奇景光電 (HIMX) 2012 Q1 法說會逐字稿

Greetings and welcome to the Himax Technologies Inc. first quarter 2012 earnings conference call. (Operator Instructions). As a reminder, the conference is being recorded.

It is now my pleasure to introduce your host, John Mattio, Senior Vice President of MZ North America. Thank you, sir. You may begin.

Thank you very much, operator. Welcome, everyone, to Himax first quarter 2012 earnings call. Joining us from the Company are Mr. Jordan Wu, President and Chief Executive Officer, and Ms. Jackie Chang, Chief Financial Officer.

After the Company's prepared comments, we have allocated time for questions in the Q&A session.

If you have not yet received a copy of today's results release, please call MZ Group at 212-301-7130. Access to the press release on financial portals, Yahoo, or Google is also available and you can download a copy from Himax's website, www.himax.com.tw.

Before we begin the formal remarks, I would like to remind everyone that some of the statements in this conference call, including statements regarding expected future financial results and industry growth, 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 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 or non-driver products developed by the Company, demand for end-use application products, reliance on a small group of principal customers, the uncertainty of continued success in technological innovations, and other operational and market challenges, including the Company's Taiwan's depositary listing, TDR, the capability to maintain the full two-way fungibles 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 defined in the sections entitled Risk Factors in its Form 20-F for the year ended December 31, 2011.

Except for the Company's full-year 2011 financials that were provided on the Company's 20-F filed with the SEC, 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 auditing procedures and audit by independent auditors, to which we subject our -- the Company's 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 our Chairman and CEO, Mr. Jordan Wu. Jordan, the floor is yours.

Thank you, John, and thank you, everyone, for being with us for today's call.

As you know, we revised our first quarter's guidance on April 5th, raising our forecast revenue to $166.7 million, gross margin to 22.9%, and GAAP earnings per ADS to $0.066. All these numbers exceed the initial guidance we provided on February 13th. I'm pleased to report that the actual first quarter results are the same as our revised guidance. I will give you some details today as to how we were able to achieve a better Q1 than we initially anticipated.

Now let's turn from our top-line performance. Our first quarter revenues came in at $166.7 million, representing 18.1% growth year over year and 1.5% decline sequentially. Notwithstanding the slight decline, we are happy with the sales performance as the first quarter was a seasonally slow quarter, marked by fewer business days due to the Chinese New Year holiday.

Revenue from large panel display drivers was $71.4 million, up 9.9% from a year ago and 6.6% sequentially. Large panel drivers accounted for 42.8% of our total revenue for the first quarter, compared to 46% a year ago and 39.6% in the previous quarter.

The quarter-over-quarter increase was mainly due to strong orders from the TV segment as many of our Chinese end customers launched new models in Q1, which generated strong sales.

We are also receiving new business from Chinese panel customers, which contributed to the year-over-year growth. We see this trend continuing through 2012.

Sales of small and medium-size applications continued to demonstrate strong momentum year over year in the first quarter. Revenue from small and medium-sized applications was $72.4 million, up 21.4% over the same period last year and down 10.1% sequentially.

The sequential sales decline was mainly a reflection of the seasonal behavior in the sector, as well as the new year holiday break in China. As expected, demand for small and medium-size applications rebounded in March.

The year-over-year growth, on the other hand, is the result of our focus and strong execution on a number of fast-growing product segments, particularly smartphones, automotive, and tablets. Our drivers for small and medium-sized applications accounted for 43.4% of the total revenues for the first quarter as compared to 42.3% for the same period last year and 47.6% in the previous quarter.

Revenues from our non-driver businesses were $22.9 million, an increase of 38.8% from the same period last year and up 5.6% sequentially. This strong result is an illustration of the continuing growth in all of our non-driver products, with many of them experiencing quarter-over-quarter double-digit increase.

As a reminder, our non-driver product lines include touch panel controllers, CMOS image sensors, wafer level optics, LCOS micro displays, power management ICs, LED drivers, timing controllers, ASIC services, and IP licensing.

Our non-driver products accounted for 13.8% of our total revenue in the first quarter as compared to 11.7% a year ago and 12.8% in the previous quarter.

Revenues from related parties were 37.9% of total sales in Q1, as compared to 47.5% a year ago and 35.1% in the previous quarter.

We continue to transform our product mix and expand our reach to other customers successfully. A more diversified customer base will further reduce our dependence on any single customer and help minimize our business risk.

Our cash gross margin for the first quarter was 22.9%, a 280 basis point improvement over 20.1% a year earlier and an 80 point improvement from 22.1% in the previous quarter. This improvement is a direct result of our product mix change, especially from high margin non-driver products. Continued gross margin improvement will remain one of our main focuses in year 2012.

For the first quarter, GAAP net income was $11.3 million or $0.066 per ADS, compared to $2.7 million or $0.015 per ADS in the corresponding quarter a year ago and $3.7 million or $0.021 per ADS in the fourth quarter of 2011.

GAAP net income grew 315.5% from the same period last year and 204.4% over the previous quarter.

We reported non-GAAP adjusted net income in the fourth quarter of 2011, which we believed could best reflect our fundamental financial performance for the period. In coming up with the non-GAAP adjusted pretax income, we excluded one-off charges such as bad debt collections and year-end tax charge-offs.

On a comparable basis, the non-GAAP adjusted pretax income for the first quarter 2012 was $15.6 million or $0.09 per diluted ADS, up 346.2%. as compared to $3.5 million or $0.02 per diluted ADS during the same period last year, and up 50.7% from $10.3 million or $0.059 per diluted ADS in the previous quarter.

While there can be no assurance that there will be no further one-time charge-offs for taxes or other reasons for this year, we have taken and will continue to take measures to try to adequately provide for such potential charge-offs each quarter so as to minimize quarterly fluctuation of our bottom line resulting from such causes as the exchange rate and R&D tax credits.

The bottom line improvement for the first quarter was mainly the result of a positive change in our product mix towards higher margin non-driver and small and medium-size driver sales, which command higher gross margins. At the same time, we continued to make efforts in managing our operating expenses. Again, margin expansion remains one of our highest priorities.

The big picture summary of our first quarter performance is that we achieved satisfactory sales and higher gross margin amidst a seasonally weak season. With control over the expenses, we have, therefore, substantially improved bottom-line profitability. This is in line with the overall strategy we set in place several years ago.

While I'm pleased with the progress we have made in the last few quarters, our entire organization remains focused on achieving additional improvements in year 2012 and beyond.

I will now ask Jackie Chang, our CFO, to provide more clarity and details on our financials. After Jackie's presentation, we will further discuss our outlook for the second quarter of 2012. Jackie?

Thank you, Jordan. I will now provide additional details for our first quarter financial results.

Our GAAP operating expenses were $23.7 million in Q1 2012, down 8.2% from $25.8 million a year ago and down 9.7% from $26.2 million in the fourth quarter of 2011. GAAP operating income for the first quarter was $14.5 million or 8.7% of sales, up $12 million from $2.5 million or 1.8% of sales a year ago and up $3.3 million from $11.2 million or 6.6% of sales in the fourth quarter of 2011.

GAAP operating income grew 469% over the same period of 2011 and it grew 29.4% over the last quarter.

Reporting GAAP net income and earnings per diluted ADS was $11.3 million or $0.066 per ADS for the first quarter of 2012 compared to $2.7 million or $0.015 per ADS in the corresponding quarter a year ago and up from $3.7 million or $0.021 per ADS in the previous quarter. As Jordan mentioned earlier, we grew 204.4% over the fourth quarter of 2011.

Jordan mentioned earlier about the non-GAAP adjusted pretax income. For investors' easy reference, we have provided detailed reconciliation in the earnings release.

Our cash, cash equivalents, and marketable securities available for sale were $102.1 million at end of March, down slightly from $116.4 million for the same period last year and from $106.3 million a quarter ago. On top of the above cash position, restricted cash was $84.2 million at the end of first quarter, up from $57.5 million during the same period last year and the same as the end of the last quarter. The quarter-over-quarter decrease was due to the 4.5 million ADS we bought back, totaling $6.5 million in the first quarter of 2012.

Inventories at the end of March were $118.5 million, down from $130.1 million a year ago and slightly up from $113 million a quarter ago. Accounts receivables at end of March were $189 million compared to $166.8 million a year ago and $181.1 million last quarter.

Days sales outstanding were 103 days at end of March 2012, little changed versus 106 days last year and 104 days at the end of the last quarter.

Net cash inflow from operating activities for the first quarter was $3.6 million, which consists of net income before depreciation and amortization of $14.4 million, offset by an increase in receivables and inventories. We spent approximately $1.6 million in capital expenditures in the first quarter versus $1.9 million a year ago and $1.2 million last quarter.

With regard to our $25 million share buyback program, we purchased approximately $6.5 million or 4.5 million ADS in the first quarter 2012. Cumulatively, we have purchased a total of $11.2 million or approximately 8.3 million ADS through March 31st, 2012.

As of March 31st, 2012, Himax had 170.1 million outstanding equivalent ADS. We will continue to execute the remaining share repurchase program in accordance with 10b-18.

I will now turn the floor back to Jordan to discuss our growth strategies and second quarter guidance.

We experienced growth in the large panel business in the first quarter mainly due to our customers' [LTE] model launches and signing new panel and (inaudible) customers in China.

Large panel drivers accounted for 42.8% of our total revenues for the first quarter compared to 46% a year ago and 39.6% in the previous quarter. Large panel display drivers remains one of our long-term focuses, over which we have continued to commit to R&D activities.

At the (inaudible) large panels require more and more high-speed interface for higher resolution and (inaudible) rate. We are at the leading edge in the development of various high-speed interfaces, which we believe will be crucial for next generation large panel products.

As we reported earlier, our small and medium-size drivers grew 21.4% year over year during the first quarter, representing 43.4% of our total revenues as compared to 42.3% a year ago.

The single-fastest-growing application in this product segment is smartphones. We are currently in a strong position in the smartphone sector with leading technologies, competitive products and good customer lineup. We carry a comprehensive, industry-leading range of products across mainstream and higher smartphones. We are also working with panel manufacturers-- panel manufacturer partners across China, Taiwan, Japan, and Korea to supply drivers for numerous smartphone brand customers in China and internationally. We expect this growth momentum to continue throughout 2012, driven by strong demand from both Chinese and well-known international brands.

Beyond smartphones, we are also working closely with numerous panel makers on other small and medium-size applications, including automotive and tablets, among others, which all show strong signs of growth.

Our non-driver products continue to show solid growth. Our non-driver products accounts for 13.8% of our total revenues as compared to 11.4% a year ago and 12.8% in the previous quarter. We are confident that the growth momentum from our non-driver products will continue throughout the rest of 2012 and beyond.

We started shipments of our multi-finger competitive touch panel controllers to a leading smartphone maker in 2011. Ever since then, we have been awarded with smartphone projects with that same customer in 2012.

Additionally, thanks to our proven product quality and first-tier customer shipping record, we have won projects with other brand names, some of which we hope will contribute to our sales starting the second half.

In our CMOS image sensor product line, we have successfully penetrated several top-tier customers in the notebook PC markets which some shipments already started at the end of the first quarter.

In 2012 we expect to see significant shipments of our HD 700p sensors, which are used by many customers to replace the older VGA sensors with the productization of Windows 8.

We also see rapid growth and promising opportunities in China for our new sensor products used in both the smartphones and automotive/(inaudible) product segments.

For our PMIC and WLED product lines, we continue to focus on monitor and TV applications and make efforts to extending our product coverage for the different needs of various customers. We are also adding customers in new regions such as China and Japan, and new segments, such as TV converter and TV fresh monitor system makers, as opposed to our initial focus of panel makers in Taiwan. We expect this product line to contribute positively to our overall profitability starting in 2012.

We are particularly excited about some recent business progress we have made in our LCOS products. We are working with a number of top-tier customers to develop certain new applications using our LCOS panels. Separately, we have also signed major contracts with [PON] customers providing IP licensing and ASIC services, some of which involve the same customers using our LCOS panels for their brand-new product ideas.

We are happy that we are able to offer one-stop shopping for our customers who need both the LCOS micro displays for their new product ideas and sophisticated ASIC service to facilitate their new system designs. This is an illustration of much of our strong R&D capability, but also the synergy of product and know-how that we are able to bring to our customers. Whereas this will not bring immediate financial contribution, we believe these products can facilitate our long-term growth.

Now moving to the second quarter outlook, we are seeing strong demand across virtually all product lines, particularly in smartphones, driver IC, PMIC, (inaudible), touch-controller IC, and CMOS image sensors. The strong demand will not only drive revenue, but also help the Company's overall gross margin and profitability.

For the second quarter of 2012, we expect revenue to increase by 15% to 20% compared to the first quarter of 2012, gross margin to be slightly up, and GAAP earnings attributable to shareholders to be in the range of $0.08 to $0.10 per diluted ADS, based on 170 million outstanding ADSs.

Thank you for your interest in Himax. We appreciate your joining today's call and we look forward to a productive and profitable year in 2012.

Operator, we can now open the floor for questions.

Thank you. (Operator Instructions). Our first question comes from Jay Srivatsa of Chardan Capital Markets. Caller, please proceed with your question.

Thank you. Congratulations on a good quarter. Jordan, as you look to Q2, what do you expect the product mix to be? Do you expect it to favor more the small and medium panels or do you expect a similar mix as you enter Q2?

Thank you, Jay. Yes, I think you are right, it will move towards small and medium-size panels, with the strongest growing segment being -- expected to be smartphones.

All right. Given that --

So, let me just -- we actually said earlier in our Q1 we have 40%-plus for large panel and 40%-plus for small, medium-sized panels. They're about equal. And based on our current forecast, we have seen some slight decline in large panels, but a very, very strong -- sorry, some slight growth in large panels, but a rather significant growth coming from small panels.

Okay. Given that, what -- and given that small panel tends to have slightly better margins for you, what is your longer-term gross margin profile as you look out three, four quarters from now?

Three and four quarters is a very long time, Jay, in our industry, you appreciate. I think we constantly face competition and, I mean, obviously, the higher end we move towards, the higher margin we enjoy. That is, indeed, the truth.

However, today's [high] VGA is kind of smartphone and it's considered to be somehow towards the higher-end spectrum, highest end of the spectrum. But I'm sure not very long afterwards it will become -- it will kind of start to become mainstream and when you see more and more competition with some cutthroat prices coming in.

So, we'd like to remain our leading-edge in high end as a way to maintain or improve our gross margin, but at this stage, I mean, to predict a year from now our gross margin is really a bit hard.

And I think there is also additional downside which I would like to highlight to our gross margin prospects, which is the foundry capacity status. It's becoming tight and we -- however, we are pretty -- we are quite confident in the foreseeable quarters we are safe in terms of our preparation for the capacity. But that also implies price offering from project partners will become tougher and tougher to negotiate.

So, there are really many factors that can influence our gross margin, but as a long-term trend moving towards high-end small panels certainly is always a gross margin booster because you get more customers, you get less competition and they are less commoditized products.

All right. Speaking of competition, it appears Renesas in Japan is exiting the LCD driver IC market, which leads me to believe that a lot of the Japanese companies like Sharp and Toshiba could potentially be looking for external solutions. Do you see this as an opportunity going forward? And, if so, how do you hope to address it?

I think the company you mentioned, I think my understanding is they have announced to leave large-panel business. They are not leaving the small panel business (inaudible) business yet. So, that -- I think they remain a competitor in that sector.

But I think, overall, we do see our strongest competitors coming from Taiwan rather than Japan. So -- and I think -- I believe certainly they are under a lot of pressure, including their economy, their -- Japan not being the strongest panel market and the currency and so on. So, I think they do -- their exiting the sector does represent an opportunity for us, but I think for the time being it's mainly on large panel.

All right. Large question, at your largest customer, where are things at in terms of market share relative to your domestic competitor? Has it stabilized? Are you seeing more market share shifting towards you or otherwise?

We are seeing the split now is being stabilized.

All right. Thank you very much.

Thank you, Jay.

(Operator Instructions). Our next question comes from Jon Gruber of Gruber & McBaine. Caller, please proceed with your question.

Good morning. Great guidance.

A question on your other products, LCOS, what progress have we made there? I mean, I know -- are we in the -- potentially in these Google glasses? Where have you got image sensors? What progress have you made there?

We have been very careful in drafting our script about that paragraph. I think -- Jon, I think we have said pretty much as we are allowed to say. I mean, you appreciate we are under an NDA. The nature of the product we are developing with our customers is sensitive.

So, one way or the other, I'm not commenting on the companies, their projects, or their projects you mentioned. But, indeed, I can only say we are involved in some very exciting brand-new product ideas and we are -- we play a very critical role in their -- in our customers' product development, both in terms of LCOS being a key part, both in terms of their total material cost composition and also in terms of the critical aspect of this technology.

And I also mentioned with some of our customers they also engaged us for ASIC service. What we meant by that is that we are -- Himax is a display semiconductor image processing provider. We -- so our customers, in order for their main system or main system IC, whatever that is, to communicate very effectively with our micro displays and sometimes they need to, in between, somehow manipulate the signals, doing some kind of algorithm, compression, decompression, some kind of little tricks to make it work better, and this is where we can come in and help out and certainly over the process we'll try to get a new piece of business.

So, these are -- and I think the fact that we are able to provide that is extremely valuable to our customers because firstly, they are very concerned about confidentiality, and secondly, to be able to talk to one vendor rather than two is extremely helpful and effective in their development process.

Again, I am certainly not allowed to disclose the name or even the nature of the product.

Let me ask it a different way. The other products, which is a lot of the growth areas in the Company, what kind of growth do you expect from that category in calendar '12 versus '11?

I mean, certainly is the -- I mean, not necessarily the LCOS, because we are -- okay, I mentioned earlier all these most exciting developments that we are into are not necessarily our top-line or bottom-line contributor for this year, per se. Hopefully, starting next year we'll see very, very significant contribution coming from there.

But other than that, literally every single sector we are seeing easily double-digit growth year over year. And, I mean, many of them even double-digit growth quarter over quarter.

Thank you very much.

Thank you.

Our next question comes from Jerry Su of Credit Suisse. Caller, please proceed with your question.

Hi, Jordan and Jackie. Congratulations on the good result. Could you address your smartphone revenue mix during the quarter and how does that compare with -- compare to the fourth quarter?

Meaning within smartphone segment how is the product breakdown?

Yes.

We don't really provide a lot of details on that, but I can tell you the mainstream WVGA and high VGA products, high VGA being on the slightly lower end of the smartphone and WVGA, I think, is now the mainstream high-end product. We certainly have -- we go all the way up to HD 720, also to QSD and others.

So, as far as product breakdown or revenue breakdown is concerned, they come mainly from WVGA and high VGA. I think -- I don't have the number right in front of me, but they are about equal and they compose a very big chunk of our smartphone sales right now.

Okay. Then how about the smartphone revenue in first quarter? How does that compare to 4Q?

Smartphone only, you mean?

Yes, smartphone only.

It's a double-digit decline and we mentioned in our early remarks that it's a seasonal issue in China.

Okay. Then --

We expect very, very strong growth this quarter.

Okay. And then my second question is regarding the wafer foundry tightness you mentioned, I think a wafer foundry in Taiwan has guided that second quarter their wafer shipment is going to grow by 40%-plus quarter over quarter. So, I think most of the -- including Himax and your peers, your guidance is somewhere around 15% to 20%.

Could you help us understand what is the disconnection of the wafer foundries wafer [starts] and your guidance? Do you think that there is double booking going on or the wafer starts in Tokyo is in preparation for the third quarter demand?

40%? Really? I didn't know that. Are you referring to, like, dedicated specialized driver IC foundries?

Yes, I think Vanguard's guidance is around 40%.

I think they started low.

I would say -- they started low?

Yes.

I think that would be a good explanation, yes. I think towards the end of last year I think people probably overbuilt a bit and then there was, at some point during Q1 there was a pretty dramatic reduction of forecasts across the board, coming from all customers, all regions, all product lines, literally, because people were, I think, a bit uncertain about how to get prepared for Chinese New Year period production.

So, I think they probably started low and that is why they have a very strong Q2, q-over-q growth. And I think, again, I mean, we are not providing guidance for Q3 outlook, but, I mean, there's no reason to believe Q3 will be substantially decline from Q2.

So, I think people are, indeed, I mean, us included, we have to get ready for Q3, as well. So, we are not slowing down.

Okay. So, we don't have to worry about capacity double booking?

I don't think so.

Not right now.

I don't think anybody would -- I mean, you talk about -- I mean, it's not just a booking, per se. If they -- you are talking about they are announcing the guidance. It means revenue for them, so it's more than just booking.

Yes.

I mean, certainly we are not going to, just for the sake of it, put in a lot of orders and receive a lot of inventory and sit on inventory waiting for the market to really pick up strongly. With that kind of outlandish number you talk about, no, we are not doing that.

Okay, thank you.

And we do have very good long-term and also day-to-day ongoing kind of dialogue with our key foundry partners about capacity status and we do provide pretty deep and long-term visibility for them. And we try to kind of smooth out their production as a way to help them reduce their costs and kind of maintain a stable capacity situation. We do try to do that.

So, what I'm trying to say is why we do see capacity becoming tight as opposed to last year, we are not really expecting any surprises in kind of any serious shortage for Himax.

Okay. Thank you.

Thank you, Jerry.

Our next question is a follow up from Jay Srivatsa. Caller, please proceed with your question.

Yes, thanks. Jordan, you mentioned ASIC services. That's quite a bit different from your current investment in R&D relative to driver ICs. Can you highlight what's the ultimate objective in terms of what you're trying to do in terms of adding your capability in the ASICs side?

Very good question, Jay. We actually mentioned about this somehow in our last call and that was probably the first time in public that we talked about it. But we started to reposition our old TV and monitor chipset business. We basically said, okay, we are -- compared to the market leaders, we are behind. So, we need to switch our direction.

But over the past -- I don't even remember how many years -- but past years of investment in the TV and monitor chipset SOC businesses we have put together a great team with a lot of very valuable internal IPs, which are all related to, again, image processing and SOC.

So, we -- so, in the past, we tried to -- we tried to use their existence and also all this IP and know-how to provide our own products for digital TVs and monitors. And now we kind of reposition our strategy so that we are utilizing the same set of people and IPs and turning to customers who want much more than just a mainstream SOC processor. They want something unique in their image processing needs.

And what we provide is mainly -- to say it's ASIC application processor, I think, is over simplified, because when people talk about application processors, the definition is very, very wide. But it's a kind of application processor that we are providing to our customers, but it's all ASIC in nature because more customers come to us because they want certain (inaudible) that the tier-one TV guys are reluctant to do. Other TV -- other guys are unable to do. The specialized ASIC guys are unable to do, because they don't have the video and image processing know-how, and we fit in very nicely.

And for this business we typically would charge (inaudible) and we would also sell our chips once it's successful. And so we kind of stopped developing, to a large extent, developing our own products. We are now developing for others, for customers, for their products. So all these products we cannot sell to other customers, but we do get [NIE] income for the development and if we are lucky, we get to sell the products when they are successful.

And then, I mentioned about this when I talked about LCOS panel. Now, in that situation, again, some of our customers are developing something very, very unique. Nobody has ever done that before. So, naturally, they do -- they can't use any standard products, whether it's their CPU or whatever. (Inaudible). And, certainly, our LCOS panel is very specialized, as well.

So, again, there are tremendous opportunities over there because we are, on the one hand providing LCOS. On the other hand, we are telling our customers, hey, by the way, if you do need ASIC service requiring sophisticated algorithms, which is video-processing related, hey, you can also come to us, as well. And many of our customers are very happy to hear that.

So, that's why -- that's how we are (inaudible) opportunity there. However, our ASIC service is not limited to this segment only. We are also pursuing other opportunities.

All right. Last question, for Jackie. It looks like your OpEx numbers have come down quite a bit sequentially. What -- where do you see the cost reduction -- where did you do the cost reduction and where do you see the OpEx going for the next few quarters?

OpEx.

Oh, the OpEx. I think that we indicated that our overhead will, pretty much, stay constant from last year because the main of our ramping up cost already occurred and probably not going to be recurring and all we have left is the stabilized operating expenses that kind of consistent with our revenue growth.

So, we do not see the operating expenses increase much more in 2012 compared to 2011. So, I would say that the overall cost management, cost controls, are in place and that pretty much fits into our business model and our revenue growth.

Jay, let me also try to elaborate on your question. Again, you have observed very closely and it's a very good question.

I think, first, the driver IC. Compared to the past, I think people are now a lot more disciplined, us and our customers combined are a lot more disciplined in terms of having new driver ICs. It is good for both us and the customers because with most driver ICs, our customers need to develop a lot more R&D expenses to develop all these modules and verify these modules and promote these modules. And also their material separation becomes a lot more difficult and inventory control is always a headache.

Having said that, how you stabilize your driver ICs for various multiple panels is a serious engineering subject. But I think over time people have learned the lesson and, again, our customers and us, together, have become a lot more disciplined. So, I think -- I see it as a long-term kind of reduction of our R&D expenses. That is item number one.

Item number two on non-driver ICs, LCOS as a first example. We needed to focus on pico-projector market and we have -- we needed to develop (inaudible) products, so that took time and money and once our product roadmap of our standard products that we offer is complete, we are basically telling customers, if you want anything beyond that, we are asking you to pay NIE for our -- and we'll do a specialized panel for you.

And certainly in that -- and so, whenever we come into a project development we receive NIE and, as a result, the number of new product panels we are developing is less than last year.

For ASIC service, right, we used to have our own TV chipset and, again, over there we needed a product roadmap. So, it is -- rather than one product it is a set of products. Now, we are saying we are not doing that any more. We are waiting for the customer to come to us -- well, actually, we are promoting to our customers and hoping to engage new projects so the number of projects becomes less. What I'm trying to say is this.

And also, as a consequence, we need a lot more less in-field service engineers compared to before. That also reduces our OpEx.

I would probably say about our sensors, last couple of years, being a newcomer, we are very, very busy trying to put together not the most comprehensive but a kind of respectable road map. Otherwise, people say you're only a piece of sensor. And, I mean, I like your product, but I can't use you because you cannot service me anywhere else. So, you need to have a set of products.

And we are kind of through that stage already. So now we are a lot more, again, disciplined in terms of new product development. Our feasibility study is a lot more strict than before. We need to make sure we got all the market information. We make sure what we invest in this new project is a profitable project for us.

So, right, all this, both driver and non-driver, I think it is a matter of discipline and also a matter of kind of the background, right, now against last couple of years. I think there are things that we do to intentionally control our OpEx.

But, I mean, OpEx every quarter, I mean, if you look at the long-term trend, I'm pretty sure this will be the trend, but I cannot guarantee quarter over quarter there could be fluctuations because we can have two major tape-outs just happen within this quarter, then OpEx comes up. So, quarter over quarter short-term fluctuation is necessary. But as a long-term trend, I think what I described is a fair statement.

Thank you very much.

Thank you. Thank you for the question.

(Operator Instructions). Our next question comes from [Steve Huang] of [Denato Research]. Caller, please proceed with your question.

Hi, Jordan, Jackie. Hello? Could you guys hear me?

Yes.

Oh, okay. Congrats on the good quarter.

Actually, looking at your financial statement I observed that your revenue from CMI has been declining for a couple of quarters and in Q1 this is the first quarter to show the recovery. So, my question is, do you think there is market share again from CMI is sustainable into the second quarter and third quarter or this is just a new product launch and we are the early movers to gain their new product design?

I think it's more of the latter rather than the former.

The latter than the former?

Yes, it's a new product launch and we are the early movers, so we kind of enjoy the early ride and I cannot -- it's very difficult to comment -- for me to comment on kind of the long term or even short-term kind of allocation of vendors' business from our customers' point of view. So, it's difficult to comment, for me to comment on that.

But I think -- as my personal observation, I think it's primarily the early performance and we enjoy an early lead and, therefore, we enjoy the ride.

Great. Got it. And then, Jordan, I just would like to have your view on the large panel industry, because in Q1 your large panel business actually beat the overall market. But for your Q2 guidance, actually your revenue from large panel is kind of like just tracking in line with the overall industry.

So, what's your view on the large panel market? Do you think there will be like a dramatic recovery acting in the second quarter and third quarter or I just would like to hear you view?

Certainly not in second quarter. Longer term, I would certainly love to see some recovery, but I mean, I think -- I guess we have to be realistic. I mean, I think certainly the growth -- it's hard to imagine the same kind of growth momentum coming from large panel as opposed to certain segments of small panel, such as smartphone, automotive, all these (inaudible). All these are really enjoying very strong momentum.

And as far as large panel is concerned, I think -- I mean, we do have -- if I look at my numbers, we do have a short-term second quarter kind of upswing in, say, laptop, right? And I think we do believe the new laptop computers will drive some growth from there. But, again, laptop panel is not necessarily the very significant portion of the total large panel business.

So, as far as monitor and TV is concerned, we don't really see very strong growth kind of (inaudible) prospect. We don't see that.

Got it. Okay, in terms of smartphone, could you provide like in Q1 how many percentage of revenue comes from smartphone? Because I remember in Q4 it was around like 10% to 11%. And how about in Q1?

In Q1 --

Sorry, in Q4 it's about 18%.

Yes, that's -- in Q1 it's between 20% to 25%, 20%-plus. Smartphone alone, including feature phone.

Smartphone accounts for 20% of total revenue in Q1?

20%-plus, more than 20%. It's in 20% to 25%.

So, if I remember right, in Q4 --

Sorry, sorry, sorry. Sorry. Correction, correction. Mobile phone in total was mid-20s -- between 20% to 25%. Smartphone alone was about 15%.

Okay, smartphone around 15% of total revenue.

Yes.

Okay. And you expect smartphone will see like beyond corporate average growth in the second growth?

Much, much higher than average growth.

Much, much higher. Okay. In terms of your SOC business is there any product that has over 5% total revenue contribution -- not SOC, non-driver businesses?

Oh, in the non-driver business, I need to do my math. Let me see. You mean, well, firstly, we are in the early stage, right? Let me kind of one step backwards.

I mentioned earlier, second half of last year, we decided to make the -- reposition of our team, our business, in this segment. So, we kind of only started towards the end of last year and I think we were pretty lucky. We got -- we have been able to sign up quite a number of very significant contracts from a number of very significant customers.

But this ASIC service business, in the long term, its revenue stream will come from twofold. Number one, the NIE sales, NIE revenue, and the other one is the unit sales when you are through your development stage and the customer starts to make shipments.

And also, we do -- we also have IP licensing business, which, together with the repositioning of our TV team, is now a new product offering we are doing and we have also engaged a couple of customers for that.

And, again, over there, we think we could have a one-off charge or a certain -- in a few transactions a one-off charge to a customer and they will use our IP and embed our IP into their ICs and when they start to ship their ICs, we get to get some royalty income.

So, they are twofold. So, now, given the fact that we are in the early, very early stage, we have only the first type of income, the one of fees for IP and the NIE charge. Part of the NIE charge -- NIE charges typically are spread across your development phase.

So, that is kind of the background. You asked me --

Because I remember -- I remember for last quarter and actually you ranked the revenue by scale, your non-driver IC business like timing controller is the number one and CMOS image sensor is second, followed by touch panel controller.

My question is if any of them have 5% or above revenue contribution for your --?

Oh, I see. Only timing controller.

Only timing controller?

Yes, only timing controller so far.

Okay. So, for Q1 it's still -- TCON is still the number one, followed by CIS, and then touch panel controller?

Yes. Yes.

Okay, got it. Got it. And then for TCON, just one question because recently in Taiwan embedded display port is a hot topic in Taiwan. So, just wondering if you guys also manufacture like a embedded display port or EDP TCON?

Yes, we do. Actually, we are one of the early movers in the industry for both.

It's already in the mass production stage?

Early stage, although they are not really kind of mainstream for our TCON revenue so far.

Okay.

I think we are -- we are really in middle stage, (inaudible) in our TCON business. For example, you mentioned EDP, for example, that is mainly for laptop and people talk about 4K by 2K for next generation TV. I think we are -- both for (inaudible) and TCON we are very much in top of it.

So, we -- but all these are still niche markets so far, so for us, for our TCON revenue. I think the monitor, the typical monitor and TV TCONs.

Could you share with us how much like ASP premium that an EDP TCON can enjoy over the typical TCON?

I certainly cannot give you the detailed number, but certainly better, better margin, better ASP for sure.

All right.

Because much fewer people can do it.

Okay. Okay. The last question is, you mentioned that smartphone will like dramatically outgrow the average growth rate in the second quarter. Just would like to know where the strength comes from? Is that from like a Chinese customer or from a global brand?

It's percentage certainly mainly from Chinese customers, no doubt. But we also enjoy very strong growth coming from global brands Taiwan, Asia, and international, and Europe.

Okay. Okay, got it. Thank you, Jordan.

But certainly the Chinese are really expanding so fast that we certainly -- and we've been one of their main vendors. We have seen the strongest momentum coming from China.

Okay, so second quarter smartphone key strength comes from China and also from other international brands, but Chinese is the key growth driver?

Yes.

All right. Thank you.

Thank you.

It appears we have no further questions at this time. I would now like to turn the floor back to management for closing comments.

Well, thank you, everyone, for taking the time to join us today. We look forward to talking with you again at our next call in early August and, hopefully, seeing some of you on our coming trips to the US for conferences and investor meetings in California and New York. Thank you.

This concludes today's teleconference. You may now disconnect your lines at this time and thank you for your participation.