奇景光電 (HIMX) 2007 Q3 法說會逐字稿

Welcome to Himax Technologies third quarter 2007 results conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session. At that time, if you have a question, you will need to press the star 1 on your push button phone. The call is scheduled for one hour. As a reminder, this conference is being recorded today. A replay will be available 2 hours after the call today, through noon on Friday, November 9, 2007 in Taiwan. The replay dial-in number is 1-201-612-7415 with account number 3055 and conference ID number 258193. The replay will also be accessible at www.himax.com.tw.

I would now like to turn the call over to David Pasquale. Please go ahead, sir.

Thank you operator. Welcome everyone to Himax's third quarter 2007 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 of Himax's website.

Before we begin the formal remarks, the Company's attorneys advise that certain statements in this conference call, including statements regarding expected future financial results and industry growth, are forward-looking statements that involve a number of risks and uncertainties that could cause actual events or results to differ materially from those described in this conference call. Factors that could cause actual results to differ include general business and economic conditions and the state of the semiconductor industry; level of competition; demand for end-use applications products; reliance on a small group of principal customers; continued success in technological innovations; ability to develop and protect our intellectual property; pricing pressures including declines in average selling prices; changes in customer order patterns; shortages 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 20-F dated June 22, 2007, 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 on today's call. I will now start with a brief highlight of Himax's performance during the third quarter of 2007 and discuss the outlook for the fourth quarter of 2007. Max, our CFO, will then provide further details on our financial performance.

Our third quarter revenues came in within our guidance. At the same time, both gross margin and EPS were able to beat our guidance. This was another strong quarter for us.

In the third quarter, we achieved record high net revenues of $243.3 million, representing a 37.4% growth year-over-year and a 9.2% growth sequentially. The increase in revenue was primarily due to increase in demand for large applications products, especially TVs, as we enter the strong season in the second half of the year.

Revenues from large panel display drivers were up 29.1% from the same period last year, or up 10.0% sequentially and accounted for approximately 82.9% of our total revenues in the third quarter. Customers maintained high level of [cap] utilization to meet high demands for all of TV, monitor and notebook panels as holiday season approaches.

Revenues from small- and medium-sized display drivers grew 118.5% year-over-year and grew 2.6% sequentially. Small- and medium-sized revenue accounted for about 14.2% of our total revenues. While demand for handsets in the third quarter was strong, capacity constrained at the panelmakers level limited our handset shipments.

Our gross margin was 22.5% in the third quarter of 2007, up 510 basis points year-over-year and 210 basis points sequentially. We are pleased that we were able to improve our gross margin for the fourth consecutive quarter. This positive trend showed the results of our continued efforts in diversifying our product offering and supplier base.

Our GAAP operating income was $19.9 million, up almost twenty-five fold from approximately $800,000 in the same period last year, and down from $24.9 million in the previous quarter. The year-over-year increase was a result of achieving record high quarterly revenue, improving gross margin from a historical low level in the same period last year, and maintaining our operating expense at a relatively stable level. The sequential decline is primarily due to granting of our 2007 RSUs at the end of September.

Our GAAP net income came in at $21.8 million, up sevenfold from $2.6 million in the same period last year, and down from $26.8 million in the previous quarter. EPS was $0.11, as compared to $0.01 in the same period last year and $0.14 in the previous quarter. Excluding share-based compensation and acquisition-related charges, we achieved a record high non-GAAP operating income of $36.2 million, up significantly from $12.2 million in the same period last year, and up from $28.1 million in the previous quarter. Also, we posted a record-high non-GAAP net income of $38.0 million, up considerably from $14.1 million in the same period last year, and up from $30.0 million in the previous quarter.

Non-GAAP EPS of $0.19, also a record-high, was up from $0.07 in the same period last year and up from $0.15 in the previous quarter. We made a 2007 annual RSU grant of approximately $26.4 million of which approximately 54.5% was paid out in cash and vested and expensed immediately. The remainder of the 2007 grant will be paid in restricted share units, which will be vested in three equal installments over the next three years, resulting in a maximum of approximately 1.5% dilution to our total shares outstanding. Max will provide more details on the 2007 RSU grant.

On October 12, we announced plans to spin-off our TV and monitor chipset operation, which will be named Himax Media Solutions, Inc., a wholly-owned subsidiary of Himax Taiwan upon its establishment. Himax Media Solutions will be focusing on expanding market share in the global TV and monitor chipset market opportunities. We have identified certain strategic investors and have planned to invite them to partner with us in the future. We've already had a good working relationship with these partners, with our chips now designed into several of their LCD TV and monitor projects. We believe this new company structure will allow us to better focus our resources for the global TV and monitor chipset market opportunity.

On November 1, our board approved a stock repurchase program that authorizes the Company to repurchase up to $40 million worth of the Company's ADRs, in the open market or through privately negotiated transactions, depending on prevailing market conditions and other factors. The program does not obligate Himax to acquire any particular amount of ADRs and may be modified or suspended at any time at the Company's sole discretion. With the repurchase program, we reaffirm our confidence and optimism in the long term future of the company. This also demonstrates our commitment to deliver value to our shareholders.

Now let me talk about our guidance for the fourth quarter of 2007. We expect revenue growth for large application to decelerate as we approach seasonal downturn in the second half of the fourth quarter. However, we are excited about the outlook for our small- and medium-sized product segment as shipments of our new generation products to previously designed-in customers are either being ramped at present or expected to ramp up in the next quarter and onward.

Overall, we expect revenue to grow around mid-single digits in the fourth quarter and gross margin to remain flat. We expect diluted GAAP EPS to be in the range of $0.16 to $0.17.

With that, now let me turn over to Max Chan, our CFO, for some financial details.

Thank you, Jordan. Our net revenues in the third quarter were $243.3 million, representing a year-over-year growth of 37.4% and a sequential growth of 9.2%. Our gross margin increased to 22.5% from 20.4% a quarter ago, primarily due to product mix change.

Our GAAP operating expenses were $34.8 million in the third quarter, up from $20.5 million in the previous quarter, primarily due to the annual grant of 2007 RSUs at the end of September. Our non-GAAP operating expenses, excluding share-based compensation and acquisition-related charges were approximately $18.9 million in the third quarter, slightly increased from approximately $17.4 million in the previous quarter. In the third quarter, share-based compensation was approximately $15.7 million, and acquisition-related charges were approximately $0.6 million.

The fair value of our 2007 annual RSU grant was around $26.4 million, of which approximately 54.5% or $14.4 million was paid out in cash, and vested and expensed immediately on the date of grant. The remainder of the grant will be vested in three equal installments over the next three years.

Total share-based compensation accrued in the third quarter, including expenses from legacy grants amounted to $15.7 million, or $0.08 per diluted share. Our net cash used in operating activities was approximately $14.6 million, down from approximately $34.6 million provided for in the previous quarter. The decline was primarily due to the cash payout of 2007 RSU grant and significant increase in sales in the third quarter.

On August 15, we announced that the board of directors declared a dividend of $0.20 per ordinary share of the company, or approximately $40 million. The dividend was paid out on October 30, 2007 to shareholders of record on October 5th.

Capital expenditure for the third quarter was approximately $2.5 million, mainly for the purchase of software, equipments and subsequent payments relating to the earlier construction of our headquarters.

Our total headcount remained literally unchanged at around 1,050 at the end of the third quarter. Jordan provided our 4Q07 outlook earlier. We are basing that guidance on approximately 199.5 million diluted weighted average outstanding shares.

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

Thank you, sir. (OPERATOR INSTRUCTIONS).

Our first question comes from the line of Frank Wang of Morgan Stanley. Please proceed with your question.

Good morning. Congratulations for a good third quarter and also a good guidance for the fourth quarter. The first question is if you look beyond the quarter in a typically seasonally down first quarter 2008, would you please maybe comment in terms of what kind of environment you are foreseeing in the first quarter of 2008? And would that be a deeper sort of decline or would it be a shallow one, when there could be some constraint in volume on the panel side or any related factors?

You do have a second question, I'll address this question first.

If you don't mind, I do have another question.

Okay, thank you, Frank.

We (inaudible) provide solid guidance beyond the next quarter, beyond the following quarter. As far as Q1 is concerned -- I've been talking to many of our customers in large panel and small panel, and people seem to be reasonably upbeat about the prospects of next year. As far as Q1 is concerned, you are right, that typically it is the down season. While we are still seeing actually pretty solid forecasts coming from our customers, I think it just a bit too early for us to comment on the real numbers of Q1 next year. Having said that, I think that the general feeling of our customers, and that certainly translates to our business next year is that the environment appears to be healthy for next year for (inaudible) expects, and our design phases for next year's productions or next year's customers in further design remain pretty solid at this point.

Thank you. My second question is related to the hinted capacity construction you mentioned in the third quarter. When do you expect that to be alleviated? And then maybe if you can talk about what was the constraint you saw? Is that on the wafer foundry side or is that on the back-end side? And then I have one more question to follow up then after that. Thank you.

The capacity constraint is actually on our side. It's neither our factory nor or back end, meaning testing or packaging. It is actually our panelmaker partners' capacity constraint. Meaning, as you know, panelmakers have now been utilizing their other generation fabs to make such products, and this market sector has been very, very tight in overall capacity on the panel side. Meaning, we do have a very strong demand coming from our multi-maker customers who however suffer from a lack of panel or sales supply. And that, as a result, has limited our (inaudible) shipment.

Now, whether this concern will be alleviated or inflamed -- I think it will be alleviated because we are seeing more and more of our panel customers utilizing their... In the past, there were 23 or 23.5 fabs that were utilized for such products, but now they are moving towards 24 or 24.5. I suspect sometime in the next year, that a small-panel (inaudible) can also be utilized for the larger-size panels in the medium, small- to medium- panel segment.

So that would certainly help alleviate the capacity constraints. As far as when, it's actually, that is going to happen -- we really don't see the visibility. Having said that, I think we also mentioned our opinions in the small panel segment. That is because there is another sector for Himax in the sense that there is a (inaudible), and however they are similar. However, they are also, there is this statement for us where the panelmakers do have their own (inaudible) for capacity. They are typically first-tier panelmakers supplying their products to first-tier handset makers. We mentioned this potential market several times in our conference call. And now, these customers cover across Korea, Japan, and Taiwan.

Now, given that, for these customers, we are new entrants, so there is actually indeed a good upside potential for us. And a small amount of (inaudible) are being revved at the moment, but I think with the majority remain (inaudible) next year. So that actually represents a good financial for us next year.

My final question is that obviously we are all quite fortunate in terms of what the stock price has done for Himax. I think you have taken action in terms of stock repurchases last year and now you've just announced another stock buyback program. And also, this year you have just have distribution of a cash dividend. Looking on, maybe for the next year or two, on the longer term, can you perhaps share with us in terms of what's your view in terms of improving shareholder value in terms of the cash dividend for stock repurchases on a normalized basis -- what's your view of that in terms of the amounts or the ratio of how you come to think about that.

Thank you, Frank. I think that we have structured it to our shareholders and our share price, if not more. And we certainly believe that our share price is grossly undervalued. If you look at the (inaudible) on a GAAP basis or a non-GAAP basis, you compare our share price to our peers in the US or Taiwan, it is really actually very low. And that is the reason why we are buying back shares. Certainly the intention, for the long term, is hopefully to maintain a strong stock.

And I think that as far as the long-term policy for cash dividends and buybacks, I think that we are still a very young company, and we have only been doing the [repurchase] for over a year. So, in a way, we are still listening to the markets and exploring what our investors expect from us. On the one hand we are seen as a high-tech company, and high-risk, a bit unusual for a steady, cash-dividend (inaudible) for investors to expect. On the other hand, we do generate a lot of cash. We do have very little CapEx requirements being a (inaudible) company. So a lot of the intention is hopefully to maintain a certain amount of cash distribution by way of cash dividends to our shareholders year after year.

However, I emphasize again that we are a young company, and such policy may change. And certainly, we need to look very carefully at our working capital requirements, our requirements for strategic investments, when they appear. So in all this we're perfecting our decision.

So, as far as share buybacks are concerned, I think it's still only a sort of small, opportunistic, if you like -- it depends on where our shares stand, our share price stands, our cash position, our outlook for the market and so on.

In summary, we haven't really established a very, very firm policy as far as our long-term cash distribution is concerned. But the intention is that when we do feel we have excess cash, we should do one or the other.

Thank you very much. Again, congratulations for a good quarter.

Thank you.

Thank you, Frank.

Our next question comes from the line of Adele Mao with Susquehanna International. Please proceed with your question.

Hi. My first question is also related to handset demand and panelmakers' capacity. Would you say some of that lost revenue in the third quarter actually got pushed out to the fourth quarter?

Did it get pushed out? Hmmm. Yes and no, not necessarily. Because the panelmakers' capacity is limited, and when they cannot meet the requirements, the opportunity is gone. In next quarter, they still have the same amount, the still have a fixed amount of capacity. Meaning, it does not necessarily get pushed out. The indication for being pushed out is that -- let's say in the previous quarter, they do have capacity and all in progress, or semi-finished goods, have been produced and waiting for the final stage, meaning the [IC] can be bonded. You've got the case in our opportunity to be pushed out into the fourth quarter, but our case, I think that once the opportunity is gone, it's gone. And next quarter we are still faced with a fixed amount of capacity.

All right, okay. If you are able to fulfill all the demand -- or the panelmakers are able to fulfill all the demand -- I just want to get an idea of what type of revenue growth would you have seen from handsets, specifically, quarter over quarter?

This is a very tricky question. The way it works is that this is hard to answer. But I would say that in our small panel business per se, for the growth, for the shipments -- certainly double digit percentage numbers are more than likely. The reason this is a bit hard to address is that our pure module customers facing a lack of, or a less than sufficient supply from their vendors, companies such as CMO or CPP and so on, they automatically adjust their forecast to us. So we don't necessarily know about their actual demand if the capacity, the front-end capacity supplies are limited.

But judging from the discussions that we always have on a three-party basis, the kinds of demands that they are requesting from our panelmakers for further shipments, I think it is safe to say double digit percentage kind of difference. However, having said all that, they may have inflated their demand, so they know it's in a shortage situation. So we really don't know.

But the double digit, you meant quarter over quarter double digit growth?

Absolutely, yes.

Okay. That's very helpful. If I remember --

If I may make one point. It is slightly unfortunate that we are put in this situation because our new generation IC is very, very competitive. The customer qualification is a few steps ahead of our competitors. We are actually pretty ready. So we certainly wish we had an unlimited supply. However, it is also because of the competitiveness of our current generation that we are doing very well with first-tier panel customers, small-size panel customers who have their own capacities. That refers back to my earlier comments about our optimistic outlook for next year.

Right. Okay, that's great. Remember you discussed the ramp up in digital photo frame opportunities last quarter? Could you comment on the trends you are seeing in the market today?

It remains quite strong, actually. And I would say that plays a major factor in the shortage of small panel capacity at the moment. I think very few people, if any, expected this segment to be so strong. And now we are seeing many small design houses, most of them based in China, providing new features, (inaudible) new systems for this application. So it's a -- on the systems side or the (inaudible) side, there's no one or two dominant players. But I think part of the reasons why it is so strong. There are so many players participating in the market, and panelmakers are having a hard time catching up with the demand.

And this is a new market, as I said earlier. Even earlier this year, I think nobody would have expected the total shipment for this particular product that it would be so strong this year. I think our panelmaker customers are still optimistic about their outlook for this product next year, but I think it is hard for us to comment on actual numbers.

Right. Okay, that's great. Thank you very much.

Thank you, Adele.

Our next question comes from the line of David Duley with Merriman Curhan. Please proceed with your question.

Yes, a couple questions from me. I guess from a macro perspective, the beginning of this year and the end of last year was a very difficult period for gross margins for you guys. And I suspect that it be a little bit to do with some of your panel guys maybe slowing to Moore's Law, not building the most advanced facilities to continue to drive costs down so they look to you to drive more costs down. What does 2008 look like on that front? Do you see your customers putting similar amounts of pressure that you saw at the beginning and end of 06 and beginning of 07 or do you think it's more of a normal environment on the margin side?

Thank you, David.

I think, if look at our -- well, firstly, the price pressure is always there. So don't get me wrong, needless to say. Now, if you look at our historical gross margin trend -- in fact, if you look at our major competitors -- we are all share the percent which the, our gross margin actually comes very much in line in terms of trend with our panelmakers' gross margin, or operating margin. Meaning, when they are having a good time, profitability-wise, they give us a better time, and vice-versa. And so, I think, that's a little strange why we are having a better time compared to Q3 of last year, where we had a historical low, when, to understand how, you look at the panelmakers' margin, you are not looking very good. In fact, many panelmakers lost a sizable amount of money during that quarter. So I think that our IC and panelmakers, their relationship is really one of partnership. So I think that when they are suffering from profitability, they expect us to suffer as well, and when they do better, they give us a better time.

So that is, if you work from the macro perspective. If you take that as the main reason for our (inaudible) margin, then it is anybody's call how next year is going to be like for panelmakers. And I think the general sort of consensus around the marketplace is that the overall environment for LCD next year is likely to remain strong, given the limited, the comparatively limited capacity increase next year. So, for that reason, we are -- I see little reason for us to be bearish for our margins.

Certainly our other factors such as our product mix, supplier mix, etc. and our own Moore's Law, geometry and so on. If you talk about the macro reasons that would be my view.

Okay. Maybe I'll ask the question a different way. When I talk to people like AUO, they told me they get half their costs down from their supply chain, and half the costs down from building a new factory. And so when they don't build new factories, the cost down from the supply chain becomes much more difficult. And I think that's one of my theories as to why you had such a difficult gross margin time early this year and late last year. So if I ask in a different way -- do you see your customers building their next generation fabs in the schedule that was originally anticipated?

I think so, I think so. Having said that, at the moment we do have a number of major customers building their new capacities, primarily in 7.5, and Gen 8. In tier, you talk about the obvious customers in Korea, in Taiwan. And there is likely to be sort of a marginal capacity increase coming from China as well. That's what we're seeing.

I'm not so sure whether these new capacity increases will, how that is going to play into our margin or our price pressure. Because these new generation fabs are typically for very large spec TVs and they are exploring the new market segment. In that case, if they are using such fabs primarily for large-size panels, TV panels, the requirements for such driver ICs, typically, technology-wise is actually tougher. We typically enjoy a slightly better margin as a result.

So that is another factor, another angle if you like, for our margin.

Another question, probably for Max. Max, when you guided EPS for the fourth quarter here in the press release at $0.16 to $0.17. I think that's a GAAP number. What would be the pro forma guidance attached with that GAAP guidance?

Our pro forma guidance, I mean non-GAAP, we would be seeing a non-GAAP EPS as in the third quarter, which would be in the $0.18, $0.19 range.

I'm sorry, I got confused -- say that again?

$0.19 per share at non-GAAP, or pro forma levels, if you want to call it.

Okay. So $0.19 would be the pro forma guidance for the $0.16 to $0.17 you're guiding to in the fourth quarter.

Yes. It's roughly at the same levels compared to the third quarter of this year, at a non-GAAP level.

Well, one of the questions I was driving at was should we as investors and analysts start to look at the pro forma numbers as a better metric for your earnings power? Since this last quarter there was a huge difference between the GAAP and the non-GAAP numbers, and it sounds like there's going to be 2 or 3 pennies a quarter going forward? How would you like us to model and view the company? Which numbers should we be using?

Yes, we do provide GAAP and pro forma numbers, and I think it's better for investors both based in the US and based in Taiwan to compare our performance based as with our peers. And so I think both numbers are valuable, and especially when you compare us with our peers which are mostly based in Taiwan and it's better to look at non-GAAP, which is more close. I won't say identical, but more close to the so-called ROC GAAP numbers.

Okay.

David. I do believe that our pro forma basis or non-GAAP numbers are a set of benchmarks, primarily because if you do look at our GAAP numbers, our RSU charges, they actually fluctuate substantially. They had a peak in the third quarter, and they remained at a relatively low level in the other three quarters. We don't like this accounting arrangement, but unfortunately that's how the accountants release them. [The big argument is how to curtail these] numbers. We hope that we can have a steady charge of RSU expenses for all four quarters, but unfortunately we are not allowed to do that, primarily because of the, of the fact that we distribute our RSUs at the end of Q3. For that reason, they believe, a simple majority of RSUs should be charged in that particular quarter; in fact, on that particular day.

So, for that reason, if you look at non-GAAP numbers, you get a better sense of how revenues are comparing quarter after quarter. And after you do that, you then look at our earnings dilution otherwise. I think that would be an easier way for you to do your numbers.

And I agree, I think we should look at the pro forma numbers. And it's not, I think in Q4, it's only a $0.02 or $0.03 difference. But it sounds like in the September quarter -- is it going to be an ongoing big bonus payment in the September quarter, so we'll have a big change between GAAP and pro forma in September, and then in the other quarters it will be more moderate changes like this $0.02 or $0.03 you're talking about?

Yes.

Okay. So certainly I think you should start to really focus people on the pro forma numbers because we'll all get really confused if you don't.

Yes, I think regulatory wise we are obligated to always emphasize the GAAP numbers. But when, for analysts and investors to do their modeling, I think the pro forma number is the most consistent approach. So we are obligated to announce both, I think.

Yes. Final thing from me is, and you know I was just wondering -- why are you spinning off your TV chipset business? What are the advantages to do that?

Well, thank you for raising that question. I was wondering how come that question hasn't popped up.

We believe the TV chipset business, through a partnership, among the chipset maker, the system maker and also the panelmakers is also important for resultant success. And Himax has enjoyed the advantage of being very close to many panelmakers. And by having this three-way partnership, firstly, the chipset designing phase is extremely long from discussion to specs to mass production, it's almost a year. So having, and secondly, when you can combine the three parties' technologies together, or product designs together, there are actually ways where you can either drive down your costs or improve your performance, even within cost. However, the requirements for that is for the three parties to be able to sit down at a very, very early stage and discuss about these very comments for the future. And now, in order to achieve that, the three parties need to be very confident about each other in terms of the -- in terms of the support coming from each other. It could be long-term support coming from us being the chipmaker in providing the technology or the spec they require for the future. It could be long-term support coming from panelmakers, or the system makers, in terms of the capacity and also the next generation product design. It could also be the system makers' support to panelmakers and the IC makers in terms of being willing to release at a very early stage their product design concept after talking to their end user customers, or as far as panelmakers are concerned, a system maker's commitment to panelmakers' capacity for the future.

So a three-way relationship, we believe is very, very important in this regard. And secondly, I think if you look at the whole market, this year the whole world's TV shipments, I would say, probably still less than 100 million sets for the whole year. And with the amount of cost reduction, people are driving it -- if you look at the whole market, it's really not so big in size, especially if you consider that there are many small system houses playing a small role. However, to design in and mass production for those small customers is a mega customer for us. It takes a tremendous amount of technical support. So we feel we need to first get a couple of very big end customer support to be able to cooperate with them from the very early stages of product concept through mass production. And I think that panelmakers welcome such a partnership because that way they get a very steady customer base and steady capacity assumption outlook from their mega customers.

Having said all that, people do expect the chipmakers, i.e. Himax in this case, to be the majority shareholder in the venture, because at the end of the day chip the day is near the core of this new company.

So this spinoff, you would own 51% of it, and so therefore you would account for it in your financial statements in a single line item below the line?

We would be, we would have more than 51%. Hopefully, in a couple months' time, when everything gets finalized -- we're doing all the paperwork at the moment -- we'll be able to announce the final number. In any case, the new company will be reporting on a consolidated basis, with majority control.

I said I was done with questions, but could you just tell me one housekeeping one -- what was the cash flow from operations in the third quarter?

Cash flow from operating was $35 million, due to the outgoing of RSUs. So every third quarter, we bring up RSUs. And this year there's something special compared to previous years because we, over 50% of our RSUs were actually granted in cash. So it's primarily, it's one reason for our cash, negative operating cash outflow.

And the other reason for our negative operating cash flow in the third quarter was primarily due to our increased pre-sales revenues in the past couple quarters. So we need to pay money to the vendors. And accounts receivable also increased as well.

Okay. Thank you.

Thank you, David.

Our next question is from the line of Amit Kapur with Piper Jaffray.

Great. Thank you very much. Most of my questions have been answered. But maybe you could talk a little bit about how your lead times are trending as you look into early 2008, how much visibility are you getting from your customers in terms of order flow?

Lead times in terms of forecasted order flow?

Yes.

Okay. It hasn't been changed much. Typically, customers will give us a pretty solid three months rolling forecast, with the most recent month being by way of shipment schedules. They will also typically give us somewhere between 12 to 24 months longer-term rolling forecast.

Okay, great. And maybe one quick follow-up question. Getting back to the spinout of Himax Media Solutions -- I might have missed it, but what time frame were you looking forward to finalizing the agreement? And in terms of the strategic investors you're speaking with, what could the possible form of investments be? Primarily financial, or is there intellectual property that can be contributed? Maybe if you can comment on that.

Okay, I think there are certain procedures to go in Taiwan for the business spinoff, and it's likely that all this will be settled at around the end of the year. By end of the year, we will have Himax remain the majority shareholder in this JV, while certain strategic investments from either panelmakers or system makers.

As far as the second part of the question -- this is the way it works. Himax will cut off the people, the products, the operation, the equipment, etc. of our TV and monitor chipset business from the parent company, and we'll set up a new company. And then our strategic investors will then be invited to subscribe in shares in the new company. In the meantime, they would then undertake to cooperate with us for their product designs, and their products, basically. The strategic investors were, there will be panelmakers and there will be system makers. So a panelmaker will come in with their design requirements and in fact, as we mentioned earlier, we have already a rather sizable amount of new design projects going on at the moment. Our panelmakers also come in, because part of our design involves our panelmakers' permanent site. We actually created this product design concept we combine panel control into our chip. So that's as a result, has a lot to do with panelmakers' product design technology. So we also are coming into an early stage to work on this together on a three-way basis.

Great. Thank you very much.

Thank you Amit.

Our next question comes from the line of Stefan Chang with Macquarie Securities.

Hi, good morning Jordan and Max. Congratulations for your great results.

[I just have two questions here. First, can you break down in your large-size IC (inaudible)?] How much percentage is for TV and how much percentage is for non-PC use?

I think in the third quarter of this year, large panel revenue accounted for [83%]of our total revenues. But TV accounted in the range of 20% to 25% of our total revenues, while PC-related, i.e. monitor and notebook combined to 50% to 55%. Because some IC could be commonly used for either notebook application or for monitor application, so we tend to do monitor and notebook together, so the two combined accounted for 50% to 55% of our total revenue, give or take.

(inaudible) include small-size panel or large-size?

We categorize panel size diagonal size below 10 inch as small- and medium-size.

Small and medium size.

And my second question is -- can you rapidly talk about TV IC solution? How many [physical] solution do you have right now? If I don't remember wrong, you mentioned you have (inaudible). And how many other (inaudible) solutions do you have for TV chipsets?

For chipsets, this is mainly on the systems side. We have a product family. Well, firstly, we have an integrated IC family, which covers the video controller or the video processor. Different people give it different names, but it was primarily, the (inaudible), the scalar, the color enhancement, and on the front end of the [ADC] computer. And we have also combined an audio processor, an audio decoder, in one chip. I might have missed out on a few major items. But they are primarily, the current designs are primarily for (inaudible)-only ICs.

Yes.

Our single-chip solution, covering each of those digital features, will be coming up very, very soon. And when I say there's a product family, what I'm referring to is there are products for the low-end models, and there are products for higher-end models.

And finally, we have, what you've probably heard, a solution which is for very high-end models. But at the moment the major design efforts are primarily on the single chip and focusing primarily on mid to lower end models.

Just to clarify, when you mention single-chip digital TV solutions, do you mean your (inaudible), including the modulator?

The modulator will be packaged into the same chip. Yes, it will be packaged into the same chip. Because different regions have different demodulator requirements, it's one piece of silicon that we think is unnecessarily meaningful. But it will still be packaged into the same chip.

So for the first product, will you focus on the US vendors for the NTSC or Europe vendors?

At the moment, the current design projects involve project markets for China, Taiwan, Europe, Latin America, Canada, etc. Not necessarily the US at this stage.

Okay, thank you. My last question is, previously you mentioned about dual listing (inaudible) -- can you mention something about this? Do you have internal talking about dual listing in Hong Kong/Taiwan or any other markets?

I believe we never really indicated that we were going to do a dual listing as such. There are certainly discussions about this. We are [sifting through] various proposals. But nothing has been decided at this stage.

Okay. Thank you. And once again, congratulations for your results.

Thank you. Thank you, Stefan.

Thank you.

Our next question is from the line of Jessie Chang of Credit Suisse.

Hi, good morning Jordan and Max. I'm very pleased to see your results.

Thank you.

I have a few questions for you. First, regarding your gross margin -- it's a very big improvement in Q3, and can you tell me -- did you improve the gross margin by small- to medium- size panel drivers and also large-panel drivers on an apples to apples basis?

On an apples to apples basis? Yes.

(inaudible) when you pull them out by segment?

Okay, no. You talk about small or medium size driver. I would think, most of all, the main three products at the moment, which is the headset driver IC, for QVGA resolution. The mass production of that new generation IC commenced at the begin -- let me see, in Q3. And when you have got a new generation IC in the early stage of life, obviously the margin tends to be higher. Although we were able to price it lower compared to the previous generation IC because there's a significant amount of [cost value] involved, and the reason for [cost value] is primarily geometric migration. And now, for headset drivers we are using, depending on the specification, in between [0.13 to 0.16 to 0.18], compared to the previous generation of [photomicron]. Again, we are pleased to see that we are among the earliest to successfully put in mass production such IC at the moment. As a result of that, we have a very good (inaudible).

If you look at your third quarter gross margins, did you improve your gross margin for large panel drivers as well as the small to medium size drivers? If we just break out by these two segments, do you see gross margin improvement for each segment?

Yes, I think so, yes. We do see a margin improvement in both segments. For the small -- I think that it's always a combination of two factors, our costs and our efforts. in our small and medium size panel segment, there have been a couple of our major items of our IC (inaudible) when we introduce our new generation.

And actually, we are in a similar situation in an early (inaudible) stage for our large-panel driver as well, which is a [0.18 micron] for our fourth driver. And Q3 is also the first quarter of ramping, and the percentage of this saturation, IC [in our last shipped large panel] driver IC shipment. That will increase over time because customers can't replace old generation ICs with new ones overnight.

So I would say that is the single most important factor.

Secondly, I mentioned earlier that we also, panelmakers all have outstanding performance [profitability-wise]. So I think the cost pressure to us is relatively low compared to, again Q3 of last year.

Okay. Thank you. And going forward into 2008, do you still consider that there is enough room to reduce your costs given you have a new generation [product that has just started to ramp]? Personally, I think there is still room to play, right?

Definitely. While we can't control the market, we can't control the customer's profitability, we do control our costs. And while we are ramping this current generation, the next generation is already in the works, and pretty soon we'll announce [assembly] to our customers, but then again, design takes a very, very long time, so you sort of play the cycle along.

So can we assume going forward that your gross margin will be more stable, at least at around the third quarter level? A kind of assumption?

I really can't comment on that. There are just so much other things.

Can I still ask -- for your small to medium size drivers, the percentage going up around the third quarter is around 15%. What is your target, what is your view, about the [wait] into next year?

In terms of the unit, we definitely expect panel shipment for small and medium will outgrow panel for large panel. But having said that, one small panel for handsets just requires one driver IC. And also, the IC is undergoing a geometry migration, as Jordan just mentioned. In the next couple of years, we definitely believe in terms of unit, small and medium size definitely has better growth potential than the large panel in terms of unit shipment. But they also lack IC required, not like large panels. Large panels, they are gradually moving, mixed towards the 4HD stuff.

So, in general I would say, they are outgrowing large panels, but it's probably a stretch to achieve, say, like 20% revenue next year. I think that's a very, very stretch goal next year.

So probably 15% to 20% range would be more reasonable.

Fifteen percent to 20% range. Because this year is about 15% of our total revenue, give or take. And definitely we will increase the situation next year.

And finally, regarding the Himax Media Solutions, Inc -- when will you, if everything comes out, if you can integrate everything by the end of this year, would you expect to start to see synergy from the second half of 08?

You mean mass production?

Yes.

Well, firstly the IC has been there, in place; otherwise, we could forget about 2008. So the IC has been there, fully qualified, etc. etc. The system, meaning the system design, is also in place, so we're going through [our certification], and [for certification], the world markets cross different specs and different regions as I mentioned earlier.

So I think that you can certainly expect mass production in the second half of next year, if not earlier.

And for this kind of product can I assume a gross margin of more than 40% or around that level?

Can you leave that to when it actually happens? Around the marketplace, I can see that it will be a real exception. Having said that, we are new to the market, so actually there will be price pressure, so I would rather leave that to when it actually happens.

Okay. It's just that hopefully it's higher than your driver IC for (inaudible).

Hopefully, yes.

Okay, thank you very much.

Thank you, Jessica.

Our next question comes from the line of Greg Weaver of Kern Capital.

Hi. Just to wrap up here on your spin-off -- what percent of your current business is associated with the business that you will spin off? What is the run rate there?

Revenue-wise, it's close to nothing. But R&D-wise, we now have more than 150 people being relocated to the new company, and these 150 people, almost all of them are engineers. So it is actually a rather sizable percentage of our engineering staff. I would say more than a quarter of our engineering staff. Meaning, there's a negligible amount of revenue or our gross profits for that matter being affected by this. But R&D expense will be the single biggest item of impact in our P&L.

Okay, that's helpful. I thought maybe because you put the word "monitor" in there, there was some revenue associated with it.

Our monitor is (inaudible) for that business. It's all owned on the system side, not the R&D. (inaudible) on the panel side, and TV we talk about the TV/monitor systems side. The company being spun off is focusing on the system solution. Himax will be focusing on the panel solution.

Okay, that's helpful. I missed that subtlety. Could you tell us, maybe, in terms of the unit volume that you had sequentially here from the June to the September quarters? What was the percent increase there?

I think the ASPs pretty much remained unchanged, give or take. So the unit growth was about the same magnitude as our revenue growth.

Okay. So --

The ASP remained unchanged because there was no price pressure, actually. It is primarily because of product migration into other channels. Meaning, on a [production] basis, the number of channels on average increased slightly, as customers continued to migrate to the adoption of high-channel production.

So it's this high-channel situation that caused the large differential between your sequential revenue increase and CMO's?

No. I think the panelmakers typically generally enjoy a very good revenue growth on a sequential basis, primarily due to the increased panel ASP for the past couple quarters. While the component makers, the drive to ask the vendors to tend to continually provide the costs down on a per-panel basis. While this cost-down was pretty much offset by the geometry mix, product mix or supplier mix, we are not stopping providing cost-down to our customers. We just have more time to schedule ahead, to plan ahead, of our own cost-down measures to offset our so-called cost-down contributions to our customers during the past few quarters.

Let me also try to help answer your question. As Max mentioned, panelmakers and a panel's sales price can go up or down. They can go up a lot or they can go down a lot. They do fluctuate a lot. In comparison, some ICs, similar to literally all semiconductor segments, the price had to always go down. It rarely goes up. However, goes down in a more sort of steady process. That is point one.

And point two is if you look at all our components, or if you look at the build material, the composition of a typical panelmaker (inaudible). Because of the fact that it is a semiconductor, the driver is typically the item that's the biggest cost down potential; you can always use new geometries, you can always squeeze more circuits into an area.

In reference to the last quarter, the previous quarter, I would certainly say panelmakers raise their price substantially, and that explains the revenue differential.

But CMO was up 30% sequentially on a unit basis, right? I know their revenue was up even more, but I guess that's, you know, where I'm struggling a little bit with that.

Again, according to the markets, the CMO, in terms of capacity expansion, they outperformed industry average, and CMO is just one of our customers. So I think that, in general, CMO definitely showed better than market average in growth in the previous growth.

There were other customers who didn't have capacity increase, but they are also migrating to high channels.

Okay, so what percent of revenue was CMO?

Shipments, unit shipments to them decreased.

So what percent of revenue was CMO this quarter versus last quarter?

This quarter was 60%, slightly over. And last quarter it was about 50% to 55%. Revenue to/from CMO increased slightly, outgrowing the market.

And last question here is just on the gross margin outlook -- obviously, excellent performance this quarter. But I guess I'm trying to understand why it would be flat in light of your favorable mix shift forecasting with more small panel?

I guess, you can always see the -- I mean, certainly we remain optimistic about the next quarter. If you read between the lines of our announcement, I'm sure you can see the same. I think sometimes on a last-minute basis, we do see a different product mix and some of our sales capacity. We anticipate, we'd like to be slightly on the conservative side.

Understood. Thank you very much, and nice results.

Thank you, Greg.

Our last question comes from the line of Erica Chen with JPMorgan.

Hello, good morning. I think we talked about the [High-channel] adoption. I would like to have some questions on that. How do you feel the transition from HD to 4HD on your customer's side? Could you let us know what percentage is the recorder? Thank you.

You mean the panel resolutions from standard definitions to high definition?

High definition to 4HD1080.

Oh, okay. So this is separate questions. One is for the panelmakers -- their migration from high definition to 4HD. And definitely you are seeing increasing adoption of 4HD in panel size equal or above 37 inches. And this is not, there is not direct linkage between the 4HD panels versus the high channels ICs. Even 4HD panels can still use standard channels of ICs. Even standard panel definitions can use high channel ICs. So these are two, I would say, independent classifications.

Meaning, this is a probably a better question for panelmakers because we don't really look at our shipment right now that way. We do categorize them by high channel/low channel/TV application/monitor application and so on [when we speak about multi-]requirements and so on. When it comes to how much of our (inaudible) are utilized for HDTV, we don't really know.

Okay. I understand. Thank you.

Thank you. there are no further questions at this time. I would like to turn the floor back over the management for closing comments.

Well, thank you very much, everyone for spending the time with us this morning. We look forward to the next announcement. Thank you.

This concludes today's teleconference. Thank you for your participation. You may now disconnect your lines at this time.