奇景光電 (HIMX) 2010 Q3 法說會逐字稿

Greetings and welcome to the Himax Technologies' Third Quarter 2010 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 host, Joseph Villalta of the Ruth Group. Thank you. Mr. Villalta, you may now begin.

Thank you, operator, and welcome to Himax's third quarter 2010 earnings call. Joining us from the Company are Mr. Jordan Wu, President and Chief Executive Officer, and Mrs. Jessica Pan, our Acting 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 646-536-7009. Or you can 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 results or events to differ materially from those described in this 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 and 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; the uncertainty of our Taiwan listing plan, which is still under review by the Taiwan regulatory authorities and subject to change due to, among others, changes in either Taiwan or U.S. 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 20-F for the year ended December 31st, 2009 filed with the SEC dated June 3rd, 2010 as amended.

Except for the Company's full year 2009 financials, which were provided on the Company's 20-F, filed with the SEC on June 3rd, 2010, 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 subjected to the same review and scrutiny including, including internal auditing procedures and audit by independent auditors to which we subject our annual consolidated financial statements, and may vary materially from the unaudited consolidated financial information for the same period. Any evaluation of the financial information included in this conference call should also take into account our published audited consolidated financial statements and the notes to those statements. In addition, the financial information included in this conference call is not 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 participating in today's conference call to discuss our third quarter 2010 financial results. Let me begin with a brief overview for the quarter before we discuss our outlook for the fourth quarter. Then our acting CFO, Jessica Pan, will then provide additional details on our third quarter financial results.

Our third quarter 2010 revenues, gross margin and earnings per ADS were all in line with our guidance updated in early October.

Our third quarter revenues came in at $138.3 million, which represents a 31.9% decline year-over-year and a 26.3% decline sequentially. The decline was primarily due to the significant order cutback in August and September when panel inventory levels became a concern for panel makers.

In terms of product mix, revenues from large panel display drivers were $72.5 million, down 48.0% from a year ago and down 32.8% sequentially. Large panel drivers accounted for 52.4% of our total revenue for the third quarter compared to 68.6% a year ago and 57.4% in the previous quarter.

Revenues from small- and medium-sized applications were $54.1 million in the third quarter, up 11.8% from the same period last year and down 17.6% sequential. Small- and medium-sized applications accounted for 39.2% of total revenues for the third quarter, a record level since our inception, compared to 23.8% for the same period last year and 35.0% in the previous quarter.

Revenues from our non-driver businesses were $11.7 million, down 24.2% from the same period last year and down 18.0% sequentially. Non-driver products accounted for 8.4% of our total revenues, compared to 7.6% a years ago and 7.6% in the previous quarter.

The Q3 non-driver sales, especially those from our LCOS product line, were lower than our expectation. Many of our LCOS customers built significantly inventory during Q2, anticipating strong market demand over certain new product designs. However, beginning from the end of Q2, the Chinese government took measures to crack down on the on the white-box handset market which, at this stage, is still a major end market for our LCOS products.

Facing a high inventory level, our customers have slowed down placing new orders to us starting in Q3 and toward the beginning of Q4. We are now seeing order flows returning towards normal levels as those overbuilt inventories were gradually being consumed.

We remain positive for the prospects of the LCOS pico-projector market next years. We continue to boast the most comprehensive product line with the most widespread optical engine partnerships. We are also working closely with certain top tier end customers, some targeting to launch innovative applications using our LCOS technology within next year.

Our GAAP gross margin for the third quarter was 22.9%, up 250 basis points from 20.4% a year earlier and 20.4% in the previous quarter. The sequential improvement in gross margin was primarily due to a more favorable product mix.

For the third quarter, GAAP net income was $0.4 million, or $0.03 per ADS, compared to $8.8 million, or $0.05 per ADS, a year ago, and $12.0 million, or $0.07 per ADS, in the prior quarter.

Excluding share-based compensation and acquisition related charges, our non-GAAP net income was $7 million, or $0.04 per ADS, compared to $16.2 million, or uds0.09 per ADS for the same period last year, and $14.0 million, or $0.08 per ADS, in the previous quarter.

We grant our annual RSUs, or Restricted Share Units, at the end of each September, which leads to higher Q3 GAAP operating expenses each year. The total value of our 2010 grant, RSU grant, is approximately $9 million, representing a 25% decline as compared to approximately $12 million in 2009. Jessica will elaborate more on this later.

This year, in our efforts to allow more distributable RSUs to the team, Biing-Seng Wu, our Chairman, Chih-Chung Tsai, Chief Technology Officer, along with myself have voluntarily reduced our RSU amount proposed by the compensation committee to $1. Moreover, several senior managers also agreed to contribute half of their RSUs to the pool, which were then reallocated to compensate other employees. Our goal is to provide competitive compensation to our team, while limiting RSU expenses to shareholders in a year when our financial performance is not as strong as those in years past.

We believe we are bottoming out from the current trough and our global driver IC market share is expected to grow again next year. Our core competence in display drivers remains strong as demonstrated by the steady year-over-year revenue growth of our small and medium-sized panel drivers. Large-sized panel display drivers remains a business we are fully committed to. Looking ahead, China's aggressive capacity expansion plans have made it the market with the highest growth potential over the next few years. We are confident that we are in a strong position to capture a major driver IC market share in China at this time of fast expansion.

An area to highlight is our 2D to 3D conversion solutions, which have been embedded into a number of worldwide first-tier TV brands, particularly in China and Japan. We continue to see enthusiastic adoption of our solutions from many other customers covering TV and other applications. Capped by the availability of 3D panels, however, our shipment this year has been insignificant.

Today 3D panels are offered only by a small number of panel makers with a limited number of models. However, we are seeing more display makers offering a wide variety of 3D panels to the market, using different technologies. We expect our world leading 2D to 3D conversion products to benefit strongly next year with the increasing shipment and penetration of 3D panels.

Revenues from CMOS image sensors and WLED drivers each experienced over 100% quarter-over-quarter growth in the third quarter. We expect both segments to carry the strong momentum into the fourth quarter and next year. Our new generation sensors, in particular, are very competitive in cost and performance and are being adopted by numerous handset, notebook and web camera customers. We anticipate an explosive growth for our sensor sales next year.

Looking forward to the fourth quarter of 2010, we expect revenues to be approximately flat, gross margin to be down by 1 to 2 percentage points sequentially, and GAAP earnings per ADS to be in the range of $0.04 to $0.06.

Jessica will provide more details on our earnings per ADS guidance. Now, let me turn over to Jessica Pan, our Acting CFO, for further details on our financials.

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

For the third quarter, our GAAP operating expenses were $32.4 million, up 5.7% from $30.6 million a year ago and up 27.9% from $25.3 million in the previous quarter. The significant sequential increase was primarily due to the expenses resulting from the immediately vesting portion of 2010 RSU grant.

As Jordan just pointed out, the total value of our 2010 RSUs is approximately $9 million, representing a 25% decline as compared to approximately $12 million in 2009. Of the $9 million, approximately 65% were immediately vested and expensed in the third quarter and paid in cash. The remainder will be paid in three equal installments in stocks at the first, second, and third anniversaries after the grant. The maximum share dilution in the next three years resulting from the 2010 RSU grant is about 0.6% of our total shares outstanding.

The higher GAAP operating expenses led to a GAAP operating loss of $0.7 million for the third quarter, as compared to a GAAP operating income of $10.8 million in the same period last year and $13.0 million in the prior quarter.

Excluding share based compensation and acquisition related charges, our non-GAAP gross margin for the third quarter was 23.0%, compared to 20.5% a year ago and 20.4% a quarter ago. Non-GAAP operating income for the third quarter was $7.3 million, as compared to $20.0 million in the same period last year and $15.4 million in the previous quarter.

Share based compensation and acquisition related charges for the third quarter were $6.3 million and $0.3 million respectively, compared to $7.0 million and $0.4 million a year earlier and $1.7 million and $0.3 million a quarter a go.

In the third quarter, net cash outflow from operating activities was $20.3 million compared to a net cash inflow of $2.3 million in the previous quarter.

Now turning to the balance sheet, our cash, cash equivalents and marketable securities available for sale were uad82.6 million at the end of September, compared to $157.9 million a quarter ago. We paid out our annual cash dividend of approximately $44 million, or $0.25 per ADS in August.

In addition, we incurred a net working capital outflow of $14 million in Q3, which was mainly a result of inventory buildup as our customers suddenly cut back on orders during the quarter. Other major net cash outflow items in Q3 also included RSU, share buyback and certain long-term investments.

The inventory amount at the end of third quarter is $111.7 million. With business gradually recovering from the bottom in the end of Q3, we expect the inventory level to decline towards end of the year.

By using U.S. dollars as our functional currency, the recent fluctuation in foreign exchange has had a very limited impact on us.

We have concluded our $50 million share buyback announced in November 2008. Under the program, we repurchased approximately 19.3 million ADS, or 9.9% of our total outstanding shares from the open market and voided the underlying shares accordingly. Since our IPO in March 2006, we've returned over $300 million by way of cash dividend and share repurchase.

In the fourth quarter 2010, we recovered approximately $8.6 million in cash from the $25.3 million of bad debt expense we wrote off for the default of SVA-NEC during the fourth quarter of 2008. This bad debt recovery has been taken into account when Jordan provided our fourth quarter guidance a while ago. We are not certain if there will be subsequent payments but we will continue to seek further recovery of the bad debt from SVA-NEC.

The fourth quarter 2010 earnings per ADS guidance that Jordan provided earlier is based on the assumption of 355 million diluted weighted average ordinary shares, with one ADS representing two ordinary shares.

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

(Operator Instructions). Our first question comes from Jay Srivatsa from Chardan Capital Markets.

A couple of questions on the inventory, can you tell us what is the makeup of inventory in terms of large panel versus the small panel?

I think they are pretty much in line with our sales. When our sales, meaning there's no final [price] ordinary inventory build up in either segment. And I think I want to also advertise that after all these years our customers and our sales together have really quite successfully combined our product designs for a number of vendor products, which are quite wide across different product models, so given that these are standard products, so I think the life time of such products quite safe from our point of view so we are not particularly worried about inventory levels at this point.

Okay you mentioned that order activity seems to be picking up a little bit going into December. Could you share with us are you seeing it across the board in different geographies or is it specifically coming from a certain geography like say China?

Geography if you are referring to end customers then we don't know. If you are referring to our direct customers, which are module makers, then certainly China has increased. We are relatively large in several markets over there. I guess it can be probably better traced by way of our applications. We have seen softer demand coming from monitors and cell phones in particular, from these particular segments and we shared with our customers and I guess their comments, the sort of the consensus to us is that our TV inventory still remains a bit on the high side compared to monitors so we are seeing stronger monitor demand in Q4 and therefore I think also our customer experienced something relative in Q3.

But that applies to both front end and channel market and our (inaudible) inventories are being consumed. I think the orders are coming back quite strong but I am sorry if you have an echo. I don't know whether you guys are experiencing problems. Anyway I think we should carry on.

Thank you.

Yes thank you, Jay.

Dan Heyler, Bank of America, Merrill Lynch.

I want just a couple of things. Could you break out what the sales mix was between large and small quickly?

They have come down to about quite similar with small panel still probably 2% or 3% higher than large panel but other than that they are becoming more and more similar. And I think there is detail on product as well so we are seeing with certain particular front end customers, end user customers the margins are better and certainly high end products with this competition, the margin is better. Where you talk about certain very big volumes, standard products such as [2VGA] products for cell phone, I think the margin is certainly lower so it really varies according to your customers and products.

No just the percentage mix, do you have that for third quarter and second quarter?

You mean the margin or the--?

Contribution to sales, contribution to sales.

In Q3 let me see -- our large panel sales were about 52% and small panel including cell phone was about 39%.

Okay what was the second quarter number? Do you have that?

Second quarter number yes we do. Large panel was a bit higher and small panel was a bit lower. Could you hold on one second?

Sure no problem.

Right okay here we go. In Q2 large panel was about 57% to 58% and small panel was about 35%, almost 35%. And actually we are seeing the trend tracking into Q4 for as well. We are -- based on the current forecast our Q4 small panel will be just over 40%. Our large panel will be about exactly half.

Okay and you alluded to the crackdown on handsets so -- in China. Has that been resolved? Has that stabilized?

I think results gradually and slowing, I think there's no particular say when the markets say okay starting it's going to start from this day and it's going to end from that day so things don't pace but it's a gradual thing but we are hearing so much noise from our customers talking about these in particular second tier Chinese panel makers and/or cell phone makers, so certainly that was a factor.

As far as when exactly it is going to end I think it's hard to say but what we are trying to say, we are trying to comment on our quite frankly disappointing Q3 sales for LCOS products, that we explained we refer to the Chinese government crackdown and, as I said in my earlier comments, our customers for LCOS because they just finished the certain new product designs and they were very excited about the cost and performance of those products. So I guess they placed too much orders in Q2 so our Q2 was highly unusual from in retrospect.

And Q3 what is correct now the direct results on in particular the second tier players was that they literally stopped everything, or they slowed down their business substantially, so that certainly impacted our LCOS sales.

To some extent, that also explains our Q4 strong, anticipated strong driver of sales for our cell phone market because we have seen strong momentum picking up already.

And is that driven by the relaxed crackdown and inventory replenishment or could you explain that a little bit on the small drivers?

I think it's mainly inventory replenishment because what happened is they are watching over their customers a lot more closely but that doesn't mean business stopped completely so, given time the inventory, the old inventory level, will be fully consumed and they're to come back to buy again, so I think that's what's happening.

Okay if that's the case then why wouldn't the LCOS pick up strongly as well?

Well, as I've said, LCOS July was the peak -- sorry, June was the peak and then July came down a bit and then we are seeing very pretty dramatic August and September slow down, with September being the bottom and we are seeing the trough carry into Q4 in October and then we are seeing pretty steady returns in November and then looking forward, December. So we are seeing this fast up kind of shape with September and October being the bottom for LCOS. LCOS picks up later than our cell phone driver and I can't really explain why.

Okay so do you think there will be a pick up in December ahead of the Lunar New Year or is that too late?

I'm sorry; can you repeat that?

Well the typical, the Lunar New Year pick up right for the Chinese New Year?

Oh okay. I think certainly yes. I think customers are [paying less]. They are picking up their orders again in preparation for Chinese New Year yes.

Okay finally and then I'm going to get back in the queue, could you -- it looks like I think you talked about flat revenue overall. Could you give us what your ASP units and ASPR for panels on an area basis, what your growth will be in the fourth quarter and then the ASP decline?

Right. ASP, certainly ASP cases are always impacted, influenced by product mix, so I guess what you are interested in is overall sort of price pressure coming from our customers. There are some price pressures, not -- probably not as significant as average but we feel -- in Q2 there was a shortage, if you recall, and so we were able to raise our sales price. In Q3 sales price was flat compared to Q2 and now customers are [complaining] slightly I guess for the ASP so I think we know our ASP I would say on average are less than 5% Q4 compared to Q3.

What percent growth, change in shipments then for drivers?

I'm sorry?

The shipment, the change in shipments, quarter-on-quarter change in shipments?

Oh change in shipments, we -- our visibility is slightly tricky because you appreciate when we provide guidance we always leave some [certain] cushion so if I tell you the effect numbers it's going to be higher than flat so it's a bit -- it's going to be a bit but we are seeing between zero to 5% growth for large panel and double-digit low teens growth for small panel and about mid teens growth for other products, in our driver products. But then, I mean it certainly doesn't add up compared to flat sales so you get the idea.

Got it yes and that third quarter what was the change there?

That's quarter-to-quarter change yes.

So basically just in line with your aggregated so large panel units were down how much in the third quarter?

In the third quarter?

Yes for large panel driver.

Now about 35%.

Okay right okay. Thank you.

(Operator Instructions). We appear to have no further questions. I'd like to turn the floor back over to the speakers for any closing comments.

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

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