奇景光電 (HIMX) 2010 Q4 法說會逐字稿

Greetings and welcome to the Himax Technologies, Inc., fourth quarter and 2010 full-year earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Joseph Villalta of the Ruth Group. Thank you, Mr. Villalta. You may begin.

Thank you, Doug. Welcome, everyone, to Himax's fourth quarter and full-year 2010 earnings conference call. Joining us from the Company are Mr. Jordan Wu, President and Chief Executive Officer; and Mrs. Jessica Pan, Acting Chief Financial Officer. After the Company's prepared comments, we will have time for any questions.

If you have not yet received a copy of today's results release, please call The Ruth Group at 646-536-7009. 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 this conference call.

Factors that could cause actual results and the Taiwanese 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 of the driver and non-driver products developed by the Company; demand for end-user applications products; reliance on a small group of principal customers; the uncertainty of continued success in technological innovations; our ability to develop and protect our intellectual property; pricing pressures, including declines in average selling prices; changes in customer order patterns; 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 the dual listing plan, changes in either Taiwan or US authorities' policies; Taiwan Stock Exchange and Taiwan authorities' acceptance of the Company's Taiwan listing application, changes in capital market conditions in either Taiwan or the US; capital market acceptance of our share offering; the capability to maintain a 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 31, 2009, filed with SEC on -- dated June 3, 2010, as amended.

Except for the Company's full year of 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 US GAAP. Such financial information is generated internally and has not been subjected to the same review and scrutiny, including internal and auditing procedures and audit by independent auditors, to which we subject our annual consolidated financial statements, and may vary materially from the 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, everyone, for joining us on today's call.

In today's earnings call, in addition to reporting our performance in the fourth quarter, I will also summarize our results for 2010 and highlight key milestones we achieved last year. I will then provide our outlook for the first quarter 2011 and outline our strategic focus areas for 2011. Our Acting CFO, Jessica Pan, will then provide further details on our financial performance.

To begin, our fourth quarter results were either in line or better than the guidance we provided in the previous earnings call. Our revenue and GAAP earnings per share were better than we had guided, while our gross margin came in line with our forecast.

Our fourth quarter revenues came in at $141.2 million, representing a 21.0% decline year-over-year and 2.1% growth sequentially.

Revenues from large panel display drivers were $71.1 million, down 44.6% from a year ago and down 1.9% sequentially. Large panel drivers accounted for 50.3% of our total revenues for the fourth quarter compared to 71.8% a year ago and 52.4% in the previous quarter.

Revenues from small and medium-sized applications continued to substantially outpace those from large panels. They were $57.5 million, up 52.3% from the same period last year and up 6.1% sequentially. Small and medium-sized applications accounted for 40.7% of total revenues for the fourth quarter, as compared to 21.1% for the same period last year, and 39.2% in the previous quarter.

Revenues from our non-driver businesses were $12.6 million, down 0.4% from the same period last year and up 8.6% sequentially. Our non-driver products accounted for 9.0% of our total revenues as compared to 7.1% a year ago and 8.4% in the previous quarter.

Our GAAP gross margin for the fourth quarter was 21.5%, as compared to 20% a year earlier, and 22.9% in the previous quarter.

For the fourth quarter, GAAP net income was $11.7 million, or $0.07 per ADS, compared to $11.0 million, or $0.06 per ADS, a year ago, and $0.4 million, or $0.003 per ADS in the prior quarter. Earnings per ADS for the fourth quarter were higher than we had anticipated, primarily due to the lower-than-expected R&D expenses.

It has been our standard practice for years, virtually all of our revenues and costs of goods sold are priced in US dollars. We are, therefore, naturally hedged in terms of gross margin from foreign exchange fluctuation. Also as a way to obtain a natural hedge for our US-dollar-based balance sheet, we keep essentially all of our cash in US dollars.

However, we do maintain a small portion of cash in NT dollars and other non-US-dollar foreign currencies for local working capital purposes. We may, therefore, still incur some foreign exchange gains or losses from time to time.

Now, let me summarize our 2010 performance. 2010 was a year full of both challenges and excitement. While we lost share in large panel drivers, we also gained a lot of ground in small and medium-sized panels. Meanwhile, we also picked up strong momentum last year across all of our non-driver businesses, which we have cultivated for a long time. We believe the strong momentum will continue into this year and beyond.

Compared to smaller panels, large-panel drivers have become a market with customer concentration becoming a way of life as the amount of capital required to build a new generation fab represents a very high barrier for entry. We suffered from a significant decline in large panel driver business last year primarily because one of our major large panel customers decided to diversify their driver IC supply base.

However, we were able to grow our small and medium-sized driver businesses and significantly expand our market share there. The market for smaller size panels is a lot more fragmented with a much larger number of customers participating in the market space. The fact that we were able to achieve outstanding performance in this area last year was a strong demonstration of our continued competitiveness in the driver IC industry.

Meanwhile, our non-driver products remain on an excellent growth track, showing strong momentum and likely to reach a double-digit percentage of our total revenue in the near future.

Our revenues totaled $642.7 million in 2010, representing a 7.2% decline year-over-year. The decline was caused by the 25.7% decline year-over-year on large-panel drivers, which represented 57% of 2010 revenue, as compared to 71.3% in 2009.

We don't expect further loss of market share for large-sized drivers with our existing major customers for this year. Moreover, we are confident that we will gain share in China, where there are aggressive panel capacity expansion plans offering attractive new driver business opportunities in the near term, especially in the large panel segment.

Small- and medium-sized drivers, on the other hand, grew 46.5% year-over-year, representing 34.8% of our total revenue, as compared to 22% a year ago. This strong growth momentum in the small and medium drivers will continue into this year, thanks to the expanding markets for several emerging product segments, especially smart phones and tablet PCs.

Non-driver products grew 13.8% year over year, representing 8.2% of our total sales, as compared to 6.7% a year ago. We achieved numerous milestones for non-driver products in 2010. Firstly, 2010 was the year when we commenced mass production for several new product areas, including CMOS image sensors, wafer-level optics, wafer-level camera modules, 2D to 3D conversion solutions and touch controller ICs.

These milestones are illustrations of our strong R&D capability and our commitment to a more diversified product portfolio. It also paved the way for strong long-term growth.

Moreover, our LCOS picoprojector solutions, power management ICs and LED drivers all showed significant year-over-year shipment and revenue growth in 2010. We are confident that the strong momentum will continue into 2011 and beyond for every non-driver product segment.

Gross margin in 2010 was 21% compared to 20.5% in 2009. Our net income was $33.2 million, or $0.19 per ADS, compared to $39.7 million, or $0.21 per ADS in the previous year. We expect to see contribution from our non-driver products to our gross profit and bottom line this year, on top of their contributions to the top line.

Other than a short period of ramping time in the initial stage of mass production, each of our non-driver products exhibits higher gross margin than our driver products. We believe, with further ramp-up in non-driver products, we will be able to improve our gross margin from the current level.

Entering into 2011, we are seeing encouraging signs in literally all aspects of our businesses, including large panel driver business where we suffered last year. We are, therefore, optimistic that our business is bottoming out and we are on track again to see top-line and bottom-line growth starting this year following three years of decline.

Equally important, looking ahead, we foresee a more balanced business portfolio with the large panel driver business accounting for a smaller percentage of our total sales. We also anticipate small panel drivers and non-drivers, which do not rely on a small number of large customers, to contribute significantly to our total sales.

We have just talked about our overall outlook for our driver IC products for the year. Now let me run through each non-driver area briefly.

CMOS image sensor is and will continue to be a fast growing area for us. We currently offer VGA, 1.3 megapixel, HD, 2 megapixel and 3 megapixel products focusing on handset and notebook camera modules.

While we are a newcomer to the market, our sensors have been highly praised by several customers with leading market positions to have outperformed those offered by the incumbent players in terms of image quality. Consequently we have won numerous design wins from customers ranging from camera module makers, contract manufacturers to system integrators with world-leading brand names.

While our current shipments are handicapped by the serious wafer foundry capacity shortage from which the industry is suffering, we remain confident that we will deliver phenomenal volume growth and strong market expansion this year. To what extent our sensor products will grow this year will depend largely on the availability of foundry capacity.

Touch controller is another very exciting area for us where we offer solutions for capacitive and multi-touch resistive touch panels. During the fourth quarter of 2010 we began shipping projected capacitive touch controller ICs to a leading Chinese brand customer for their MID application.

Our analog multi-touch resistive touch controllers received Windows 7 certification for medium and large panel applications.

We are now working closely with several touch panel makers and a number of world-leading handset and tablet PC brand names who are using our projected capacitive solutions primarily.

While we still have a limited shipping record, we are excited about such first tier design wins, as they are a strong endorsement to our technology. We will leverage our leading market share in the small- and medium-panel drivers and solid customer relationships we have built over the years for the long term success in this fast growing segment.

Moreover, 2D to 3D conversion is gradually becoming a popular feature for many kinds of electronic devices with a 3D display. Our innovative, world-leading 2D to 3D conversion solutions have been adopted by first-tier TV brands in China and Japan and we are working with additional leading brands in new product development.

We are also pioneers in introducing new features such as eye protection for our next generation products, which have attracted the attention of numerous TV makers.

We recently made two announcements regarding our latest progress in LCOS picoprojectors. The first announcement was the partnership with Faraday for the world's first USB 3.0 picoprojector solution, which offers an unprecedented real-time, seamless and high-quality video streaming projection for customers.

The other was with our customer, Compal Communication Inc., which adopted our proprietary color-filter-type LCOS microdisplay in their newly-launched robot product for toy market.

These new applications reflect the dynamics and diversity of the picoprojector solutions. We believe that new applications of LCOS picoprojector will surface with further development and innovation in products.

Furthermore, our analog product line has been contributing stable and above-average gross margins. With the increasing penetration of LED panels, our WLED driver segment experienced strong growth in 2010 and we expect the momentum to continue into this year.

In addition, we are expecting several major project wins for our integrated power ICs in 2011 which are to be used for large-sized applications.

2011 will be marked as a year of transition for us. Seeing the exciting upside potential, we continue to invest heavily on R&D, which will result in less-than-satisfactory first quarter profitability, as will be provided by the guidance below. Nevertheless, we believe we will be able to grow both our top and bottom lines each quarter during 2011.

Another important task for this year is the listing of our planned Taiwan Depositary Receipts, or TDRs. The filing, however, can only be made after the publication of the 2010 full-year US GAAP audited financial reports, which is scheduled for the end of April.

Prior year audited financial report is one of the essential documents required for official TDR application with the Taiwan Stock Exchange. We expect the issuance of TDR will provide a more convenient platform for our Asia-based investors and would help better reflect our corporate value through increased liquidity. We will provide occasional updates along the way.

Now moving on to our first quarter 2011 guidance, we expect revenues to remain flat or go up slightly, with our non-driver products to account for over 10% of our total sales, the first time in our history.

Moreover, we expect gross margin to decline within 1 percentage point. The decline in gross margin is primarily due to certain ramping-up expenses involved in non-driver products in their early stage of mass production. With further shipment ramp-up, we do expect non-driver products to contribute positively to our overall gross margin soon after this quarter.

As mentioned earlier, R&D expenses are projected to increase from last quarter. Finally, our GAAP earnings per ADS is expected to be in the range of $0.01 to $0.02.

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 for our fourth quarter and full-year 2010 financial results.

For the fourth quarter, our GAAP operating expenses were $17.4 million, down 23.1% from $22.7 million a year ago and down 46.1% from $32.4 million in the previous quarter.

The significant sequential reduction in operating expenses was primarily due to the recovery of SVA-NEC bad debt expense and the higher RSU amount expensed in the third quarter. As we mentioned in our last earnings call in November, we recovered $8.6 million in cash in October from the $25.3 million of bad debt we wrote off during the fourth quarter of 2008 for the default of SVA-NEC. This recovery led to lower operating expenses for us in the fourth quarter.

Also, our third quarter operating expenses were high because we granted our 2010 RSUs, or Restricted Share Units, at the end of the third quarter. Of the $9 million RSUs, about 65% were vested and expensed immediately on September 28, the day of the grant.

GAAP net income for the fourth quarter was $11.7 million, or $0.07 cents per ADS, up from $11.0 million, or $0.06 cents per ADS in the same period last year.

Excluding the SVA-NEC bad debt recovery and its associated tax benefit at the time the bad debt expense was charged, our net income for the fourth quarter was $5.4 million, or $0.03 cents per ADS.

Excluding share-based compensation and acquisition-related charges, our non-GAAP gross margin for the fourth quarter was 21.5%, as compared to 20% a year ago and 23% a quarter ago.

Non-GAAP operating income for the fourth quarter was $14.5 million, down from $15.4 million in the same period last year and up from $7.3 million in the previous quarter.

Share-based compensation and acquisition-related charges for the fourth quarter were $0.9 million and $0.4 million, respectively, as compared to $1.5 million and $0 million, a year earlier.

Non-GAAP net income in the fourth quarter was $13 million, or $0.07 per ADS, up from $12.6 million or $0.07 per ADS for the same period last year, and up from $7 million or $0.04 per ADS in the previous quarter.

Our cash, cash equivalents and marketable securities available for sale were $105.5 million at the end of December, up from $82.6 million a quarter ago.

Inventories at the end of 2010 were $118 million, compared to $111.7 million a quarter ago. While we were able to digest old inventories from the previous quarter, we had a slight increase in inventories at the quarter end primarily due to build-up of new stocks resulted from sudden changes in customers' orders. We will work toward bringing down our inventory levels at the end of this quarter.

Net cash inflow from operating activities for the fourth quarter was $29.8 million as compared to a net cash outflow of $20.3 million in the previous quarter.

In terms of 2010 full-year performance, our GAAP operating expenses were $99.7 million as compared to $98.3 million a year earlier. GAAP net income in the year of 2010 was $33.2 million, or $0.19 per ADS, compared to $39.7 million, or $0.21 per ADS in 2009.

Excluding share-based compensation and acquisition-related charges, our non-GAAP gross margin for the year 2010 was 21%, as compared to 20.5% last year.

Non-GAAP operating income for the year 2010 was $49.7 million, as compared to $60.8 million in 2009.

Share-based compensation and acquisition-related charges for 2010 were $10.6 million and $1.5 million, respectively, as compared to $12.8 million and $1.2 million in 2009.

Non-GAAP net income was $45.2 million, or $0.25 per ADS, as compared to $53.6 million, or $0.29 per ADS in the previous year.

The first quarter 2011 earnings per ADS guidance that Jordan provided earlier is based on the assumption of having 356 million diluted weighted average ordinary shares, with one ADS representing two ordinary shares.

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

Thank you. (Operator Instructions). Our first question comes from the line of Jay Srivatsa with Chardan Capital Markets. Please proceed with your question.

On the non-driver business, could you tell us what percentage was CMOS image sensors and what percentage was everything else?

You mean now, or --?

Yes, in Q4.

Oh, in Q4. Let me see. Actually, they are fragmented, but in Q4, our total non-driver is 8.5% and the largest contribution will come from timing controller and OPs, or operational amplifiers, which are used primarily for large panel applications. But there -- in terms of other products, we are quite fragmented. For example, sensor or sensor-related products, including WO and WOM has between 0.5% to 1%. And 2D to 3D solution about 0.5% only of -- and LCOS-related products, also 0.5% to 1%.

But, again, we are seeing pretty significant growth, in particular from sensors, during Q1.

Okay. In terms of your gross margin profile, I guess I'm trying to understand what -- is it because of product mix or is it because of ASP pressure on the large panels that your margin is dropping in Q1, or do you expect that to subside as you go into the second half of this year?

(Inaudible) for your later part of the question and I think the -- on driver business, the overall 8-inch foundry capacity (inaudible) capacity remains quite tight. And we believe it will continue to be so, going forward, at least for the rest of the year.

Winning our negotiating power, quote/unquote, vis-a-vis our suppliers is quite limited. On the other hand, we are seeing our prices to our customers being stable. Certain customers on a case-by-case basis will always want to negotiate for a better price. They are still (inaudible) being very profitable, as we all know. So they have their price pressure, however, given the fact that IC supply situation remains quite tight, so the pricing pressure from current customers is also limited.

So, we -- and one of the main reasons for Q1's slight gross margin decline is, as we mentioned in our prepared remarks, in the queue of our non-driver businesses where we really are adhering to first and second quarter ramping, there are certain related charges come from, for example, low yields, which always takes a few wafers to ramp before you reach the satisfactory yield rate and so on. So there are some charges we need to make for our -- which hurts -- results in a slightly lower gross margin.

But we mentioned earlier, we are quite cognizant that all these non-driver segments were bringing better than average or better than driver, at least, gross margin, going forward, very soon, very quickly. So, I think in the past we saw non-drivers, we didn't even see top line and all we had was R&D expenses. And now we are in this small period, hopefully small period, transition period, where we are starting to see some top line, but they didn't bring in very exciting gross margin because of the early stage, but certainly we don't expect the ramping up stage to take too long and as (inaudible) becomes more significant, I think their contribution to our bottom line will be even more significant.

I don't know if that answered your question.

No, it did. Thank you. One last question. On this -- your guidance, you've talked about how you expect top and bottom line growth in every quarter of the year. Typically, in past years you've had third or fourth quarter where revenues have declined. I want to understand why you don't expect that to happen again this year.

We can't really predict with certainty. Last year -- over the last two years or three, since the financial crisis, I think all the traditional seasonality has come upside down, in a way.

So typically, for example, Q1 typically should be a slow season, but as you just heard from us, we are not expecting a major decline in our sales. And you can -- Q1 typically is the low season because it is the Chinese New Year, right? And Q4 typically should be a high season, but last year I think we had -- the whole industry, not just Himax, the whole industry had a pretty phenomenal first half, which is unusual. And second half, typically, was supposed to be strong but the whole industry, the whole supply chain suffered from an overbuild of inventory. So, the whole thing declined rather consistently, starting from Q3.

So, I think while I'm making that comment, firstly, certainly, I will have to admit we cannot foresee such incidents from happening. But I think, overall, we look at the panel industry, which is the focus of our drivers business, we are seeing -- we are not seeing, really, the industry overbuilding their capacity. Capacity will be brought up gradually and nice and steady. So we are not really seeing major surprises.

I mean, barring from a major financial sort of meltdown or major negatives and certainly that is something we cannot predict or control, but other than that sector we are seeing the panel industry in a pretty healthy shape and we are also seeing our market share in all of the three major sectors, being large panel, small- and medium-sized panel and handset panels, being at least stable or continuing to grow, either for large or smaller panels.

And on top of that, we are seeing all our non-driver business picking up very strong momentum in terms of percentage growth from last year. So, there is no reason for us to have a -- to -- not to have an optimistic view for the year.

Okay, thank you.

So I think if you look at our previous two years, our revenue has suffered primarily from -- due to one single customer, who I mentioned in my earlier remarks, who accounted for a big chunk of our sales and who has decided to bring in other suppliers to diversify their supply base.

But I think that factor is, more or less, and even with that customer we are seeing a possibility of regaining some market share there. And so if that factor is removed, then I think we are seeing exciting growth potential again.

Thank you.

Well, thank you, Jay.

Our next question comes from the line of Frank Wang with Morgan Stanley. Please proceed with your question.

Hi. Good morning. For the large-size driver IC business, can you talk about, in the first quarter, what kind of trend are you seeing for the revenue and gross margin? And also, for 2011 what kind of growth are you looking at for the business? Thank you.

I'm looking at my number. I know, for sure, in terms of percentage contribution to our total year, it continues to decline slightly to below half. I look at my numbers in front of me, it's going to be around 47% of total, where non-driver will account for almost 12%. Certainly, that is not your question.

Back to large panel, we are seeing a slight growth from previous quarter, some 3%, 4% from the previous quarter, with monitor being the strongest sector, while TV being the weakest.

How about for the --

For the rest of the year?

What kind of growth opportunity are you looking at for the large-size driver IC business?

I think there are two major Gen 8.5 consumptions in China, as we all know, one in Beijing, one in (inaudible). The Beijing is expected to start ramping earlier than the (inaudible) one by about a quarter or two.

I think we are pretty confident, based on the current engagement we have with both customers that we have a -- we will have a major share in those additions. And as we all know, large panel drivers, large panel business has been dominated by only a small handful of customers worldwide.

So we are making penetration, although I cannot say with absolute certainty, into, for example the Japanese major player and one of the Korean players, as well. But then how much they will contribute to our sales this year really depends on a lot of factors that we cannot really foresee.

So, based on our current view, we are seeing for large panel our overall large panel business to probably remain flat against last year.

Jordan, for the China Gen 8.5 fabs, when do you expect you can start seeing revenue contribution this year?

I think as soon as they started ramping, I guess. I hope so. So I think for the one in Beijing, I think they are scheduled ramping in early stage (inaudible) I think it's Q3 and we are hoping for ramping to really pick up starting from Q4 and beyond. And, as I said, the one in (inaudible) is behind by a quarter or two.

So, there will be -- but bear in mind, there will be a ramping like everyone else, right, in Taiwan or Korea or Japan. There will always be a ramping schedule on that site. So, certainly if you look at major contribution, I think it will be mainly next year, given that Q3, even for the earlier one, the volume will be limited and Q4 there will be a ramping stage, but even that is only one quarter.

And then for the small- and medium-size business, can you talk about where you are in some of the tablet opportunities and maybe also talk about smart phones and what kind of growth are you expecting for the year? Thank you.

What kind of growth? Very strong, very strong growth. I think I am not really here to provide detailed numbers, but we do have a business plan for each of those segments and --hold on, I'm trying to look at my folder.

On top of a very strong year for 2010, which as we pointed earlier, we grew some 40% -- more than 45%, 47% for our small- and medium-size driver business, we are not expecting the same level of growth, 40%-plus, but we continue to expect a very robust growth from those two segments.

And I think last year was a year where we gained a lot of market share and I think we will continue to gain market share, meaning we will continue to outperform the market for those two segments. And those two markets are, I think, in terms of growth, also outperformed large panel.

We all know about tablet PCs. Literally all our customers are having that kind of product.

In terms of real production, the volume is still limited other than one or two major customers who have the steady engagement with Apple and the like. But as we all know, there are a lot of tablet PCs. If you go to CES this year, you will see there are I don't know how many customer announcing new tablet PCs.

And so literally all our panel customers are having some projects on this segment right now and we have pretty decent engagements there and that is why we are excited about the growth opportunities here and smart phones, I'm elated to say, all (inaudible) are adopting smart phones very aggressively. Now even China is adopting Android aggressively and we are seeing panel (inaudible), for example, for smart phone but (inaudible) that is for China, certainly not a brand name, will be competing (inaudible) share or even higher.

But for China's (inaudible) market, in the past we have (inaudible) and so on, such low resolution. But (inaudible) we have smart phones, we will be talking about minimum of 2.8-inch panel and (inaudible) resolution. That is really the very bare minimum.

So that is good news for our driver. As you know, our driver is really (inaudible) by way of resolution. So the higher, the better.

So we are seeing there is a trend of moving to these smart phones being very strong, even in China.

And last question for me, on the small -- I'm sorry, on the non-driver business, you talk about there is some ramp-up on expenses for first quarter. Can you talk about for which product lines?

And then also, can you also talk about touch drivers in terms of contribution in the fourth quarter and how do you expect that to ramp for the year? Thank you.

Touch controller for fourth quarter is negligible. We started mass production, but it's in order of thousands -- hundreds of thousands for units only for one customer. So we mentioned it's a China (inaudible) customer, that is one customer. So it might be -- so you should not expect the kind of volume built by a (inaudible) project, for example.

But that was very good (inaudible). That was (inaudible). As we know, touch controller market, touch controller IC market is really dominated by a small handful of international companies and I think, logically, we are the first Taiwanese company to really have a major penetration in (inaudible).

So certainly I cannot talk about names, but we have engaged with customers with -- who are (inaudible) in smart phones. So there's new touch projects and effective mass production will be second quarter or later part of second quarter this year.

So from there, we expect -- we are hoping -- we saw (inaudible). We are hoping for better adoption of our product with customers in (inaudible), coming from both brand names in China. So that is your question on touch.

And on the issue of ramping up expenses or low yield was the example I quoted. For example, (inaudible) our wafer-level optics, wafer-level module, in particular, for our wafer-level optics, wafer-level module and color filter associated with sensor, all those three we have our in-house fabs. And when you run a fab, you've got to allow a certain level of ramping up expenses for them. Otherwise, they will never learn and the yield will never pick up to the right level.

So, I think that's where we're going through now. Again, we don't expect the ramping period to be too long.

Okay, thank you.

Thank you.

(Operator Instructions). There are no further questions in the queue. I'd like to hand the call back over to management for closing comments.

Well, thank you, everyone, for taking the time to join us today and we look forward to talking with you again at our next conference call, now scheduled in early May. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation.