奇景光電 (HIMX) 2006 Q1 法說會逐字稿

Greeting, ladies and gentlemen. Welcome to HIMAX Technologies First Quarter 2006 Results Conference Call. (Operator Instructions.) As a reminder, this conference is being recorded today. A replay will be available two hours after the call today through noon on Tuesday, May 16, 2006 in Taiwan. The replay dial-in number is 1-201-612-7415 with account number 3055 and conference ID number 200644. The replay will also be accessible at www.himax.com.tw. I will now turn the call over to David Pasquale of The Ruth Group. Please go ahead.

Thank you, Operator. Welcome everyone to HIMAX's First Quarter 2006 Earnings Call. Joining us from the Company are Mr. Jordan Wu, President and Chief Executive Officer, and Mr. Max Chan, Chief Financial Officer. After the Company's prepared comments, we will have time for any questions.

If you have not yet received a copy of today's results release, please call The Ruth Group at 646-536-7003, or you can get a copy of the release off HIMAX's website.

Before we begin the formal remarks, the Company's attorneys advise that this call contains certain statements, including statements regarding expected future financial results and industry growth. These are forward-looking statements that involve a numbers of risks and uncertainties that could cause actual results or actual events to differ materially from those described on this conference call.

Factors that could cause actual results to differ include general business and economic conditions, and the state of the semiconductor industry, level of competition, demand for end-user applications products, reliance on a small group of principal customers, continued success and technological innovation, ability to develop and protect intellectual property, pricing pressures, including declines in average selling prices, changes in customer order patterns, surges in supply of key components, changes in environmental laws and regulations, exchange rate fluctuations, regulatory approvals for further investments in our subsidiaries, and other risks described from time to time in the Company's SEC filings, including its Form S-1 dated March 13, 2006, as amended.

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.

At this time, I would now like to turn the call over to Mr. Jordan Wu. Please go ahead, sir.

Thank you, David, and thank you, everyone, for joining us for today's call. This is our first quarterly call as a public company and we appreciate your support. For those of you we did not make on our recent IPO road show, we look forward to meeting over the coming year.

HIMAX continues to be committed to providing transparency in our financials and communications. And we will be available to answer your questions, either on the phone or email, and welcome you to obviously visit our offices in Taiwan.

Earlier today, we released the results for the first quarter of 2006. We are pleased to have delivered record earnings while continuing to invest in products that will contribute to future growth. Net revenue in the first quarter was $174.9 million, an increase of 31% compared to the year-ago period, and a decline of just 1% compared to the fourth quarter of 2005.

Net diluted EPS was $0.12, based on 181.1 million diluted weighted average outstanding shares, compared to $0.06 in the first quarter of last year, and $0.09 in the fourth quarter.

As you know, the market demand for displays tends to be lower in the first quarter compared to the fourth quarter, especially in the TV equipment. Large panel manufacturers have reported flat to lower shipments for the first quarter, as well as work in process and finished inventory levels, an increase from the low levels of the fourth quarter.

As expected, this had an impact on our shipments in the first quarter. HIMAX display driver revenues increased slightly as higher shipments across large panel and small and medium size applications were offset by [SP] decline. The large panel applications revenues from sales of display drivers for both TV and other panels showed strong sequential growth, while revenues from sales of monitor drivers declined. In the [line supply] data, HIMAX continued to build up its share. Our share of the large panel display driver market was now 19% in the first quarter of 2006.

Revenues from small and medium size display drivers were up by more than [150%] from the first quarter of 2005, but flat sequentially. Our shipments of display drivers for both mobile and consumer electronics applications increased from the previous quarter. We feel significant ASP erosion. This is primarily due to our product mix changing towards the lower price, lower resolution segment, including charges for low-temp polysilicone displays.

Let me now turn to the outlook for the remainder of the year. We expect the business environment in the second quarter of 2006 to be similar to that of the first quarter of 2006 as large panel display driver shipments will be impacted by the increased inventory levels of large panel manufacturers.

While PC-related demand should improve sequentially, revenues from display drivers for TVs are expected to decline. Revenues from third-party customers are expected to grow as a result of their fab production ramp ups and increased sourcing from HIMAX, offsetting an inventory-related decline in revenues from related parties.

We forecast unit shipments of small to medium size display drivers will increase while average selling prices will continue to decline. Specifically, we expect net revenue in the second quarter of 2006 will be in the range of low single-digit growth to a low single-digit decline sequentially, representing a more than 50% year-over-year growth. We expect diluted GAAP earnings per ADS to be in the range of $0.10 to $0.11. This reflects $1 million of share-based compensation and is now based on 197.5 million diluted average--weighted average outstanding shares used in the calculation.

While based on indications from our customers and typical seasonal patterns in the panel industry, we expect shipments and revenues to increase significantly in the second half of 2006. We also expect to continue to increase our share of the large panel and the small and medium size display drivers market.

Now, let me turn over to Max Chan, our CFO, for our financial details.

Thank you, Jordan. As Jordan stated earlier, net revenue in the first quarter of 2006 was 174.9 million, representing year-over-year growth of 81% and a sequential decline of 1%. Revenues from related parties increased 11% sequentially, partially reflecting shipments made pursuant to orders to receive in Q4 that were filled at the beginning of January. Revenues from other customers declined by approximately 17% sequentially. This was primarily caused by the reduction of production activity at one of our customers during the quarter. As a result, revenues from related parties accounted for 63% of total revenues in the first quarter. We expect the revenue contributions to be more balanced during the remainder of the year.

In terms of geographies, revenue momentum was the strongest in South Korea, while revenues from Chinese customers declined substantially. The gross margin, excluding share-based compensation, increased slightly to 21.5% sequentially, somewhat below the year-ago level of 22.2%. We are targeting ongoing unit cost reductions in the coming quarters to try to offset ASP decline.

Operating expenses, excluding share-based amortization, decreased 11% sequentially to 12.9 million. We will continue to invest in research and development to enable the growth of our existing product lines, as well as new solutions, such as LCD TV chipsets and LCOS microdisplays.

Headcount as of March 31, 2006 was 737. The operating margin, excluding share-based compensation, increased to 14.1% in the first quarter of 2006 from 13.2% and 13.1% in the first and fourth quarters of 2005, respectively. Share-based compensation was $1.1 million in the first quarter. During the first quarter, HIMAX generated an annualized return on equity of 49%.

Net working capital increased slightly during the first quarter of 2006. Account receivable days and inventory days declined sequentially, although it was more than offset by a decline in the account payable days as we slowed down the procurement in the quarter. We were able to realize positive cash flow from operations of approximately $16 million in the first quarter.

Capital expenditure for the first quarter was [$2.8] million. For the full year 2006, we expect capital expenditures to be approximately $26 million. Following the IPO, which closed in April, the Company's net cap cash position increased to more than $141 million.

Operator, that concludes our prepared remarks. We can now take any questions.

Thank you. Our first question comes from Mr. Tore Svanberg of Piper Jaffray. Please proceed with your question.

Hi, guys. This is Heidi Poon calling for Tore. Just a few questions. You mentioned that you expect TV display revenues, driver revenues to decline in Q2. Could you give a little bit more color on that? Is that mainly driven by the inventory-related impact from your major customer? And also, if--when you see a rebound in second half, is that going to be also driven by maybe a certain new customer's [indiscernible]?

Yes. The answer to your first question is yes. That is driven primarily by inventory adjustment-related reasons from our major customer. In the second half, we remain quite confident of the prospects because of actually our full sector is [indiscernible], our major customer, and also new customers. Or should I say the smaller ones, the [indiscernible] customers, increasing their volume or sourcing from HIMAX.

I see. What are some TV driver revenues as an approximate percentage right now, your total?

Large panel display drivers total accounts for approximately 85% of our total revenues.

Right. But I mean TV driver, specifically. Would that be in the 20% range of more than that?

Yes. In Q1, we see the TV revenues increase significantly. Now TV drivers account for around 25% of our total revenue in Q1. But we said this percentage will decline a bit in the second quarter.

Okay. Turning my attention to the mobile side, is there any maybe customer design win update that you could share with us?

We have--I guess our policy is not to comment on a specific customer's status. But overall, we have stated and I feel sure that our strategy is to be more focused towards the design with first tier customers who serve first tier handset makers. And I am pleased to report that that progress have continued to go well. [These are priced] across the board in all of Taiwan, Korea, and Japan. We are looking at all primarily first tier [indiscernible] makers second or third tier sort of small independent module makers who [indiscernible] sales primarily from tier two makers. So our target market at the moment includes the integrated tier two makers across Japan, Korea, and Taiwan who are serving the first tier handset customers--end customers. So we have got the--with the--actually after the IPO road show over this past month, we have got additional design wins from all the three countries customers [with that].

Great. But could you quantify maybe the ASP erosion that you experienced in Q1 and the outlook of that ASP erosion going forward?

The [OEM] requirement for the panel--for the panel for handsets is one of the major declines--price erosion, and that obviously puts pressure on us being the major component supplier. Now our SP erosion in Q1 was actually more as a result from our product mix when--where we shipped our [indiscernible] for low-temp polysilicone panels. These are for handsets, of course. While those panels are typically a basic design and [indiscernible] panel drivers, they typically have lower SPs because typically--we don't have the drivers required for the other functions required for polysilicon drivers that are saved from the--our drivers for other polysilicon panels.

So I guess it is primarily this nature of polysilicon panel drivers towards polysilicon drivers that makes the big difference. And certainly, there is also a difference of resolution, where in Q1 we shipped a lot more [indiscernible] with more resolution than before. And many of these are [indiscernible] to low-temp polysilicone drivers.

So going forward, I think if you look at the very long term, meaning next year, the year before, or surely the remainder of this year, we will be shipping more to QEGA compared to Q1. However, I don't think that is going to chart the picture significantly because the chances are we'll be shipping QEGA low-temp polysilicone drivers more and more. However, if we move towards next year or even longer further down, we have seen QEGA - meaning the very high end resolution, and QEGA means a very low resolution - in the two major sectors of this marketing, meaning compared to today's shipment, QEGA is likely to contribute to more of our long-term revenue.

And if I look at the design state of [indiscernible], as I mentioned earlier, we are seeing a lot more requests for QEGA, meaning the higher resolution, than before.

Okay. That's great. And one last question. So given that mix outlook in terms of your gross margin going forward, do you see that primarily driven by mix or do we still see some sort of backend pricing pressure, or are we starting to see some wafer pricing pressure as well?

We are really not seeing anything extraordinary compared to our operating history in the past. We--but certainly, we will continue to see our [LCs] decline pressure as we have seen over the past five years. So we will be surprised if we don't--if we stop seeing that. However, I think our--certainly, we will continue to introduce better, cost effective solutions to our customers. And this contributes to our sort of--our margin in remaining [indiscernible]. Now, we certainly had high price pressure in Q1.

And also, the second major factor you saw--our fabrication of our suppliers, primarily on the foundry side. And as you know, we used to have exclusive sources from [indiscernible] and now we have a lot more foundry suppliers. If we go along this year and next year an even longer term, the strategy is toward a more diversified supplier source. But that is continuing.

Great. This is very helpful. Thank you.

Thank you.

Thank you. Our next question comes from the line of Mr. Frank Wang with Morgan Stanley. Mr. Wang, please proceed with your question.

Hi. Good morning, Jordan and Max. Congratulations on your first earnings conference call.

Thank you.

My first question is would you please deliver more quantitative guidance in terms of shipment growth for the large type drivers and small and medium size for the second quarter?

Yes. Max?

Okay. In the large panel display driver shipments in Q1, we see pretty strong double-digit sequential growth for notebook and TV. But we see it starting to decline - approximately 10% shipments, sequentially. And in the mobile and consumer electronics segment - they are combined - we show more than 10% increase, and all of this will be offset by LP decline. Overall, we see--except for in the monitors, we see the decline. For the rest of the segment, we are seeing the increasing shipment in Q1. I think Q1 is a typical low season for OA products and this is the trend we have seen.

And Max, what would be your perspective for the second quarter for these various segments?

Second quarter, as Jordan just mentioned, we expect to see a decline in shipments for TV drivers in the second quarter, primarily due to our customers' inventory adjustment. And however, we are seeing double-digit sequential growth in notebooks and the monitor segment. And we will also see double-digit sequential increase in shipments in the mobile handset and consumer electronic segment.

[Indiscernible] distribution coming from our affiliated companies, our related companies in the second quarter.

Great. A question you didn't comment on. When do you expect the TV side to come back? And also, many people are expecting the second half to have a demand recovery. Can you share with us if you are seeing signs of that, and whether or not the second half recovery could be [indiscernible] to that view?

We really don't want to comment on the overall end market demands because I think it's a better question to address with panel makers. However, in our indications from our customers, we do see a strong rebound of demands for TV drivers in the second half. It's quite significant compared to the first half.

And based on the demand expectation that you have for the second half, do you think you have enough foundry and [back-ends] on capacity that's securely in place to fund your growth?

Absolutely. We are at this moment in Q2--or Q1, we are slightly underutilized in our capacity, both our foundry and back-ends. And on the foundry side, we do expect to have major additions in our capacity by bringing new--bringing new foundry suppliers in the second half. And on the back-end side, as I said, today we are slightly underutilized and literally all of our major back-end sub-cons are still increasing their capacity according to our indication--our demand indication for the second half.

So if everything goes as planned, we--although we are likely to see a significant increase in volume in the second half, we are seeing little progress so far on the supply side, sort of [manufacturing] side.

Okay. And then, if the second half was a significant volume rebound, presumably the pricing environment [shows it] will be better compared to the first half. That will also be a little bit better for you from the margin standpoint.

I certainly hope so. I think it's a bit too far for us to comment. And certainly, that also depends on how panel maker customers are doing in the second half I guess.

Great. Thank you.

Thank you.

Thank you. (Operator Instructions.) Our next question comes from Mr. Tony Sandu of HSBC. Please proceed with your question.

Hi. Good morning, Jordan and Max. Just--can you talk a little bit about the competitive environment--about new IT design and trends in Taiwan or even some competitors investing in kind of the new IT design startups? I know in the past you've said that the entry barriers are pretty high. But can you discuss a little bit and tell us if anything has changed over the past couple of months in your view?

I think our view remains the same. I think the entry barriers we see are still very high for a lot of commercial reasons. And we are actually still seeing customers [pairing] up. Actually, it's more and more--up till the IPO, I have actually myself spent time with almost 100% of our major customers over the past month. And what I'm hearing from them is a strategy towards more consolidated IT supply base [indiscernible]. So I think the trend towards consolidation is continuing.

Okay. And can you talk about the LCD TV as kind of--you talked about TV drivers, but more products within the LCD TV side--more controllers, et cetera?

Max?

Yes. We're almost--it's only a couple of months after our road show. So we don't really have a whole lot to update except that--except to say that our--we actually highlighted two major segments, one being--the first one being TV chipsets, the second one being LCOS. And I guess the overall comment is that there is no negative surprise after our IPO. And in fact, we are perhaps more confident than before in terms of our progress with our major [verified] customers.

And for TV chipsets, our actual shipments for Q1 and Q2 is in between around 18,000 to 19,000 a quarter - that kind of range. And we do expect a growth in Q3 and a significant growth in Q4. And I guess I probably need a disclaimer for Q4--my comment on Q4 because, again, this is a very early [indiscernible] for us. So there could possibly be negative surprises or delays by a quarter. But [indiscernible] with [indiscernible] and customer indications, we have seen strong demand growth in Q4.

So our overall internal target and so on, as we mentioned in the road show specifically with serious investors, I think we [indiscernible] as planned.

Okay. Thank you.

Thank you.

Thank you. Our next question is from the line of Mr. Tore Svanberg.

For Tore, just a housekeeping question. What is the percentage of your other products accounted for in Q1? And also, it seems like the tax rate in Q1 on a pro forma basis was a little bit lower than 9%. Can you comment on what's the appropriate tax rate to use for the remainder of the year?

Yes. Max?

Mainly from other products in Q1 is approximately 3% of our total revenue. And we expect this percentage to remain at about the same level for Q2. And effective tax rate in Q1 is 6%, which is lower than what we had originally expected a quarter ago, primarily due to the--we also partially--we got the tax rate lowered because we had again another income tax exemption with respect to our capital increase in 2003. And we will file to an [indiscernible] extension period, which is scheduled from the beginning of 2006.

And also, we had an increase in tax credit derived from the expended--expected capital expenditure for R&D equipment. And this also contributes to more cap credit relating to R&D expenses. So going forward, I suggest the effective tax rate will be in the range of 6% to 7% throughout the whole year of 2006.

Okay. And do these tax credits get re-evaluated in '07, so in which case we should switch back to 9% for now, or do you see 6% to be a good bet?

The local tax scheme actually is very complicated to the actual effective tax rate--subject to a lot of conditions. So we won't just comment for the time being. But at a later time of this year, we will probably provide a clearer guidance on next year's tax rate. But so far, I think you can guide 7% or a little bit higher to be conservative.

Okay.

Yes. It is--we always--the full story is that we keep bookings very closely with our accountants who are working closely with the tax authorities. But it could be some type of spending or R&D spending [indiscernible]. But before that, we are regarded officially as some sort of take exception items by the tax authorities. We really--we always hesitate to tuck them all in. So--and again, this is tax authority. So there could be variables. So we are reluctant to guide more--too aggressively.

Yes, understood. And one more question about your operating expenses level. Obviously, a really good job on the cost management there in Q1. But do you see those--maybe the R&D level to be a sustainable level maybe as a percentage of sales going forward for '06, especially as your revenues rebound--expect to rebound in the second half?

We do intend to [indiscernible] reverse demand [indiscernible]. And I appreciate Q1's [de-spending] of the percentage of total revenue was a bit lower than probably the previous quarter. And you appreciate our R&D in addition to headcount - it was a lot of [indiscernible], including for new projects as well as certain product qualification or testing kind of procedures in the expenses involved in those.

And we, as a company, from day one, we have expensed such expenses right on the spot meaning rather than [indiscernible] across a period, we expense them on the spot. So sometimes expense booked on end of March versus beginning of April will make a difference in between two quarters. So you could see some slight fluctuations on R&D because of this reason. But I think the long-term strategies to continue to invest in our R&D and at least for now keep the R&D level, including our--so excluding share-based compensation, they were overall 6% as compared to revenue.

Got it. Thank you.

Thank you. (Operator Instructions.) Gentlemen, it appears there are no further questions at this time.

Well, thank you, everyone, for joining us on today's call. This is obviously the first of many updates to come. And we certainly look forward to speaking with you on our next quarter's call. And if you have any questions, please feel free to call us directly. Thank you.

Thank you, ladies and gentlemen. This concludes today's teleconference. You may disconnect your lines at this time.