin was 36% for the quarter.
Howard.
Operating expenses for the third quarter.
<unk> $44 million to $6.7 million slightly up by three 8% from the previous quarter and a 5% from a year ago.
The sequential increase was caused mainly by increased salary expenses, while year over year expenses increased because of higher inventory I'm, sorry, higher salary and R&D expenses.
<unk> operating expenses were $72 9 million for the third quarter up 38, 5% from the preceding quarter and a six 4% a year ago.
The higher <unk> figures.
Mainly due to the change of annual bonus compensation, which we award employees at the end of September each year.
The 2022 annual bonus compensation, including ICU and the cash are worth what in line with guidance. We mentioned on our last earnings call that totaled $39 6 million dollar, although quitch $18 5 million or eight.
Five cents per diluted ads was immediately vast paid and recognized in the third quarter of 2022.
The remainder will be equally vast data in three tranches. The first second third anniversary of the grant date, the remaining compensation expenses will be recognized on a straight line basis over the vesting period of each tranche.
Third quarter non <unk> operating income was $30 9 million or.
Or 14, 5% of sales versus 29, 3% of sales in the last quarter and a 41, 2% of sales for a year ago.
<unk> after tax was $29 $8 million or <unk> 17 cents per diluted ads.
Decreased from $76 $8 million or $43 19 per diluted <unk> last quarter.
Turning to the balance sheet, we had $227 9 million of cash cash equivalents and other financial assets as of September 32022, compared to $258 million at the same time last year and the $400.
Q1, $46 million a quarter ago.
Our cash balance at the end of third quarter substantially declined following the annual cash dividend payout of $217 nine meaning dollars in July .
We had a $48 million of long term unsecured loans.
The end of Q3 of which $6 million.
What's the current Portia.
Our quarter end inventory as of September 32022 was $410 1 million from $337 $3 million last quarter and up from $169 million a year ago.
The vacate the inventory level reflects the abrupt drop in the demand trigger.
By the street customer inventory control due to sluggish and customers demand.
And the murky visibility.
The excess.
Customer inventory particular in consumer electronics.
Diversely affect hit our sales, resulting in high inventory level.
All of our production always begins Monza, Nevada.
Accounts receivable at the end of September 2022 was $253 $3 million down from $371 million last quarter, and the flying $409 million a year ago.
DSO was 74 days at quarter end.
Let's compare to 100 days, a year ago, and 93 days from last quarter.
Third quarter capital expenditures worth.
$3 $4 million versus $12 5 million last quarter, and a $2 $1 million a year ago.
The third quarter Capex was mainly for R&D related equipment for our IC design Victor.
As opposed to temporary <unk> 2022, <unk> had $174 four meaning ADF outstanding little changed from last quarter on a fully diluted basis.
Total number of all.
Outstanding for the third quarter was $174 seven meeting.
Now turning to our fourth quarter 2022 guidance.
We expect.
Fourth quarter revenue to increase 4% to 8% sequentially.
<unk> gross margin is expected to be around 31, 5% to 33, 5% depending on the final product mix.
Now <unk> profit attributable to shareholders is expected to be in the range of 21 to 24.
Fully diluted the ABS.
The fourth quarter <unk> profit attributable to shareholders is estimated to be in the range of $17 eight to <unk> <unk> per fully.
Diluted.
<unk> <unk> gain from disposal of long term capex in the third had financial arrangements.
I will now turn the call over to Jordan to discuss our Q4 outlook Jordan the floor is yours.
Thank you Eric.
The near term economic outlook appears bleak in the face of elevated inflation and rapidly rising interest rates.
Push or heard in the market the loan we still going full out from China City, Lockdown and geographical geopolitical conflicts.
For the display application market.
<unk> are down.
Answer their panel procurements.
Consequent to the triggers panel makers to further lower fab utilization.
Against this backdrop, our business visibility remains limited.
Actually in consumer.
Human centric products.
As we continue to.
Thread through this inventory offloading cycle, we are cautiously managing our new wafer starts trying to strike a balance between inventory level foundry contract fulfillment.
The silver lining.
The amount of <unk>.
Is the automotive segment quarter visibility is relatively better.
<unk> allows us to continue to maintain new orders.
Our foundry partners and began suppliers.
Continuous orders in such segments, coupled we saw successful negotiation with suppliers were reduced the incurred charges in Q4 full contracts.
To secure capacity as compared to the third quarter.
Charging them by our current business pipeline and production plan.
Belief.
Tori level has reached the peak at the end of the third quarter.
Looking into Q4, our gross margin is still under pressure due to price erosion from high inventory offloading for the cost of goods sold remained high as the inventory was sourced Quinn funds III.
And pay good prices.
It's still at high levels.
Despite the soft demand we remain upbeat about topline growth from several revenue streams that we consider our high visibility group.
Notably.
Automotive.
OLED.
Coming controller, and the <unk> AI image sensing.
In the automotive business, we expect <unk> sales momentum to pick up starting in Q4 from this trial in the third quarter.
For automotive <unk>, however, customers are still in the process of loading the inventories accumulate.
Intended for the second quarter production push you will severely disrupted by the widespread China CD Lockdowns.
We believe our 2022 full year automotive business growth will reach around 50%. Despite the challenging environment I expect growth momentum.
Specially with <unk> to extend into 2023 for another stellar year of strong growth.
Separately <unk>.
<unk> sensing enabled.
Enable that business.
<unk> to deliver an impactful contribution next year.
We expect <unk> sales to grow nicely backed by strong business pipelines from a wide variety of new AI applications adoptions.
Among our AMOLED deployments or more.
<unk> for smartphone will commence as a new sales stream next year.
Of the current air molded for tablet.
Mortgage sales.
That benefits.
From the increasing contribution from this higher visibility segments is twofold.
Overall corporate visibility improves as they are.
<unk> <unk>.
Increases.
Second.
The gross margin for this segment is above our corporate average lending support to a more sustainable higher margin profile for us.
We expect this group.
Groups combined to account for more than 50% of total sales in Q4.
<unk> contribution waiting will continue to increase for years to come.
We start I will begin with an update on the large panel display IC business.
Our fourth quarter loss with spreads driver IC business.
<unk> is projected to be flat sequentially.
Hello base up to three consecutive quarters of decline.
Yet on a year over year basis. This is still a double digit decline as we price for a disappointing year in holiday season.
On a positive note, we do see TV panel prices showing signs of stabilization as customers have started to replenish inventory, particularly in midstream models, leading to positive momentum in our TV driver sales, which offset to increase.
Single digits sequentially in Q4.
Conversely, the downward trend in our it segment lingers on.
Further declines expected in both notebook and monitor sales in the fourth quarter on the first drop of customers continuous tight inventory control measures as the sluggish economy.
Turning to the small and medium sized display driver IC business.
In the fourth quarter.
Revenue is expected to increase by single digit sequentially.
Q4, automotive driver IC sales are anticipated to be flat sequentially.
<unk> double digit decline in Q3 as customers look to restock inventory.
Sales of automotive TVD are poised to grow by double digit <unk> for traditional driver IC are set to decrease single digits from last quarter.
The business visibility for automotive segment into next year remains much better than those of consumer centric products.
Smartphone driver IC revenue, you said to be slightly down sequentially. A result of legacy inventory offloading cycle, Amit soft demand and limited visibility across those channels.
Tablets driver IC revenue, however is projected to increase double digits sequentially, driven by Rupert threw up by reclaiming replenishment momentum from leading customers.
Now for a more detailed update on the automotive segment.
An area, which has more resilient demand is less vulnerable to the macro headwinds.
As we have previously discussed automotive driver sales are now our largest revenue contributor.
Set to represent over 35% over total sales in Q4.
The demand trends for automotive interiors continue to favor more stylish and diverse designs.
Made possible, we see increasing quantity and size of panels equipped with advanced display technologies.
As the leader in automotive display IC market with not only offer the most comprehensive multi product portfolio in the industry.
Ranging from traditional <unk> to new technologies, such as TDI local dimming T Con <unk> and air molded.
We also the preferred partner that panel customers like to work with especially those looking to focus more on growing the automotive business in order to compensate for the soft.
Consumer electronic businesses.
As the pioneer of mass production for automotive TDI have effect by rapid expansion of automotive TVD of adoption, we expect automotive TVD. Our sales will be one of the primary targeted forces for a long term business growth for years to come.
The automotive TDD technology is essential for large sized interactive stylish and curved automotive displays.
To date, we have acquired more than 200 automotive <unk>.
Project Awards with only a small portion currently must production in.
You can play an enormous growth opportunity ahead.
Our <unk> design wouldn't coverage continues to quickly expand with panel makers tier ones and <unk> brands.
Meanwhile, the Chinese government continues to support the <unk> industry.
We stimulus programs.
Which may accelerate adult the adoption of premium automotive displays that adopt TBD.
Moreover, we are well positioned with suppliers in support of our automotive segment grows leveraging.
Divert funds resources for optimal operational efficiency benefit.
Furthermore, we are the first in the industry to launch the cutting edge OTT.
Our large touch and display driver integration.
Multi display solution.
Specially designed for the next generation extra large sized automotive displays which are typically larger than 30 inches.
<unk> adopts.
Topology technique, the low end up too so the chips seamlessly connected.
Support of extra loss sized display.
High precision touch sensitivity.
Creating the high entry barrier for potential competitors.
This was featured at CES 2022 earlier this year by one of our key customers who showcased.
<unk> inch in cell touch display powered by <unk> Ltvs solution.
More design collaborations are underway.
And worth debut in 2023 in some of the most.
<unk> automotive vehicles.
Yes.
Next.
Smartphone and tablet business.
My phone muscle of our shipments to key customers for their next generation new designs have been delayed.
<unk> deteriorating demand.
For the tablet shipments out of the rise full premium models up high end tablet <unk> and advanced payable that's heavily solution of which we offer both DDI CMT come to certain leading brands.
Q4 sales will those premium tablet solutions are expected to increase more than 2% sequentially.
And we believe momentum et cetera into next year supported by demand for advanced specifications and higher end displays.
Turning to the pay per driver business.
The business is expected to increase double digits quarter over quarter stemming from increases in shipments of a large size display to a leading customer as their sole supplier.
We expect long term demand for both E vapor and E signage to endure.
E reader demand is fueled by the growing use only market alone with increasing reading material.
Material over the Internet.
He signed each market is also on an upswing upstream.
The product is being more widely used in smart warehousing smart retail and many other fields to replace traditional signage.
We continue to collaborate with leading customers for southern <unk> and <unk> projects with increased R&D efforts spent on their next generation products towards larger size high resolution and color type of displays.
Thanks for an update I'll handle that.
We continue to queue up for AMOLED driver IC.
Development joins <unk> with major Korean.
And then Chinese panel makers in various applications.
Q4 automotive.
For a modest sales are set to increase by double digits sequentially.
Sent over 9% of total sales.
Our AMOLED business, including T comment driver is slated for strong growth in the next few years.
For a more of a tablet products, we provide both the AMOLED driver in <unk> and are the sole source supplier for wasn't global leading brand.
For automotive OLED display.
We continue to win project awards for our flexible AMOLED driver in telecom, we suppose conventional car makers and vendors.
Finally, we are making good progress with BD panel houses.
For the development of AMOLED display drivers for smartphone TV and mobile applications.
We expect to start shipping smartphone AMOLED drivers around middle of 2000 and for the Street.
As a reminder for smartphone AMOLED display driver, we already have secured meaningful capacity and can you continue to look to expand it moving forward.
Now, let me share some of the progress we made on the non driver IC businesses.
Starting with an update on timing controller.
We anticipate.
Q4, <unk> sales to increase by high teens sequentially.
Bolstered by higher shipments of automotive products for both LCD and AMOLED displays.
For the AMOLED display market, we successfully commenced production of AMOLED T cons for tablet and automotive.
We also made good progress strategically with leading panel makers on amble as notebook T Con, which features advanced Edp one five <unk>.
Providing higher resolution higher refresh rates, it's worth improve image quality to.
To the notebook.
Next on LCD display of Automotives.
Our position remains unchanged in automotive T con for local dimming technology.
Which not only enhances display contrast for better viewing and drive a safe car under various ambient light conditions.
Also provides an effective policy.
Critical for Evs and larger size displays.
We see Australia.
Work on this high entry barrier technology, we have won numerous awards for various Oems tier ones and carmakers premium new car models.
Some of which have already commenced mass production.
We anticipate Q4 automotive pecan sales to increase more than 80% year over year.
Represent around 2% alcohol sales in the fourth quarter with additional projects slated for meaningful volume shipments starting in 2000 and for the Street.
Additionally, we are undertaking new design developments supporting even larger panel sizes and higher resolution.
More than customers.
We expect to gain traction with small shipments to key customers in upcoming quarters and are optimistic about the long term potential for our telecom business, we secured capacity from our foundry partners in pursuit of long term sustainable growth.
Now switching gears to the <unk> solution.
Push incorporates highlights for clarity I'll show low power AI processor.
With the Cmos image sensor is CNS based AI algorithm.
Yeah.
For one side business for notebooks will continue to support a range of sales new models.
<unk> remains a key supplier for leading edge offshore power ultra low power AI processor, and always long Cmos image sensor.
In order to capture the vast opportunity presented in the emerging notebook AI application market. We have extent extended deployment of in house development of new algorithms to advance our AI capabilities.
Partnering with leading notebook CPU players aiming to expand our partnerships with leading global laptop names to propel the business forward.
In addition to features such as human presence.
Weigh in on low code.
Sections.
We are also working on a variety of <unk> reached a new AI features and use cases to product plus.
Possibly applications with end customers for next generation Smart notebooks.
The size of our notebook.
Highly integrated WSI total solution Fisher and ultra low power tiny MRO vision AI.
Tiny form factor is a perfect fit.
For many resource constrained and battery powered endpoint applications.
Anyway area.
Now at the entity explored by our communities.
Our successful example worth highlighting.
One successful example was highlighting is the strong adoption with meaningful shipments of our <unk> solution in autonomous automatic meter reading.
Our power efficient and AI can help existing conventional water meters operate with the predatory peck for over five years for real time order consumption readout.
Detection of.
Economic fees, such as water leakage.
Attracted by the simplicity of installation and superb low power performance.
Dozens of water authorities utility companies.
Oems Oems and or Iot network providers across the globe.
Commenced joint development projects with us.
Moreover, we have additional WSI AI.
Customer engagements in areas such as video conference device.
Sure by capacity.
Medical capsule endoscopy.
Automotive.
Small office battery Tim surveillance.
Just to name a few.
These are involved in a shipment is anticipated within the next few quarters.
Yes.
As we focus on scaling adoption.
In this relatively untapped market.
We continue to build alliances with numerous AI partners and communities to make OIS solution more.
Accessible.
To that end during the upcoming CES.
2023.
Several of our proprietary ultra low power AI solutions will be showcased jointly with our ecosystem partners and customers in various applications, including smart home smart agriculture, and so whether it's just to name a few.
Also on display will be applications embedded we saw heavy <unk> molecule.
Our solution that offers numerous pre trend machine learning modules.
Machine learning models.
With a plug and play design that makes it possible to drastically reduce the significant entry barrier for AI or citizen developers in deploying computer vision and machine learning AI capabilities to the endpoint devices.
We welcome all interested parties to stop by to learn more about our AI product line and see them in action.
Finally.
We recently announced the divestiture of our fully owned subsidiary Endesa visual sense.
As we mentioned in our press release.
Election that will not affect the system business sale.
The divestiture does not change our ultra low power Wi Fi AI image sensing business model.
We will continue to develop.
All algorithms and work with third party algorithm partners.
Furthermore, we are more committed than ever to strengthening our wildlife product roadmap and retaining our leadership position in ultra low power AI processor and image sensor for endpoint AI applications.
As a demonstration of this commitment.
CES 2023, we will also debut our next generation AI processor code named W. E T.
That ability to AI processor fishers Palm Bay.
<unk> cortex, CPU and ethos MCU risk.
<unk> of central control interfaces.
Industrial grade security.
And cryptography engines.
A multi layer of power management architecture to offer a superb tiny email computing performance for Tmall hedged energy efficiency and best in class security and privacy assurance.
The <unk> AI processor offers 40% peak power savings.
30 fold.
Eva speed.
In providing over 50 times.
Efficiency on a per insurance basis compared to the first generation <unk>.
What.
Which is already leading the industry about AI processes and meaningful similar modest tuck in markets.
Several leading desktop nims and CPU players have shown strong interest.
We need to process.
To support diverse AI issues of their next generation smart notebooks.
We are very excited about the potential for <unk> and believe we are well positioned to capture the vast endpoint AI opportunities presented.
Yes.
Lastly, I would like to give an update on the optical related product lines, including <unk>.
<unk> and <unk>.
<unk> is one of the few companies in the technology industry with optical design capabilities and years of proven track record of mass production.
We continue to work on strengthening our optical related technology suite.
While collaborating with some of the worlds largest technology companies that are deeply committed to investing in it.
His development.
We are well positioned to play in enabling growth in this exciting new industry.
<unk>.
Now to quickly review some of our recent progress.
Chris.
Leading edge.
These aircrafts medical display features lightweight small form factor and full color with unique characteristics of high illumination and low power consumption.
One notable highlights in Q3 is a design win with a partner for new glasses with Alf.
From the day of close Michael displays.
CIS.
Hearing impaired.
People through all deal to tax translation.
That is projected onto the ADR collapses on a retail basis.
Small volume shipments commenced during Q3.
In addition, we also started shipping from <unk> micro display in Q3, four customers assisted reality type phase III type multi device.
Below a percent line of sight to assist workers to access real time information.
Moving onto an update obviously remains of essentially we are seeing increasing adoption of optical components in <unk> sensing technologies that enables new ways people interact with AI and VR applications.
On the <unk> gesture control <unk> technology is deployed to empower <unk> perception sensing for precise controller free gesture recognition in VR devices.
The collaboration is ongoing with a leading player with promising progress with volume production expected during 2033.
On <unk> scanning for object reconstruction.
Our <unk> technology, which incorporates both our <unk> project is really the colder.
<unk> is being deployed by the leading customers release scanning device for the purpose of generating real time digital twins.
EBITA and <unk> environments surround these that ultimately helps users transit.
Connect seamlessly between physical and digital worlds.
While still early in the lifecycle for the optical and medical related products. The ongoing commitment by the world's technology leaders alongside expanding interest in this potential.
Yes.
This next generation technology is poised for significant growth in the years to come.
We are excited that <unk> is at the forefront of optical innovation for this.
Laser industry and believe it has potential to be a long term growth driver for our business.
For non driver IC business, we expect revenue to increase high teens sequentially the fourth quarter.
That concludes my report for this quarter. Thank you for your interest in <unk>.
We appreciate you joining today's call and we are now ready to take questions.
If you'd like to ask a question at this time. Please press star one one on your telephone.
Again that is star one one if you'd like to ask a question.
Yeah.
Our first question comes from the line of Donnie Teng with Nomura. Your line is now open.
Oh, Hi, Thank you Jordan for taking my question can you hear me.
Yes, very well.
Oh, Thank you Jordan so congrats on a very strong.
Our results and guidance.
My first question is regarding to gross margin.
I think you have mentioned like foundry saw lowering the price as well.
And I think we have seen some of them are lowering the price quite aggressively.
But at the same time, I think all Cosmos, I'll still asking us to lower the price as well.
So I think it's pretty dynamic, but wondering if you could kindly.
Karma now.
Like.
When do you think the gross margin will be the lowest point into next year and how should we expect.
A reasonable gross margin.
Next year after you know the foundries or the price and also we lower our price to our customers. Thank you.
Thank you Tony.
It's an interesting question Diane.
Dynamic.
So evolving.
You are right to say that the foundry.
Yes.
Is kind of lowering their price.
Although they are making in in doing so they do expect volume from customers any change now.
Now the thing is.
We are burdened we as an industry and highlights include the we are burdened with still relatively high inventory meaning.
Our.
Our.
Our capability to keep.
Significant orders to foundry right now is quite limited.
So I think.
So actually I think on a negative note.
You are likely to see across the industry.
Gross margin continued to be under pressure because we.
We are just offloading our inventory.
Which were sourced previously at a higher cost.
It doesn't matter really how foundries, though in that price right now.
So that is the major issue however for the.
For the products or the.
The industry enjoys better visibility.
Certainly we continue to place new orders to foundries. However, the foundry also wealth. This so all of those areas typically always sees that.
Yes.
They are price down.
Will they become less aggressive because they know actually you do have to continue to place the order because you don't have much inventory burden.
Market prevents.
Visible in.
Relatively strong.
So I think.
And for <unk> specifically.
For next year I mean.
We will say first off it's too early to comment on the whole years.
Gross margin because the macro uncertainty.
You know what I'm talking about this year.
You still causing the market's rise. So so I think it's still too early to comment. However, I think we are still quite confident of what we call the.
The strong visibility group.
In my prepared remarks, we also mentioned the same as last quarter.
Basically full major things in the next few years.
We'll call high visibility group, namely automotive business in general and timing controller business.
AMOLED business and lastly, our wide Psi ultra low power AI business.
And.
This fall.
Segments together account for it's going to a comfortable about 50% or 50% over total sales. So they are pretty significant.
And they all.
They all they are all protected to enjoy better growth next year.
They all are protected to enjoy better gross margin is lower than our corporate average.
So I think that is our positive note.
So mixing the negative and positive together what is going to be the outcome for next year. I think is indeed too early to tell however, I do believe.
After this inventory Destocking cycle is complete.
Uh huh.
Hopefully you will be.
Within two to three quarters from now.
After this destocking cycle is complete.
We will emerge.
<unk> position, a better company gross margin wise.
Supported by these so called high visibility group.
Products.
So that will be my.
A long answer to you Tony.
Thank you Jordan very helpful and.
Maybe a housekeeping question is like in the past.
Two years I think most of.
Uh huh.
Higher loss of.
Talents and employees.
On the face mostly facing quickly.
Quickly deteriorating outlook over the past few quarters.
I'm wondering do you have any expectation or managing the opex into 2023.
Where you can.
Control of Opex or you would just we should model aligns the similar opex as they see it.
I think there will be a fair assumption for your modeling purposes.
Think that is.
Right now the.
The plan.
It is not to increase our.
No advice opex.
And ill advised the opex.
Certainly.
I advise to opus with lot depends largely on our profitability as you know our <unk>.
It goes in line with our profitability.
Now.
<unk>.
How do we do that I think.
Again back to my so called high visibility group for those product lines, we do need to continue to invest.
However, we were.
We are likely to.
Yeah.
Recoup our organization so that.
Those people walk in all other product areas many of them will be channeled through to support those product areas that is one thing that is a major thing that as a way to.
While our head count knowing that actually the business without visibility is poor.
And.
So so on select areas I think we will continue to invest and expand but we just have to do that.
More smartly.
Okay.
Proceeds to re channel some of the people flow.
Other areas into those focus areas.
And.
We are still in the process of finalizing our beef for next year.
It's very dynamic or otherwise certainties.
I think.
I'll also considering.
Inflation, which is.
Which is creating pressure pressure for.
Which increase.
The industry.
And on the top of the fact that the Taiwan is steel.
Hi Tech engineers are seeing quite hot demand. So we have to remain competitive.
For such titles, so again I think.
The bottom line given the highest.
The low visibility of our business our turkeys too.
Keep it flat.
Opex expense next year compared to this year.
Or steer.
<unk>.
Continuing to invest in those especially for those high visibility group of product lines.
Almost.
Thank you Jordan Congrats on the strong results I'll back in queue.
Thank you Tony.
As a reminder, if you'd like to ask a question at this time. Please press star one one on your telephone.
We have a question from the line of Tiffany <unk> with Morgan Stanley . Your line is now open.
Yeah.
Okay.
Good evening Jordan the Eric.
If I might.
Thank you.
Yes, loud and clear.
Okay. Thank you. Thank you for taking my question.
My first question will be about <unk>.
Finally your question Glenn.
Could you. Please let us know whether you will know why Chinese foundries in the future.
Yes.
I have a follow up question. Thank you.
We have.
I've been using Chinese factories, although.
Our off of vast majority of our foundry suppliers via come from Taiwan.
So.
A bit from Korea as well.
China.
Is a new source of supply and we do intend to collaborate with Chinese foundries.
Now.
Understanding the.
U S China tension at the moment right. So I think on the one hand.
Our Chinese customers too.
Certainly love to see our using more Chinese foundries.
On the other hand.
I mean, even though Chinese customers.
Other other.
Other international customers they do.
Do you need to target non China customers.
And so while some of those for many of those non China customers.
Yeah.
I mean.
The uncertainty okay.
This.
Our current intention the prevailing tension between China and U S.
They are already so they need to.
They need to hedge.
Okay Chinese foundries, so I think.
I think.
Okay.
The good news is is that for guys like US China is such a big foundry phase it doesn't matter how you <unk> your foundry.
Position you.
I'm talking about my customers or even end customers you can't really get away with.
With.
Utilizing.
The pending.
Cutting on Taiwan as yourself answering.
Place so I think.
Leaves us with.
Pretty good position, so I think.
Going looking forward.
We are going to continue to.
Sure.
Carlos Taiwan as a primary source of foundry supplier buyer continuing to.
Expand our China and Korean foundry basis.
Okay very clear thank you.
Alright as possible. Thank you kindly, let us know like you're I guess quick question.
Hi, Dan.
Dan question.
Uh huh.
I don't have the data right in front of me right now but.
We do.
<unk>.
They are they are product considerations.
Just areas.
Sure.
Right.
Korean foundries are quite suitable southern area.
Capacity, we do have the track record that newer technology and that is suitable for us.
As far as China by in China.
Now clean.
Actually.
The fourth quarter.
Quite a diversified line of.
Product areas covering.
Smartphone.
Smartphone tablet.
To a lesser extent television.
And.
And monitor.
Yes.
Our.
Social supply automotive.
Primarily Taiwan almost exclusively Taiwan.
And for example, our sensor tayo.
Taiwan Korea.
So it's.
I don't I don't exactly quantify them.
By percent potentially.
Our our sourcing because.
Look at it more on a.
Product and technology perspective.
Yeah.
Yes.
And if you like.
And a follow up with you for a more.
The number of breakdown.
Okay. Thank you.
Okay. My second question is no.
Thoughts on the economy on Chinese components.
Could you address whether you see any impact on this business with new.
New Chinese components.
Okay.
Could you also share plan.
Yes.
Thank you.
Yes. Thank you.
Tiffany.
It's a fair question I think.
China has always wanted to localize.
<unk> is a directive from the from the government.
For years, so it's nothing new to us.
So.
Throughout the years they have.
<unk> been dealing with Chinese competition, all the time and certainly.
<unk>.
ESP intensified over the last few years because Chinese.
Chinese government has given it another push.
<unk>.
So regardless, we are still doing our best to support China customers.
Both in terms of technology and service and capacity and whatnot.
We are actually view by.
Many of them buy a vast majority of that is there.
Our strategic partners as well I think it's.
The fact that China wants to localize small doesn't mean they would.
They are going to stop using <unk>.
And suppliers outside suppliers.
So our strategy is to.
Upgrade our technology and our offering and.
And tried to core of possible dominance.
In certain applications for example, automotive.
Our our position remains quite dominant in Chinese copper.
Petition is steel.
Having a hard time trying to get it because.
The qualification process of card technology requirements and.
And.
And the willingness for adoption.
From an.
And end user customers.
Or higher.
There is a much higher even for Chinese tier ones, because many Chinese tier ones. They still have to deal with international end customers even for TD.
Leading with <unk> and customers.
Of the.
Noah and customers still want better quality and better technology support.
So.
That is one thing in Automotives.
We are.
We are working very hard to call our position and in the meantime.
Excluding Chinese competition.
We have seen Chinese competition.
Most severe.
From.
Two segments TV and smartphone.
Yes.
Both segments.
Sure Juan.
Common.
Sure.
Common characteristic.
<unk>.
Both have four.
In both.
Local Chinese and brands.
To master a major market share globally.
So is the push from the end customer.
Panel makers get too.
Uh huh.
Easier position in terms of introducing Chinese IC vendors today and customers' products.
Sure.
Yes, if you look at notebook and monitor in comparison.
Sure.
Chinese end customers.
This is less compared to the two sectors I mentioned earlier.
Sure.
You see less Chinese competition.
And this will last forever, so im saying automotive will be the most difficult not just for <unk> across the board.
Just also a sector, where IMS enjoys the best position.
And followed by <unk>.
Notebook.
The monitor.
The.
And customers.
Still pretty much international dominance.
And lastly.
TV and <unk>.
Smartphone, whereas Chinese end customers too.
Together commence a pretty <unk>.
Sizeable market share.
So.
Yes.
That is one thing and the other thing is we are diverse type diversified into.
New business such as our optics.
Such as our waste side.
Really.
Competition is not really an issue as such we are dealing with in the initial.
Customers, we are competing in international markets. So this China factor is relatively.
Small in those areas.
I hope that addresses your.
Your question.
Yes.
Yes, yes.
Alright. Thank you so much for answering my questions. Thank you congrats on.
Paulson guidance and I'll be back to you. Thank you. Thank you.
Thank you Tiffany.
Again, if you'd like to ask a question at this time that star one one.
We'll pause for any additional question.
I'm showing no further questions in queue at this time I'd like to turn the call back to Jordan <unk> for closing remarks.
Yeah.
As a final note Eric <unk>, our Chief <unk> Officer will maintain investor marketing activities and continue to attend investor conferences.
Announced the details as they come about thank you and have a nice day.
Okay.
This concludes today's conference call.
Thank you for participating you may now disconnect.