奇景光電 (HIMX) 2011 Q3 法說會逐字稿

Greeting, and welcome to the Himax Technologies' third quarter 2011 earnings conference call. (Operator's instructions).

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

Thank you operator. Welcome everyone to Himax's third quarter 2011 earnings call. Joining us from the Company are Mr. Jordan Wu, President and CEO, and Mrs. Jessica Pan, Acting CFO.

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 at 646 536 7009, or you can download a copy from 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 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 investment 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 acceptance of the share offering, the capability to maintain the full two-way fundability 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 the SEC 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 the US GAAP.

Such financial information is generated internally and has not been subjected to the same review and scrutiny, including internal auditing procedures and audit by independent auditors, to which we subject our annual consolidated financial statements, and may vary materially from unaudited 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.

I will now start with discussing our third quarter performance and provide outlook for the fourth quarter of 2011. Jessica will then provide further details on financials.

We reiterated our third quarter guidance on 19 October 2011. Our third quarter revenue, gross margin and earnings per ADS all met or exceeded our previous guidance.

Our third quarter revenues came in at $162.1 million, representing a 17.2% growth from $138.3 million in the third quarter of 2010 and a 1.0% growth from $160.6 million in the second quarter of 2011.

Revenues from large panel display drivers were $62 million, down 14.4% from a year ago and down 18.9% sequentially. Large panel drivers accounted for 38.3% of our total revenues for the third quarter compared to 52.4% a year ago and 47.6% in the previous quarter.

We are happy to report that sales for small and medium-sized applications was another record high for us in the third quarter of 2011. Revenues from small and medium-sized applications were $79.7 million, up 47.2% from the same period last year and up 28.1% sequentially. Small and medium-sized applications sales for cell phone applications more than doubled in the third quarter on a year-over-year basis and were up 61.4% sequentially, mostly due to strong demand of smart phones. Small and medium-sized applications accounted for 49.2% of total revenues for the third quarter, as compared to 39.2% for the same period last year, and 38.7% in the previous quarter.

We are extremely excited about the strong and steady growth in this sector which more than offset the sales loss in the large panel display drivers. I will elaborate more on this later in the call.

Revenues from our non-driver businesses were $20.4 million, up 75.0% from the same period last year and down 7.0% sequentially. Non-driver products accounted for 12.5% of our total revenues in the third quarter, as compared to 8.4% a year ago and 13.7% in the previous quarter.

Our gross margin for the third quarter was 18.5%, as compared to 22.9% a year earlier, and 18.6% in the previous quarter.

As an annual practice, we grant RSUs - or Restricted Share Units - at the end of September each year which lead to higher third quarter GAAP operating expenses compared to the other quarters of the year. The total value of our 2011 RSUs is approximately $3 million. Jessica will add more details on this later.

Net income attributable to shareholders for the third quarter was $0.6 million, or 0.4 cents per diluted ADS, compared to $0.4 million, or 0.3 cents per diluted ADS, a year ago, and $3.6 million, or $0.02 per diluted ADS, in the prior quarter.

Non GAAP net income attributable to shareholders for the third quarter was $4.8 million, or $0.03 per diluted ADS, compared to $7 million, or $0.04 per diluted ADS during the same period last year, and $5 million or $0.03 per diluted ADS in the prior quarter.

Now, I will elaborate further on the third quarter performance and fourth quarter outlook for a number of product lines.

As we discussed briefly earlier, our third quarter highlight is the strong growth of display drivers for small and medium-sized applications while the overall market demand in large-sized applications remained relatively weak amidst uncertainties in the global markets.

Thanks to the fast-growing smart phone sector, our small and medium-sized driver reached another record high in terms of units shipped, absolute value and percentage of total sales.

This is a direct result of our leading technology in smart phone drivers. This also demonstrates our successful implementation in regards to product diversification as well as market and customer base expansion.

The handset segment has become our single largest revenue contributor, replacing what was traditionally contributions from TV display drivers. In fact, revenues from the handset segment alone are now comparable to those from all large panel applications combined, including TV, monitor and laptops.

We are currently in a strong position in the smart phone sector with leading technologies and competitive products. We carry a wide range of smart phone products including hVGA, WVGA, nHD, qHD resolution drivers for mainstream smart phones as well as the HD720 high resolution drivers of which we are one of the industry leaders in shipping to first-tier smart phone brand customers.

We are also working with our panel partners in Taiwan, Japan, Korea and China to supply drivers for numerous smart phone brand customers. The growth momentum is expected to continue into the fourth quarter and beyond with strong demand from both Chinese and international brand customers.

Our non-driver products as a whole declined slightly in the third quarter versus second quarter primarily due to the weaker demand in large panel and laptop markets. However, it still grew 75% year-over-year with many products experiencing double digit growth.

Notwithstanding the short term setback, we still expect strong growth momentum for our non-driver products next year and beyond.

CMOS image sensor sales, which accounts for a significant portion of our non-driver sales, declined slightly in the third quarter. Laptops have been the largest revenue contributor to our CMOS image sensor products over the past quarters. However, the laptop market is facing headwinds with overbuilt inventory as well as competition from tablets which reduced customers' orders for CMOS image sensors in the short term. In the longer term, we expect the market to stabilize and we plan to release our high-resolution sensors for handsets next year to diversify our product portfolio and capture the tremendous growth potential in this market.

Our touch panel controller is expected to be the next bright spot for our non-driver products. In the third quarter we successfully mass-produced and shipped our multi-touch capacitive touch controllers to a worldwide smart phone brand leader. We expect this demand to grow further in the fourth quarter and beyond. With our product quality and proven first-tier customer shipping track record, we are confident that we will continue to gain more new customers in the future.

LCOS in the third quarter maintained steady shipping rates. We remain committed to the long-term development of LCOS microdisplay and its applications. In addition to pico projector - which accounts for the bulk of our LCOS shipments - we are working with customers on the development of brand new applications using our LCOS panels, some of which we have received tooling fees for the development of tailor-made products.

In the third quarter, with double digit sales growth to many of our top ten customers, revenue from related parties reduced to 39.3% of total sales, compared to 48.6% a year ago and 42.4% in the previous quarter. We believe a more diversified customer base would reduce our dependence on one single customer and help minimize our business risk.

Moving into the fourth quarter 2011, we are pleased to see our continuous efforts on product mix improvement and cost controls over the past few quarters come to fruition. We expect to see better gross margin and bottom line during the fourth quarter.

Looking forward, gross margin improvement will continue to be one of our key focuses.

As we mentioned earlier, we expect strong demand for small and medium panel drivers in the fourth quarter. Although the visibility for large-sized panel demand is still limited at the moment, we are seeing a relatively low level of inventory on the customers' side. We are well prepared for possible rush orders coming from a sudden inventory replenishment needs. This is not factored into the fourth quarter guidance we are going to provide.

In the fourth quarter, we expect our revenue to remain flat to slightly up with gross margin improving to over 20%. We also expect our profit to improve as a result of better product mix and continuous cost controls. GAAP earnings attributable to shareholders per ADS is expected to be in the range of $0.02 to $0.04.

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 third quarter financial results.

For the third quarter 2011, our GAAP operating expenses were $30.5 million, down 5.7% from $32.4 million a year ago and up 15.2% from $26.5 million in the previous quarter. As Jordan pointed out, the significant sequential increase was primarily due to the expenses resulting from the 2011 RSU grant. Without shares-based compensation, our operating expenses were $26.1 million in the third quarter as compared to $25.1 million for the same quarter 2010 and $25.3 million in the previous quarter.

The total value of our 2011 RSUs is approximately $3 million, out of which approximately 97% were immediately vested and expensed in the third quarter and paid in cash. The remainder will be paid in three equal installments of stocks at the first, second, and third anniversaries after the grant. The maximum share dilution in the next three years resulting from the 2011 RSU grant is about 0.04% of our total shares outstanding.

The higher GAAP operating expenses led to a GAAP operating loss of $0.5 million in the third quarter, compared to an operating loss of $0.7 million in the same period last year and an operating income of $3.4 million in the previous quarter.

Excluding share-based compensation and acquisition-related charges, our non-GAAP gross margin for the third quarter was 18.6%, as compared to 23% a year ago and 18.6% in the second quarter. Non-GAAP operating income for the third quarter was $4.5 million, down from $7.3 million in the same period last year and down from $5.1 million in the previous quarter.

Share-based compensation and acquisition-related charges for the third quarter were $3.7 million and $0.4 million, respectively, as compared to $6.3 million and $0.3 million a year earlier, and $1 million and $0.4 million in the second quarter.

Non-GAAP net income in the third quarter was $4.8 million or $0.03 per diluted ADS, down from $7 million or $0.04 per diluted ADS for the same period last year, and up from $5 million or $0.03 per diluted ADS in the previous quarter.

Our cash, cash equivalents and marketable securities available for sale were $90.8 million at the end of September, up from $82.6 million during the same period last year and down from $104.1 million a quarter ago. Restricted cash was $84.7 million at the end of September up from $44 million during the same period last year and up from $57.5 million at the end of the last quarter.

To give an update on the $25 million share buyback program, share repurchases by the end of October totaled $2.8 million or approximately 2.1 million ADSs. Their underlying ordinary shares will be cancelled as required. At the end of the October 2011, we had roughly $22.2 million remaining in the current authorized share repurchase plan. The share buyback program will continue to help improve the Company's earnings per share.

Inventories at the end of September were $104.7 million, compared to $111.7 million during the same period last year and $124.4 million a quarter ago. We expect to see substantial improvement on inventory level toward end of the year.

Net cash inflow from operating activities for the third quarter was $17.4 million as compared to a cash outflow of $3.5 million in the previous quarter. Cumulative cash inflow in 2011 was $26.2 million versus $27.8 million during the same period last year.

In addition, I would like to talk about potential goodwill impairment, a non-cash charge, which is subject to the final result of our pending goodwill impairment test. As of September 2011, we had $26.8 million of goodwill on our book, as a result of our acquisition of Wisepal in early 2007.

According to the Statement of Financial Accounting Standards No. 142, goodwill needs to be tested annually. Accordingly, we are performing a goodwill impairment analysis which is expected to be completed by April next year.

The fourth quarter 2011 guidance that Jordan provided earlier is based on 176.4 million outstanding ADS.

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

Thank you. Ladies and gentlemen, at this time we will be conducting a question and answer session. (Operator's instructions).

Our first question comes from the line of Jay Srivatsa from Chardan Capital Markets. Please proceed with your question.

Thanks for taking my questions. Congratulations on a good quarter and the guidance.

Let me ask you a few things Jordan. On the gross margin part of it you have guided for very strong growth in margins. Can you tell us where you're seeing the increase in margins? I suspect it's from small panel, but consequently even the mix improvement and mix in Q3 how come you didn't see a similar improvement in Q3 but you expect it to be in Q4? Can you address that issue?

Yes, thank you Jay.

Indeed you are right in saying that the improvement comes primarily from the difference in product mix, particularly the increase in terms of percentage from small panels. But if we look deeper into the small panel drivers composition, actually we are seeing a surge of demand coming from smart panels in Q4. We're actually starting in Q3 and coming in very strongly in Q4.

In fact in Q4 we tried to limit our shipments on most low-end feature phone drivers which, because of you know over-completion I think has a potentially lower margin compared to the new and upcoming smart phone segments.

So yes you are correct in saying that the margin improvement comes from more shipments for small panels, but Q4 versus Q3 I think the main difference comes firstly from the major increase in smart phones. Actually, if you look at our revenue (inaudible) based on forecast - again this is a forecast - but based on the forecast our Q4 smart panel revenue versus total -- sorry, smart phone revenue - versus total sales (inaudible) revenue are slightly over half, and this is a pretty significant improvement over the same number for Q3 and Q2.

So that's number one, and number two, we do have a few product push - although are still small in total revenues, but they are coming up strongly and they tend to enjoy good margin. A good example would be our touch panel controller.

We mentioned in our earlier talk that we have successfully mass produced and shipped to our Taiwan customer and we certainly expected momentum to continue into Q4, so Q4 versus Q3 we are seeing a very strong growth in that segment. That would be another example.

Okay that helps. In terms of large panel, we know that several Chinese TV manufacturers are ramping up towards the Chinese holidays, Chinese New Year holidays, so why would you not expect some growth in that space? You seem to be a little cautious on that large panel market.

I think - I'm not sure I can comment very much on customers' activity, but I think well firstly we do have a major share in those customers who are actually - they are primarily just one - the one headquarters in Beijing. An upcoming one in (inaudible) but I think they are in very very early stage of mass production, so they are - although we do expect, you know, hopefully good market share from the second customer, major customer in large panel in China, they are not really a real contributor to our revenue yet. Certainly we do expect next year we will see some good growth out of there because we are coming from nothing.

Now, for the existing customer, I think starting from end Q2, yes, starting from end of Q2 they started to face the pressure to adjust their inventory, so if you look at their shipments against our shipments to them, I think Q2 we shipped a bit too much to them and while Q3 and Q4 is the opposite. So I think that kind of explains why we are not seeing good growth from large panel.

Okay, your largest competitor has guided for sequential decline in revenues into Q4 from Q3 - almost high single digit decline - but yet you are optimistic on seeing revenues being either flat or up. So can you help us understand - is there any market share shift that you're seeing at CMI or any of your other customers relative to your competitor?

I think comparatively speaking, our small panel, small medium-sized panel as a percentage of product sales is now higher than our major competitor, and we all know where the growth is today, right, worldwide, so I think that - I guess that explains the difference.

Alright. My last question was on--

Yes, sorry Jay, go ahead.

--my last question was on ASPs - can you set the stage on where things are in terms of pricing, ASP erosion? Is there a lot of price pressure or are you seeing reasonable stability in pricing, both in the small panel and in the large panel?

I think two points - if you look at the apple to apple basis, the same product Q4 versus Q3, I would say the pricing pressure at the moment is not substantial compared to some times in the past. So we are seeing, you know, although the demand in forecast is not really fantastic, very exciting, but on the other hand the pricing pressure is not significant, and customers tend to behave in such a way that they don't really give you the whole lot of visibility, or you know a long-term forecast, but they expect you to be very (inaudible) on what you ordered. I think possibly as a result of that, they don't give you very strong pricing pressure because they expect rush orders.

So that would be my point one, and another respective - for the first time in quite a long time we have seen the overall company ASP increase in Q4 versus Q3. Why - smart phone. The ASP is so much higher compared to large panel drivers and certainly feature phones. So that is an interesting phenomena - ASP in smart phone. They don't just enjoy better gross margin, they have much higher ASPs.

So again, driven by high growth in smart phone, we are - again for the first time in, you know, god knows how many quarters, we have seen actually ASP increase for the overall Company.

Okay. Thank you very much.

I would just - to kind of elaborate on Jay's question, on small panel, I think - I mean everybody knows, you know, Chi Mei is our single biggest customer, although the percentage of total from Chi Mei has been substantially reduced, but it remains our single largest customer.

Now, Chi Mei's exposure in the market is primarily on large panel - as we all know - and they do have small panel facilities, but one of their main business models for small panel systems is to provide sales, provide panel with (inaudible) so to speak, to a whole bunch of customers primarily in China.

So in that segment, or for those capacities of Chi Mei, our direct customers - our customers are actually in China, rather than Chi Mei, although the panel comes from Chi Mei. And certainly that trend also kind of helps in our diversification of our customer base and I think that trend is certainly going to continue in any foreseeable future, but Chi Mei or some other large panel players will commit to do so - meaning to provide sales to customers who (inaudible) for any other customers. So it is the module makers who are our [priority] customers.

So the point I am trying to make is we hope, you know, over (inaudible) our customer diversification will continue going forward.

Any other questions?

Yes, our next question comes from the line of Jerry Su from Credit Suisse. Please proceed with your question.

Good morning Jordan, this is Jerry here. Just two questions - first is could you give us a business outlook on the different products - large size, small, medium-size and non-driver in fourth quarter, what you are seeing; which area will grow or which area will decline?

Okay, thank you Jerry. If you look at - let's see how we should break it up. In both quarters - I mean sometimes one quarter there is a (inaudible) a long-term trend, and certainly one Company's quarterly outcome doesn't represent the whole industry. So that's just a disclaimer.

But if you look at our quarter-over-quarter - and again, when I say the numbers they may not add up to our, like zero to slightly up growth, because certainly you will appreciate we tend to give a little bit of buffer in our guidance.

So we are seeing some slight decline in monitor, with some increase in TV, and cell phone remains double digit growth segment - again, aided by smart phone - and if you break down smart phone versus feature phone, as I said earlier - we are seeing around - on quarter-over-quarter basis we are seeing only about 10% - we are seeing almost, about (inaudible) the revenue for fourth than third quarter for smart phone. We had some decline, a small decline in feature phone shipments.

But again, it is actually not to say that we are seeing so weak feature phone demand, rather we try to kind of limit our shipments to certain customers so that we don't - we are not exposed to too much very low margin product.

Consumer electronics remain about flat to slightly up. So I would say the two major highlights are both cell phone and TV - both double digit growth. Within cell phone it is smart phone which is the real real highlight which support the sales performance.

Okay, that's very helpful. One follow-up question - on the notebook side, do you see any impact in first quarter next year from the Thai flood?

Certainly, we certainly do, although the impact I mean is indirect, you will appreciate that right? I mean to put together the whole laptop, you know, the assistant company needs to have all the parts available, and certainly the flood in Thailand is a big problem. So that certainly impacts the demand for laptop panels which in turn impacts us.

But we, as the supply chain management, (inaudible) on our own, we don't have any exposure in Thailand, so there is no impact there. But certainly our customers are impacted in that particular segment.

So in fourth quarter notebook (inaudible) that was just - I assume it will be a decline.

About flat. About flat. Again you may wonder why they don't add up. I mean everything is flat or slightly declined, how come it's - so again we - so you will appreciate we tend to set a little (inaudible) in our overall guidance.

Okay. One last question on the gold composite sum - which is gold, copper and nickel - one of your major back end foundry's has those as going to (inaudible). Could you give us some color or your thoughts on this kind of bump in technology - how much cost raising out of that would come to you?

Yes, gold bumps are four-part basis; account for roughly 10% of our total] (inaudible) material. So with the gold price increasing, I mean let's say from beginning of the year to the middle of the year, or if we look from last year to middle of the year, or our third quarter about the peak, it was substantial. So if gold price increased by, you know, let's say 30%, that means our total (inaudible) material increased by 3%, so that is very very substantial.

So (inaudible) gold bump accounted for above (inaudible) for those costs of (inaudible) material now is 10%, so you see that is significant. So it is indeed our key challenge to somehow save money over there.

And also, as further (inaudible) information, we are priced on gold bump processing by way of two - combination of two parts. One is their processing fee, you know to cover their labor and the facility and so on and so forth. The other one is the uses of gold. So we run our (inaudible) very tightly, very effectively. That means that the [density] of gold becomes very high, so as a result you may actually [suffer] more, although your overall IC, because of better design, is very cost competitive.

So we did try - we tried the (inaudible) approach you mentioned earlier, but so far we don't feel we can use this to all products because of further technical issues yet to be resolved, in particular the reliability.

Now yes it's painful because gold price is increasing and that's a big chunk of our costs, but the reliability problem is a disaster for the Company, so we are very very very cautious of that.

So we (inaudible) rather is a more critical [approach] and can be implemented in the short-term, which is to reduce the height and the width of gold bumps, so that way, although you are still using [pure] gold, but you are actually using a lot less gold. And I think we are among the market leaders in taking this to the market. We have started some mass production and we certainly expect the portion of reduced gold bumps - bump height and width - to substantially increase as a percentage total of our shipments very very soon and we believe we are a market leader in that.

In doing so, again, we have spent a very long time verifying the reliability of our products to make sure it's okay, and actually we have (inaudible) customers. We asked them to [qualify] them, so we have done everything we can to prevent any sort of, you know, future problems. So far we feel this is the right approach.

Okay. So when you mentioned that this gold composite bump cannot be used to all applications, do you mean only smart phone, I mean the [COG] could use this, and for the large like TVs it still has reliability issues?

Yes, some [COG] maybe, but when used for high-end [COG] - that's smart phone - when the gold density is too high and you're receiving too much gold and also the value of the IC becomes too high, then we don't want to risk it, and certainly we don't believe it's been proven to be reliable for large panel viewer product.

Okay, got it. Thank you.

So far anyway. Yes.

Our next question is a follow-up question from the line of Jay Srivatsa. Please proceed with your question.

Jordan can you give us an update on where you are with the Taiwan listing?

I think we kind of put it on hold in a way, because the market has been so bearish and we - certainly we didn't perform well in Q3 and I think, you know, first the overseas listing into Taiwan so far hasn't really received very good reception among the local markets. And certainly the global market being so uncertain and variation being so low, and also the fact that we are not really - we are not - we are [doing] listing to certainly, hopefully improve liquidity, but not to raise money, as you all understand.

So we hope we can kind of pick a better timing so that local investors out there subscribing to our shares will feel very happy. So we, again with the overall environment being so uncertain and negative, it's not (inaudible) at the moment.

Okay, in terms of inventories, can you give us a sense on what the make up is in terms of large panels versus small panels, and the reason I ask is if small panel demand is pretty strong as you seem to be suggesting, I would expect that the small panel inventory levels would be higher as well. So I want to try to see if you can give us some clarity of the make up of inventory.

It is (inaudible). Firstly I will explain the overall inventory level. We explained that we expect the Q4, end of the year inventory level to see substantial improvement, meaning much lower than that of Q3 and you also saw in our result announcement, Q3 level lower than Q2.

I would actually argue Q2 inventory level was too high for us, and why, because approximately at the (inaudible) - end of last year to early this year we saw a pretty major negative revision of forecasts coming from our customers across the Board, you know, all regions and all product sectors. So we suffered from high inventory level at the beginning of the year. We kind of spent the first half to kind of resolve that issue.

The first half and the Q3 - and that is one of the reasons why you saw in our earlier announcement that our Q3 cash flow from operations was pretty decent - that was because it was inventory, you know, inventory driven. We expect to see the same in Q4, and we expect at the end of the Q4 our inventory level will be slightly on the tight side, but it's not extraordinarily tight, okay, but certainly our first half inventory level was just way too high.

So it has been an internal goal for us, we must improve that because we're sitting on, you know, on inventory level coming out of customers [misleading] forecasts. So that's point number one.

Point number two - we should have seen a strong demand coming. Going forward we should be (inaudible) for the demand. We are not doing that so aggressively - why, because firstly I think we all know, firstly we are not really talking about strong growth; compared to our peers maybe we performed slightly better, but it's not really strong growth as such. We are talking about flattish growth.

Secondly, with the economy being so uncertain and our (inaudible) as well as (inaudible) has been so empty, so to speak, we do expect there should be room for part negotiation going forward. So why, we feel, you know, probably too early (inaudible).

And thirdly, typically, large panel customers they are large, large, large in size and they have complicated inventory control management, because the parts come from everywhere - so many parts to manage - so they typically have what they call VMI - Vendor Management Inventory system - under which they provide a hub and you are supposed to bid on their forecast, ship your goods to their hub, waiting for them to take.

So by the time you ship your goods to the hub, it is your inventory, rather than theirs, and because of this VMI management practice, large panel inventory for guys like us tend to be higher because until we make a shipment it's not revenue yet, we are still waiting for the customers to take the goods to their production line.

The small panel I explained earlier, they tend to be much smaller customers. They tend not to have such practice, so in that way our inventory days turnover is better. That is not say - so if you take from start of manufacturing to shipping, they are probably the same, however there is additional waiting time in the hub for those VMI customers, and they tend to [large panel] customers, so you do see large panel customers having high inventory days.

Does that answer your question?

Yes. Thank you very much.

Our next question comes from the line of Jack Wilson from UBS. Please proceed with your question.

Hi, I apologize for missing part of the call. Do you anticipate the cash dividend for the 2012 year?

We don't see any reason why not, but I mean this - we are a tech company, we are high risk, so it's not something we would undertake so to speak. So it depends on our cash flow position, but we don't really - I mean we are trying really really hard to control operating costs, our R&D, our admin, our - you know even sales expense and so on and so forth - and we will certainly try to limit out new investments, our in-house capacity expansion including our WOO costs and so on - so in a way we try to converge our activities, you know, that would be the key - one the key goals of next year - converge our activities so that the remaining business will try to turn profit and try to turn positive cash flow, rather than to invest in more things.

In fact, we may actually make an announcement, you know, further down the road that we may actually restructure some of our existing umbrella business so that we feel we have the right positioning, we have the right approach to the market.

You will appreciate, you know in the past few years we have been only investing so they are expenses to us. So one of the key challenges for next year and also a key kind of goal for the management for next year is to how we turn those historical expenses into profit.

So what I am trying to say is cash flow wise, I don't really expect a major, major kind of big ticket item cash flow outflow for us next year.

So assuming business remains not too negative (inaudible) , I believe [our customers will] happily (inaudible) strong growth areas and we have good positions in those areas, so I don't see any reason why not. But again, I mean its other product co-commitment as such.

That's great. Dividends are becoming more and more important to investors these days, so we appreciate it very much when you do it.

I appreciate that, and again, as a Company, our philosophy is not to keep a whole bunch assets cash within the Company. We feel we just - if we do that we will just spend it stupidly - so our philosophy is to return that to investors.

Thank you very much.

And my personal view for next year is I think, I mean, how worse can you go, I mean for panels? I mean I may be wrong, but I hope I'm not, but I really don't feel next year will be that negative for panel industry - for panel industry. The panel industry, you know, gets better (inaudible) then they do better, and Jay pointed out already that there are actually new customer opportunity coming in in China, you know. They have major skill sets and we do have good exposure to those new customers.

So we don't feel so bad about next year.

Any further questions?

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. We look forward to talking with you again at our upcoming earnings call in early February next year.

Thank you.

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