奇景光電 (HIMX) 2011 Q1 法說會逐字稿

Greetings and welcome to the Himax Technologies Inc first quarter 2011 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. If anyone should require operator assistance during the conference please press star zero on your telephone keypad.

It is now my pleasure to introduce your host Thomas Mei of the Ruth Group. Thank you Mr Mei you may now begin.

Thank you operator. Welcome everyone to Himax's first quarter 2011 earnings 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 today.

If you have not yet received a copy of today's results release, please call The Ruth Group at 1-646-536-7009 or you can get a copy off 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 can cause actual events or results to differ materially from those described in this conference call.

Factors that could cause actual results and the Taiwan listing plan to differ include, but not limited to, general business and economic conditions and the state of the semiconductor industry; market acceptance and competitiveness of the driver and non-driver products developed by the Company; demand for end-use 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 authority's 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 the full two-way fungibility between the Company's ordinary shares and ADSs and other risks described from time to time in the Company's SEC filings, including those risks identified in the section entitled Risk Factors in its Form 20-F for the year ended 31 December 2009 filed with SEC on dated 3 June 2010, as amended.

Except for the Company's full year of 2009 financials which were provided on the Company's 20-F, filed with the SEC on 3 June 2010, the financial information included in this conference call is unaudited and consolidated, and prepared in accordance with US GAAP. Using financial information is - such financial information is generated internally and has not been subjected to 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 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 Thomas and thank you everyone for joining us on today's call.

In today's earnings call I will be reporting our performance in the first quarter and then provide outlook for the second quarter of 2011.

Our Acting CFO Jessica Pan will then provide further details of our financial performance.

Our first quarter revenues came in at $141.1 million, representing a 19.6% decline year-over-year and a 0.1% decline sequentially. Revenues from large panel display drivers were $64.9 million, down 43.3% from a year ago and down 8.6% sequentially. Large panel drivers accounted for 46% of our total revenues for the first quarter compared to 65.2% a year ago and 50.3% in the previous quarter.

Small and medium-sized applications continued to demonstrate strong growth momentum. Revenues from small and medium-sized applications hit a record high at $59.6 million, up 28.9% from the same period last year and up 3.8% sequentially. Small and medium-sized applications accounted for 42.3% of our total sales for the first quarter, also a record level, as compared to 26.4% for the same period last year, and 40.7% in the previous quarter.

Revenues from our non-driver businesses were $16.6 million, up 12% from the same period last year and up 30.4% sequentially. Our non-driver products accounted for 11.7% of our total revenues, as compared to 8.4% a year ago and 9% in the previous quarter. This is the first quarter where our non-driver products have accounted for over 10% of our total sales.

Our GAAP gross margin for the first quarter was 20.1%, as compared to 19.8% a year earlier, and 21.5% in the previous quarter. For the first quarter, GAAP net income was $2.7 million, or $0.02 per ADS, compared to $9.1 million, or $0.05 per ADS a year ago, and $11.7 million, or $0.07 per ADS, in the prior quarter.

So the big picture summary of our Q1 performance is that while we achieved a more balanced product mix and continued to improve on customer diversification, our gross margin and bottom line profitability were not satisfactory. We expect our gross margin to decline further in Q2 for reasons which we will elaborate later in the call. Notwithstanding the short-term unsatisfactory margin, we are encouraged by the fundamental improvements in our product and customer diversification, which is in line with the overall direction we set a long time ago and will greatly enhance our corporate value in the long-term.

While the short-term low margin is a concern, we see this as temporary in nature and we are fully committed to improving our gross margin in short time.

There are factors for both driver and non-driver segments which are causing lower gross margins for Q1 and Q2. For the driver IC product line, we are facing pressure from our suppliers who are suffering from rising production costs due to NT dollar and Renminbi appreciation and the skyrocketing gold prices.

Another factor that has negatively impacted our Q1 and Q2 driver IC gross margin is an unfavourable shipment mix as we are seeing more short-term demand for certain of our lower margin products. Some of them involve older generation products which the customers have not replaced and these products have a lower gross margin than average.

We mentioned in our last earnings call that we did anticipate the ramp-up expenses for non-driver products to negatively impact the overall gross margin in the first quarter. Such ramping costs are expected to continue into the second quarter and therefore some non-driver segments, which will bring in better profitability than driver ICs in the long-term, are contributing negatively to our overall gross margin at the moment.

We believe such low margins are temporary at a time when we are going through learning curve in bringing up these products' to the mass production stage.

Improving gross margin from the current level is the top priority on our list at the moment, both for driver and non-driver product lines.

I will discuss the second quarter in more depth later in the call, but first I will go into more detail on each of our major product segments.

For the driver IC product line, cell phone, or more specifically, smart phone, and medium size panels are the two segments which show the best growth potential while the large panel segment suffered from a decline sequentially.

We remain one of the world leaders in the fast growing smart phone market. We are front-runners in technologies and specifications which are required for high end smart phones. Some examples are colour enhancement, 3D data processing, MIPI high-speed interface and HD720 or WXGA high resolutions.

Beyond handsets, we are also working very closely with numerous panel makers on other small and medium-sized applications, including five inch to 10 inch mobile internet devices and tablet PCs.

Among our non-driver product lines, CMOS image sensors demonstrated the strongest growth in Q1, with revenues surging to a level which is multiples higher than the previous quarter.

While foundry capacity remains a bottleneck - as we pointed out in the last earnings call - we believe the strong growth momentum of our CMOS image sensors will continue in the coming quarters.

The gross margin of this segment was below our overall level in both Q1 and Q2, but we have seen steady improvement by replacing older generation products with newer ones and by bringing up the production yields of those newer generation products. Our customer base is mostly leading brand names for both handsets and laptops. We continue to receive positive feedback regarding product performance and win new projects from these customers. We are excited about the prospects of this product line and we are fully committed to its long-term sales growth and margin improvement.

We mentioned in the previous calls, regarding our wafer-level optics product line, which we are one of the pioneers in the world. We started our first mass production shipment to a leading handset brand company earlier in the second quarter. We are going through the ramp up learning curve right now, similar to the newer generation sensors mentioned earlier, the yield rates are being steadily improved.

We are looking into expanding our in-house facilities for this product line because we do foresee a rapid demand pick-up in Q2 and onward. Further details will be provided in the next few quarters.

We continued to ship our 2D to 3D conversion chips in the first quarter with revenue close to double that of the previous quarter. However, shipments for the second quarter will be lower primarily due to certain high-end TV customers' dropping demand caused by the recent earthquake in Japan.

We have seen increasing orders for our LCOS micro-display for pico-projector products targeting emerging markets in the second quarter. For touch controllers, we continue to make small quantity shipments and are in the final verification process with a smart phone maker, for which we expect the shipment to begin in the second half of 2011.

Moving to the second quarter - we are seeing strong demand pick-up across literally all product lines. However, even though the recent Japan earthquake has had limited impact on our own display driver supply chain, it does pose an uncertainty to our Q2 guidance below as we are not entirely certain how the overall industry supply chain has been affected.

Our revenue guidance is given here based on the current forecast provided to us by our customers. We are guiding for our gross margin to decline for reasons mentioned above.

Considering the factors we have discussed, for the second quarter we expect revenues to go up 10% to 15% with gross margin to decline 1% to 1.5%. Our GAAP earnings per ADS is expected to be in the range of $0.02 to $0.03.

Now let me turn over to Jessica Pan, our Acting 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 $25.8 million, up 4.7% from $24.6 million a year ago, and up 47.7% from $17.4 million in the previous quarter. The significant sequential increase in operating expenses was primarily due to the recovery of $8.6 million of SVA-NEC bad debt expense which led to much lower operating expenses in the fourth quarter. During the first quarter, we recovered another $1.5 million from SVA-NEC for bad debt expense.

GAAP net income for the first quarter was $2.7 million, or $0.02 per ADS, down from $9.1 million, or $0.05 per ADS in the same period last year and down from $11.7 million, or $0.07 per ADS in the previous quarter.

Excluding share-based compensation and acquisition-related charges our non-GAAP gross margin for the first quarter was 20.1%, as compared to 19.8% a year ago and 21.5% a quarter ago.

Non-GAAP operating income for the first quarter was $4.3 million, down from $12.5 million in the same period last year and down from $14.5 million in the previous quarter.

Share-based compensation and acquisition-related charges for the first quarter were $1 million and $0.4 million, respectively, as compared to $1.7 million and $0.4 million, a year earlier.

Non-GAAP net income in the first quarter was $4.1 million, or $0.02 per ADS, down from $11.2 million or $0.06 per ADS for the same period last year, and down from $13.0 million or $0.07 per ADS in the previous quarter.

Our cash, cash equivalents and marketable securities available for sale were $116.4 million at the end of March, up from $105.5 million a quarter ago.

Inventories at the end of March were $130.1 million, compared to $118 million a quarter ago. The increase in inventory is primarily our response to the projected stronger second quarter sales. In addition, we intentionally raised our inventory level toward the end of the quarter to safe-guard against the earthquake in Japan.

We expect the inventory level will be lower at the end of the second quarter.

Net cash inflow from operating activities for the first quarter was $12.2 million as compared to $29.8 million in the previous quarter.

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. 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 question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we pause for questions.

Our first question comes from Jay Srivatsa from Chardan Capital Markets.

Yes, thanks for taking my question. Could you tell us what percentage of your non-driver product was CMOS image sensors?

You mean Q1?

Yes.

In Q1 it's about 2.5%.

Sorry, what's that?

Two and a half per cent.

Okay. Thanks. In terms of gross margins, when do you expect the margins to improve? Are you expect that you will be able to stabilize it and improve starting in the second half or is it more for longer term goal?

Certainly second half is the absolute profit we must achieve. And I think, if I may, just to elaborate a little bit - I mentioned earlier in my prepared remarks that these are - I mean there are various ramping up costs that are causing our sort of negative contribution from those non-drivers and we are seeing - you will see now pretty encouraging improvement of all those issues.

So I think there is a fair level of confidence that we should be able to see much improvement pretty soon. Very soon.

Alright. In the last conference call you have mentioned about how you expect that in every quarter of fiscal '11 you would expect both top line and bottom line growth. Is that something you expect to be able to achieve still or is it under consideration?

I think the answer is yes, assuming the overall market environment in the panel industry remains sort of in a similar condition to what it is today - then the answer must be yes.

Alright. Thank you very much.

Thank you Jay.

Thank you. Our next question comes from Frank Wang from Morgan Stanley.

Hi, good morning. Can you talk about what are the impacts you are foreseeing from the Japan earthquake for your own supply chain and maybe what you are observing on your customer side that potentially could impact upon you?

Very little to be honest. So if you look at our own supply chain per se we say the impact is close to nothing. What I was referring to was that our customers - and their customers - customers, customers, customers you know for a reason and for certain, you know, some small component or materials which I may not be aware of, you know, if there are problems, and certainly that would cause impact on the demand of our driver ICs from our direct customers.

The only one thing I mentioned in my earlier remarks about Japanese impact - earthquake impact - is that 2D to 3D conversion chip, which we are shipping directly to a Japanese TV maker, and they have actually told us rather specifically that their local demand in particular has been rather severely negatively impacted by the earthquake as a result. You know they have been the end-product maker, the set maker, which purchase the 2D to 3D conversion chips directly from us. Certainly the demand over there has, will decline.

But other than that, if you talk about our direct supply chain for driver IC would say the impact is very, very limited, if any.

Okay, and can you also talk about your dual listing plan?

We said in our previous earnings call that we cannot file until we file our annual report and we have indicated that the target for the annual report is end of April. Now it has been frozen for a few days and we will be filing our annual report in the last few days - in early or to middle of May. And after that certainly we will start - and actually we are, we have already started the preparation work with our investment bankers and lawyers for the filing.

Now, bearing in mind this will be the first time when a company with an ADR listed status trying to make a dual listing of (inaudible) in Taiwan, so we cannot be entirely certain whether there will be technical or regulatory issues in the process of our preparation or filing.

But I think the intention is to make a file after the annual report - not immediately - but probably a few months after our annual report.

As far as the actual listing day - for the reasons I mentioned earlier - it's really hard to make a prediction.

Can you also talk about - in your opening remark you talked about there have been product mix shifts for lower margin products in the driver IC sector - can you talk about which product you are referring to?

I'll give you one example, I mean because this is about our customers I cannot get into very much detail. I will give you one example - I believe you are referring to what I mentioned about the older generation product which the customer has not been able to replace, and all of a sudden we are seeing a demand surge and certainly those products, some of them are lower margin than average.

I will give you one example which is certain of our older generation TVs - so [CCMV], you know, so for some reason after a lot of replacement of LED to CCMV all of a sudden we are seeing CCMV sort of coming back, the demand rather strongly recently and certainly those belong to very old generation models of our customers and they use old generation driver ICs, and we certainly have an obligation to continue to shipment. So you know we have to ship older generation products, which certainly suffers from low margin.

Right.

They are actually similar examples for monitors, for example.

Okay, and last question from me - can you just talk about in terms of wafer situation in the CMOS image sensor and how do you expect that business to ramp in the second quarter and the second half?

We are - firstly the capacity situation - [PSNC] the source of our supply and certainly we appear at the moment, for this particular product line, is it shouldn't be tight at the moment. And because of a tight situation the allocation decision was made primarily in the end of last year when we, you know, been - in the year zero mass production last year, because this year will be the year one of our mass production. We are not as certain about our customers' firm demand. We have customers from all the (inaudible) because at the time they were still in the stage of design.

So we could not, we were not able to provide solid focus or to demonstrate our ability to ship a lot, like what's happening now. So we were not aggressive enough towards the end of last year in securing our allocation.

Now the industry being so tight, certainly our supplies from PSNC becomes limited. Having said that, we have got very strong support from PSNC in the first year in such circumstances, so our Q2 - I mentioned earlier, a few multiples the size of Q1 in terms of sales and we are very confident we will continue to - the revenue, many shipment, many suppliers of PSNC will continue to increase Q3 over Q2 and Q4 over Q3 - meaning we are fairly confident that our CMOS image sensor product line in terms of sales will continue to grow sequentially at this and over the next few quarters.

Okay. Thank you.

Thank you.

Thank you. Once again if you do have a question, please press star one at this time. Again that is star one to ask a question.

We appear to have no further questions at this time. I would like to turn the call back to the speakers for any closing comments.

Thank you everyone for taking the time to join today's call and we look forward to talking with you again at our next earnings call in early August. Thank you.

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