奇景光電 (HIMX) 2010 Q1 法說會逐字稿

Greetings and welcome to the Himax Technologies Incorporated first quarter 2010 earnings conference call. At this time all participants are in the listen-only mode. A brief question and answer session will follow the formal presentation. (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 Mr Villalta you may begin.

Thank you operator. Welcome everyone to Himax's first quarter 2010 earnings call. Joining us from the Company are Mr Jordan Wu, President and Chief Executive Officer, and Mr Max Chan, Chief Financial Officer. After the Company's prepared remarks we'll then have time for any questions today.

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

Before we begin the formal remarks, I would 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 events or results to differ materially include but are not limited to -- general businesses and economic conditions and the state of the semiconductor industry; market acceptance and competitiveness of the driver and non-driver products developed by the Company; demand for end-use application products; reliance on small group of principal customers; uncertainty of continued success in technological innovation; 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; the uncertainty of our Taiwan listing plan which is still under review by Taiwan regulatory authorities and subject to change due to among other things changes in either Taiwan or US authorities policies and Taiwan regulatory authorities acceptance of the Company's Taiwan listing application; 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 20F for the year ended December 31 2008, filed with the SEC on May 5 2009 as amended.

Except for the Company's full year 2008 financial we will provide on the Company's 20F filed with the SEC on May 15 financial information included in this conference is unaudited and consolidated and prepared in accordance with a US GAAP. Such financial information is generated internally and has not been subjected to same review and scrutiny, including internal auditing procedures and audited 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 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 everyone for being here with us today.

To begin I will briefly highlight our performance in the first quarter and then provide our outlook for the second quarter of 2010. Our CFO Max Chen will then provide further details on our financial performance.

Our first quarter revenue has come in at $175.5 million, representing a 39.7% growth year over year and a 1.8% decline, sequentially. At the end of first quarter, certain of our customer's order was either postponed or cancelled, primarily due to insufficient lead time for us or shortage of other components for customers TFT-LCD panels.

Revenues from large panel display drivers were $114.5 million, up 28.5% from a year ago and down 10.7% sequentially. Large panel drivers accounted for 65.2% of our total revenues for the first quarter, as compared to 70.9% a year ago and 71.8% in the previous quarter.

(Inaudible - technical difficulty) from the same period last year and up 22.6% sequentially. Small and medium-sized applications accounted for 26.4% of total revenues for the first quarter, as compared to 23% for the same period last year, and 21.1% in the previous quarter.

This is the first time that our (inaudible - technical difficulty).

Excuse me ladies and gentlemen; we seem to be experiencing technical difficulties. Please hold for a moment.

Ladies and gentlemen, please continue to hold. Thank you for your patience.

Ladies and gentlemen, our speakers will be back with us momentarily. Please continue to hold.

Ladies and gentlemen, thank you for your patience. Now rejoining Mr Wu.

Hi everyone. Sorry, apparently there was some technical glitch. So, Joseph, shall we - first we--

I think if we start from the first quarter revenues that would be fine.

That pretty much means the beginning.

Yes.

Okay. Thank you.

Our first quarter revenues came in at $175.5 million, a 39.7% growth year over year, and a 1.8% decline, sequentially. At the end of first quarter, certain of our customer's order was either postponed or cancelled, primarily due to insufficient lead time for us or shortage of other components for our customers' panels.

Revenues from large panel display drivers were $114.5 million, up 28.5% from a year ago and down 10.7% sequentially. Large panel drivers accounted for 65.2% of our total revenues for the first quarter, as compared to 70.9% a year ago and 71.8% in the previous quarter.

Revenues from small and medium sized applications were $46.3 million, up 60% from the same period last year and up 22.6% sequentially. Small and medium sized applications accounted for 26.4% of total revenue for the first quarter, as compared to 23% for the same period last year, and 21.1% in the previous quarter.

This is the first time that our small and medium panel drivers accounted for more than a quarter of our total revenues. The strong sequential growth was mainly driven by our share gain in the global handset display driver market. With an increasing number of compatible panels, our product portfolio is among the most complete and popular in the industry. We expect the strong demand of our handset display drivers to continue into the second quarter.

Revenues from our non-driver business were $14.7 million, up 93.2% from the same period last year and up 16% sequentially. Our non-driver products in the first quarter accounted for 8.4% of our total revenues as compared to 6.1% a year ago and 7.1% in the previous quarter.

We are pleased to start 2010 with solid results in our non-driver products. Our LCOS pico-projector line, our 28 inch embedded solution for handset applications has been well-received by a number of optical engine makers and end customers, especially in the Chinese market.

We are also working with certain leading names in IT and consumer electronics for various pico-projector products. We believe the emerging pico-projector applications are just in the early stage of a long-term product life-cycle. Being the leader in this fast-growing segment, we are planning aggressive capacity expansion to capture the ample business opportunities.

Revenues from our analogue IC lines grew more than 50% sequentially, primarily due to the ramp of our WLED drivers. In addition to small and medium panels and notebooks, we also started to ship WLED drivers for TV applications, where multiple LED drivers are required per panel.

With a more integrated and complete product line-up, we are confident that we will benefit from the trend of fast-growing LED-backlight displays, due to our solid technology and close partnerships with both panel makers and system makers.

We are excited that our 2D to 3D conversion solution is receiving overwhelming interest from the 3D ecosystem, software and hardware makers alike. Our solution is widely praised for offering the best 3D effect and viewing experience in the marketplace. In addition to the software/firmware version which we announced in February, we recently launched our chip solution, which is now ready for mass production. This puts us firmly ahead of the market.

Our IC solutions can accompany all types of 3D displays empowered by various technologies. They are also suitable for a range of applications including TV, monitor, notebook, portable DVD player and digital photo frame.

Our GAAP gross margin for the first quarter was 19.8%, as compared to 20.9% a year earlier, and 20% in the previous quarter. The slight sequential decline in our gross margin was primarily due to change of product mix.

For the first quarter, GAAP net income was $9.1 million, or $0.05 per ADS, compared to $4.4 million, or $0.02 per ADS, a year ago, and $11 million, or $0.06 per ADS, in the prior quarter.

Now I would like to provide you with a brief update on the status of our dual-listing plan on the Taiwan Stock Exchange. The application is still under review by the authorities; however, we recently started to assess a potential alternative, which is to have a secondary listing in Taiwan by way of Taiwan Depository Receipts or TDRs.

In early March the authorities proposed certain amendments to the existing rules governing foreign companies' offering and issuance of securities in Taiwan. Under the proposed amendments, our ADSs will be eligible to be listed on the TWSE in the form of TDR. The amendments also contain measures to encourage better secondary market liquidity, a major improvement over the existing rules.

As we are a Cayman registered company listed on the NASDAQ, a major benefit of TDR for us, as opposed to our originally planned dual-listing, is that our maintenance costs of listing in Taiwan will be substantially lower because our ongoing compliance will remain essentially the same with the additional compliance requirement in Taiwan becoming much more limited.

We are still in discussion with the authorities and no decision has been made as to whether to change the original dual-listing plan to a secondary TDR listing.

We stress that all the amendments we mentioned above are merely proposals made by the authorities and have not been made effective. We are not certain when or whether it will be made effective or the final form of the new regulations if they should be made effective.

Before providing our second quarter 2010 guidance, I would like to share with you some recent market observations.

We are seeing capacity tightness throughout the entire driver IC supply chain. This has led to severe shortage in driver IC across the board. The unfulfilled demands are at levels far above what we have experienced. The shortage has resulted in an increase in our cost of revenues and we are raising our selling prices to offset such impacts.

The capacity tightness may have become a mid to long-term trend. This is because, while the TFT LCD industry is aggressively expanding capacity again after several quarters of slowing down, the driver IC industry's overall capacity growth now appears limited.

On the foundry side, display drivers' constant demand for large volume and favourable price has left it in a relative disadvantage when the foundry capacity becomes so tight. The back-end vendors, including tape, gold bump, packaging and testing, are still hesitant to expand aggressively, following several quarters of heavy losses during and after the global financial crisis.

We believe the shortage situation is to the advantage of leading players such as ourselves who have always enjoyed solid access to a relatively large pool of capacity.

Additionally, we have established critical long-term partnerships with several of the key suppliers in the industry. Therefore, we are confident that our relative competitiveness will strengthen in this new industry environment.

Moving to our second quarter 2010 guidance, we expect revenues to grow by 10% to 15% sequentially and gross margin to remain flat. GAAP earnings per ADS is expected to be in the range of $0.06 to $0.08.

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

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

For the first quarter, our GAAP operating expenses were $24.6 million, up 15% from $21.4 million a year ago and up 8.4% from $22.7 million in the previous quarter. GAAP operating income for the first quarter was $10.1 million, up 109.9% from $4.8 million, in the same period last year and down 22.7% from $13.1 million in the prior quarter.

Excluding share-based compensation and acquisition-related charges, our non-GAAP gross margin for the first quarter was 19.8%, as compared to 20.9% a year ago and 20.0% a quarter ago. Non-GAAP operating income for the first quarter was $12.5 million, up from $7.7 million in the same period last year and down from $15.4 million in the previous quarter.

Share-based compensation and acquisition-related charges for the first quarter were $1.7 million and $0.4 million, respectively, as compared to $2.2 million and $0.4 million, a year earlier. Non-GAAP net income was $11.2 million, or $0.06 per ADS, up from $7.0 million or $0.04 per ADS for the same period last year, and down from $12.6 million or $0.07 per ADS in the previous quarter.

The effective tax rate we have used in the first quarter of 2010 in deriving our net income and earnings per ADS was 20%, as there were temporary uncertainties in tax regulations. Recently there have been major changes in tax regulations on how to account for tax credit resulting from R&D expenditures. The prior applicable Statute for Upgrading Industries expired at the end of 2009, while the succeeding Industrial Innovation Act has not yet become effective. Therefore, we were unable to recognize R&D-related tax credits when there were no applicable tax rules in effect. Once the pending Industrial Innovation Act has been made effective, our estimate on 2010 effective tax rate will be 15%.

In the first quarter, we continued to generate strong cash flow from operations. Net cash inflow from operating activities for the first quarter was $45.8 million as compared to a net cash inflow of $16.6 million in the previous quarter. Our cash, cash equivalents and marketable securities available for sale were $161.1 million at the end of March, up from $121.7 million a quarter ago.

During the quarter, we continued to repurchase our ADSs and thereby cancelled our underlying ordinary shares accordingly. Share repurchases in the first quarter totalled $3.6 million or approximately 1.2 million ADSs.

At the end of the first quarter 2010, we had roughly $7.0 million remaining in the current share repurchase authorization.

The second quarter 2010 earnings per ADS guidance that Jordan provided earlier is based on the assumption of having 358 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. Ladies and gentlemen we will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment it may be necessary to pick up the handset before pressing the star key. One moment please while we call for questions.

Our first question comes from the line of Dan Heyler with Bank of America Corporation.

Good morning gentlemen. I have a couple of questions. First, you alluded to the capacity constraints and your effort to build up some partnerships there, so that sounds encouraging. I wanted to get an update. Could you elaborate a bit more, number one what percentage are your wafers currently, that is specifically in the LCD area, or from your top foundry, and what percentage is from effectively everybody else?

Well thanks. The first question of foundry, our supply at the moment are quite diversified. We are coming from the main ones being Taiwan Semi, UMC, Vanguard, and Magnachip. And there are also minor ones including (inaudible), Magnachip and Global Semiconductors. So they are really quite diversified and at the moment there is not a single one which is say more than, you know, 35%, 40% of our supply.

Is every one of the foundries full at this point?

Yes, pretty much, very full.

So what are your options, you know, because I'm a little bit mystified your competitors have been able to grow much much faster, and effectively using the same foundries. I'm wondering why, you know, why you've been handicapped and they not.

Well certainly our revenue guidance for Q2 as an example, you know, the specification for the short-term situation would have been much more aggressive if we were not taxed by the capacity constraints on the foundry side. That would be the truth. And, we are working extremely close with combination of all these foundry suppliers, but in the medium-term there is not much anyone can do other than to try to squeeze a little bit more (inaudible) out of the effect here and there.

And, we are in few discussions with such country partners for the situation of next year, our demand for next year. And there are, to be honest here, a lot of confusion in the market place, a lot of people saying there are a lot of over-bookings and (inaudible) for foundry suppliers they look at their books and they are seeing indeed pretty strong demand. And as far as the second half of this year is concern, I think it really depends a lot on really how the global economy plays out, certainly if the economy is not as strong as people (inaudible). I mean a lot of the demand might disappear, but at this point we are indeed facing difficulties of trying to place more orders.

So based on your suppliers current assumptions, what level of capacity growth do you think you can secure for the rest of the year in terms of sequential? You can grow you said 10% or so in the second quarter. What capacity do you have available for second half growth?

Well in the second quarter obviously we have discounted the [message], i.e. the demands were already up 10, but for which we have failed to secure the capacity for. So we have included those in our guidance.

In the second quarter I think we are, it's a work in progress, we are still working on this. We don't believe our available capacity will go down from the current level, but how much it can go up, it really depends on a lot of factors, which I think it's still too early to tell, you know. Really, it's beyond our control.

Okay, sorry Jordan, I just wanted to clarify what you just said. Did you say on second quarter that your guidance for growth of 10% to 15% - that sequential revenue growth, that excludes the missed shipments in the first quarter, or includes?

Oh, no, the missed shipments for second quarter - meaning, we know the capacity constraint, our guidance would have been higher, but we--

I see.

--the fact that there are capacity constraints, and we have found detailed calculation as far as how much we can ship in the second quarter, given the capacity constraints and based on that we are providing our guidance.

Okay. And how much under-shipment do you think you had in the first quarter and the second quarter had you more capacity? Where could you have been? In terms of the orders.

Well over 10%.

Okay, for the first quarter.

Both. Second quarter is more severe than first quarter. First quarter is really, it's really towards the end of the quarter, it started to happen. But, it came in starts and [fears], so we have seen shortage across the [fall] in the second quarter. All sectors. All foundries. Various processes, you know, geometries.

Okay. So you think you could have grown, you could grow, you're saying 10 percentage points faster in the second quarter - so you could grow 20% to 25% without the shortage, is that what you're saying?

Yes.

Okay. Great. Well I'll get back in the queue. I've got some more questions, but I'll go back in the queue. Thanks.

Thank you Dan.

Our next question comes from Jay Srivatsa, Chardan Capital Markets.

Jordan, can you speak to a little bit about your comment on how this capacity constraint could be a mid to long-term issue? I guess I'm trying to understand what - I mean you talked about the second half constraints, or possible second half issues, but what is long-term? Do you expect this to continue into 2011? Can you kind of quantify this whole thing for us?

Well I'm not sure I can quote unquote quantify it as such, and in fact we are working closely internally as well as externally with several of our key customers and suppliers on how the situation is going to be like for the long-term. But I think the simple truth is that the, you know, starting from now actually, a bit earlier, you know, earlier in the year, we are seeing all these in panel makers in the world expending their capacities. They are so-called next generation capacity very very aggressively, and we are talking about every company. And there are actually newcomers to join the market primarily in China. And all these people are building, you know, Gen 8.5, Gen 7.5, even Gen 10, and these capacities are very large in scale, and inevitably they will need to find driver ICs in order for them to make shipments of the panel in (inaudible) capacity.

So we argue in this current demand level, which is before most maker new capacities are coming in place, we are already suffering trouble, you know, trying to fully fulfil (inaudible) demands. But once all those are up and coming, now we look at our supply side, (inaudible) stuff from foundry, a foundry historically, you know, in fact since our inception, you know, which is about nine years ago, we have been really using the older or what they call mature technologies or processes that used to be used, occupied by either a logic product or probably in a bigger way - memory products.

So at the time, the logic or memory product move away into more advanced technologies while leaving those mature capacities sort of available, and in a way, semi-empty. So that provides some IC industry with a fantastic opportunity to go and grab those capacities and (inaudible). However, as I pointed out in my earlier comments, we are pretty aggressive in price, because that's how TLT-LCD industries all (inaudible), you know, we are pushed pretty hard our customers to deliver a good price. And therefore we see in the industry - just Himax, the industry as a whole has to be aggressive, demanding good prices from our foundries.

Now we are seeing those foundries are very full, those [commences] are very full. And do they really have a lot of incentive to build new ones, yes and no. But after talking to a number of key players, foundry players, I think this may not be on the top of their priority list because, as we all know, 55 millimetre 12 inch for example is now in serious shortage globally. So [if I am] foundry company and I have a limited budget authorised by my board of directors to expand where do I put my money? I don't think, to be very honest, I don't think (inaudible) will be on the very top of their priority, which is sad, but I think we have to tell the truth, so that is (inaudible). I think somehow it's constrained, and I think as a long-term trend the industry probably need to reconsider its price level, you know, there for it to be, to have better access to those foundries capacity.

Now, if I move on to other back-end, including [COF, the tapes] or gold bump or testing and packaging, all these capacities are really pretty much tailor made for drivers industry, and this industry only. And historically they are strong, according to our customers - meaning panel makers expansion plans - meaning we are the, we act as the communicators for people, right? We went to our customers and we discussed with them how much they are going to grow and how much they need from us, but in turn we went to our suppliers - the back-end suppliers - and pushed them to expand according to our customers plans.

But, you know, during and after the financial crisis I think most, if not all, of these back-end players suffered losses, and some of them actually pretty big losses, and we are seeing certain consolidation over the past last two years of the back-end industry, I think primarily because less competitive players just couldn't be in the market any longer because the overall, the market environment is pretty demanding.

So, after all these losses, you know, seeing the (inaudible), the strong, our potential growth because of the panel industries expansion plan, these back-end players will need to really go as aggressive as before to match the panel makers demands. You know, again, after a lot of discussions with these people, I am a bit worried. I think naturally they want to take a more cautious step.

So I think from across our supply chain, competitive constraint will be the big thing in the - I don't know for how long, but I would say even this - the next several quarters for sure.

Okay. Thanks for the detailed explanation on that one. Let me have a follow-up here. Your competitor seems to be a lot more bullish than you are, I guess partly because they seem to be getting a little bit more capacity, but I guess the question is, is there any market shift at your largest panel customer to that competitor, or are you guys still holding onto your market position there?

I think if you look at our Q1 result and Q2 guidance, I think if you compare those with the performance of our panel customers, the industry as a whole, I think we are holding up, and you know, and actually we are pointing out a potential issue. That doesn't mean we are bearish from ourselves. I think we pointed out in our prepared remarks that we believe leading players such as Himax will actually benefit from the shortage because, guess what, we'll be the ones who have access, good access to capacity. In fact, we also (inaudible) some of our strategic relationship with several of our suppliers. We've done all them. We have actually met the equity investment in the past, with some others we have either have extremely long-term relationship or have a contractual agreement.

So we actually believe in the situations like this, lot of players would have struggled finding capacity support. And the image of we are being small and potential struggle for (inaudible) support may actually negatively affect the ability to catch (inaudible). And I think we are seeing Himax service becoming actually a lot more demanding from, you know, across China, Taiwan, Korea and Japan - all of the leading panel customers. So we are actually quite bullish about our long-term prospects on a comparative basis for our sales. However we also like to point out that the, where the shortage appears to be a long-term strength.

Okay. Thanks Jordan. Good luck.

Thank you Jay.

Once again ladies and gentlemen if you would like to ask a question please press star one on your telephone keypad.

We do have a follow-up question from the line of Dan Heyler with Bank of America. Mr Heyler, your line is now live. Okay, our next question is from the line of Jessica Chan with Himax.

Hi, good morning Jordan and Max. Just a few questions to ask. First regarding the tightened foundry capacity - are you seeing foundry or back-end costs going up in Q2 or like in the near future in Q3?

Yes, actually we say that in our prepared remarks that the cost is going up and we are also raising our prices to offset the cost up.

So you can fully transfer the cost?

We certainly hope to. It's all work in progress. We certainly hope to.

Okay, thank you. And also, can you tell us--

And I think there is no reason to believe otherwise because, hey, it's tight.

Okay. Can you tell us what your revenue breakdown in Q2 look like? Like for example your (inaudible), will you holding a similar percentage - what's the growth for different segments compared to the (inaudible) items?

Max, do you want to come in on that?

Yeah, I'll just provide a brief outlook for the second quarter product mix, and given the fact that it is due in early May, so I would say we will continue to grow our market share in the small medium size panel drivers, and revenue from small medium sentiment I think is probably accounting for 30% or slightly lower - roughly 30% of our total revenues in the second quarter continuing the strong growth momentum from the first quarter. And this is based on the assumption the overall revenue base is still growing.

So on top of this I think small medium size continue to outperform large panels in the second quarter of this year, and especially the handsets. We continue to gain market share in the handset display driver segment, and so that's primarily due to we have very complete and product line-up, and our product portfolio can be used with literally all major panels for handsets. So with this I think our product offering has become one of the most popular and complete one in the market space, so that we have seen our strategy bearing fruit in the last quarter and the current quarter. So I think this is a preview of our product mix in the second quarter, our seeing the overall revenue growth because of the shipment growth and also we are raising the selling price and beyond that I think small medium size is outgrowing our large panels especially, and then in the small medium size our growth in handset has been phenomenal.

Just want to also add that Max talked about the bullish picture for handset drivers, which however is also the product line amount very strong IC using the more sort of advanced process comparatively, meaning the product used by handset driver is also shared - the capacity is also shared by those used by logic products, certain fresh memory products.

So we are seeing actually the most severe competitive constraints over there in that sector - the handset driver IC. But again we have extremely good design. We (inaudible) market position across the fall, whether in the world's leading handset players products or in China.

Okay. And what's your current, your estimate of your current market share in the mobile java IC segment?

I think this is very dynamic, and I would say the [monthly handset shipment] driver is, in Q1 is roughly close to 20 million a month. Now in Q2 it's about 30 million a month, so I would say on average the monthly average in Q1 is close to 20 million - not yet there - but in Q2 the monthly average is roughly 30 million a month for the time be 30 million pieces a month.

Okay, so it's very very robust sequential growth?

Yeah, and again we could have grown faster without the capacity constraint.

Understood. And how about your [new] driver?

--the result, I think we are, in an interesting way, our relationship with end user customers - meaning the front-end makers - have become closer, because they now realise they need to have pretty direct access to guys like us in order to have good planning for the future.

Okay, and can you also give us what rough - your roughly - the rough goal for revenue coming from non-drivers - what's the percentage - as a percentage?

I think the growth will be - if we look at the - it's very hard to say - the growth will be similar to the overall growth.

So it could be still around 8% or maybe slightly below?

Roughly around 8%.

Around, yeah--

And the driver also growing because of the [ASD] is growing. So is a dynamic between driver and non-driver and the entire place is growing, so the revenue mix between non-driver and driver probably remain unchanged in the second quarter.

Okay. And regarding the (inaudible) or TDR listing, I know right now is leaving more moving parts, but do you have any target, timetable for a completion date, or completion quarter?

As we said, the authorities have proposed to rewrite certain of their TDR rules, and after the revision the TDR all suddenly comes (inaudible) to us actually. However those rules have not been made effective. So we are actually discussing very closely with the authorities, but before that becomes more certain I think it's, I'd rather not comment too much on the timetable per se.

So in a way we are sort of holding up our original plan and we are discussing with the authorities on the, all aspects of moving from the old plan to a new plan, and we are told orally - I stress orally - from the authorities that the new rules or the revised rules will be made effective pretty soon. But then I really can't comment beyond that.

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

Thank you Jessica.

Thank you, our follow-up question comes from the line of Dan Heyler.

Thanks. Can you hear me guys?

Yes.

Okay great, sorry - so, yeah, just a couple of quick follow-ups. On the large size growth Jordan do you expect that to show any kind of growth in the second quarter? It sounded like your still constrained, so my sense is that that's single digit, is that fair to say?

Yes--

Yes, given those uncertainties in the price - on one hand we are raising the price, on the other hand there probably have some shortages which may impact our shipment at the end of Q2, so given our best estimate for the time being I think the revenues, sequential revenue growth in large panel is probably flat to up slightly. That's our best estimate for now.

The large panel product in nature of build according to customers orders or forecasts, and meaning we really cannot, or it is, let me say, it is pretty risky for us, with our customers quote unquote (inaudible) our forecast to be building up inventory level for large panels in particular, and then when you have sudden tightness in the capacity, it's very very difficult for us to react so as to fully fulfil customers demands. Although capacity for panel, for handset drivers is even tighter, but is a segment where we can have more leeway in terms of somehow filling our inventory and also our commonly shared products around many customers. And that is why we're seeing more robust growth in the second quarter, although it is actually subject to even more severe capacity constraint, as I mentioned earlier.

Okay. So the, roughly flat, slightly up revenue, it sounds like units - would units be potentially down in the second quarter in terms of shipments or are they hold up flat?

Units are flat, because the--

Grow slightly, yeah.

--AP is going up, so think the--

Our guidance is for 10% to 15% revenue up, and I think it is probably slightly higher than the price up, so I think the unit is holding up or growing slightly.

So your ASP will be up how much roughly?

10% plus.

I mean how, is that 10%?

Mm.

Okay. Is that a, are those price increases have gone through or they've been agreed to by customers?

Mostly.

Okay, mostly agreed to 10% higher prices.

Yes.

Okay, so then why - what's the gross profit margin then for the second quarter? I mean is this, this is passing on the packaging costs I presume. Is there any growth profit margin expansion? You said earlier not, so this (inaudible) transfer.

We are guiding for flat growth margin.

Okay, so this is passing on costs?

Yes.

Is this - the increase in costs, is it all back-end?

So far, primarily.

Okay. Right, it sounds like you're worried about maybe foundry price increases. It sounds like - is that a risk for second half?

Certainly going forward.

Okay.

We don't know.

Sure, yes, I understand, no problem. It's a tough market. And then on the OPEX side are you, what are you thinking there on the second quarter?

Yes, we have look at our internal forecast, we actually have a lot of [tape out], our media processor (inaudible).

2D to 3D.

Yes, the chip solution for our 2D to 3D conversion solution, so we conduct our operating expenses to grow double digit, especially from those new product tape outs.

Okay, double digit overall?

Yes. Actually the main growth is coming from non-driver products. I think we are very excited across the board about our (inaudible), so we are more aggressive on the expenses over there at the moment, in particular tape out.

Okay, does that OPEX number keep rising in the third quarter, or does it taper off, does it level off?

I think Q2 is the exception - about 10%. Let me clarify - it's about 10% operating versus growth over the first quarter, and this is primarily, we haven't had a lot of tape out in the second quarter, and I think that the line will be smoothing down, smoothing out in the third quarter. So Q2 is really one, really in the one quarter where we have more tape out primarily from the non-driver products.

Got it, okay, but smoothing out in the second half. It's not going down in the second half, it's smoothing out because you have continued tape outs I imagine?

I think the trend is, it won't go down, it won't go down, but I think it will maintain at that level, or give and take a few percentage points up or down, but it won't go down or go up significantly in the third quarter.

I think if you look at just one quarter, there are a lot of uncertainties because you have a number of expensive tape outs, it goes up dramatically, and then it goes down because those tape outs are not happening in those following quarters. So I think one quarter may not be a very good indication. I think in the long-term I would say non-driver, comparatively non-driver R&D expenses with growth will be higher than driver. I think that is a long-term trend for Himax. We will certainly observe very closely how our suppliers and bottom lines are growing in managing the long-term trend of our R&D expenses, in particular for (inaudible) non-driver segment.

But as I said, the opportunities are amazing, so we really feel very strongly, we need to move aggressive over there, at this point.

Okay great, and then one small question - Jordan you had alluded earlier in the call about some shortage of some specific components at handset companies, that they were missing some specific components as well that limited their ability to ship -what were you referring to?

Oh that was--

That was the drivers--

--that is for Q1 - and that is not handset, that is panel industry overall, and things like polariser or certain other components like palm management IT, et cetera. Those are for Q1. And actually towards the end of Q1 you could see a lot of size of material (inaudible) of LCD makers they were very very busy, because so many changes coming from their sales forecasts and then so much to do to chase on those materials. I mean polariser would be a good example. I'm not sure I can measure it all, but--

No, that gives me some idea. Have those relaxed in the second quarter?

Well they are (inaudible). It's kind of slow, it's driver IC requirements. Driver IC has the longest lead time, so in the, towards the end of first quarter, you know, other parts are more problematic than driver IC, but I think second quarter it is probably fair to say that driver IC is now the number one problem, because we do have, still require the longest lead time.

Okay, and finally if you just look out on the landscape on capacity, I'm sure you've been searching for it, is there any hope in the second half that you're going to see some capacity come online? I mean there are some fabs that are getting converted over I imagine, given the shortages. You don't see anything like that occurring?

You are referring to foundry I assume?

Yes, I mean there is certainly still eight inch capacity out there, I just wonder if that's going to get converted or not to drivers?

Well, for us, for example [Vanguard] earlier in the year, have announced they [have bought the tools] for expansion for their factory, which is their [old site] which they acquired from Wincount. And those (inaudible) will be, you know, the majority of load capacity will be for Himax.

Okay.

I can, you know, that is a major addition, but I think to qualify or to be able to start really utilising a new (inaudible) capacity - it is actually a very difficult thing technically. It takes a lot of effort engineering wise, and also (inaudible), not just by our sales, but also by our customer and in many cases by our customers' customers.

So it is not something you can just, you know, switch on immediately, and that applies to everybody.

Okay. Thank you.

Thank you. Ladies and gentlemen there are no further questions at this time.

Gentlemen, do you have any closing comments?

Well thank you everyone again for being with us today, and we look forward to talking to you again at our next earnings call in early August.

Thank you.

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