奇景光電 (HIMX) 2009 Q1 法說會逐字稿

Greetings and welcome to Himax Technologies first quarter 2009 financial results conference call. (Operator Instructions). As a reminder, this conference is being recorded. A replay will be available two hours after the call today, through noon on Tuesday, May 26, 2009, in Taiwan. The replay dial-in number is 1-201-612-7415 with account number 3055 and conference ID number 320842. The replay will also be accessible at www.himax.com.tw.

I would now like to turn the call over to your host for today's presentation, Ms. Ashleigh Barreto from The Ruth Group. Thank you, Ms. Barreto. You may begin.

Thank you, operator. And welcome everyone to Himax Technologies first quarter 2009 earnings call. Joining us from the Company are Mr. Jordan Wu, President and Chief Executive Officer, and Mr. Max Chan, Chief Financial Officer.

We apologize that due to technical problems from our last earnings call, questions were unable to come through. After the Company's prepared comments, we will have time for any questions today.

If you have not yet received a copy of today's financial results, please call The Ruth Group at 1-646-536-7028 or you can get a copy off Himax's website at www.himax.com.tw.

Before we begin with 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 events to differ materially from those described in the conference call.

Factors that could cause actual results to differ include but are not limited to general business and economic conditions and the state of the semiconductor industry, market acceptance and competitiveness of the drivers and non-driver products developed by the Company, demand for end-use products, reliance on a small group of principal customers, the uncertainty of continued success in technological innovations, our 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 approval for future investments in our subsidiaries, our ability to collect accounts receivables and manage inventory, and other risks described from time to time in the Company's SEC filings, including those risks identified in the section entitled "risk factors" in its Form 20-F for the year ending December 31, 2008 filed with the SEC, dated May 15, 2009, as amended.

Except for the Company's full year 2008 financials which have been provided on the Company's 20-F, filed with the SEC on May 15, 2009, the financial information included in this conference call is unaudited and consolidated, and prepared in accordance with US GAAP. Such financial information is generated internally and has not been subjected to the same review and scrutiny, including internal auditing procedures and audit by independent auditors, to which we are subject on our annual consolidated financial statements, and may vary materially from audited and consolidated financial information for the same period.

Any evaluation of the financial information included in this conference call should also take into account our published audited consolidated financial statements and notes for these statements. In addition, the financial information included in this conference call is not necessarily indicative of our results for any future 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.

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

Thank you, Ashleigh. And thank you everyone for joining us on today's call.

Before discussing our first quarter highlights and financial results, I would like to talk about the revisions to our fourth quarter and full year of 2008 financial results as disclosed in our press release, along with the 20-F filed with the SEC on May 15, 2009. The revisions were primarily made to account for a bad debt expense of $25.3m related to our customer, SVA-NEC, and its associated tax benefit of $7.9m. These two adjustments lowered our operating income by $25.3m and net income by $17.4m for the fourth quarter and full year of 2008.

As a result, our earnings for the fourth quarter and full year of 2008 are lower than what we previously reported in our unaudited financial results. Our GAAP loss per share for the fourth quarter is now $0.07 and GAAP earning per share for the full year of 2008 is now $0.40, compared to GAAP earnings per share of $0.02 and $0.49, as previously reported.

SVA-NEC, a subsidiary of SVA Group, is one of China's largest TFT-LCD panel manufacturers, with Shanghai municipal government being its majority shareholder. Starting in September 2008, SVA-NEC has delayed payment -- has delayed paying a significant portion of our outstanding accounts receivable.

At the time, SVA-NEC had undertaken to fully and promptly resolve these outstanding payments and made partial payments in January and February 2009. Due to these payments, we did not make an allowance for doubtful accounts for SVA-NEC in the unaudited results furnished on February 19, 2009.

At the end of March 2009, new material information regarding SVA-NEC came to our attention. The Shanghai municipal government set up a conservatorship committee to assist in SVA Group's restructuring. Two subsidiaries of SVA Group, SVA Electron and SVA Information Industry, are indirect shareholders of SVA-NEC and are both listed on the Shanghai Stock Exchange. Since the end of March 2009, the stocks of these two companies have suspended trading for an extended period of time.

In view of these developments and our increasing concern about SVA-NEC's financial condition, we recorded an allowance of $25.3m, the total amount of accounts receivable outstanding from SVA-NEC as of December 31, 2008, less any subsequent payments collected.

In 2009 to date, we have made several shipments to SVA-NEC, the majority of which were guaranteed by credible third parties. For the first quarter of 2009, we have made an allowance of doubtful accounts of $0.4m for the un-guaranteed shipments incurred for the first quarter. To the extent that SVA-NEC's financial condition does not improve, the maximum amount of allowance for doubtful accounts in relation to the remaining un-guaranteed shipments would be $0.2m.

Notwithstanding this unfavorable incident, we believe our approach has been prudent and appropriately reflected the available information at any given time. This is the first time since our inception in 2001 we have had to make a significant amount of allowance for doubtful accounts. We will, by all means possible, continue to seek to recover our accounts receivable from SVA-NEC.

Now, turning to first quarter 2009 financial results, I will start with brief highlights of our overall performance during the quarter. Then I will provide our outlook for the second quarter of 2009. Our CFO, Max Chan, will then give you further details on our financial performance later on.

To begin, we are pleased that our -- that for the first quarter of 2009, we achieved revenues of $125.7m, gross margin of 20.9%, and GAAP EPS of $0.02, all meeting our guidance. Our first quarter revenues of $125.7m represents a 45.7% decline year over year and a 1.1% growth sequentially.

While our first quarter revenues were at a similar level as the fourth quarter of 2008, the fluctuation in our monthly revenues has been unprecedented. In the fourth quarter of [2009], we experienced double-digit revenue decline month over month. In contrast, our monthly revenues rebounded strongly in the first quarter of 2009, showing double-digit monthly revenue growth and were particularly strong in February and March.

Revenues from large panel display drivers were $89.1m, down 53.4% from a year ago and down 1.6% sequentially. Large panel drivers accounted for 70.9% of our total revenues for the first quarter, as compared to 82.6% a year ago, and 72.9% for the previous quarter.

Revenues from small and medium-sized applications were $28.9m, down 10.6% from the same period last year and up 3.6% sequentially. Small and medium-sized applications accounted for 23% of our total revenues for the first quarter, as compared to 14% for the same period last year and 22.5% for the previous quarter.

Revenues from the non-driver businesses were $7.6m, down 4.4% year over year and up 32.2% sequentially. The non-driver businesses accounted for 6.1% of our total revenues as compared to 3.4% a year ago and 4.6% for the previous quarter.

Our customers' orders declined significantly toward the end of 2008. Starting from the later part of January, we began to see improvements in TFT-LCD panel demand, primarily due to the overall inventory replenishments and the stimulus program implemented by the Chinese government for certain electronic appliances sold in rural areas. As a result, there has been an increase in rush orders for TFT-LCD panel manufacturers and for us.

Although display drivers typically require the longest manufacturing lead time among the key components used in TFT-LCD panels, we are pleased that we were able to achieve on-time delivery for the majority of our customers' orders, even those where we were given extremely short notice, which allowed our customers to capitalize on the business opportunities. We are proud to demonstrate once again, our value to our customers through our understanding of the display driver business and our close collaboration with both customers and suppliers.

In the first quarter of 2009, our revenues from small and medium-sized display drivers and non-driver combined accounted for 29.1% of our total revenues, an all-time record level, which again validated our product diversification strategy. As the world's number-one display driver supplier for large panel applications, according to iSuppli, we aim to achieve comparable leading position in our small and medium-sized display driver in the not-very-distant future.

We are also leveraging our worldwide leadership in the TFT-LCD display drivers to penetrate other display-related semiconductors, which include timing controllers, LCOS projector solutions, our power management ICs, TV chipsets, monitor scalers and CMOS image sensors. As an example, we are now working closely with several of China's tier-one handset solution providers for our LCOS projector solutions and CMOS image sensors. These Chinese handset solution providers play a critical role in the development of the Chinese handset market and ecosystem.

Another example to validate this cross-selling strategy is our timing controller and power management ICs, where we have been winning new projects from various TFT-LCD panel manufacturers with which we have long been their strategic supplier in the display driver space.

In March 2009, we announced our CMOS image sensor product line, which is developed under Himax Imaging, our fully owned subsidiary. In two years since the team's inception, we have successfully launched 3-megapixel, 2-megapixel and VGA sensors with product performance comparable to the world's top-tier players. In April, we made our first small-scale commercial shipment to one of the world's leading cell phone camera module manufacturers. While we will concentrate primarily on customer design wins and completing a more thorough product portfolio in 2009, we expect the LCOS -- the CMOS image sensor to be one of our major long-term growth drivers.

While the global financial crisis has had a profound impact on the TFT-LCD industry, we believe that it is a great opportunity for us to capitalize on our strategy and grow our business. Customers around the world are paying attention to suppliers' financial soundness, looking for industry leaders who have sufficient resources to fund R&Ds, product developments and customer services on a sustainable basis.

Even amid the global economic downturn, our financial position has grown stronger over the last quarter. Still with no debts, our cash, cash equivalents and marketable securities available for sale were $204.6m on March 31, 2009, a significant increase of $55.5m from a quarter earlier. Backed by our strong balance sheet, we remain confident in the long-term growth prospects of our business and remain committed to add value for our shareholders.

On May 18, our Board approved an annual cash dividend of $0.30 per ordinary share which will be payable on June 29. Max, our CFO, will provide further details on the cash dividend and update on our share repurchase program later on in this call.

Before providing our second quarter 2009 guidance, I would like to share with you some recent observations. We are seeing a strong across-the-board rebound in the demand for our display drivers as customers' capacity utilizations have been substantially improved. We also expect rush orders to continue throughout the second quarter.

For the second quarter, we expect revenues to grow 52% to 55% sequentially, gross margin to remain flat, and GAAP earnings per share to be in the range of $0.07 to $0.09.

Now let me turn over to Max Chan, our CFO, for further details on our quarterly financials.

Thank you, Jordan. I will now provide additional details for our first quarter financial result.

Our GAAP gross margin for the first quarter was 20.9%, down 440 basis points year over year and down 10 basis points sequentially. For the first quarter, our GAAP operating expenses were $21.4m, down 20.7% from $27m a year ago and down 54.8% from $47.4m for the previous quarter.

As Jordan mentioned earlier, we recorded an allowance for doubtful accounts of $25.3m for the fourth quarter of 2008 and $0.4m for the first quarter of 2009. Excluding these bad debt expenses related to SVA-NEC, our operating expenses were $21m, down 4.9% from previous quarter and down 22% from a year ago. The significant year-over-year decrease in operating expenses were primarily the results of a series of cost-control measures we have undertaken since the fourth quarter of 2008.

For the first quarter, GAAP net income was $4.4m and earnings per share was $0.02, down from $34.1m and $0.18 for the same period last year, and up from a GAAP net loss of $13.2m and a GAAP loss per share of $0.07 for the previous quarter.

Excluding the bad debt expenses related to SVA-NEC and its associated tax benefit, our first quarter net income was $4.7m, up from $4.2m for the fourth quarter of 2008, and earnings per share was $0.03 for the first quarter of 2009, as compared to $0.02 for the fourth quarter of 2008.

Excluding share-based compensation and acquisition-related charges, our non-GAAP gross margin for the first quarter was 20.9%, down from 25.3% a year ago and virtually unchanged from 21% a year -- a quarter ago.

Non-GAAP operating income for the first quarter was $7.7m, down from $34.6m for the same period last year, and up from an operating loss of $18.8m for the previous quarter. Excluding the bad debt expenses related to SVA-NEC, our non-GAAP operating income for the first quarter was $8.1m, up from $6.5m for the previous quarter.

Non-GAAP net income was $7.0m, or $0.04 per share, down from $37m, or $0.19 per share for the same period last year, and up from a net loss of $10.9m, or $0.06 per share for the previous quarter. Excluding the bad debt expenses related to SVA-NEC and its associated tax benefit, our non-GAAP net income for the first quarter was $7.4m, or $0.04 per share, up from $6.5m, or $0.03 per share for the fourth quarter of 2008. Share-based compensation and acquisition-related charges for the first quarter were $2.2m and $0.4m, respectively.

Our inventory at the end of the first quarter was $63.9m, down 47.8% from the $122.4m a year ago, and down 34.1% from $96.9m a quarter ago. Our inventory days for the first quarter was 58 days, down significantly from 91 days for the previous quarter.

For the past two quarters our inventory level had continued to decline as we aggressively managed our procurement and inventory to better reflect our business needs and minimize the risk of excess inventory. As the overall demand for TFT-LCD panels and for our products have improved quite substantially for the past few months, we expect both of our procurement activity and inventory levels to increase for the second quarter of 2009.

We completed our goodwill impairment test as of December 31, 2008, the balance sheet date. Based on the result of assessment of our fair value using an adjusted market capitalization approach, and as validated by our assessment using a discounted cash flow approach, we believe that our estimated fair value exceeded our stockholders' equity and our goodwill was not impaired.

We generated a positive operating cash flow of $64.6m for the first quarter 2009, as compared to $28.8m for the previous quarter, primarily due to a significant reduction in working capital, excluding cash and cash equivalents.

Capital expenditure for the first quarter was $3.1m, the majority of which was for our color filter facility.

At the end of March 2009, our cash, cash equivalents and marketable securities available for sale were $204.6m. Our Board has approved an annual cash dividend of $0.30 per ordinary share which will be paid on June 29 to shareholders of June 22. Books will be closed from June 15 to June 22. Based on our current shares outstanding of 185m shares, the total payout will be $55.5m.

We continue to execute our $50m share repurchase program announced in mid November last year. As of May 15, 2009, we have bought back around 7.4m shares of a total of $14.4m and our shares outstanding have been reduced accordingly. In 2007 and 2008, we have returned approximately $79.1m and $75.5m respectively to our shareholders by way of cash dividend and share buyback combined.

The second quarter guidance that Jordan provided earlier is based on 185m diluted weighted average shares.

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

(Operator Instructions). Our first question is from the line of Frank Wang with Morgan Stanley. Please go ahead.

Yes, hi. Good morning. The first question is that can you talk about your current lead time? And when do you expect that to normalize? And can you also talk about the fulfillment rate on your customer orders? Is there any shortage of -- on components to your [driver estimating] or is there any other shortage of other components to your panel customers that may have prevented you from shipping more products? Thank you.

Thank you, Frank. As far as lead time is concerned, I think it's actually quite a complicated issue to address. If you talk about our lead time from the customers' order to shipment, then it really depends on whether we have received previously their forecast to begin with, i.e. whether we have any work in progress, goods -- semi-finished goods that we can use to ship final product.

So it depends a lot on our collaboration of our customers. And certainly we encourage our customers to give us as accurate as possible and as early as possible their forecast demand for the next period. And that way we can properly supply the goods to them. Certainly, as we all appreciate, the market is now full of -- still full of uncertainty. So most of our customers are, notwithstanding their willingness to give us the required lead time, may not be able to do that all the time.

So in that case, there are actually two kinds of scenarios. One, they give us a rush order to the extent that it is 'physically impossible' to prepare, meaning even if we start the manufacturing process immediately and doing different process steps without delay, we still are not the -- are not able to ship the goods. That's how they call physically impossible to ship. In that case, we'll just go back to the customer and say it's impossible.

But this quarter it's possible but it's really tight. We'll certainly do everything we can to try to meet the customers' shipment demands. And there are many ways to accelerate the delivery. And how we do it is through our large pool of manufactured goods, we would -- again, we would discuss with various customers in detail their exact requirements for the timing of the goods.

For example, customer A may want 100 units on such and such date. But in fact, they may -- they can live with a postponement of several days because when they plan the goods, they -- if we ship the goods based on their requirement days, the goods may be sitting there in their inventory for a few days without being used. In that case, we make most of our capacity to other customers to meet their more urgent requirements, and so on and so forth.

But general, our average manufacturing time is now shorter than before, than average time. The reason being that capacity -- our manufacturing capacity from our suppliers are in some of the [assets] is still relatively empty. However certainly there are certain other areas of capacity which are becoming very tight at the moment.

I would take foundry process to begin with. Typically, in the front end, even today, front end is still relatively tight compared to back end. That is because many of their customers, including Himax, are still adding rush orders. So all the rush orders are crowded in the front end, while the back end is comparatively empty.

And again, I think one of the reasons why we can probably, compared to our peers, better address our customers' rush order demands is that, firstly, we work very closely with our customers, hoping to fill their demands as early as possible. And secondly, we manage our inventory and certainly we operate closely with our suppliers. And I think, with our scale, we are in a comparative advantage at this kind of unusual times.

As far as our fulfillment rate is concerned, again, it is quite a difficult issue to address. If you [total up] all of the indicated demand, written or orally, then, as I said, there are simply some orders which are impossible to deliver. But if you take those out, then I think our fulfillment rate is very, very high, I would say, over 90% out of the total, assuming -- taking only those demands which are physically possible to manufacture based on the lead time requirements.

So I apologize for the very long answer, but it is indeed a rather complicated issue to manage.

And Jordan, just based on what your are seeing right now, are you seeing any more bottlenecks at panel makers that may have prevented you from shipping more drivers?

Yes. I think panel makers are having a hard time as well because the lead time from their customers are not necessarily very long. So they are under pressure to deliver quite often under a reasonable lead time requirement as well, and to add to the complication, in addition to driver IC, which arguably is the very component which requires the longest time to manufacture. But they also do have other components to manage.

And sometimes, as you indicated earlier, sometimes we do see situations where our customers, we have been able to meet their rush order lead time requirements. But then there are some other components which may not be able to meet the same requirements. So it is also a complicated issue for our customers as well.

And Jordan, can you just talk about what's your current lead time right now and how you are expecting that to change?

If you talk about -- if you -- we actually, again, we -- well again, firstly, it depends on whether we've got the forecast. And secondly, if you talk about our manufacturing cycle, then I think for our normal -- take our semiconductor process as an example, as a rule of thumb, the normal run would take about two days for layer, but now we are substantially lower than that for normal run. And certainly in the case of high run or super-high run, the manufacturing cycle per layer could be substantially lower than one day per layer.

But again, it varies depending on the forecast given by our customers and the type of products we are manufacturing and, in fact, the specific fabs we are talking about to manufacture that very product.

Okay, thanks. And my second question is just for clarification. For the second quarter, given that you are guiding for significant revenue increase of over 50% and you still talk about your inventory will rise accordingly, can you talk about why your gross margin is only flat quarter over quarter?

I think a few reasons. One, at this very moment, the majority of our customers and, in fact, our suppliers are -- many of them are still suffering from losses. So I think being a part of the supply chain, we feel we should take that into consideration in our prices. And secondly, we are, at the very moment, part of the goods we are shipping are goods -- are leftovers from the fourth quarter last year when many customers provided us with forecasts which were substantially higher than the actual results.

So we took the forecast, we started to manufacture part of the goods at the time, and then the orders got canceled or postponed. Now we are shipping those goods. And inevitably those goods were manufactured earlier and so the cost could be higher. And certainly, at the moment, we are also shipping goods which are new, are made from scratch, but they are typically under short notice. And, as I said, rush order is the norm at the moment.

So in that case, it is also difficult for us to push the manufacturing cost down for such rush orders. So, in general, while we were trying to, with our now more diversified product portfolio, we'll try to raise our gross margin in the future. In the very immediate short-term future I think we are guiding for flat gross margin.

Thank you. My last question is can you talk about your maybe touch-panel-related efforts or projects, maybe on the drivers, controllers or maybe CMOS image sensor or optical solutions?

Right, touch panel. Firstly I will talk about the more traditional touch-panel solutions. We are developing our own in-house touch-panel solution and we will, in the very near future, start to ship them to our customers. There are two types of touch-panel solutions of both capacity types. One is a standalone discrete touch panel controller. And the other kind is touch-panel integrating to driver ICs, i.e. our integrated solution.

We have sampled some -- we have made some demos to our customers. We have been -- those demos were received well. And our touch-panel solutions will cover across the board from very small panels, such as handset drivers, to larger panels, such as notebook or monitor.

So that's point one. And point two, as far as CMOS image sensor is concerned, if you are talking about the application of using CMOS image sensor for touch-panel applications, this is fairly new in the industry and we are in early stage of discussing this with several of our customers the possible expectations for that. But at the moment, our main focus for CMOS image sensor is still for camera applications, not necessarily touch-panel applications, although we are talking to certain customers in collaboration efforts.

Okay, thank you.

Thank you, Frank.

Thank you. Our next question is from the line of Jessica Chang with Credit Suisse. Please go ahead.

Hi Jordan and Max. Good morning.

Good morning, Jessica.

Yes, I have some questions here. First, recently there is quite some talk regarding potentially CMO may want to diversify the suppliers and because you will be playing a very important role in the driver IC part, what is your view for this and will there any negative impact in the next maybe coming one or two years?

I think as far as we understand, and in fact CMO, I believe, made a press announcement some months ago about this issue. CMO has never had Himax as its solo driver supplier. So we have always faced competition from other vendors. And I think the situation remains unchanged.

I cannot comment on what the customer is going to do. But I think we have provided CMO with very good services, not just on the reliability of our driver IC supply, we also put in a lot of effort on in-time delivery, R&Ds, whether it's very innovative types or for our cost-down solutions.

So I think what we are trying to do is to continue to keep our position with CMO, but we have never ever taken it for granted as CMO has used our driver IC. It has never been the case and I don't think it will ever. So we just manage day in and day out and we are prepared to face competition and as we always have in the past.

So it is difficult for me to comment one or the other whether or how our position with CMO may be impacted. And I understand there certain rumors about CMO bringing in new suppliers and so on, but as I emphasized earlier, there have always been other vendors servicing CMO.

Or can I say it a different way? For the second half new models, are you confident that you still secure your [pie]?

Well, I think we -- based on various discussions with CMO's people, I believe we are still seen as a strategic vendor for their driver IC. And, as usual, we continue to work very closely with CMO's engineering team for new designs. But, again, I really can't comment on what the customer is going to do in the future. But, likewise, CMO is -- people are speculating on what they are going to do. And based on our day-to-day working relationship with CMO, we really can't see one way or the other how such rumors will impact our business in the future. I think that is probably as far as I could say.

Okay. Thank you. And my next question is previously you said that your revenue rebounded quite strongly from February and continued to be quite robust in March. And going into April and all the way, for the rest of this quarter, are your revenues peaking out already in April or do you expect the crucial momentum for the next few months?

Yes, we have been seeing quite a strong rebound of our monthly revenue, especially in February and March. And now we are seeing our second quarter revenues quite stable at that range, so on a quarter-over-quarter basis, and then that would be a very significant increase. And we are still seeing rush orders from our customers. So this -- so as far as the second quarter is concerned, we are really confident about our guidance.

Okay. How about some of the initial views for the third quarter? Would you expect sequential growth?

We are not providing guidance for the third quarter yet. But we can't say it's going to be sequential growth. But, again, it's a bit too early. I don't think we have sufficient visibility to provide a guidance for the third quarter. But I think our visibility at the moment covers up to July and some part of August.

So is July still holding well?

Yes, certainly. Certainly we are not anywhere near the third quarter level, that is for sure.

I mean, is July holding relatively similar to the current -- like current high level, like March and April?

Yes, Jessica, I think our forecast looks beyond two months are still very dynamic. Customers are still adding their forecast for July and beyond.

Okay.

What we have seen is customers have recently been updating or increasing their forecast for driver ICs to us, so they are July, August, and September forecast shipments. And I think that is an encouraging sign because, as I said, visibility is still relatively low for everybody, our customers included. And the fact that they are updating their longer-term forecast is a good sign.

Okay. And then inventory levels, would you expect your inventory days to increase at the end of the second quarter?

I think the inventory days is a ratio between costs of goods sold and also the inventory. I think both will increase. So with regard to the days, I have to admit our inventory days at the end of March is slightly below our average. So I do expect that inventory days my slightly go up from the current level. The current level is 50-plus days which is below our historical average.

Okay. Thank you very much.

Thank you.

(Operator Instructions). Our next question is from the line of Dan Heyler with Merrill Lynch. Please go ahead.

Thank you. Can you hear me?

Yes.

Yes. Hi, Jordan and Max. Hi. Thanks for taking my question. I just have a couple of quick ones. First, how much of your revenue came -- in the fourth quarter came from Shanghai NEC, or percentage of your revenue?

Very small, very little. These receivables were actually incurred in Q3 or earlier. And we started to notice their financial position turning substantially negative so we were already in extensive discussion with them in Q4. And we slowed down very substantially our shipments to them during Q4. So it's actually a very small percentage of our total revenue compared to normal. Somewhere around 2%.

Okay. And what was the peak contribution of revenue at the peak level of business?

That was probably -- last year, the year before, it went up to between --.

Yes, mid to high-single digits.

Yes, mid to high-single digits, yes.

Okay. So fair to say that it's very small in the first half of this year. Are there any other customers in China that you may -- that may encounter this? And do you need to -- do you anticipate that you may need to increase your allowance for bad debt in the future? How will your policy change going forward on bad debt?

We have, as a matter of general policy, we do give credit to our large panel customers. Well firstly we do assess our 'credit rating' or credit quality of each of our customers, and we give them a credit line or a number of days before they are payable, reflected by number of days for their payables, according to such assessment and certainly after negotiation with them. And large panel companies typically are large in scale. And in this particular case we thought -- this is a company which is backed by the Shanghai government.

As far as small panel customers are concerned, they are certainly high-quality, sizable companies or customers. And they are less cyclical. And customers which -- whose credit quality or whose financial status is comparatively -- is comparative or less transparent to us. So we those smaller in scale or less transparent in their financial reporting, we felt customers who typically either get full or little credit from them or we get immediate payment, what we call [TP in] advance for any good shipped to them.

So in China there are indeed many such smaller customers, in particular, in small size or sales [from applications]. But again these are customers where we have got our -- either little credit from credible banks or we have -- we receive money before we made a shipment. So I think those are safe.

As far as large panel driver -- customer is concerned at the moment, I think the main ones are for Himax in China is SVA-NEC only. We are not really expecting further write-downs in any substantial scale in the near -- in the foreseeable future.

Okay. So you feel you have a tight control of the situation now, better than last year?

Yes.

I also wanted to ask about the -- if you could give some color on your revenue breakout for the second quarter, that is specifically the small and medium-panel driver business, what's the growth rate there relative to your guidance? And if you could give an outlook on the drivers for that business in the second half, specifically market share gains or product introductions, to help us understand the small panel business better.

So your first question is related to our overall growth, probably sector by sector, and which sector is stronger than others, right?

Right.

The question is specifically on small-panel business, is that correct?

Correct. Thank you.

Right. We indicated our 50%-plus growth year over -- quarter over quarter based on our forecast. The biggest -- the strongest sector will come from TV segment. And that is because certain of our major customers are very strong in those segments. I think there is really no particular reason, but we are just seeing their businesses in China and with some other customers in developed countries are picking up very strong momentum in the TV segment.

And it is also worthwhile to mention that our small and medium-sized panel business, there are actually two segments. The first one is cell phone application and the other one is other applications, ranging from smaller sizes, such as [DFC], or to larger sizes, such as netbook.

The cell phone business was very strong in the first quarter, primarily because of China and also because certain of our customers serve in our -- the world's leading brand names. We have certain models, although the overall demand for cell phones was declining last quarter or the quarter before, but in China, again, China -- the demand outgrows the rest of the world. And also in the rest of the world, certain of our end customers are leading brand names. They have certain of their models which are selling very well and which are using our drivers.

So that's why I think in both areas we gained our market share strongly in Q1. And Q2, we see -- we are still seeing a very strong growth for mobile phone application, but probably in around the 40% range, not necessarily 50% plus.

But what is also worth mentioning is that in the non-cell-phone segment, I'm talking about small-sized panel applications but not cell-phone segment, the growth rate will be also very strong, approaching [50%] range. And that, I think, is primarily because of the netbook applications which are picking up a very strong momentum at the moment. And our non-driver segment will also be growing with a rate approaching 50% quarter over quarter in Q2, after a very strong growth of 30% plus in Q1.

That's great. I guess a little more color on the small size in the second half in terms of maybe new design wins or major OEM opportunities there, to what extend could we see any share gains further from new customers or from new products?

I think, again, we can beak it down by cell phone and non cell phone. In cell phone, our customer penetration was again -- there are two levels. One is our direct customer, meaning the panel makers, and the second level being the end-user customer, the cell phone makers. And I think with both levels, our penetration has been very, very good already. And with some major exceptions, I think literally almost all of the end-user customers, the front-end customers, albeit small, are indirectly our customers.

So in that, we are just working hard everyday to hopefully win new projects. And there are new projects coming now all the time. And we just go out there every day trying to win more new projects. That's what we do. And I think we are proud to have, arguably, the most comprehensive product [line] in the industry.

We are among the leading players in features, such as high-speed interface, such as our CABC technology, which is content-adaptive brightness control, and so on. So I think we are quite well regarded in the marketplace to be the one with the new technology, with the comprehensive product roadmap. And to add to that, I think we have been appraised by some of the largest end-user customers over the last two quarters that our ability to ship in rush order is unrivaled.

So I think we are trying to get more market share over there. And also we are quite confident our market share in China will continue to gain for [foreseeable] segment, and that is partially because of our CMOS image sensor business and our LCOS projector business, we are now getting better known. And we are getting to know our end customers in China. The cell phone demand also is much better than before. And I think, over time, that will also help our business.

Okay. Thank you.

Does that answer your question, Dan? Thank you.

Yes. That was great, thank you. And just finally a housekeeping question on inventory targets for Max. Could you repeat what your inventory days target is for this -- for the June quarter? And assuming the environment is more stable and normalized in the second half, with less fresh orders and less capacity constraints, what would you want to have your inventory levels at in the second half of this year on average?

I think the inventory levels will -- the days, in terms of inventory days, will go up slightly in the second quarter compared to the first quarter where we --.

To two days or five days or --?

I don't know. But the trend is going up slightly. So the first quarter figure is relatively below historical average. And even the market demand and given our procurement activities, and also given the overall demand size as of today compared to the market demand a couple of quarters ago, I think our inventory days and levels will increase. But if you -- I think the inventory level will definitely increase given the increase in revenue. But in terms of inventory days, not the -- I don't expect a major increase in terms of inventory days. We are actually running quite tight at the moment.

But currently, at the end or as of the end of June, certainly it's going to be a snapshot. So, as usual, it's going to be midyear and some customers may want to postpone a day or two for the shipments, just to dress up their books. But overall I think our -- in terms of inventory turnover at the moment, we are running a rather tight inventory level. But in terms of absolute level, absolute level certainly will increase.

I guess what I'm wondering about is given the rush orders and, as you know, the smaller companies in order to secure parts would have to double order to be more aggressive with you to secure the business. So what portion of your business do you think is rock solid in terms of companies not canceling orders? And to what extent is there risk to lower-quality business and lower-quality orders?

Well, I think for our business, you talk about certain customers trying to double-up their orders, trying to have access to capacity.

Right.

In our case, the first step of the manufacturing process, meaning the overall manufacturing process in foundries, in semiconductor foundries, what we are trying to raise is the work-in-progress of our goods. But when it's in the work-in-process stage, it is not a part of our inventory yet.

And what we trying to do, what we have always tried to do is, firstly, we try to design, to the extent possible, standard products, or quasi-standard products, meaning it is a product commonly used across various models and across various customers, but there are changes towards the end of the overall manufacturing process. So in the majority of the overall manufacturing process, they remain common across different models and across different customers. And that way we can tightly control inventory level. And then depending on the end result of shipments coming from different customers, we would then decide on the final steps of our wafers. So that is the first approach we -- how we control inventory levels.

And secondly, again, seeing the -- anticipating rush orders, we are certainly raising our level for work-in-progress in our foundries. But when they are still in work-in-progress stage, they are not counted as our inventory. But certainly we were -- they will eventually become our inventory, so we will certainly recognize the fact that we placed the order and we will be responsible for those orders.

But what we're trying to say is that we are not unnecessarily raising our inventory levels too high because I think the visibility remains limited. And so what we are trying to do is to talk extensively with our customers, trying to monitor their demand on a real-time basis. And secondly, to manage our inventory level by, firstly, having common parts or quasi-common parts, and secondly, monitoring our inventory levels with our suppliers also very extensively.

So, all in all, I think at the moment, in terms of inventory turnover rates, I would say given that we are still in rush order stage, so I don't think it will be anything substantially higher than normal. I don't think so.

That's great. Thanks a lot.

Thank you, Dan.

(Operator Instructions). We have no further questions in the queue at this time. I'd like to turn the call back over to management for any closing comments.

Well thank you everyone for taking time to join today's call. And we look forward to talking to you again at our next meeting, our next earnings call in early August. Thank you.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.