奇景光電 (HIMX) 2011 Q2 法說會逐字稿

Greetings and welcome to the Himax Technologies Second Quarter 2011 Earnings Conference Call.

(Operator Instructions).

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

Thank you, operator. Welcome, everyone, to Himax's second 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 remarks 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; or you could 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 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 are 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 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 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 2010 filed with SEC and dated 20 May 2011, as amended.

Except for the Company's full year of 2010 financials which were provided on the Company's 20-F, filed with the SEC on 20 May 2011, 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 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 the audited consolidated financial information for the same period.

Any evaluation of the financial information included in this conference call should 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 I will be reporting our second quarter results and provide outlook for the third quarter of 2011. Our Acting CFO, Jessica Pan, will then provide further details of our financial performance. On 20 June we reiterated our second quarter guidance. As we will report today, our revenues, gross margin and earnings per ADS were all within our previous guidance.

Our second quarter revenues came in at $160.6 million, representing a 14.5% decline year over year and a 13.8% growth sequentially.

Revenues from large panel display drivers were $76.4 million, down 29.1% from a year ago and up 17.7% sequentially. Large panel drivers accounted for 47.6% of our total revenues for the second quarter compared to 57.4% a year ago and 46.0% in the previous quarter.

Revenues from small and medium sized applications were $62.2 million, down 5.3% from the same period last year and up 4.3% sequentially. Small and medium sized applications accounted for 38.7% of our total revenues for the second quarter, as compared to 35% for the same period last year, and 42.3% in the previous quarter.

Non-driver segment continued to perform strongly. Revenues from our non-driver businesses were $22 million, up 54.3% from the same period last year and up 32.8% sequentially.

The percentage of our non-driver products revenues reached another record high, accounting for 13.7% of our total revenues in the second quarter, as compared to 7.6% a year ago and 11.7% in the previous quarter.

Our GAAP gross margin for the second quarter was 18.6%, as compared to 20.4% a year earlier, and 20.1% in the previous quarter.

For the second quarter GAAP net income was $3.6 million, or $0.02 per ADS, compared to $12 million, or $0.07 per ADS, a year ago, and $2.7 million, or $0.02 per ADS, in the prior quarter.

Now, let me go through the second quarter performance and third quarter outlook for major product lines. For large panel display drivers the 17.7% quarterly revenue growth in the second quarter was primarily the result of orders coming from one of our customers in China which was ramping up its new capacity.

The third quarter outlook, however, appears sluggish for large panel drivers. We are seeing reduced demand for all applications, and many of our customers have responded to the uncertain global economy by lowering capacity utilization for large panel products.

The quarterly revenue growth for small and medium size display drivers was just 4.3% in the second quarter, primarily a consequence of the weak feature phone demand particularly in China's white box market. However, we are seeing a robust third quarter customer forecast for the cell phone market.

Accounting for the bulk of this strong growth momentum will be smart phones from both world leading brands and Chinese manufacturers. We remain the leading player in high end panel drivers for smart phone applications.

For example, our industry leading HD720 high resolution cell phone panel driver has been adopted by first tier smart phone brands, and shipments are expected to commence at the end of the third quarter. The driver IC offers an unrivaled color and brightness enhancement feature which is very popular among our customers.

As mentioned earlier, our non-driver segment continued to contribute positively to our top line growth, particularly the CMOS image sensor and LCOS micro-display products. We expect both products to carry the strong revenue growth momentum into the third quarter.

In our previous earnings calls we talked about wafer foundry capacity shortage for CMOS image sensor which limited our revenue growth in this segment over the past few quarters. Starting from the second quarter the shortage situation has been gradually alleviated and we have been able to fulfill more customer orders.

We expect the capacity shortage to further loosen, going forward. We also continue to make wafer level optics (WLO) and wafer level module (WLM) shipments to leading laptop and handset brands.

We are also seeing increasing demand for our LCOS pico-projector products, particularly for cell phone embedded applications targeting emerging markets. We have therefore embarked on a capacity expansion for our LCOS production line.

This expansion requires just a marginal increase in the total investment in our fab and will allow us to increase our monthly panel output from the current 150,000 units, to over 250,000 units.

We are pleased to report that, after a thorough and strict verification process, our touch panel controller has been adopted by a top worldwide smart phone brand. We expect shipment to start at the end of the third quarter. We will build upon this success to broaden our market share in this fast growing market.

Furthermore, our 2D to 3D solution was adopted by several monitor and 3D projector customers. We also integrated the 2D to 3D conversion feature into our timing controllers designed for handheld naked-eye 3D panel applications.

Looking into the third quarter, the TFT-LCD industry is suffering from weak end market demand and general concerns for the outlook of the global economy. Many customers are evaluating whether they should further reduce capacity utilization. We are therefore seeing lower-than usual visibility for orders and forecasts provided to us by our customers.

Despite the negative market sentiment we remain committed to continue the execution of our strategy toward building a more balanced product portfolio and customer base which, we believe, will lead to long term improvement in both our gross margin and bottom line.

We have seen significant progress in diversification of our revenue stream, with small and medium panel businesses expected to replace large panel, to become our largest revenue contributor in the third quarter.

CMOS image sensor and LCOS micro-display.

As we reported in the previous earnings call, our CMOS image sensor - now the fastest growing non-driver product line - is suffering from low margin as we are still shipping a relatively high proportion of older generation products which will gradually be replaced by a newer generation of products with improved cost and margin. While we are confident that our margin in this segment will improve as our customers make the switch, we are seeing third quarter gross margin from our sensor product line still lower than our overall average.

The LCOS capacity expansion we mentioned earlier will also lead to short-term gross margin pressure. This is because the expansion involves relocation of certain facilities during the third quarter. We will therefore have reduced capacity utilization and may suffer a temporary yield loss during the relocation process. As a result, the LCOS product line will still not make a positive contribution to our overall gross margin, despite its anticipated revenue growth.

We also mentioned in the previous earnings call that we faced low production yield and certain product rework charges in the second quarter when starting to ship wafer level optics to a leading handset brand for the first time. We do foresee a steady yield improvement in the third quarter.

We believe these are crucial and necessary investments in the short term that will allow us to execute our long-term strategy. We are not satisfied with the current profitability and will, by all means, do our best to shorten this painful period where gross margin is not improved while R&D expenses stay high at a time when we are bringing up the non-driver products. We remain confident in our long term outlook and we are fully committed to enhancing shareholder value.

We paid out an annual cash dividend of $21.2 million, or $0.12 per ADS, on 20 July 2011. In addition, we announced a $25 million share buyback program as we are confident on the long term prospect of our share price. Jessica will elaborate on that later on.

Moving to the third quarter, we expect revenues to remain flat or to decline slightly with gross margin to remain at the current level. Taking into account our 2011 grant of restricted share units, or RSUs, at the end of September, our GAAP loss per ADS is expected to be in the range of $0.02 to zero. Excluding share-based compensation and acquisition-related charges, our non-GAAP earnings per ADS is expected to be in the range of zero to $0.02.

Our 2011 RSUs, subject to Himax's Board approval, is projected to be valued in the range of $3 million to $4 million, representing a 56% to 67% decline year over year. Almost all of the 2011 RSU is expected to be vested and expensed immediately on the grant date.

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 second quarter financial results.

For the second quarter our GAAP operating expenses were $26.5 million, up 4.7% from $25.3 million a year ago and up 2.8% from $25.8 million in the previous quarter.

GAAP operating income for the second quarter was $3.4 million, down from $13 million in the same period last year and up from $2.5 million in the previous quarter.

Excluding share based compensation and acquisition related charges, our non-GAAP gross margin for the second quarter was 18.6%, as compared to 20.4% a year ago and 20.1% a quarter ago. Non-GAAP operating income for the second quarter was $5.1 million, down from $15.4 million in the same period last year and up from $4.3 million in the previous quarter.

Share-based compensation and acquisition-related charges for the second quarter and first quarter were both $1 million and $0.4 million, respectively, as compared to $1.7 million and $0.3 million a year earlier.

Non-GAAP net income in the second quarter was $5 million, or $0.03 per ADS, down from $14 million or $0.08 per ADS for the same period last year, and up from $4.1 million or $0.02 per ADS in the previous quarter.

Our cash equivalents and marketable securities available for sale were $104.1 million at the end of June, down from $115.4 million a quarter ago. On 20 July 2011, we paid out our annual cash dividend of $0.12 per ADS, totaled $21.2 million.

As Jordan mentioned earlier, in addition to the cash dividend, we announced a $25 million share buyback program on 20 June 20 2011 to repurchase our ADSs and thereby cancel the underlying ordinary shares accordingly.

Share repurchases up to the end of July totaled $0.6 million or approximately 0.3 million ADS. At the end of the July 2011 we had roughly $24.4 million remaining in the current authorized share repurchase plan.

Inventories at the end of June were $124.4 million, compared to $130.1 million a quarter ago. Net cash outflow from operating activities for the second quarter was $3.5 million as compared to a cash inflow of $12.2 million in the previous quarter.

The third quarter 2011 guidance that Jordan provided earlier is based on the assumption of having 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.

Ladies and gentlemen, we will now be conducting a question and answer session. (Operator Instructions).

Our first question is from Jay Srivatsa with Chardan Capital Markets. Please go ahead.

Thanks for taking my question. Jordan, in terms of the non-driver products you've had at least a couple of quarters where some of the lower margin products continue to dominate. What's the reason for the timing? Meaning why are some of the newer products not being adopted sooner which could help your gross margin profile?

Thank you, Jay. Firstly, on the CMOS image sensor, we have (inaudible) products which were sellable in terms of quality, but in terms of cost, from today's standpoint, it may not be competitive.

By the time we are to start engaging our customers in this market particularly, it is very important that you have direct engagement with your end customer -the likes of cell phone and laptop brand names. So because whether the product is adopted (inaudible) our direct customer is the (inaudible). Whether the product is adopted is up to the end user's decision.

So to start engaging them, and the engagement process takes a long time, so we decided we should not wait until we have the new product because you have the new engagement process as a precision process, which will take a long time. The first time is always the most difficult one. It took us, actually, quite a bit of time for our product to be adopted, verified, approved. We then became a so-called approved vendor on the approved vendor list.

So when those first (inaudible) products was all been through this process, they started mass production. They are already in (inaudible) for the models. With those sort of models you cannot easily replace your new products with old products because your new products can only get into their newer models.

Unfortunately, the switching process is slower than we anticipated, meaning certain end user customers seem to be telling us that the old model (inaudible). They do need to require our shipment support for those products, although they are certainly aware that we are suffering from low margins from those products.

Having said that, our HD sensor, which is the one megapixel sensor, which is soon becoming the mainstream for laptops and (inaudible) products. We enjoy good timing in terms of the launch of the product and very good specification. So we have won numerous design wins from (inaudible) customers. So those are expected to (inaudible) production in Q4 or end of Q3/Q4.

Our predictability for our 1.3 [mega] products has a similar story. Again, the market situation at the moment because of the various specifications of this product is on Notebook and laptop. Again, we have won (inaudible) design wins. So it is our (inaudible) product which includes VTA and two megapixel sensor and three megapixel sensor, shipping to - in particular this year, two megapixel sensors - shipping to (inaudible). That's where we are suffering from low margins.

So in Q3 and Q4 in particular we are working hard to change the mix of our product shipment by pushing customers to take more higher margin products.

(multiple speakers)

Yes, it does. A question on the large panel business -- earlier in the year it looked like China was ramping pretty fast on the large panel market but, as you pointed out, it looks like things are slowing down there a little bit.

Even despite that, it appears 3D TVs and LED TVs appear to be doing reasonably well. What needs to occur in the next quarter or so for you to start to see some pickup in demand there?

Firstly, as we all know, there is a brand new TFT player in China coming up (inaudible). So that will certainly be brand new demand for us because they just started mass production.

The other more sizable players for large panels in China certainly is BOE. BOE certainly has a lot of capacities, but I think similar to other major players in Taiwan and Japan. I think they are - I mean everybody's seen a pretty uncertain market situation. Everybody is evaluating whether they've already got too much in stock and whether their customers are having a smooth time selling their products.

So I think, to be frank, when I talk to customers, everybody's telling me that business is appalling. But I think I mean it is to say everybody is worried about the current economic situation. Our concern - I mean we give a pretty conservative guidance, I think primarily because we are just hearing people's concerns over the economy and whether they should continue to lower their [utilization] and so on and so forth. Although, as I see it, they are still in the process of evaluating it, although we all know the current utilization rate is already pretty low. So I think it not just about China. It is the overall situation that is making people conservative on their utilization.

Now, we emphasize China a bit because that was a relatively new market for us. It is a relatively new acquisition of new customers for us in China. Certainly, it is for that reason I think we have a net gain in our market share as our China customers start to ramp. But I think China is not different from others - I mean people are worried about the current situation.

A question on the dual listing. With the demand dropping off a little bit in the large panels, are you reconsidering your dual listing or give us a sense on what the timing is going to be?

I can't say right now. Certainly, the current situation does have an impact on this, so we have to re-evaluate the whole thing, whether this is good timing for dual listing. I don't have an answer right now.

The last question. I must have missed this on the buyback. Where are you at thus far and what do you hope to be able to do in this quarter?

We certainly play the safe way. We basically set a formula and we get our [dealers] to deal for us, based on the formula.

So far we just announced the plan somewhere in June - 20 June, is that right? 20 June. So we have a little bit of June and the whole of July. We have so far only purchased $600,000, meaning we still have $24.4 million of the remaining overall share purchase plan. We have used very little so far.

Okay, thank you.

Thank you, Jay.

(Operator Instructions). We have no further questions in the queue at this time. I will turn the floor back over to management for closing comments.

Thank you, everyone, for taking the time to join the call. We look forward to talking with you again in the next call in early November. Thank you.

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