奇景光電 (HIMX) 2009 Q4 法說會逐字稿

Greetings and welcome to the Himax Technologies Incorporated Fourth Quarter and Full Year 2009 Earnings Conference Call. At this time all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference please press star zero on your telephone keypad. As a reminder, this conference is being recorded.

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

Thank you, operator, and welcome, everyone, to Himax's fourth quarter and full year 2009's earnings call. Joining us from the Company are Mr. Jordan Wu, President and CEO, and Mr. Max Chan, CFO. After the Company's prepared remarks, we will then 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 could get a copy off of Himax's website at www.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 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 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 competitiveness on the driver and non-driver products developed by the Company; demand for end-use application 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; changes in estimated full-year effective tax rate; shortages in supply of key components; changes in environmental laws and regulations; exchange rate fluctuations; regulatory approvals for further investments in our subsidiaries; our ability to collect accounts receivable and manage inventory; shareholders' support on dual listing plan, changes in either Taiwan or U.S. authorities' policies, Taiwan Stock Exchange and Taiwan authority's acceptance of the Company's Taiwan listing application, changes in capital market conditions in either Taiwan or the U.S., capital market acceptance of our share offering, the capability to maintain the full two-way fungibility 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 15, 2009, as amended.

Except for the Company's full-year 2008 financials, which were provided on the Company's 20-F filed on May 15, 2009, the financial information included in this conference call is unaudited and consolidated and prepared in accordance with U.S. GAAP. Such financial information is generated internally and has not been subject 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 audited 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 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, Joseph, and thank you, everybody for joining us on today's call.

To begin, I will briefly highlight our performance in the fourth quarter and summarize a few milestones we have achieved in the past year. Then I will provide our outlook for the first quarter 2010 and outline our strategic focus areas for 2010. Our CFO, Max Chan, will then provide further details on our financial performance.

In summary, we are pleased with our fourth quarter performance. Our revenues, gross margin and earnings per ADS for the fourth quarter all came in better than or in line with our prior guidance.

Our fourth quarter revenues came in at $178.7 million, representing a 43.8% growth year-over-year and a 12% decline sequentially.

Revenues from large panel display drivers were $128.2 million, up 41.5% from a year ago and down 8% sequentially. Large panel drivers accounted for 71.8% of our total revenues for the fourth quarter, as compared to 72.9% a year ago and 68.6% in the previous quarter. While demand for IT panel drivers was down and off from a high season, demand from TV panel drivers continued to grow.

Revenues from small- and medium-sized applications were $77.7 million (sic - see release), up 35.2% from the same year, or from the same period last year, and down 22.1% sequentially. Small- and medium-sized applications accounted for 21.1% of total revenues for the fourth quarter, as compared to 22.5% for the same period last year, and 23.8% in the previous quarter.

Revenues from our non-driver business were $12.8 million, up 120.2% from the same period last year and down 17.3% sequentially. Our non-driver products accounted for 7.1% of our total revenues as compared to 4.6% a year ago and 7.6% in the previous quarter.

Our GAAP gross margin for the fourth quarter was 20%, as compared to 21% a year earlier and 20.4% in the previous quarter.

For the fourth quarter GAAP net income was $11 million, or $0.06 per ADS, compared to a net loss of $13.2 million, or $0.07 per ADS a year ago, and a net income of $8.8 million, or $0.05 per ADS in the prior. The net loss in the last quarter of 2008 was mainly the result of a net loss of $17.4 million arising from our allowance for doubtful accounts from SVA-NEC, having taken into account the associated tax benefits thereof.

Now, let us turn to our performance for the full-year 2009. Looking back, it was a dramatic, while challenging, year for the TFT-LCD industry and us. Starting from the later part of the 2008, the global financial crisis had adversely impacted the demand of TFT-LCD panels. As a result, the whole TFT-LCD industry suffered from over-supply and experienced significant pricing pressure. This extremely difficult operating environment continued as we entered into 2009. To almost everybody's surprise, demand of TFT-LCD panels rebounded strongly with short notice. Ever since then, the main challenge of the entire supply chain has been the ability for rush order fulfillment.

As our customers struggled through this unprecedented industry downturn, Himax, an anchor supplier to many of them, suffered as well from severe pricing pressure and loss of revenue. Our revenues totaled $692.4 million in 2009, representing a 16.9% decline year-over-year. In terms of product mix, while revenues from large panel display drivers declined significantly, we managed to grow revenues in both small-and-medium and non-driver segments, each with around 10% annual growth, an illustration of our commitment to our long-term diversification strategy.

Among our small-and-medium display drivers, share gain in the worldwide handset display driver was particularly remarkable, with shipments growing more than 50% year-over-year, from both the international brands and the Chinese brands. We aim to continue to expand our market share in this strategic segment with our competitive product offering and services.

Gross margins in 2009 was 20.5%, as compared to 24.5% in 2008. The decline was primarily due to the significant pricing pressures from our customers, as we pointed out earlier. Our net income was $39.7 million, or $0.21 per ADS, compared to $76.4 million, or $0.40 per ADS in the previous year. Max, our CFO, will later elaborate on further details.

Amid this volatile and challenging operating environment, we remain fully committed to becoming the world's leading semiconductor solution provider for the flat panel display industry. 2009 was a transition and remarkable year for Himax to achieve this long-term goal.

While the global TFT-LCD industry and the associated demand on display drivers are inevitably entering into a mature stage, we believe there is still room for us to grow our market share, especially from China, which is now the world's most aggressive builder of new TFT-LCD capacity. Based on our long-term, solid business relationship with Chinese TFT-LCD makers, we are confident that we will have a leading share in this increasingly important market.

2009 was also a remarkable year for our non-driver products. First of all, we commenced shipments of our white LED driver and CMOS image sensor product lines. Though both were in small quantities initially, we believe the commercial shipment is paving the way for us to tap the great market potential in these two emerging segments for us.

During the past year, we further strengthened our leadership in the world's emerging pico-projector industry with a solid shipment record and increasing new design wins. Notably our LCOS pico-projector solutions enabled the world's first projector-embedded digital camera, making another milestone in the field of innovation.

Recent customers' feedback and intensive design-in activities firmly support our belief that 2010 will be a promising year for our LCOS pico-projector solutions. As both orders and design-ins are picking up strongly, we are planning to expand our in-house capacity to fulfill the increasing demand for our LCOS panels. Looking into 2010 and beyond, we expect to see increasing adoptions of our LCOS pico-projector solutions by our customers in various applications.

In our TV and monitor chipset product line, we had not only multiplied the revenues in the past year, but also been working closely with our customers in commercializing our innovative technologies. Our ICT, or infinite color technology, can save panel power consumption by up to 30% to 60% while enhancing image quality.

Our 2D to 3D conversion solution, which has received overwhelming reception by customers for its superior performance since its launch not long ago, can convert any 2D content into 3D format on a real time basis, while offering a high level of visual comfort. We are extremely excited to see these innovations being adopted by customers to be their key differentiators in new products, some of which could hit the market as early as the second quarter of 2010.

In our CMOS image sensor product line, we had commenced shipment of sensor for conventional camera modules in the first half of 2009. On top of that, we made inroads into the leading-edge wafer level optics, which are expected to replace the conventional lens in the long run, starting with lower resolution camera modules. Our wafer level optics is a novel and state-of-the-art technology enabling camera modules to continue to challenge small form factor requirement. Its high temperature resistance feature also makes SMT reflow process possible, saving phone makers' assembly costs. Currently we offer products with VGA and 2 mega pixel resolutions, mainly focusing on cell phones and mobile PCs. Our wafer level optics have been well received by a number of the world's first-tier CMOS image sensor and camera module makers.

Before providing our first quarter 2010 guidance, I would like to share with you some recent observations. As you are aware, there were recently announced mergers in the TFT-LCD industry, including both our customers and suppliers. We believe these consolidations are healthy developments for the entire TFT-LCD industry in the long term. We will continue to deliver the best service and products to these customers in both our display driver and non-driver product lines.

In the year term, some TFT-LCD panel components are currently experiencing a shortage in supply, as indicated by TFT-LCD makers, which may be a factor leading to uncertainty in our first quarter 2010 guidance. Furthermore, the capacity and equipment tightness at certain of our subcontractors may potentially increase our costs of revenues and negatively impact our gross margin.

Moving to our first quarter 2010 guidance, we are seeing rather healthy demand in a traditionally low season. Compared to the previous quarter, we expect revenues to remain flat or go up slightly with a slight gross margin decline of less than one percentage point. GAAP earnings per ADS is expected to be in the range of $0.04 to $0.06.

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

Thank you, Jordan. I will now provide additional details for our fourth quarter and full-year 2009 financial results.

For the fourth quarter, our GAAP operating expenses were $22.7 million, down 52.1% from $47.4 million a year ago and down 25.9% from $30.6 million in the previous quarter. The significant year-over-year reduction in our GAAP operating expenses was primarily due to our allowance for doubtful accounts of $25.3 million from SVA-NEC in the fourth quarter of 2008. The sequential decline in GAAP operating expenses was primarily because we granted, at the end of third quarter 2009, our 2009 RSUs, or Restricted Share Units. Of the $12 million RSUs, about 54% was vested and expensed immediately on the grant date.

GAAP net income for the fourth quarter was $11 million, or $0.06 per ADS, up from a net loss of $13.2 million, or $0.07 per ADS in the same period last year. Excluding those one-time effects from SVA-NEC, as Jordan pointed out earlier, our net income in the fourth quarter of 2009 grew by 162% year-over-year.

Excluding share based compensation and acquisition related charges, our non-GAAP gross margin for the fourth quarter was 20%, as compared to 21% a year ago and 20.5% a quarter ago. Non-GAAP operating income for the fourth quarter was $15.4 million, up from an operating loss of $18.8 million in the same period last year and down from an operating income of $20 million in the previous quarter.

Share based compensation and acquisition related charges for the fourth quarter were $1.0 million (sic - see release) and $0 million respectively, as compared to $1.9 million and $0.4 million a year earlier.

Non-GAAP net income was $12.6 million, or $0.07 per ADS, up from a net loss of $10.9 million, or $0.06 per ADS for the same period last year, and down from a net income of $16.2 million, or $0.09 per ADS in the previous quarter.

Our cash, cash equivalent and marketable securities available for sale were $121.7 million at the end of December, up from $117.5 million a quarter ago.

Net cash inflow from operating activities for the fourth quarter was $16.6 million as compared to a net cash outflow of $7 million in the previous quarter.

In terms of 2009 full-year performance, our GAAP operating expenses were $98.3 million as compared to $143.9 million a year earlier. The significant reduction in our operating expenses was primarily a result of the continued optimization and rationalization measures covering literally all aspects of our operations.

Tax expense for 2009 was $7.9 million, as compared to a tax benefit of $8.7 million in 2008. The increase in tax expense in 2009 was primarily due to the expiration of one of our 5-year tax exemption programs, among other factors. Based on our current best estimate, we now expect our full-year 2010 effective tax rate to be around 10%, primarily because the Taiwan statutory income tax rate is reduced from 25% to 20%, starting from the beginning of 2010.

GAAP net income in the year of 2009 was $39.7 million, or $0.21 per ADS, compared to $76.4 million, or $0.40 per ADS in 2008.

Excluding share based compensation and acquisition related charges, our non-GAAP gross margin for the year 2009 was 20.5%, as compared to 24.6% last year. Non-GAAP operating income for the year 2009 was $60.8 million, as compared to $84.1 million in 2008.

Share based compensation and acquisition related charges for 2009 were $12.8 million and $1.2 million, respectively, as compared to $21.1 million and $0.9 million in 2008.

Non-GAAP net income was $53.6 million, or $0.29 per ADS, as compared to $0.51 per ADS in the previous quarter.

During the quarter, we continued to repurchase our ADSs and thereby cancelled our underlying ordinary shares accordingly. Share repurchases in the fourth quarter totaled $11 million, or approximately 3.9 million ADSs. At the end of the quarter, we had roughly $10.4 million remaining in the current share repurchase authorization.

In regards to our dual-listing plan on the main board of the Taiwan Stock Exchange, we continue to make progress during the past quarter. According to Taiwan listing requirements, prospect issuers are required to submit 2009 full-year ROC GAAP audited financials by the end of February 2010 to continue the review process by the authorities, followed by the update of preliminary prospectus, among other procedures. We now expect to receive the Taiwan-listing approval in the second quarter of 2010, subject to regulatory approvals.

The first quarter 2010 earnings per ADS guidance that Jordan provided earlier is based on the assumption of having 359 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.

(Operator Instructions). Frank Wang, Morgan Stanley.

Couple questions -- first one, for first quarter revenue guidance that seems to be lower compared to some of your peers, such as [NovaTech] looking for about 15% to 20% growth rate for their first quarter. Can you reconcile the growth difference and, given that you have a lower first quarter revenue base and was your preliminary view on the second quarter outlook?

Thank you, Frank. I believe our guidance for first quarter is in line or even in some cases slightly above many of our customers and so I don't think we are under performing the industry but I guess it's difficult for me to try to reconcile our performance versus our peers. And, as far as second quarter outlook is concerned, I think certainly we are not providing guidance yet but we are seeing the industry continue its pretty healthy track at the moment.

Thank you. If I may have a follow-up, can you give some color to the status of industry you are seeing right now maybe in light of talks about different parts of component shortages in the supply chain as well as everyone is very busy for the Chinese New Year build and also there are people caution about after Chinese New Year effect and can you provide your view of the industry status and what you are seeing right now and what you expect after Chinese New Year?

I think the -- I mean to us -- the overriding thing of the industry right now is that, having learned from the lesson of the previous period when there was a financial crisis and the whole industry was hit hard because of overbuild of inventory, now customers are very, very cautious and careful in terms of inventory preparation. And that is a good sign for us always although, as we all hear or read from the press that the industry is suffering from a bit of a shortage, but we are still seeing customers behave "quite nicely" in terms of inventory control, meaning people are not overly aggressive trying to overbuild for the very strong demand.

And, in terms of Chinese New Years is concerned, we are seeing customers continue to fully run their production during the Chinese New Year period, so we are ourselves then required to also continue our shipments and also our suppliers are required to have a non-stop operation during the Chinese New Year period. So I think and if I look -- if I talk to our customers, end customers, any of the system [managers], we are seeing pretty much the same thing. People are optimistic. However, people are cautious, trying not to overbuild their inventory level. I think that is the most significant thing we are observing right now.

And, as far as we are concerned, we have -- knock on wood -- we have been able to fulfill pretty much all of our customers' orders, many of them with short notice, perhaps with the notable exception of our cell phone drivers to the Chinese market, which typically has a very volatile nature and [often] provides its initial notice to the extent that they are really too short for fulfillment.

So, other than that sector, where we are actually improving our shipments and trying to fulfill more of our customers' demands, you know, these demands against last demands and hopefully next month will be even better than this month's. And also, [overall] we believe our performance is among the best compared to our peers so, other than that sector, our performance in terms of fulfillment has been I would say way above industry standard and having said that, we also remain very cautious. We are not trying to build the inventory beyond customers' forecast given to us.

Thank you. My last question is for some of the non-driver products that you mentioned earlier, can you maybe elaborate a little more detail in terms of what kind of commercialization and maybe revenue mix you're expecting, how they're going to ramp? For example, the LCOS and pico-projector, the CMOS wafer level optics and LED driver, the controller? Also, I think you have introduced some new products in the content controller in 2D to 3D, as you mentioned earlier. Thank you.

We are not going to provide our projected revenue mix at this stage because, as we all know, each individual item the revenue is still small compared to our overall revenue. However, there are -- they've been growing phenomenally. If I look at my projection for first quarter, in terms of revenue the non-driver segment as a whole I think is we are seeing more than double the growth compared to the same period last year, so it's a good illustration. And last year was actually, meaning year 2009, was actually the pretty much the first year when many of these segments entered into the first year of real commercial production.

So we did start from a slow base because it's only the commencement but the growth has been phenomenal and reflected by two things. One is the fast increasing shipment we are seeing and more importantly, the second thing, the number of design wins we have won. And I would start with individually -- I would start with LCOS. Cumulatively whole pico-projector market we have shipped a total of more than 600,000 units of panels cumulatively throughout the past history and we believe that is amount, the high shipment for any suppliers in this emerging segment.

And I think more exciting that than that is the expected phenomenal growth we are seeing in the coming few quarters and, on top of that, we are seeing a very encouragingly first-year [front ends] starting to come in, some making serious inquiries and some others kicking off there and generating discussions with us or in some cases design ins, so the fact that certain internationally first-year global [fronts] have joined these emerging segments is very exciting to a provider of key components in this industry at the moment.

And for TV and monitor chip sets, we believe our both in the TV segment and monitor segments in terms of MOS tender chip sets, this year's revenue will continue to see good growth compared to last year and we highlighted in our prepared remarks our ICT technology, which is a very unique technology providing power saving, as it's able to save you a big (inaudible) consumption substantially without compromising your picture quality and our 2D to 3D conversion technology. I think both technologies are very new and they are very innovative.

They are very unique and ever since our recent launch for both, we have seen initially strong reception from our customers, so we are quite excited and we believe those are the adoption of those two technologies in the real marketplace, meaning the end users, will get to see them I think hopefully in not too distant future. And we certainly make inroads in certain of our other segments as well but I think maybe if you have individual questions on each, any individual segments I will be happy to provide further details.

Okay thank you. Maybe one last question from me and then I'll leave for others to ask is that maybe you'll also talk about LED drivers. You want to talk about some of the efforts there?

Right, LED driver, we started from last year. We started from a small panel market and now we are starting to get into notebook market, notebook panel market, and this year we expect to get into monitor and TV market as well. And I am talking about real shipments.

Okay thank you. Have a good day.

(Operator Instructions). [Jay Cerveza] with [Chardon Capital Markets].

Thanks for taking my question and congratulations on a good quarter and good guidance. I want to follow-up on the question on Chinese New Year. As you see the market today, what is your expectation in terms of the sell through post New Years and how would you be adjusting your inventories and what kind of feedback are you getting from your customers on how things are shaping up for the Chinese New Year?

Chinese New Year to us I think firstly it is a challenge for us in terms of logistics and inventory control and trying to make sure our customers production will not be interrupted because, as we all know, the customs in China, they do take a break. So that is the first challenge and, other than that, whether the Chinese New Year season will see a very strong sell through in the Chinese market in particular, that is actually less of our concern.

Basically we prepare our material based on our customers' forecast so we have our sell through is with customers where they will provide forecasts followed by POs and, based on those forecasts and POs, we then prepare our materials and we make shipments. And what we do is we try -- we, meaning the customers and us -- we try to shorten the lead time to the extent possible so that in case of a sudden industry trend turnaround we are not caught in surprise. And we have been managing that quite successfully. We have been able to shorten our production process thereby allowing our customers to give their forecasts to us with shorter lead time.

Now, the whole industry is after a pretty long period of downturn the capacity is relatively low and in some segments we are even hearing about labor shortages now and facing this significant uptick I think people are rushing to get their labor and their capacity in place. And, you know, supplier side to the extent that is also true so, as I pointed out earlier, we are asking them to -- we are actually very actively since end of last year we have been, or actually middle of last year, we have been actively discussing with our suppliers about their required capacity for this year and, in some cases, next year. So that is one thing.

And the second thing is we are working very closely to make sure our customers' production aren't interrupted and I think throughout the whole 2009 our belief is that driver IC supply will be tight, barring any big surprises, the driver IC supply will be tight, Himax being a leader in the industry, having among the biggest volume, I think the tight industry situation will be to our advantage because we will always have priority over assets to those capacity of our suppliers.

Okay let me ask you about your guidance for Q1. How do you expect the mix to be? I mean, do you expect large panel shipments to continue to grow in Q1 or would you expect after the buildup in Q4 there will be some decline in those shipments?

Max, can you answer that question?

Sure. Hey, Jay, this is Max. Looking at the preliminary forecast for Q1, we are seeing some mix change, mix shift. We are seeing strong momentum, especially coming in small and medium size display drivers, so small and medium size display driver, including the mobile handset and other consumer electronics combined, will account for more than a quarter of our total revenues in our first quarter revenue. I think that's a historical levels, which we are quite confident to achieve more than 25% of our total revenue in 2010 first quarter.

And, in terms of the mix for large panels, I think the driver from monitors and notebooks according a rebound quite nicely from a low fourth quarter of last year, while TV driver will decline based on our current forecast. So there are some miss shipped between IT panels and TV panels okay. TV panels declined while IT panels grow quite nicely. And also, for our non-driver, as Jordan pointed out earlier, we are seeing our non-driver continuing to grow sequentially, so the non-driver product as a percentage of total revenues may achieve close to more than 8% or even close to 9% on our total revenues. This is according to our current forecast, so we are seeing our mix continuing to move towards more healthy directions, i.e. diversification away from the so called large panel display drivers.

I think there must be a seasonal reason we are seeing TV, which has been a very, very significant segment for us, TV applications, in terms of percentage of total revenue it is likely to decline from around 40% of our total in Q4 to down to about 30% in Q1, so it's going to suffer a more than 20% sequential decline based on our forecasts and that is really the only segment we are seeing decline and that actually contributed to the -- actually all other segments we are seeing pretty strong rebound from the last quarter.

Okay let me ask you one question on gross margins. Your margin eight quarters ago was close to 25% but in the last four to five quarters they're closer to 20% margin range and you're guided for possibly some decline in Q1. When do you expect to start getting some good gross margin expansion and what's going to drive that?

We certainly hope gross margin will continue to improve from here where we believe at this period in time, meaning this quarter and perhaps previous couple of quarters, hopefully is the bottom of our cycle. And we pointed earlier in our earlier remarks that our [lessons] at the factory, our gross margin last year, was really the result of a lot of pressures from our customers, cost pressures from our customers.

With the industry expected to climb up and the supply chain expected to be tight, we hope that will certainly help in our gross margin and also we are hoping, as a rule of thumb, once we reach a certain level of shipments, the more we ship our non-driver products the better our gross margin will be, as many of the non-driver products enjoy revenues substantially higher than that of driver products. So those will be the two segments.

The last question for me is from -- I know you can't give revenue guidance for the full year but I guess what I am asking for is it looks like the March quarter is definitely stronger than people expected. Do you believe in terms of just overall revenues for 2010 you can get back to 2008 levels or do you expect 2010 to be more of a modest growth from 2009?

I think if you look at the CapEx for 2008 level, I think it is difficult. The trouble [ISP] has declined substantially from 2008 and we are -- we don't really expect that to get back to any level close to that. And also, the overall market size is really determined by two things, one our customers, meaning that LCD tier peers to the industry as a whole their capacity, their overall capacity and certainly the associated capacity utilization.

And secondly, ISP and, as I pointed out ISP where in semiconductor industry so it is unlikely we'll see price level get back to historical high or the level in 2008. And the whole industry hasn't really grown that much in terms of overall capacity. Having said that, I think starting from the year after -- next year and the year after when the Chinese panel makers, their new capacity plan, if they come out with specials, then that will be a moment for capacity increase for the increase, meaning demand, further demand, for driver industry as well.

So before that happens, certainly there are incremental increases, our customers' capacity, but given that they are not really that significant so we don't really expect our revenue in those drivers to get back to a level close to level 2008.

Okay thanks for answering my questions.

(Operator Instructions). Jessica Chang, Credit Suisse.

Just a few questions, you expect to have your opinion. First, what's the current pricing pressure in Q1? Would it be actually quite mild?

Yes.

So the slight gross margin decline in Q1 is more attributable to like your economic change and also increased second costs?

Well, on top of that, yes for both a bit, but on top of that also there's a change of product mix. It's -- I'm not saying this is a long-term trend, okay, change of product mix to adversely impact our gross margin, but sometimes within a quarter or months when customers want most such ICs and less of those other ICs with different gross margins by chance you do see increase or decrease of your gross margin.

I am not seeing this as a long-term trend but we do observe that between Q1 and last quarter there is also this -- there is this factor, which somehow adversely impacted our gross margin. Other than that, I think we are seeing mild pricing pressure and we are not giving strong pricing pressure to our suppliers either because the industry is tight and we are not really getting much pricing pressure from our customers anyway.

Okay so the problem in September a product mix change would be the like your TV segment probably will have some decline versus the IT segment so this also making your gross margin a little bit lower?

Yes I think so.

Okay, all right, and my second question is you mentioned you announced drivers revenue probably will grow more than double versus the same period of last year and roughly, as a roughly calculation, can I say this non-driver line probably they can count for around 8% to 9% of your revenue in Q2 -- in Q1 and very likely you will be greater than 10% in Q2?

I think you can say that yes.

And also you mentioned you are working on to get more market share from China, your China based customers. Can you shed more light on your development in this segment?

We have large panel segments and small panel segments for -- we don't want to name specific customers' activities but we have all witnessed the approval and in some cases commencement of construction or in some other cases even commencement of production coming from certain of our Chinese customers and one or two of them have even announced their plans for new fabs, new -- their new [trend] 8.5 fabs, which are very -- certainly very exciting news for us. And with some of them we have actually commenced extensive engineering discussions in anticipation for their new fabs production in the future.

So that is a very exciting sign and also our non-Chinese customers, meaning customers in Taiwan, in Korea or in Japan. Many of them have also moved their next generation fabs to China where you will expect to see more Chinese engineering dominated. Chinese engineers dominate the operation and that will always, in the long term, play to our advantage in terms of getting those market shares.

A small segment, a small, small, small size panel segment, China's [server] market as we know, it's very vibrant and on top of their local market they've been grabbing international market, particularly those of the third world countries, very aggressively and we have recently seen extremely strong demand coming from that segment. I pointed out earlier we may not be able to fulfill 100% of their current demand because the lead time was just too short and the way they up their forecast is just phenomenal. But we have been filling market share in that segment as well. We are seeing more of the Chinese manufacturing shipping to -- moving towards from the old traditional, the so called (inaudible) market also to the branded market as well and, as I said, to third world country markets big time. So that has increasingly become a very important market for us as well.

So you mean you already have quite good contribution from the small to medium sized panel drivers but for large panel segment in China you are getting new like design approval, design wins and you are going to commence your productions to it already?

For big scale that will be the future because you have to wait for their next generation fabs to get into operation but certainly for certain sort of smaller scale increase of our shipments we are talking about their increasing fabs or smaller scale increase of their capacity. But, if you talk about some of the more significant increase of that capacity, that will be the future or that will be a story for next year I think. But how you get your sales line up for design wins and get ready for the production in upcoming new fabs, at the moment it's very important and we believe we are making good progress there.

And for Q4 what was the revenue contribution from your China customers?

China customers, revenue contribution, let me see. There are so many of them. I would say Q4, as you know, SVA-NEC, which used to be a major customer, still did not have any production so I would say for China as a whole 5% to 10%.

5% to 10%.

Yes.

Thank you and the following question is can you explain a little bit on the technology front regarding the TV products, like 2D, 3D, these kind of products? What's the difference between these kind of new product drivers versus old type of the drivers or timing controller?

If you talk about 2D to 3D conversion, it is not a driver IC. It is a logic IC. It is to be used by whole set makers rather than panel makers. 2D to 3D conversion I'll give you a short version explanation. It's a program or a chip, which converts your old, good old traditional 2D content, into something with 3D effect. It is independent from what kind of panel you are using. It could be a real 3D panel or real 3D TV or monitor set. In that case the effect will be better. Or it could be a traditional 2D panel. In that case you still get to see certain 3D effects certainly with a lower performance compared to a real, and these days still expensive, 3D TV sets. Okay so that is a new technology, which we announced. We formally announced only last week but prior to our press release last week we had started to have engaged certain leading customers and the reception has been overwhelming.

We all know 3D is now a popular subject and we clearly are in the leading edge in terms of providing this very unique technology to convert your 2D contents, which as we all know still accounts for 99.99% of all of our contents, to convert your 2D content into 3D format on a real time basis. That's what we're trying to do. So it has nothing to do with driver IC.

So you'll produce the logic IC?

Yes that particular product.

Okay is there a single chip or it's a chip set?

It's a single chip.

Okay and for the real tailored 3D panel do you need to use special drivers or timing controller?

No you don't.

All right and then my final -- my last question would be can you rank your gross margin by each of your non-driver different kind of products called the LCOS, pico-projector, the ICT TV, 2D, 3D and CMOS [power] sensor wafer level optics and also LED driver? Can you rank by like from the size?

Can I rank?

Yes.

I would say power IC and LCOS enjoy the highest followed by [pico] and video followed by sensor. However, we briefly touched upon our wafer level optics. We view certainly that can be seen as part of the sensor solution but that does enjoy better margin compared to traditional sensor, the semiconductor. So again, and then everything is better than driver, okay so it is LCOS and power, including LED driver that would be the top rank followed by video and timing controller followed by sensor.

And wafer level optics this is lower or higher? Sorry I didn't get it very clear.

Wafer level optics is higher.

Higher.

Yes.

So far it's very, very small.

I'm sorry.

So far their contributions they're very small but it has good potential.

Yes.

Okay that's all from me. Thank you very much.

There appear to be no further questions at this time. I'd like to turn the floor over to management for closing comments.

Well, thank you, everybody, for taking the time to join us today again and we look forward to talking to you again at our next earnings call in early May with an update on our first quarter results. Thank you.

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