奇景光電 (HIMX) 2010 Q2 法說會逐字稿

Greetings and welcome to the Himax Technologies' Second Quarter 2010 Earnings Conference Call. (Operator Instructions). As a reminder, this conference is being recorded.

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

Thank you, operator. Welcome, everyone, to Himax's Second 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 comments, we'll 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 646-536-7028 or you can get a 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 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 the conference call.

Factors that could cause actual events or results to differ materially include, but not limited to, general business 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; the uncertainty of continued success in technological innovations and 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 the Form 20-F for the year ended December 31, 2009, filed with the SEC dated June 3, 2010, as amended.

Except for the Company's full-year 2009 financials, which we provided on the Company's 20-F, filed with the SEC on June 3, 2010, the financial information included in this conference call is unaudited and consolidated and prepared in accordance with the 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 (sic -- see Press Release) consolidated financial information for the same period. Any evaluation of the financial information included in this conference should also take into account our published audited consolidated financial statements and the notes to those statements.

In addition, the financial information 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 joining us today to discuss our second quarter 2010 financial results. I will start with a brief overview of our performance during the quarter and discuss our outlook for the first quarter. Our CFO, Max Chan, will then provide additional details on our financial performance for the quarter.

Our second quarter 2010 revenue, gross margin and earnings per ADS were all in line with our guidance, updated in early July. Our second quarter revenues came in at $187.7 million, representing a 1.5% growth year-over-year and a 7% growth sequentially.

In terms of product mix, revenues from large panel display drivers were $107.8 million, down 21.2% from a year ago and down 5.8% sequentially. Large panel drivers accounted for 57.4% of our total revenues for the second quarter, compared to 74% a year ago and 65.2% in the previous quarter.

Revenues from small- and medium-sized applications achieved a record level of $65.7 million in the second quarter, up 74.9% from the same period last year and up 42% sequentially. Small- and medium-sized applications accounted for 35% of total revenues, compared to 20.3% for the same period last year and 26.4% in the previous quarter. This strong sequential and year-over-year growth for small- and medium-sized products reflects our continued efforts and solid execution to diversify our product portfolio and customer base.

Revenues from our non-driver business were $14.2 million, up 34.9% from the same period last year and down 3.7% sequentially. Non-driver products accounted for 7.6% of our total revenues, compared to 5.7% a year ago and 8.4% in the previous quarter.

Our GAAP gross margin for the second quarter was 20.4%, compared to 20.8% a year earlier and 19.8% in the previous quarter. The sequential improvement in gross margin was primarily a combined result of gross margin improvement in some of our major non-driver products and our being able to raise selling prices of display drivers, which partially offset the increase in our back-end costs.

For the second quarter, GAAP net income was $12 million or $0.07 per ADS, compared to $15.4 million or $0.08 per ADS a year ago and $9.1 million or $0.05 per ADS in the prior quarter. Max will elaborate more on this later.

Now I'd like to talk about our product portfolio. We expanded our small- and medium-sized market share and further strengthened our market position. Most notably, in the first half of 2010, our display driver revenues for the handset applications achieved 84.6% year-over-year growth. We believe our complete product lineup, coupled with our strategic marketing and solid execution, will continue to drive growth and increase our market share.

Our LCOS product line, including LCOS panels and their associated controller ICs, continued to dominate this market segment. In particular, our proprietary color-filter LCOS solutions, which enable easy mass production, continue to be widely adopted by customers for a broad range of pico-projector applications, in both stand-alone and or embedded types.

In the first half of 2010, we have already shipped more LCOS panels than we delivered in the full year 2009. We are confident that we are well positioned to capitalize on the emerging pico-projector industry, which we believe is still in the early stage of a long-term product life cycle.

Our analog IC line, comprising primarily of power ICs and white LED drivers, is another important product category at Himax. Moreover, thanks to the ramp-up of WLED drivers for notebooks and TV applications, revenues from our analog IC line more than doubled in the first half of 2010, both sequentially and year over year. We expect this momentum to continue, with increased penetration of white LED back-light in TFT-LCD panels and the growing adoption of our white LED drivers.

We achieved another important milestone in July 2010 with the commencement of small-volume shipments of our 2D-to-3D chip to a major TV brand. Our real-time 2D-to-3D conversion solutions, suitable for all types of 3D displays, has achieved overwhelming interest from customers since we introduced this technology in February.

Customers are keen to incorporate our solutions into a number of 3D-ready displays to capitalize on the early adopter advantages in the 3D era. While our design-in and sales activities have been intensive, our near-term shipments are constrained by the limited availability of 3D panels. We expect the supply shortage to ease in our next few quarters.

In our CMOS image sensor product line, on top of shipments for handsets, we started small-volume shipments for notebook PC applications to one of the world's top notebook brands. The adoption by this world-class brand validates our product and technology competitiveness. With the sampling of our next generation CMOS image sensors, we are on track to be awarded with more design-in projects for a wider range of customers.

Before providing third quarter 2010 guidance, I would like to share with you some of my recent observations.

We are seeing softening demand since June with talk of end-product sell-through noticeably slowing down and customers getting cautious on inventory levels. Over the last 10 days, in particular, literally all of our customers cut back their forecasts significantly for August and September.

While we are actively talking to our customers, we have not yet come to a conclusion as to whether this is a short-term overreaction owning to customers' concerns over excess inventory and weakening demand or this has longer-term implications. While the forecast reduction came from a wide range of customers, covering a broad range of products, we are still uncertain if this is specific to Himax or this is an industry-wide phenomenon. That said, demand for our handset display drivers remains relatively stable and we are still having difficulties fulfilling all those demands due to tight foundry supplies.

In response to uncertain market conditions, we have been managing our production plan and inventory level carefully. Our inventory days at the end of second quarter was 48 days, remaining within the normal course of our business, as compared to 52 days a year ago and 42 days a quarter ago.

Despite recent concerns over excess inventory and weakening demand, industry wide, we have seen our gross margin improve since the beginning of the year. We expect this trend to continue, primarily due to better product mix, and solid execution of our price strategies and cost reduction measures. In particular, we are pleased to see improved gross margins for some of our major non-driver products.

Take our LCOS pico project product line as an example. With increased shipment and higher capacity utilization, gross margin and gross profit continue to grow. We believe similar economics of scale are taking place in some of our non-driver product lines, which will eventually be growth drivers of both of our top-line revenue and bottom-line profit in the not-too-distant future.

Now comes to our guidance. In the third quarter 2010, we expect revenues to decline by 13% to 18%, gross margin to increase by 1 to 2 percentage points, sequentially, and GAAP earnings per ADS to be in the range of $0.00 to $0.02.

Our third quarter GAAP earnings per ADS guidance take into account our 2010 grant of restricted share units, or RSUs, at the end of September. The 2010 RSU, subject to Himax Board approval, is assumed to be valued in the range of $9 million to $10 million, of which approximately 60% will be vested and expensed immediately on the grant date.

Excluding shared-based compensation and acquisition-related charges, our third quarter 2010 non-GAAP earnings per ADS are expected to be between $0.04 to $0.06.

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

Thank you, Jordan. I will now provide additional details on our second quarter financial results.

For the second quarter, our GAAP operating expenses were $25.3 million, up 7.2% from $23.6 million a year ago and up 2.8% from $24.6 million in the previous quarter. GAAP operating income for the second quarter was $13 million, down 12% from $14.8 million in the same period last year, and up 28.7% from $10.1 million in the prior quarter.

Excluding share-based compensation and acquisition-related charges, our non-GAAP gross margin for the second quarter was 20.4%, compared to 20.8% a year ago and 19.8% a quarter ago. Non-GAAP operating income for the second quarter was $15.4 million, down from $17.7 million in the same period last year, and up from $12.5 million in the previous quarter.

Share-based compensation and acquisition-related charges for the second quarter were $1.7 million and $0.3 million, respectively, compared to $2.1 million and $0.4 million a year ago.

Non-GAAP net income was $14 million or $0.08 per ADS, down from $17.9 million or $0.10 per ADS for the same period last year, and up from $11.2 million or $0.06 per ADS in the previous quarter.

In the second quarter, net cash inflow from operating activities was $2.3 million, compared to a net cash inflow of $45.8 million in the previous quarter. Our cash, cash equivalents and marketable securities available for sale were $157.9 million at the end of June, compared to $161.1 million a quarter ago.

As announced previously, we scheduled our annual dividend of $0.25 per ADS, or $0.125 per ordinary share, to be paid on August 13, 2010, to shareholders of record as of August 6, 2010. The total dividend payout amount is approximately $44 million.

In May, we announced that we are pursuing a TDR listing on the Taiwan Stock Exchange as an alternative to the prior application of a primary listing of our ordinary shares. As Himax is a Cayman Islands company listed on NASDAQ, a major benefit of a TDR listing for Himax, as opposed to primary listing as initially planned, is that maintenance costs of listing in Taiwan will likely be substantially lower because additional compliance requirements in the case of TDR listing is rather limited.

We are preparing our semi-annual financial statements to be reviewed by our external auditor as a required procedure for our TDR application. We are also in further discussions with the Taiwan authorities on the details of our TDR mechanism. We will continue to provide updates on our TDR plans as they become available.

As Jordan discussed, excluding shared-based compensation and acquisition-related charges, our non-GAAP earnings per ADS guidance for the third quarter would be $0.04 to $0.06, as compared to the GAAP earnings per ADS guidance for the third quarter of $0.00 to $0.02. The difference is primarily due to our 2010 RSU grant at the end of September.

As Jordan mentioned earlier, the total value of the award is expected to be in the range of $9 million to $10 million, of which approximately 60% would be vested and expensed immediately on the grant date, settled in cash, with the balance being vested in three equal installments in three years and amortized over three years accordingly.

This vesting and expensing schedule for our annual RSU grant has been a consistent practice since our IPO in 2006. We are studying a new bonus scheme for 2011, under which the expenses will be expensed more evenly over the four quarters of a year. We will provide further updates in our next earnings call, scheduled in early November.

During the quarter, we continued to repurchase our ADSs and, thereby, canceled our underlying ordinary shares accordingly. Share repurchases in the second quarter totaled $2.9 million or approximately 1 million ADSs. At the end of the second quarter 2010, we had roughly 4.1 million remaining in the current authorization share repurchase plan.

The third quarter 2010 earnings per ADS guidance that Jordan provided earlier is based on the assumption of having 357 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 the line of Jay Srivatsa with Chardan Capital Markets. Please go ahead.

Yes. Thanks for taking my question. Typically, in the past, Q4 has been a weak quarter for you with Q2 being much stronger. Now given that you have guided for a pretty significant drop in revenues in the September quarter, what's your outlook in Q4, without getting into specific numbers?

Right. As I said in our prepared remarks, we are actually-- this significant drop for Q3 drivers came as a bit of a surprise to us, as well and it all took place, as I said earlier, over the last about 10 days, also.

So we have been talking to our customers actively and I think the-- again, I think I said very much what we wanted to say in our remarks. I just want to elaborate that it appears to us the general comments coming from our customers are a few things.

One, there is a high degree of uncertainty in the current market environment. So I think our customers are taking-- because of component pressures taking a cautious measure, given the present market situation. And (inaudible) the cause-- the major cause for that was Q2, as we all know, is traditionally a weak season. However, Q2 was relatively strong, as we all witnessed.

So a lot of customers were actually taking in too many-- too high a continuing inventory level, seeing the strong market demand and also with the concern that there'll be a shortage situation. Now-- so once we began Q3, the demand is not as strong as most people anticipated.

So I think probably, starting from, again, a few days ago, we are seeing a widespread reduction of inventory levels and, thereby, forecasts (inaudible) to turnaround. And many customers are commenting that if Q3 remains weak and there's a possibility-- there's a good possibility that Q4 may actually rebound, because we all know Q4 is a very important season for sell through eventually.

So I think, based on a lot of customer comments, that demand is still there, however the current reduction in their forecasts is a reflection of a correction over the previously high level inventories. So everybody seems to be hoping that if the sell-through is smooth in Q3 then we may see a better season in Q4 compared to history.

Having said that, as I said earlier, we are actively talking to customers, trying to figure out what is going on.

Yes, I mean, I remember last quarter's call you had mentioned that the tightness in capacity, which is a big problem, could be like a mid- to long-term trend. But yet, within one quarter it's turned around where it looks like there's possibly some excess inventory floating around.

How do you manage this kind of volatility in your business, going forward?

I think we-- you're absolutely right. In Q2 we suffered declines from shortages, and now, other than several display driver sockets, which is still in a shortage situation, we-- I think we are certainly turning a lot more cautious in (inaudible) and I think we just we just need to be sensible and try to adapt to what the market is telling us.

But having said that, we are not really that worried about the eventual sell-through of our large-panel drivers, because, again, this is a very tight design-in process and customers are delaying their [shipments] (inaudible) for this (inaudible) demand all together.

So I think if you look at today's level, given that the last about 10 days was still a relatively modest forecast reduction, certainly if take today's inventory level and compare to the shipments of this quarter, we are a bit high. However, as I said, we are not really that worried about the sell-through of this inventory.

But you pointed out a good question. We just have to react very fast, actually, to the market's condition.

Okay. In terms of the demand in the large panel, are you seeing weakness in TVs and monitors or either or could you kind of elaborate a little bit more on that?

Most customers are telling us it's across the board, laptops, monitors and TVs and it's very much of an over-build of inventories in Q2, because people overreacted to the concern for shortage. And now we have come to the realization that the demand is not really is not as strong as people had anticipated.

So-- and if-- see this [pessimism] hovers across the board to, literally, all product areas. Again, to Himax, anyway, it would be exceptional if sales on IC push a (inaudible) shortage. We are seeing a decline-- even (inaudible), we are seeing a decline, however, the shortage situation theory may, but all other product areas-- again, all product areas have declined, but the (inaudible) shortage situation has been relieved.

Thank you.

Thank you.

(Operator Instructions).

Any more questions?

Okay, I think some of maybe are surprised by our [pricing], and I would say, so are we. And at the moment, we are just talking to-- updating the status with our customers (inaudible), so I think it occurred to us that in a short-term-- in the case of short-term condition, anyway, we are seeing a lot of uncertainty still going around in the marketplace. I think that is pretty apparent to us.

As far as how the Q4 is going to go and even Q3, whether there will be further changes, further-- whether there will be further changes, one way or the other, we really don't know. But I think there is a higher degree of uncertainty at the moment, compared to the normal situation.

We have no further questions at this time. I'll just the floor back over to management for closing comments.

Okay, thank you. Well, thank you, everyone, for taking time to join us today. We look forward to talking to you again at our next earnings call in early November with an update on our third quarter results. Thank you.

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