奇景光電 (HIMX) 2012 Q2 法說會逐字稿

Greetings. Welcome to the Himax Technologies Incorporated second quarter 2012 earnings conference call. At this time all participants are in a listen only mode. A brief question answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

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

Thank you very much operator. Welcome everyone to Himax's second quarter 2012 earnings conference 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 will have allocated time for questions in the q&a session following the Company's prepared remarks.

If you have not yet received a copy of today's results release, please call MZ Group at 212-301-7130 or the press release can be accessed on financial portals like Bloomberg, Yahoo or Google, or you can download a copy from Himax's website at 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, 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 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 and other operational and market challenges including Company's Taiwan depository 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 identified in the sections entitled Risk Factors in its Form 20-F for the year ended December 31, 2011 filed with the SEC as amended.

Except for the Company's full year of 2011 financials which were provided on the Company's 20-F filed with the SEC, the financial information 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 yet been subjected to the same review and scrutiny including internal auditing procedures and audit by independent auditors to which the Company subjects its 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 the 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 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 like to turn the call over to Mr. Jordan Wu, Chairman and CEO. Jordan?

Thank you John and thank you everyone for being with us for today's call. In this analyst call, in addition to reporting our performance for the second quarter, I will also summarize key growth strategies and highlight milestones we have achieved so far in the first half of 2012. I will then provide our outlook for the third quarter 2012 and outline our strategic focus areas for the rest of the year.

Our CFO, Jackie Chang, will provide further details on our financial performance.

We issued our second quarter revenue's press release yesterday. Total revenues came in at $189.5m, while gross margin was 23.1% and GAAP earnings per ADS were $0.089. As we stated in the preliminary results issued on July 9, these strong results reflect further progress we have made across our organization.

Following our sales performance, second quarter revenue of $189.5m represented 18% growth year over year and 13.7% increase sequentially. Strong sales in our small and medium sized drivers and non-driver ICs remained the top contributors to our revenue growth.

Our sales to non-related parties increased an impressive 36.5% year over year and grew 21.9% sequentially.

Revenues from large panel display drivers were $79.7m, up 4.3% from a year ago and also increased 11.7% sequentially. Large panel drivers accounted for 42.1% of our total revenues for the second quarter compared to 47.6% a year ago and 42.8% in the previous quarter. The sales increase was mainly due to the growing sales to the panel customers in China. Thanks to the new capacity ramp currently underway in China, we anticipate this positive trend to continue in the second half of the year.

Sales of small and medium-sized applications came in at $83.8m, up 34.7% from the same period last year and up 15.8% sequentially. The growth was mainly a result of strong sales in a number of fast growing product segments including smartphones, automotive and tablets. Sales for smartphone driver ICs, particularly those to the China market, were particularly robust. Our small and medium-sized driver sales totaled $83.8m for the second quarter, a record high in its history.

Revenues from our non-driver businesses were $26m, an increase of 18.4% from the same period last year and up 13.2% sequentially. Non-driver product revenues accounted for 13.7% of the total sales as compared to 13.7% a year ago and 13.8% in the previous quarter.

We are able to deliver [different growth] for non-driver's revenues as a whole in Q2. Touch panel controllers, power management ICs, CMOS image sensors and wafer level optics were among the non-driver products which delivered outstanding sequential growth. Whereas LCOS microdisplays and TV chipset units saw revenue declines both sequentially and year over year as those product lines were undergoing business repositioning. I will elaborate on some of these product areas a bit later after Jackie's remarks on our financials.

Revenues from related parties in the second quarter of 2012 remained flat from the previous quarter. Overall sales from related parties continued to decline as a percentage of our total sales, reflecting strength in our large panel driver businesses. Related party sales was 33.4% of our total sales in Q2 as compared to 42.4% a year ago and [37.8%] in the previous quarter. We continued to transform our product mix and expand our reach to other customers. The more diversified customer base, the further we reduce our dependence on any single customer and helps minimize our business risk.

Our GAAP gross margin for the second quarter was 23.1%, a 450 basis points improvement compared to 18.6% a year earlier and a 20 basis point improvement from 22.9% in the previous quarter. This is the third consecutive quarter of gross margin improvement and the highest level since the fourth quarter of 2008. This increase in our gross margin is a direct result of a richer mix of higher margin products. Continued gross margin improvement will remain one our main focuses.

For the second quarter, GAAP net income was $15.1m, or $0.089 per ADS compared to $3.9m (sic - see press release $3.6m), or $0.02 per ADS in the corresponding quarter a year ago, and $11.3m, or $0.066 per ADS in the first quarter of 2012. GAAP net income grew 316.8% year over year and 33.5% quarter over quarter.

GAAP EPS per ADS grew 342.5% from the same period last year and 34.7% over the previous quarter.

In summary, we are pleased with our second quarter performance where we achieved both top and bottom line growth. This signifies the success we have achieved from more balanced sales from various product lines and a more diversified customer base.

In addition, we delivered strong growth in our higher margin products and kept our operating expenses under control. All these factors resulted in substantial improvement in our top line profitability. We are confident that Himax is heading in the right direction to achieve additional improvements for the balance of 2012 and beyond.

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

Thank you Jordan. I will now provide additional details for our second quarter financial results. Our GAAP operating expenses were $23.5m in Q2 2012, down 11.2% from $26.5m a year ago, and down 0.6% from $23.7m in the first quarter of 2012.

GAAP operating income for the second quarter of 2012 was $20.2m, or 10.7% of sales, up $16.8m, or 492.3% as compared to $3.4m, or 2.1% of sales during the same period in 2011 and up $5.7m, or 39.7% from $14.5m, or 8.7% of sales in the previous quarter.

Non-GAAP net income in the second quarter was $15.9m, or $0.093 per diluted ADS, up from $5m, or 0.028 per ADS for the same period last year, and up from $12.1m, or $0.071 per ADS in the previous quarter. Non-GAAP net income for the second quarter 2012 grew 216.8% over the same period last year and 31.1% over first quarter of 2012.

Our cash, cash equivalents and marketable securities available for sale were $103.2m at the end of June 2012, little changed from $104.1m for the same period last year and $102.1m a quarter ago.

Inventories at the end of June were $139.2m, up from $124.4m a year ago and up from $118.5m a quarter ago. The increase in inventory from last quarter is primarily because some customer order originally scheduled for shipment toward the end of Q2 got pushed back to the third quarter.

Accounts receivables at the end of June were $212.9m as compared to $179.3m a year ago and $189m last quarter.

Day sales outstanding were 109 days at the end of June 2012 compared to 108 last year and 103 days at the end of the last quarter. The day sales outstanding increase over the last quarter was attributed to increased sales from large panel customers in China who, like large panel customers elsewhere, are granted slightly longer payment terms.

Net cash inflow from operating activities for the second quarter was $3.2m which consists of net income before depreciation and amortization of $18.1m, offset by increase in receivables, inventory and trade and tax payables.

We spent approximately $1m in capital expenditures in the second quarter versus $8.7m a year ago and $1.6m last quarter, bringing the total capital expenditure to $2.6m in the first 6 months of 2012.

On June 11 we declared a cash dividend of $0.063 per ADS totaling $10.7m for 2011 paid out on July 25, 2012. This payout is consistent with our cash dividend policy which has always been based primarily on our prior year's profitability. The decision to pay out 100% of our last year's net profits signifies our Board's confidence in the positive business outlook for 2012.

With regard to our $25m share buyback program, we have purchased a total of $12.3m or approximately 8.9m shares ADS through June 30, 2012, including $1.14m or approximately 0.6m ADS purchased in Q2, 2012. As of June 30 2012 Himax has 169.5m outstanding equivalent ADSs. We will continue to execute the remaining share repurchase program in accordance with Rule 10b-18.

Before I turn the floor back to Jordan, let me quickly summarize our financial results for the six months ended June 30, 2012. Revenues were $356.2m and profits were $81.8m representing growth of 18.1% and 40.6% over the first half of 2011 respectively.

Our gross margin increased to 23%, up from 19.3% in the same period last year, a 370 basis point improvement.

Our GAAP operating expenses were $47.2m for the first six months 2012, down $5.1m or 9.7% from $52.3m for the same period 2011. This significant reduction was due to a better overall cost control and a reduction in the ramp up cost for production of WLO, WLM and LCOS product and Himax's dedicated factory for these product lines.

Operating income of $34.7m representing 482.4% increase from the first half of 2011. The improvement in operating income was mainly the result of gross margin expansion and cost control measures discussed earlier.

GAAP net income for the first half was $26.4m or $0.154 per diluted ADS up from $6.3m or $0.036 per ADS for the same period last year. GAAP net income for the first half of 2012 grew 316.2% over the same period last year.

Non-GAAP net income for the first half was $28.1m, or $0.164 per diluted ADS up from $9.2m, or $0.051 per ADS for same period last year. Non-GAAP net income for the first half of 2012 grew 206.6% over the same period last year.

All of the above are strong indications that our overall business has come out from the trials of last year. The management is committed to continue making the improvement of our overall financial performance.

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

Thank you Jackie. I will now discuss issue of our margin -- of our major business segments in greater detail. I will start with now our largest business segment, small and medium-sized drivers.

Thanks to our leading technology and strong execution, we have enjoyed a phenomenal growth in this product category for quite some time. It has not only lifted our overall sales but also contributed to diversification of our revenues.

Q4 2009 saw medium-sized drivers' quarterly sales were only $37.7m, or 21.1% of our total sales at that time. In comparison, they were $83.3m in Q2 this year, or 34.2% of our total sales. In particular, smartphone applications have delivered the strongest growth since the third quarter of last year mainly due to our successful penetration into the first tier players in China. We remain bullish on the growth prospects of the smartphone segment having had recent successful new product launches and project wins from leading smartphone brands across China and internationally.

However, we do foresee our smartphone driver growth momentum slowing down in the third quarter with sales expected to remain flat from those of the second quarter. Our main clientele in China, many of them leaders in higher end market, are experiencing competitive pressure from second-tier and white box sales who are launching numerous entry level phones, plus by some smartphones, to penetrate the marketplace.

While the first tier customers will continue to be our area of focus, we intend to regain our growth momentum by actively improving our engagement with China's second tier handset manufacturers.

Beyond handsets, our numerous design wins in tablet, notebook and automotive display applications also contributed to growth in the second quarter. These products will continue to pursue noteworthy shipments in the second half of this year.

We experienced second quarter growth in the large panel business in all large panel product categories mainly thanks to the growth from panel manufacturing customers in China who expanded their capacity and increased their capacity utilization. We expect the growth in China to continue through the remainder of 2012. Large panel display drivers remain one of our long-term focuses and we intend to commit additional R&D investment in this business.

I mentioned earlier that there were highs and lows in the performance of our non-driver areas in the second quarter. I will now highlight those key areas and share with you about where we are and our strategy going forward.

I will start with CMOS image sensor. We delivered decent growth -- decent sales growth in CMOS image sensor in the second quarter thanks to many -- thanks to some early shipments of our 1 megapixel products which were taken by customers to manufacture the new generation notebook PCs with the Windows 8 operating systems.

As many of you are aware, 1 megapixel, or so called HP sensor, is replacing the 300,000 pixel (inaudible) sensor to become the mainstream for notebook PCs after Windows 8.

However, with the delay of Windows 8 launch from Q3 to Q4, we have seen a sudden and drastic demand slowdown for our 1 megapixel sensor during Q3.

Given our design wins with a number of tier one notebook clients, we expect such demand to resume in Q4 and accelerate in next year, assuming Windows 8 is launched in Q4 as most people now expect.

Our multi-finger captive touch panel controllers have been growing very nicely since we shipped our first product in the last quarter of 2011. We have been increasing orders. We are seeing increasing orders for various panel-sized smartphones and expanded our share in the existing leading smartphone brand customers. Additionally, we have secured design wins from new handset customers to begin shipment in the first quarter of 2012. We believe touch panel controller is a long-term growth engine for Himax.

I mentioned earlier that two of our non-driver product segments are undergoing business repositioning, mainly LCOS microdisplay and TV chipset. Our original focus for LCOS microdisplay, mainly embedded pico-projector has proven premature with sales peaking in the second quarter last year and declining ever since. We are now shifting the focus of our LCOS microdisplay business to a new application, head-mounted display. It is a new and exciting product area with a great deal of potential and it's an application where we believe our technology is superior to other competitive technologies.

In addition to head-mounted display, we are still working with numerous panel partners to create new pico-projector applications in the LCOS microdisplays.

We talked about the repositioning of our TV chipset businesses in one of our previous earnings call. Basically, starting the second half of last year we exited the integrated TV chipset business and switched our focus in this area to the provision of two product lines. One, comprehensive and competitive monitor scaler products and, two, tailor-made video processing IC solutions and silicon IPs.

We are extremely encouraged by our early success with the engagements of several top tier brand customers who need such tailor-made ICs to create differentiation for their end products.

While such engagements have generated immediate development fee income, overall short-term revenues for this business are lower due to lost revenues from the TV chipset product line which we have exited. The lost revenue will be more than recovered by some of these tailor-made IC [LCOS] production next year.

For the reasons above, we do perceive some decline in our non-drivers business as a whole in the third quarter. However, we expect it will regain its upward momentum starting Q4 and going forward. We remain confident that our non-drivers businesses here represent a long-term growth engine.

For the third quarter of 2012 we anticipate revenue to be around flat compared to the second quarter of 2012, gross margin to be slightly up and GAAP net income attributable to shareholders to be between $0.04 to $0.065 per diluted ADS based on 169.6m outstanding ADSs, about 10 to 15.3 times compared to the same period last year.

Our third quarter GAAP earnings per diluted ADS guidance has taken into account our expected 2012 [grant] for restricted share units, or RSUs to attain by the end of September.

The 2012 RSUs, subject to Himax Board approval, is now assumed to be in guiding in the range of $11m to $12m, of which approximately 60% will be invested and spent immediately on the grant date.

Excluding share based compensation and acquisition related charges, our third quarter 2012 non-GAAP earnings are effectively between $0.08 to $0.105 per diluted ADS based on 169.6m outstanding ADSs. And this earnings per ADS, per ADS number is about 3 to 3.9 times compared to the same period last year.

Our cumulative GAAP net income per diluted ADS for the third quarter 2012 is forecast at $0.194 to $0.219, about 5 to 5.6 times year over year.

Our non-GAAP net income per diluted ADS through the third quarter of 2012 is forecast at $0.244 to $0.269, about 3.1 to 3.4 times year over year.

With that, 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 will now open the floor for questions.

Thank you. We will now be conducting the question and answer session. (Operator Instructions). Our first question is from the line of Jay Srivatsa with Chardan Capital. Please state your question.

Yes, this is Jay from Chardan Capital. Jordan, can you give us some sense on how you see the smartphone market in China as you look beyond Q3? It appears that there might be some temporary transition from the feature phone to the smartphone in China and that might be causing some disruption. Can you give us a little bit more color on how you see that market developing as you look ahead to Q4 and more so into fiscal '13?

Right. As you know, I think the phone (inaudible) changes very fast, everything changes extremely fast. So starting from around Q3 last year only when China started to see some domestic smartphone manufacturers launching (inaudible) smartphone to now, the market has changed so much. So I think, to answer your question, I will need to have a disclaimer. I don't have a quid pro quo. The market did change a lot. But I think that is the essence of the market.

But today, what we're seeing is in essence about one year of mass production led by third tier mainly. Now the second tier, the so-called white boxes are coming in to join the party, and they have been able to provide more current cost effective forms to cater towards entry level customers and also third world countries.

And so that is only one end of the market been very low-end. And on the other extreme of the market we are seeing Internet companies also coming to the party by launching, in this case, extremely high-spec smartphones, trying to the gain a part of the share as well.

So the traditional, so-called first tier brand names I think they are a little bit caught by surprise. They -- I think we have been seeing them adjusting their second half forecasts downwards over the last few months because I think they do need time to sit back and absorb what is going on in the marketplace.

And the operator, the carrier, continues to be the biggest buyer and I think that will not change. But the carrier usually has been using this what we call (inaudible) to squeeze the price of the provider of the phones. So, however, we do see the second tier and the white box sales still having a hard time getting into the carriers' market, although they may be more prepared to cut their prices.

So I think our view is that the first tier eventually, in about next year, next year is a long time from now in China standard, but I think eventually in next year, the first tier brands will still occupy the bigger chunk of the market. And we continue to believe smaller players, who are now extending their wins to cut their price, will still have a hard time because this thing does require a lot of software engineering and content and cooperation with carrier, are really very important; much more important than the feature phones.

So we are seeing the first tier brands, the traditional first tier brands as well as the high-end products of Internet companies, who do have software or applications. I think we do see them picking up the bulk of the market.

However, when it comes to what we call export countries, the several countries, it's harder to say. I think it may be a place where the white box have a better change.

All right. Switching to micro-displays, you've done a lot of work that's base-related to near-eye-type products. Can you give us some update on where are some of those projects? And when do you expect some of them to come into market and start to become meaningful to you in terms of revenue?

Himax as a company, has actually been doing head-mounted displays for a very, very, very long time. We are talking about almost a decade now. But the end product [may go up] while our customer, those products don't become mature until I think recently.

And I said earlier in my results that we do enjoy a very strong competitive advantage in our product technology are catering for this particular product area. So that's part of the trend, why I think we prefer because we have committed more resources. It is still non-existent, but we believe very, very promising -- promising product area.

As far as when this will materialize and become meaningful to us, I think once they really pick up, it will certainly become rather meaningful to us, both top and bottom line.

And I think our customers are telling us -- with different timetables, they are multiple customers, but I think some time next year I think is a good bet for people to come -- start to see this brand new kind concept product in the marketplace.

All right. Last earnings call you talked about ASIC services; how you -- some of that. Can you give us some update on where you are in terms of providing ASIC services to clients, and then how is that changing your business model as you look ahead?

I think we are [regarded] in the same team and the same IPs out of our TV processor, our TV controller business. And we admitted that we are too late. We wanted to exit from that market; too competitive for us. And we repositioned our business area, repositioned the team in utilizing basically the same IP and same know-how.

Now -- almost as soon as we announced it to the market, we find multimedia interest coming from suppliers, surprisingly -- some of those biggest clients in the market. And they are across TV, projector or, in this case, head-mount display, even cellphones. So there was a lot of enquiries and interest. And we are teaming up with -- we have engaged a few customers in the design of LOCOS ASIC applications.

And I tried to explain earlier, at this moment just how you start the ASIC business, the first time you give out your IP, your team and then you try to engage your customer. Once you have successfully engaged them, hopefully we will be awarded with some put in NRE charges and development fee. That is part of creating a partner for your day-to-day payroll and stuff. But you try to really make money, once some of those ASICs come off production, because in this business, in addition to the NREs we charge, we also sell the ICs to them, the ASIC ICs to our customers.

So in that case, typically, such ICs do enjoy much better gross margin than when they are driver IC or other stuff.

So I think the early -- such customer for mass production of this ASIC IC shipment, I think will be first half of next year.

All right.

And it's -- there's no guarantee right. People typically come to us for such a thing. Why do they not want to buy ICs from the shelf? Because they want to create differentiation. They want the end product to be somehow different. And that is why these things are conducted confidentially, and we -- talk about the space that we [invent] for them. So there is no guarantee every single bet will become a reality, a success.

But -- certainly we also choose our customers. We try to understand their projects. We try to determine the potential of those. So we do believe some of these were -- will start to become materialized in the first half of next year.

Thanks Jordan.

Thank you Jay.

Thank you. Our next question is from the line of Peter [Liao], of Nomura Group. Please proceed with your question.

Hi Jordan and Jackie. Thank you for taking my questions. My first question is about smartphone driver IC. Based on your third quarter guidance, does it mean that you have lower market share for the second tier of smartphone members in China?

And also, what do you see cut price competition inventory in China smartphone driver IC market right now?

Your first question, whether we have a smaller market share --

Lower, lower -- I mean.

(Multiple speakers).

Yes.

I would say whether we have between --

Lower.

In the first tier market and second tier market in China, whether we have a smaller market share?

Yes.

(Multiple speakers). Is that your question?

Yes, yes.

Yes, I think it would be fair to say the answer is yes. Clearly, it is yes. And also, actually, our smartphone market share is much higher than our feature phone market share for the same reason.

And your second question is price pressure, right?

Yes.

I think price pressure will inevitably come from all directions because we said earlier, first tier are competing fiercely with second tier trying to defend their market share, right? So the price pressure will come from both first tier and second tier.

I think we will try to defend our gross margin for sure now. There are cut-down measures, there are new product launches, etc., and certainly we have to adapt to the market situation. But in summary, I think yes, there are price pressure, but we will try to defend our gross margin. We repeat it again and again that gross margin improvement is our focus.

Thank you, and also [late] inventory for like a trend last month on driver IC is a bit high, so perhaps you can give us some color on that.

I'm sorry, I couldn't really hear very clearly. Can you repeat the question?

Okay. I heard late inventory for China's smartphone driver IC is a bit higher recently. Perhaps you can give us some colors on inventory side in the channel for smartphone driver IC.

Okay, okay. Yes, indeed, I think that is very difficult. We -- in -- towards the end of last quarter, I think with earlier, first tier, the smartphone makers seeing rather this quote unquote unexpected competition. They had to take a pause and review the situation before they move on again. So that caused some inventory buildup along the supply chain, but I wouldn't say it will be a problem for too long. The market continues -- the market overall continues to have a pretty strong momentum, or strong in relative terms compared to other markets in the world.

And bear in mind, China also -- we are talking about China being a manufacturer for our market, and China manufacturer phones all for export. We are talking about the mobile net, open export to third countries, which is still very much a tense market for anybody. So I think they do even experience of feature phones. They do enjoy a very strong advantage compared to international demand. So I would not underestimate their ability to absorb such inventory in a short time. So we don't think -- a little bit of pressure, yes, in Q3, but we don't foresee it to become a real, longer-term problem.

Okay, I see. Thank you. My second question is regarding the large driver IC. Given the slow growth for larger sized panels, including TV and IT panels, so even though your China panel makers, they bring up their capacity very aggressively this year, but will the growth from the China panel makers be offset by market share loss for Taiwan panel makers, or also offset by multi-channel technology?

I'm not sure we are losing our panel market share as such, lately. I cannot predict the future, but I don't think we've be losing market share in Taiwan. In a couple of years, yes, but probably not -- to a much lesser degree right now I think it's fair to say.

So I think with our increase of market share in China, I think overall -- our overall market share must have increased somehow.

Whether this multi-channel trend is going to affect the overall large panel driver IC market, historically, the answer clearly is yes. Going forward, I would still say yes with a caveat, which is people try to have more channels for each piece of IC to try to save costs; both IC cost and their [bundling] cost.

But I think we go to an extreme already, to the extent that now we are talking about 1,300 plus channels per fourth driver. To the extent that the IC has to cover such a big area, plus (inaudible) is becoming an issue and when people are after very narrow trends, TV products as a fashion, as a value vision I think the trend may be somehow coming back to us. People will need to come back to smaller-channel ICs in order to get over that problem.

So, overall,, whether this is sufficient to offset the trend towards large -- higher channel accounts, I really don't know. But they are two opposite trends ongoing right now. And also, I would also add that the number of channel counts per driver for TV, I think has gone as far as it can go already, logically. So it is unlikely to -- we are unlikely to see the same pressure coming from this high-channel count technology over the last few years, which certainly negatively affected the overall market size.

I think the trend is slowing now already because, as I said, we are going as high as we can go and people are now actually going back.

Okay, thank you. (Multiple speakers).

I think it's a fair, overall description. As far as the number is concerned, it's really very hard to tell.

Oh, okay, thank you. I see. My third question regarding touch-controller IC. I know you are doing well in the smartphone but there's a new trend for Windows Notebook. Will that be a positive growth for you in the future? How do you see that?

Not in this coming more than two quarters, but definitely yes for the future. I think with Windows 8 it is highly likely that your laptop PC will have touch panels. And now the real barrier is about the cost of the panel. And -- so our focus on the development of technology will drive these two. Actually, let me go back. So it's about the cost of the panel. So what's stopping the penetration of touch panel validation over laptop is cost. Cost and cost only. So the industry's under tremendous pressure and is undergoing very sudden technology improvement over the cost reduction issue.

Now, in order to achieve lower cost, there are technologies that is required of the touch-control IC. Then I think we are -- we believe we are in the leading edge over there, although it is still in development or sampling stage.

So that's why I say as far as revenue growth is concerned, touch panel we are quite confident the second half we will do pretty decently, but it will come from cellphones only. But we hope and we believe next year we'll start to see a contribution from Windows 8 Notebook as well. And that is certainly a very important area for us -- of our technology focus right now.

Thank you, may I still allowed to ask one more question?

Yes, sure.

Oh, thank you. My final question is regarding your since there is a new trend. There is a trend for high resolution for all the panels, including TV and notebook. And I know in the notebook that there's a new interface, [ETP], to replace LBDS. So now how do you see the change? Will it be flow to you, or positive upside to you, since you are also doing well in TV Cam business?

Well, thank you for the question. It's a very good question. Yes, it will provide benefits for us in the long-term, and you are absolutely right that we are major player in TV Cam business. And ETP is a new interface, new high-speed interface, which is only required for super high resolution. So not all tablets or notebook PCs will require that, but certainly -- so if you ask me about the current volumes industry-wise, still small. But whether that will become the trend, I would certainly say yes because, as we all know, panel price can only go one way, which is south.

So the way -- one way to defend your price for the panel is to increase your resolution. So I think that is to be a trend. And we are a leader in the ETP development, for sure. We are starting ETP (inaudible), and we are certainly in the leading edge in this area, although the revenue contribution is the very minimum at this stage.

Thank you. Thank you for taking my questions.

Thank you.

Thank you. Our next question is from George Chang of [Yuanta Research]. Please state your question.

Hello. Thanks for taking my questions. Just a few quick ones. Number one, how much is the smartphone revenues in second quarter, maybe in terms of percent or absolute dollar amount?

(Technical difficulty).

(Multiple speakers).

Sorry, sorry, sorry, about a quarter of total sales.

20% of our total sales?

Yes.

So that portion probably came down a little bit from where -- did it go up, or it come down from Q1?

Oh, it went up a lot from Q1.

It went up a lot?

It went up by almost by 50%.

Went up by 50%?

Yes, went up by almost 50%.

I see, I see.

(Inaudible).

In absolute dollar terms?

Yes.

Okay, and this will be flat going into third quarter?

Yes.

Would you say the mix of the smartphone changed a lot of second quarter, like WVGA, half VGA, and also what's the mix?

I think industry-wise, WVGA is still the mainstream in China, right? And in particular we mentioned earlier this so-called pseudo-smartphone. They typically have high shares panel resolution. And I would say a wild guess it's probably two to one half share versus WVGA share and these mobiles are the mainstream worldwide.

And I think our market share in WVGA is higher than half VGA, although we mentioned earlier -- one of the forces of pressure over our smartphone driver business is that people -- there is a trend moving outwards in terms of resolution, right. So half VGA we do have a competitive product line. We do have good customer base but we just need to put our act together and try to regain further market share from there.

Okay. So it sounds like the second quarter it went up 50% q-o-q and revenue-wise, that was more driven by volume, not so much by the blended ASP change due to a product mix?

Let me see. I'm sorry I don't have the detailed number right in front of me, but I would say it's probably both because we have always shipped quite a lot of WVGA since last year -- since second half last year.

Okay.

And we -- we were not early to enter into the market with this product, at a time very high in product and we had very good penetration. So -- rather, compared to our peers, I would say coming to Q3 our blended ASP is probably under slight pressure because we have to pick up our half VGA.

I see, I see. So the mix of half VGA will increase in third quarter, putting some pressure on blended ASP?

Yes, that's the trend, because we need to get back to that white box second tier market.

Right, right, right.

Where half VGA is dominant.

Right. So in second quarter, was WVGA more than 50%?

You mean volume-wise, or, or --

Yes, volume-wise.

No, certainly not volume-wise, not volume-wise. I would say our relative market share of WVGA is higher than half VGA. Volume-wise WVGA against half VGA is about one to two. Half VGA is bigger in (multiple speakers).

Okay, okay. For Himax as well?

For Himax as well, yes.

Okay, I see. And also, Jordan, did you guys ship any tablet driver ICs?

Oh, yes, yes, a lot.

(Multiple speakers).

(Multiple speakers) in China mainly.

Is that included in the small and medium business, or is there large-panel business?

It's in small and medium business.

And when you say a lot, can you give us a rough percentage of the small and medium business (multiple speakers)?

I would have to say -- let me correct my answer. A lot really, compared to last year, there's very strong growth. Tablets represents very, very strong growth.

Okay.

So I probably said it too quickly. In terms of total sales, I think it is still small. It is certainly less than 5%.

Less than 5% of the total sales?

Yes, but it's growing. It's the fastest growth for us right now.

I see, I see. That's fine. And also on tablets, the ASP for the tablet driver IC, is that more -- is that closer to smartphone driver IC, or that's more similar to the large panels like Sourcegate?

It's in-between, so closer to large panel.

Closer to large panel?

Yes, because with -- I think for same for smartphones. Cellphone driver IC has a very wide price range.

Yes, yes.

You can go as high as over $3 for very high-end drivers and with memory. It can go as low as less than $1, so it has a very wide range. And also, it makes a big difference whether the IC is memory-embedded or not. But for tablet, typically, they don't have memory, so price typically is lower.

Price typically is --

It's lower than smartphone driver IC.

Lower than smartphone driver IC, and also --

On an ASP basis.

And similar to those of large panels, like the typical Sourcegate ICs?

It's closer to notebook kind of ICs.

Okay, okay. And would you say like maybe five ICs per tablet is that a right assumption for us to model?

Less than that. It depends on customers' decide. Less than that. I would say --

That's fine.

-- it's more like three.

Three? Okay, okay. Last question --

(Multiple speakers).

Sorry about that. Last question on the large panel. The revenue from Chi Mei or related party was flat absolute dollar term effect on quarter after a small rebound in first quarter. I thought the market has been talking about Himax and Chi Mei has been doing really good on the 39-inch, 50-inch TV, so indirectly you guys also benefit. What's your take on that in terms of second quarter this part is not -- is this not growing, or --

Definitely Q1 and Q2, both Chi Mei and us enjoyed very strong growth, as you said over 39 or 50-inch TV. And certainly it is unlikely to be going like that forever, right? So --

Right.

But it did drop. Let me see. So I think quarter over quarter we are seeing, yes, about flat; about flat Q3 over Q2.

Q3 over Q2, so --

Yes, but certainly Q1, Q2, the growth is very high because it started from very low base. But now, after the full quarters, the base is already quite high, so Q3 over Q2 we still see about flattish -- volume already.

Oh, okay. So revenues from related party would be flat in third quarter, q on q?

Yes. Yes.

Which means the mix is not going to change then?

That's right.

Because your revenue is flat?

[And we] -- that's right.

Okay, okay. Well thank you very much.

Thank you. Thank you, George.

Thank you. Our next question is from [Kyna Wong] from Merrill Lynch. Please state your question.

Hello Jordan and Jackie. Thanks for taking my questions. A query from the above questions. I captured the message that the large panel driver IC, you're likely to grow in third quarter, and the small and medium sizes also maintain, but the non-driver -- non-driver IC will likely to decline in the quarter, right?

I would say overall large panel and -- there'll be some decline in non-driver, yes. That's the forecast right now. But non-driver accounts for relatively small out of the whole pie. So if you ask me about large panel and small panel, quarter over quarter basis, they are both remaining about flat.

Got it. So in terms of the gross margin, will the smartphone remain as its driver to increase your margin performance, or some other cost control, or other thing?

Well, from this quarter, certainly not from driver -- not from smartphone drivers, although historically in the past few quarters smartphone drivers certainly have been the key engine to drive our gross margin. But in this quarter there are certain things such as touch-panel controller, and tablet, and certainly our cost control as well.

Okay, thanks (technical difficulty).

That's why we guided for margin to go slightly up.

I see. And my next question is about the second-half outlook. Like 4Q, what do you see about 4Q? In large panel size do you think the momentum from China customers will continue, and the non-driver will picking up in fourth quarter, so what do you see about the fourth quarter from the current point of view?

Right, your first point about large panel driver, from China, yes, given the macro environment remaining relatively stable, I would say for sure large panel driver from China in Q4 will grow, and non-driver in Q4 definitely will also grow.

I think coming from CMOS sensor after Windows 8, we mentioned earlier, and touch panel controller and these two items in particular, and also from our ASIC business as well. And timing controller, I think we are looking pretty good as well, so I think -- we certainly believe -- we hope we will regain our non-driver growth momentum, starting from Q4.

I see. So I remember the Company is looking for sequential growth per quarter this year. Could you still retain this target or the objective?

I think it's a good question. Certainly we have guided for flat Q3, right. So --

Yes.

-- that -- yes, so -- but in terms of Q4, we -- traditionally Q3 is supposed to be the half season, of Chinese holiday, and pressures build geared up getting ready for that. So we typically ship a lot in Q3 and then slow down in Q4 after people are already coming up our inventory for manufacture for the Chinese. I mentioned holiday, as well as Christmas.

But I think interestingly, we are seeing the so-called -- the industry seasonality is getting blurred. It's almost changing every year. So it's becoming confused in the sense that -- actually we would believe even that end of Q2 and beginning of Q3 are looking slow. There's a good possibility that Q4 may actually pick up. And again, there's a huge uncertainty, which is the global economy, which is already on my scope. So I'm again assuming environment overall remains relatively stable, there's no major -- negative events in the -- in Q4 we have China smartphone, we have Win 8. We have a quite a few things that are actually promising. So it's hard to say, but we remain cautiously optimistic about Q4 prospects, I think it's fair to say, and specifically on our sales.

So there is no reason why non-driver won't definitely grow, and we certainly hope our smartphone will grow as well.

I've got it. Thanks Jordan.

Thank you.

Thank you. (Operator Instructions). Thank you. At this time we have come to the end of our question and answer session. I'll turn the floor back to management for closing comments.

Well, thank you everyone for taking the time, and thank you for your patience. We look forward to talking with you again at our next call in early November. And, as a final note, Jackie, our CFO, will actually be on our road show in the US in early September, so please contact her and/or John Mattio at MZ Group if you are interested in meeting with us in person.

So, thank you again, and have a nice day.

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