奇景光電 (HIMX) 2009 Q3 法說會逐字稿

Greetings and welcome to the Himax Technologies' third quarter 2009 earnings conference call. (Operator instructions.) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Joseph Villalta of The Ruth Group. Thank you. You may begin.

Thank you, operator. Welcome, everyone, to Himax's third quarter 2009 earnings call. Joining us from the Company are Mr. Jordan Wu, President and CEO, and Mr. Max Chan, Chief Financial Officer. After the Company's prepared remarks, we'll then have time for any questions. If you have not received a copy of today's results release, please call the Ruth Group at 646-536-7003, or you could get copy off of Himax's website at himax.com.tw.

Before we begin the formal remarks, I'd like to remind everyone that some of the statements in this conference call, including statements regarding expected future financial results, industry growth, and the Taiwan listing plan are looking-forward 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 and the Taiwan listing plan to differ include, but not limited to, general business and economic conditions and the state of the semiconductor industry, market acceptance and the competitiveness of the driver and non-driver products developed by the Company, demand for end user applications 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, shortage in supply of key components, changes in environmental laws and regulations, exchange rate fluctuations, regulatory approvals for further investment in our subsidiaries, our ability to collect account receivables and manage inventory, shareholder support on dual listing plan, changes in either Taiwan or US authorities' policies, Taiwan stock exchange and Taiwan authorities acceptance of the Company's Taiwan listing application, changes in capital market conditions in either Taiwan or the US, capital market acceptance of our share offering, the capability to maintain the full two-way fundability between the Company's ordinary shares and ADSs, 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 ended December 31st, 2008 filed with the SEC on May 15th, 2009 as amended.

Except for the Company's full-year 2008 financials, which will be provided on the Company's 20-F filed with the SEC on May 15, 2009, 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 subject our annual consolidated financial statements, and may vary materially from unaudited 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 the notes to those statements.

In addition, the financial information included in this conference call is not necessary 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, Joseph. And thank you, everyone, for joining us on today's call.

To begin, I will briefly highlight our overall operating performance during the third quarter. Then, I will provide our outlook for the first quarter of 2009. Our CFO, Max Chan, will then provide further details on our financial performance.

Our third quarter revenue came in at $203.1 million, representing a 11.7% decline year-over-year and a 9.8% growth sequentially. The third quarter was a notable quarter for us in terms of product mix. Revenues from small and medium sized applications and non-driver business achieved record levels in both dollar value and percentage of total revenues.

Revenues from these two segments combined accounted for more than 30% of our total revenue in the third quarter. Among our various non-driver products, our LCOS pico projector solutions, power management ICs, LCD TV controller, and the LCD monitor scalers all experienced phenomenal sequential revenue growth. This is the first time in Himax history that we were able to dilute our exposure to -- in large panel applications to below 70% of our total revenue by ramping our revenues from other products.

Revenues from large panel display drivers were $139.3 million, down 16.4% from a year ago and up 1.8% sequentially. Large panel drivers accounted for 68.6% of our total revenue for the third quarter as compared to 72.4% a year ago and 74% in the previous quarter.

The glass shortage for TFT-LCD panels, as we had expected, has limited to some extent our customers' panel shipments and demand for our display drivers in the third quarter. In terms of product mix, while demand for TV and Notebook display drivers remained strong, demand for monitor display drivers started showing signs of weakness. Revenues from small and medium sized applications were $48.4 million, up 0.2% from the same period last year and up 28.9% sequentially.

Small and medium sized applications accounted for 23.8% of our total revenues for the third quarter, a record level, as compared to 21% for the same period last year and 20.3% in the previous quarter. Among various small and medium sized applications, demand for our non-handset consumer electronic display drivers such as those used in digital cameras and Netbook applications were particularly strong with revenues growing more than 50% sequentially, while revenues from handset display drivers was literally flat in the third quarter.

As with our small and medium driver business, our non-driver business also achieved record highs in both revenues and percentage of total revenues in the third quarter. Revenues from our non-driver business were $15.4 million, up 46% sequentially. Our non-driver products accounted for 7.6% of our total revenues as compared to 6.6% a year ago and 5.7% in the previous quarter.

Among our non-driver products, revenues from our LCOS products more than doubled sequentially. Revenues from our LCD TV controllers and LCD monitor scalers also grew more than 80% from the previous quarter.

Our GAAP gross margin for the third quarter was 20.4%, as compared to 24.5% a year ago and 20.8% in the previous quarter. The tight capacity at certain of our packaging and testing service providers, as we expected, has resulted in an increase of our costs.

For the third quarter, GAAP net income was $8.8 million and earnings per ADS was $0.05, in line with our guidance. Our GAAP net income and earnings per ADS were $17.7 million and $0.09 respectively a year earlier, and $15.4 million and $0.08 respectively in the previous quarter.

The sequential decline in our GAAP earnings was primarily due to our annual restricted share units, or RSUs, grant at the end of September, which Max will elaborate more later on this call.

Before providing our fourth quarter 2009 guidance, I would like to share with you some of our thoughts on Himax long-term product strategy. While the global TFT LCD industry and the associated demand on TFT LCD display drivers are inevitably entering into a mature stage, primarily because TFT LCD penetration in various computer and consumer applications is already quite high, a number of our non-driver products are in their early stage of product life cycle.

Following years of R&D, we have not only commenced commercial production in most of these areas, we believe our product offerings are competitive and we are well positioned in these markets. Our LCOS product line for pocket projector applications in particular is experiencing a very strong momentum in terms of both product shipment and new customer design wins.

One of our LCOS customers, a Japanese world-class camera brand, has launched the world's first projector embedded digital camera with Himax LCOS pico projector solutions inside. This first of its kind projector camera was awarded as one of the "10 Brilliant Products of 2009" by Popular Mechanics magazine. This is just an exhibition of our product innovation and seamless cooperation with our customers. We believe we are the world leader in this new and exciting product area.

Backed by our strong balance sheet and belief in innovation, we remain fully committed to our long-term goal of being the world's leading semiconductor solution provider in the flat panel display industry. We expect our non-driver product lines to be incrementally positive to both our top line and bottom line in the long-term.

Looking ahead to our fourth quarter guidance, as the demand on TFT-LCD panels enters into a low season in the fourth quarter, we expect revenues to decline by 15% to 19% sequentially, gross margin to decline slightly, and GAAP earnings per ADS to be in the range of $0.03 to $0.05.

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 third quarter financial results.

For the third quarter, our GAAP operating expenses were $30.6 million, down 25.9% from $41.3 million a year ago, and up 29.8% from $23.6 million for the previous quarter. The significant operating expense saving compared to last year is evidence of our continued efforts in optimizing our overall cost structure amid current business environment.

As Jordan mentioned earlier, the sequential increase in our operating expenses is mainly due to the grant of our 2009 RSUs. At the end of September, we granted our annual restricted awards to our employees, valued at approximately $12 million, a decrease of 49.6% as compared to the 2008 total restricted award grants.

Of the $12 million restricted awards, $6.5 million, or about 54%, was vested and expensed immediately on the grant day and paid in cash. The remainder will be paid in three equal installments in stocks at the first, second, and third anniversaries after the grant. The maximum share dilution in the next three years resulting from the 2009 RSU grant is about 0.9% of our total shares outstanding.

For the third quarter, GAAP net income was $8.8 million and GAAP earnings per ADS was $0.05, down from $17.7 million and $0.09 for the same period last year, and down from $15.4 million and $0.08 for the previous quarter. We recognized a tax expense of $2.9 million in the third quarter to reflect changes in estimated full year 2009 effective tax rate.

Excluding share-based compensation and acquisition related charges, our non-GAAP gross margin for the third quarter was 20.5%, as compared to 24.6% a year ago and 20.8% a quarter ago. Non-GAAP operating income for the third quarter was $20 million, down from $30.6 million for the same period last year, and up from $17.7 million for the previous quarter.

Share-based compensation and acquisition related charges for the third quarter were $7 million and $0.4 million respectively as compared to $14.4 million and $0.4 million a year earlier. Non-GAAP net income was $16.2 million, or $0.09 per ADS, down from $32.5 million, or $0.17 per ADS for the same period last year, and down from $17.9 million, or $0.10 per ADS, for the previous quarter.

Our cash, cash equivalents, and marketable securities available for sale were $117.5 million at the end of September, a decrease of $21.7 million as compared to the previous quarter. The decrease was partly due to the higher working capital requirements for our increased revenues in the past months.

We had also continued to repurchase our ADSs and thereby cancelled our underlying ordinary shares accordingly. Share repurchases in the third quarter totaled $14 million, or approximately 4.1 million ADSs. At the end of the quarter, we had roughly $21.1 million remaining in the current share repurchase authorization.

In regards to our plan for dual listing on the main board of the Taiwan Stock Exchange, we continue to make progress and have submitted our preliminary application document. We have scheduled to make an official public filing by the end of next week and expect to receive the listing admission early next year, subject to regulatory approvals.

The fourth quarter earnings per ADS guidance that Jordan provided earlier is based on the assumption of having 366 million diluted weighted average ordinary shares, with one ADS representing two ordinary shares.

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

Thank you. (Operator instructions.) Our first question is from Dan Heyler with Banc of America-Merrill Lynch.

Good morning, Jordan and Max. How are you?

Good.

Yes. I want to ask a few things on looking at the fourth quarter revenue, because your -- in terms of your guidance dropping quite a bit. Should we -- can we look at large versus small versus other segments? Which one is declining the most? And if you had a order of magnitude that would be great, because obviously you've got this new business and I'm wondering if that continues to grow.

Yes, according to our current forecast, we are seeing a more significant decline on our monitor revenues in the fourth quarter sequentially, and followed by the Notebook, while TV revenue is remaining flat, literally, on a sequential basis.

I would just add one more point, which is our non-driver business, there are -- that's basically two segments, one is very large panel related, which is the timing controller, and the other one is all the others. And with all the others, given the fact that they are relatively new, in particular our LCOS business, so we tend not to be able to get the pretty decent sort of forward-looking forecast from our customers. Typically, such orders, no question, are on short notice. Therefore, typically they cannot fully reflect the actual results. So, there may be some mystery numbers here.

And also, timing controller we have seen more decline compared to drivers. I think that is largely because with drivers, the customers are the panel makers directly. For the timing controller, the customers are a lot of their SMT, the PCBA companies who place their forecast and orders to us. And apparently, based on this picture, our large panel customers control their inventory, I think, more effectively compared to their PCBA suppliers, meaning the -- given the fact that the whole industry declined in Q4 compared to Q3, I think PCBA customers may have placed their orders a bit too much in Q3. And that result in some more decline Q4.

Okay. So, fair to -- is it fair to assume that these are consumer related products?

We cannot hear you. Is that Dan? Can you speak up?

Oh, can you hear me now?

Not quite. It's very --.

Okay. Let me --.

Hello, Joseph?

Is that our line or is that your line? We are not sure.

Mr. Heyler, can you hear us?

Yes, I can hear you fine. I'm dialing in from my office. It should be okay.

Right. We can barely hear you, but please carry on. We'll try.

Okay. Thanks. Then, just could you break out what your new products are for -- starting early next year, I mean, as you look at -- would you expect normal seasonality coming through in the first quarter, number one? And number two, your inventory situation and how that progresses.

Let me first answer the second question regarding our inventory. Our inventory days are typically at around 50 to 60 days. And our inventory days at the end of third quarter of this year is about 61 days. And I think it's pretty much at the high end of our range, but we are controlling our inventory as we are entering into a low demand of the season. So, I think it's still within our typical range, and now is at 51 days as per our data for September end.

Let me just to add one comment on the inventory side. We have had very extensive discussions, almost on daily or weekly basis, with our customers on inventory level, meaning we have a very good idea, as far as driver is concerned, our side of inventory and also their side of the inventory. So, I think, although Q4 certainly the whole industry is slow, but people through our supply chain seem to have controlled their inventory quite nicely, in my view.

And what was your first question again? We couldn't quite hear you.

If you could talk about first quarter seasonality for your business, what you're anticipating in terms of the -- would it be better than seasonal, worse than season, or in line with seasonality?

I don't -- we don't really -- to be honest, we can't really see that far. So, the visibility is not great. But, we don't have any reason to believe we will be below the seasonality. But, we don't have a forecast here.

Okay, fair enough. And then finally, the -- if you could give us the pricing, blended pricing, for large versus small drivers for the third quarter.

For the third quarter? Yes, typically every quarter on a blended basis, our ASP has declined by low single -- low to mid single digits. And in the third quarter, I think I would say for large panels, we have slightly over -- about average ASP declines in the third quarter as we continue to provide the cost reductions to our customers. And that's for third quarter.

So, I would say for small and medium sized, the ASP decline is probably low single digits. And for large, it varies. Probably mid to -- for some certain ICs, that's probably a high single digit decline in the third quarter. And that also partly contributed to the declining gross margins in the third quarter.

Okay. And you anticipate pricing pressure to be in place continuing for the next couple quarters because of low seasonality, is that right?

Price seems to have somewhat stabilized, I think both on our customers' side, our -- both on our buy side and sale side in this current quarter.

Okay. Thank you, guys.

Thank you, Dan.

(Operator instructions.) The next question is from Frank Wang with Morgan Stanley.

Yes. Hi. Good morning, Jordan, Max. Can you talk about for your non-driver business, the new products for the -- maybe the part management, the TV controller, semi (inaudible) sensor and LCOS business? What kind of growth are you looking for for the fourth quarter and also for 2010, if you can give us some color in terms of how you expect those businesses to progress? Thank you.

Thank you, Frank. Again, I mentioned earlier our non-driver basically for now is comprised of, the way we see it, two major segments. One is timing controller, which is very large panel dependent, and the other one is certainly the others.

So, I guess, Frank, your question is about the others, and as I have touched upon the timing controller earlier, now for the others I will start from our -- where do I start? From the LCOS pico projector product, in -- we mentioned in our script there is a Japanese customer which their pico projection camera are hitting the market. And as I know, it is in a bit of shortage in the marketplace at the moment. I think that is not because of us, because of Himax not being able to provide our panels to them.

But, I think other than that, we are -- we have just been through the Hong Kong autumn electronics show. And in the event, there were somewhere around 25 customers showcasing somewhere around 40 different types of projectors all with Himax product inside. And again, in that very event literally, I would say, 90% or higher of the pico projectors that was over there had Himax technologies inside. So -- and there are probably, if you look at the customers who didn't participate in the exhibition, you would be talking about probably another 25 customers with another yet 40 or 50 products being designed in.

So, I think over there we are seeing very strong momentum for design. And admittedly, again, these products are coming primarily from small customers in China and Taiwan, and some in Korea. But, we also had some sort of engineering cooperation with certain leading brands in (inaudible) applications, which, again, will take a bit longer to hit the market in terms of coming out with the real product.

But, I think overall we are getting more and more inquiries from the customers. And certainly the Japanese customer's camera is very exciting news for us because it sort of demonstrated that even with a pretty premium price, the camera is still selling quite well. And as we all know, the key feature of that very camera is its projector.

And our key -- our video and monitor controller segment, we have experienced, as we indicated earlier, about 80% -- or higher, actually higher than 80% sequential growth. And we do expect next quarter to continue the very strong momentum, growth momentum, something similar to Q3.

And that is primarily two parts, scaler and TV. And for TV, our shipment so far has still been primarily analog TVs going to the Chinese market. And we -- starting from Q4 and into next year, we are seeing more and more a sort of diversified customer base as compared to Q3 or earlier. So, I think that is also good news for us for the TV market.

And for CMOS Image Sensor, we have -- we basically have three sensor products in the marketplace, the NVGA and 1.3 mega -- VGA, 2 megapixel, and 3 megapixel. And it is still in early stage in terms getting to mass production, since the products tend to be subject to a very long and detailed qualification process going by the end user customer.

Something related to this is our -- we replaced the optics of what we call our WLO, which is a replacement of the traditional sensor micro lens. What we do is, as opposed to the traditional sort of mechanical engineering style of small lens sensor, what we do is we are creating sensor out of semiconductor kind of process on a wafer level, wafer based production.

And we believe we are a leader in this segment, in this rather new and very exciting segment. And mass production is to start from VGA. And we do expect mass production for this particular product area to start in small volume in this quarter. And we are very excited about the prospects for next year.

In power management IC, we started our mass production for LED drivers for Notebook and Netbook application this quarter, starting with one customer. But, we got design opportunities from several other customers. And also, our PWM product line, a highly integrated PWM product line also again for panel applications, also started mass production this quarter and -- with exciting outlook for next year.

So, overall, again we are fairly confident that all this will outgrow our driver IC product line substantially next year. As far as a forecast or actual sort of indication of numbers is concerned, again, we are not able to provide this. But, we can see very clearly the trend which is for non-driver to outgrow driver.

It's a lot there, Frank. But, I don't know if I addressed your issue.

Yes, sure. Maybe finally, can you just maybe touch on some of the new market people have been talking about maybe like in the touch panel or e-book? What do you think of this market and whether or not Himax will look to participate? Thanks.

Well, a touch solution, this trend in the touch panel solution, in the touch technology, meaning the provision of a touch controller. And we have -- our sample is going to come out very soon for our customers, for capacity for touch controller. And we have had a good response from a number of our key customers who are primarily in small panel business at the moment.

But, I think over there people are looking to new challenges for the market, challenging the incumbents. And I think -- and people are certainly having high hopes that the driver IC providers who participate in this market, because, firstly, we know about channel industry very well, and secondly, we, together with a small number of others, are proposing an integrated driver IC with touch controller solution in one piece for several applications.

And that is exactly what we are shooting for. And we believe not very long in next year we'll be able to provide our first sample for that. So, yes, we will participate in that industry, but so far we -- there's certainly still no (inaudible). In fact, we are still in sample stage. But, again we have very positive response coming from several of our key small panel customers.

In the e-book, we have always had the technology. And, in fact, there are several different so-called e-book solutions. And we participate in many of them as far as technology is concerned. And we are talking to -- we have -- we are talking to a number of key customers in this segment in Taiwan and China. So, yes, again, we are -- will be a participant.

Having said all that, though, these two markets from the controller or driver's perspective, the market size is substantially smaller than the TV or monitor segment. That is something that I also need to point out.

Okay. Thank you.

Thank you, Frank.

(Operator instructions.) The next question is from Jessica Chang with Credit Suisse Group.

Thank you. Good morning, Jordan and Max.

Good morning, Jessica.

I'd also like to follow up with a few questions. If we look a little bit, like, longer term, like into next year, and if we break by your major business, like driver IC by life size and mobile and the non-driver, would you consider your overall driver IC revenue growth will be -- continue to be -- grow positive?

Good question. It's hard to say. We don't believe our -- we will lose market share. Whether the whole industry will gain momentum so much that you will be able to offset the inevitable ASPs decline -- some decline, I can't forecast how much. I think it's still too early to say.

So, I would not be very confident it will be positive. But, having said that, there are certain customers with new capacity coming along next year. So -- and also, the wild card is one of our old customers, [SBNEC], which -- whose production has literally stopped throughout the whole of this year. And that certainly has been a negative for us in terms of revenue contribution. But, they are being talked about. It's been taken over by somebody and thereby they have been able to resume their production.

And so, these are all variables. So, Jessica, I'm afraid I cannot provide a good answer for now.

Okay. And then, if we're look into the different sub-segment of driver IC, can I say the outlook for monitor and Notebook may be a little bit conservative, but for the TV it should be still good enough, and if they also have room for more growth into mobile phones on a smaller kind of segment?

What we are see in this year is phenomenal growth from Netbook market in which we have a major, major market share, by the way. And monitor, as everybody knows, has been sluggish. And I think the trend is likely to continue until next year. And TV, certainly I think it's likely to remain robust. So, among the three large panel segments, I would say monitor certainly is likely to have the weakest growth.

As far as cell phone and other small applications is concerned, I think our market position in cell phone market has become quite strong this year with quite a number of anchor end customers. By saying end customers, I'm referring to cell phone providers, system makers. What we are seeing is that the overall trend is for the end customers to have a lot -- how do I put it? Have much heavier direct cooperation -- direct dialogs with driver IC providers because driver IC certainly plays a major role in their panel technology progression.

So, although they are not sourcing drivers directly from guys like us, but they are having very direct working relationships with people such as Himax. And as a result of this, we are also seeing a -- such customers shortening their lists of their qualified vendors because they simply cannot handle so many effectively.

So, I think our position after the past 12 or 18 months has been strengthened substantially in this segment. I would say that. But, whether the handset business is going to grow or decline or whatever in next year, I'm afraid I don't know.

All right. And do you have some rough target for your non-driver product revenue, like about how much they will contribute? For example, right now it's already like close to 7% to 8%. Can we assume maybe it's 10% or higher like in next year Q4?

We certainly hope we will reach 10% or higher earlier than that.

So, maybe middle of next year?

You are giving me a very difficult question. It is very new. And we are very confident, given the current momentum and the design status, they are certainly going to outgrow our drivers. But, it's a bit hard for us to predict exactly their timing.

But, I think what's very, very important is in reality, I mean, you guys are asking all the right questions, right? Driver is no longer a very high growth industry, and that is exactly why we have been investing probably more than our fair share of our property into our non-driver businesses over the last few years. And luckily, we have quite a number of them and they are all very exciting. And in a few of them, we are sort of one of the market participants, and to some extent, even the follower in terms of timing.

But, in a couple of them, in particular LCOS pico projector, and also what I indicated just now, wafer level optics for CMOS Image Sensor, in these two particular segments they are brand new technologies in the market. They represent a major breakthrough in terms of technology. And we are -- fortunately, we are leaders, clearly, in these two marketplaces.

However, they are in their very beginning stage of their life cycle. But, we can just tell these two new products are -- there are many potential customers or existing customers who are extremely enthusiastic about these two areas. So, I think --.

So, is that --?

That's just picking up pace while, at the same time, trying to keep our leading position in driver IC. In the meantime, we are really going to other areas.

So, out of your non-driver product, can I say you have the highest expectation on the pico projector and then followed by the CMOS Image Sensor, considered like the product -- the current availability by potential market up size -- market size, everything. Can I say pico projector and the CMOS Image Sensor are --?

I think I've already said it about pico projector. I wouldn't say exactly CMOS Image Sensor per se for next year. In the long term, yes, but for next year, I indicated earlier sensor is a product which is always subject to a very, very lengthy qualification process by end user customers.

So, when exactly it is going to take off, I don't know. But, what I'm trying to point out is we have -- unlike our competitors, we have -- there is a subtle difference. We have two product lines, if you like, for CMOS Image Sensor. The first one is the sensor per se and the other one is optics.

For optics, we are not doing the traditional approach. Rather, we are providing a -- we replace some of semiconductor process kind of concept. It's a new kind of technology for -- to manufacture a micro lens. So, we are providing that. It's very new, and we believe we are in the forefront of this new product line. And we believe some small volume mass production will commence this quarter, meaning it is not totally a product in the lab. And in fact, we have got extremely strong reception from many of our CMOS sensor module customers.

So, WLO, or wafer level optics, I think is likely to have decent growth next year. But, the CMOS Sensor, I believe, will probably take a little bit longer because of its required timing for qualification.

Okay. And regarding timing controller, what kind of market share do you have by your own estimation?

I think currently at the single digit worldwide basis. But, I don't know exactly whether that's a low single digit, mid single digit, or high single digit. But, compared to display drivers, definitely there are more room for us to grow as we now have -- are growing from a small base in terms of product offering and customer base.

So, all these display driver customers are potentially our addressable market. And we are really confident as we are seeing the designs at not just our largest customers but also the others. So, this one, in the long run, we are confident in. And also on a year-over-year basis, we are seeing timing controllers showing very strong growth, although they are not immune from the so-called seasonality. But, on a year-over-year basis, I think most of our non-driver business are growing pretty phenomenally, even though some of them, in the fourth quarter, may still experience some seasonality. But, on a year-over-year basis, I would say they are all doing quite nicely.

I echo what Max just said. Just one comment about the number. I think we -- I'm pretty certain we are at least high single digit for our global market share for timing controller. And also, I think we are -- it is likely that timing controller for Himax is likely to outgrow driver in the long term, given that our market share there is below the driver. However, as I indicated for Q4 earlier, Q4 timing controller, by the forecast book we are seeing today is likely to be lower than driver IC, to be lower than -- in terms of growth, to be lower than driver IC, because different customer bases manage their inventory differently, we think.

Okay. And just -- so, you believe timing controller, it still has high -- good market share upside. And given this -- okay.

Yes. Yes, please continue.

Yes. And given all your major growing area lately seems to be much better -- carries much better profit margin, can we say maybe 19% to 20% something gross margin could be normalized level before -- and then that you may continue to increase maybe in the second half of next year?

Yes, I think that's probably a reasonable assumption. But, don't hold me to this.

All right. Just some reference, that's fine. Yes.

Forecast for us. But, I think it's a reasonable assumption.

Okay. And then, my final question is would you please share the -- like for the mini projector, because there is different technologies. Like, yours, LCOS, and also there is other competitor, they promote DOP. And can you have a little bit more comment on these two different technologies?

I think, as you said, these are the two major competing technologies. I suspect in the long term probably both will have a place in the market, I think, because, as you know, customers always want to hedge. However, I think there are major advantages for LCOS compared to DOP. One is the possibility to provide a very low cost solution. Over here, we are using a lot more mature technology and the center CMOS semiconductor process. For DOP, as you know, it's proprietary. And it's a process which probably designed (inaudible) higher yield rate as the very mature CMOS process.

And secondly, with LCOS, we are able to push for much higher resolution without much effort and with relatively little incremental cost. That is something, I think, fundamentally a lot more challenging for the competing technology to achieve.

And thirdly, I think as of today, anyway, our actual shipment, in our experience, is far ahead of the competing technology and, in fact, far ahead of any others who are trying to be a participant in this industry.

So, I think we are the most proven. We have access to a very mature technology for semiconductor which, again, is very proven. And that technology actually is something used to be used primarily by driver IC, large panel driver IC, and they are gradually becoming obsolete. So, that is also a very good advantage for us, meaning they are becoming very empty.

And lastly, I think the good news for the core technology is that, as we all know, LED is improving very, very fast in terms of cost and in terms of its efficiency. So, with the pico projector you are seeing today, what you'll see next year, I think it's very, very likely for the pico projector you are seeing today in terms of brightness and cost and everything, because one of the major reasons being LED's improvement. So, effectively, we are piggybacking on the phenomenal progress the LED industry is making today. So, that also explains why we are excited about this industry.

And presumably, you guys should have already filed a few key patents regarding your LCOS product, right?

Yes, we have certain very fundamental patents. And the patents aside -- well, yes, we have certain very, very -- not just marginal patents, but something very core and fundamental. But, again, patents aside, I think this industry is something with -- it's one with a pretty high entry barrier, because it requires integration of numerous different technologies. In this case, optics, LED, LC, (inaudible), and semiconductor, and even systems technology. And in the customer's case, thermal design, mechanical design, something we as semiconductor guys are not used to in the past.

So, we have actually learned in a long process how to handle all these different problems to make it work. So, I think it is the highly complicated system integration knowhow that is making the entry barrier so high for this industry.

Okay. I don't have any other questions. This information is very helpful. Thank you very much.

Thank you, Jessica.

(Operator instructions.) The next question is from Dan Heyler with Merrill Lynch.

I hope the connection is better. Can you hear me?

Yes, much better.

Excellent. Okay. I just had a follow up question, a couple quick ones. Could you break out your large panel driver contribution between monitors, Netbook, and TV, roughly percentage rev revenue?

For Q3?

Yes.

Sure.

Yes, in terms of total revenues, monitor -- display drivers for monitor accounted for about 28% of our total revenues, while display driver for traditional Notebook accounted for about 6% and driver for TV about 35% of our total revenues. And we categorize display driver for Netbook in medium size, so there could be -- there are some drivers for Netbook there.

In your medium. And what percentage of that -- is that of your total driver?

For our non-mobile small and medium sized display driver, nearly for portable DVD player and Netbook, digital cameras accounted for 15% of our total revenues in the third quarter, while for mobile phone about 9% of our total revenues.

Okay. So, 9% is mobile and the rest is pretty much Netbook?

Netbook, digital camera.

And digital camera. Okay.

Yes, etc.

So, that's about half of the small? Let's see, that's about what? That's -- you said that was 8%?

Yes, typically about half-half for mobile phone -- not mobile phone, but in the third quarter I think the non-mobile phone segment outgrowing mobile phone segment in the third quarter.

That's primarily because of Netbook. So --.

Got it.

The whole is core AV application, audio-video applications, is about 15%. I would say probably two-thirds of that is coming from Netbook. I'm just guessing. I don't have the breakdown here.

Okay. That's good enough. And then, on the -- back to the new product areas, I guess. Whether -- you can answer this, I guess, in aggregate. Is your gross profit margin there above the average or below the average right now for the new products? And if -- yes.

A very good question. In the long term, we believe profit margin for non-driver product should be much higher than driver products, but not necessarily in the short term, meaning Q3 or even Q4. I will take LCOS as the example. While (inaudible) our pricing, the cost margin should be very high. But, we have a substantial portion of production coming inside -- done in-house. So, today, our flat capacity is still potentially higher than our actual production, while we have been depreciating in full our capacity. And that depreciation now has all gone into cost of goods sold, meaning -- and however, when we price our product, in order to make it competitive and attractive to customers, we have assumed a reasonable capacity variation in our prices.

So, based on reasonable capacity variation, the gross margin is very, very high. However, based on capacity variation, it may not be as high. So, today -- I'll take this as an example. So, today in Q3, (inaudible) segment outgrowing the rest doesn't necessarily mean that it is an addition to our -- it is an increase to our overall gross margin. It's about the same.

Yes, I mean, I assume -- yes. I mean, what I was trying to get at is kind of where you are now and then when does it become roughly accretive. How big does the -- when do you expect it to be accretive to your margins? Are we thinking the middle of next year? Would that be a reasonable assumption?

Yes, I think so. I think so. Again, I will use LCOS as the example.

Yes.

If I recall correctly, Max actually showed me some numbers earlier, so a month or two ago, where our depreciation charge for our fabs and facilities for LCOS, we have been -- again, we have been depreciating them for a number of years. And our depreciation charge will became part of the current level starting from the middle of next year. And that is going to be, for LCOS product per se, the major reduction in our cost, the way we calculate it.

And just a gentle reminder, the size of fab there is very, very small, given the size of the micro display. So, we are talking about a very small fab.

Yes, it's a very small fab. But, in terms of price, a very large amount in terms of our LCOS production.

And we believe we are now the leaders in terms of the micro display track -- shipping track record for pico projector applications and the in-house color filter and the liquid crystal injection fab and production line actually is the clear competitive edge of Himax products. Given the small scale of CapEx and given the importance to our qualities and scales, I think this is a very critical investment for Himax. And also, it's a small investment.

And when we continue to ramp up our shipments in the LCOS, I think you will see clearly they are incrementally positive to our -- to Himax blended gross margins on top of the top line growth.

I think then -- okay. I'll summarize our answer. Sorry, it's a very long answer. Two points. I will take LCOS as the example. And it's actually -- it's a very typical example. It's the normal product to the rate. Two reasons contributed to the low margin, so to speak, on the books so far. Number one is, again, we have mentioned low utilization at the moment. And the second reason is the relatively high expenses related to engineering experiments compared to shipment.

And so, in the past we have done a lot of engineering experiments. Those have created, to some extent, certain bad inventories, certain expenses which all add into our resource so there is a reduction to our gross margin, okay? So, these two factors combined sort of explain why the gross margin is much lower than what it should be. But, I think until next year when such engineering expenses will be much lower and hopefully utilization will be much higher, you will see a major accretion to our gross margin.

Okay. And what's utilization now, guys?

Utilization?

Roughly, just --.

10%, maybe.

Okay. Is that because -- all right. And what has it been the last couple of quarters?

Certainly much less than that.

We are buying, I think, arguably the smallest LC fabs possible. But, with this kind of fab, and as Max indicated, it's actually a relatively small investment. However, the panel is so tiny that it is actually hard to achieve a sensible utilization.

But, again, we are likely to see strong growth momentum going forward. And so, when we price our product, we are not pricing it based on 100% or anything close to that in terms of utilization. Certainly, we cannot price it based on 10% utilization, either. So, that's what we are saying.

Sure. I mean, you're saying this is a new facility you're just bringing up, is that right?

It's not necessarily a new facility. Otherwise, this depreciation only half. It's customer made, and it's been around for a couple of years. And we have been fine-tuning the facility to make it work. I think that's the more precise way to put it.

Yes, understand. What's the depreciation for -- right now, your total manufacturing depreciation for the third quarter?

You mean the amount?

Yes, the dollar -- the NT.

Yes, Daniel, let me check the numbers and get back to you.

Okay, that'd be great. Thank you. And then, I'm wondering what you think it will be for next year as well.

Yes, sure.

All right. Thank you.

Well, thank you, Dan.

We've reached the end of our allotted time. I'd like to turn the call back over to management for closing remarks.

Thank you, everyone, for the questions and for your taking time to join us. And we look forward to talking to you again at our next conference call in early February next year. Thank you.

This concludes the teleconference. You may disconnect your lines. Thank you for your participation.