奇景光電 (HIMX) 2012 Q3 法說會逐字稿

Greetings, and welcome to the Himax Technologies Incorporated third-quarter 2012 earnings conference call. (Operator Instructions). 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 third-quarter 2012 earnings call. Joining us from the Company are Mr. Jordan Wu, President and Chief Executive Officer and Jackie Chang, Chief Financial Officer. After the Company's prepared remarks we have allocated time for questions in the Q&A session following the Company's presentation.

If you have not yet received a copy of today's results, please call MZ Group at 212-301-7130. Access to the press release on financial portals like Bloomberg, Yahoo or Google are also available and 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 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 or 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 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 depository listing, PDR, ability 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 section 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 2011 financials which 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 generally -- 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 materially differ from the audited consolidated financial information for the same period.

Any evaluation of the information included in this conference call should also take into account the Company's 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 the Company's 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. Jordan, the floor is yours.

Thank you, John. And thank you, everybody, for being with us for today's call.

In this earnings call I will start with discussing our third quarter performance, including key growth drivers and milestones that we have achieved so far in 2012. Our CFO, Jackie Chang, will provide further details on our financials. I will then elaborate on our fourth quarter outlook issued earlier this morning, US time.

Our 2012 third-quarter revenues, gross margin, GAAP and non-GAAP earnings per ADS all met our previous guidance. For the third quarter we reported net revenues of $190.4m, with gross margin of 23.3%. Third-quarter GAAP earnings per ADS was $0.061 and non-GAAP earnings per ADS were $0.097, both coming in at the upper end of our earnings guidance.

Our third-quarter revenues of $190.4m represents a 17.5% increase from $162.1m in the third quarter of 2011 and a 0.5% sequential increase from $189.5m in the second quarter of this year. Our revenues of this quarter are the highest since the fourth quarter of 2009.

Revenues from large panel display drivers were $76.5m, up 23.4% from a year ago and down 4% sequentially. Large panel drivers accounted for 40.2% of our total revenues for the third quarter compared to 38.3% a year ago and 42.1% in the second quarter. The sequential decline came in after three consecutive quarters of growth and was attributed to slower demand from the TV models which our customers launched earlier this year. That said we have experienced an 11.9% growth from large panel segment in the first three quarters, mainly thanks to the capacity increase in China.

We're happy to report that our driver sales for small- and medium-sized panels reached another record high in the third quarter. They came in at $87.3m, up 9.5% from the same period last year and up 4.1% sequentially. As a segment, driver ICs for small- and medium-sized applications accounted for 45.8% of total revenues for the third quarter with tablet and multi-display being the fastest growing applications.

As we pointed out in the previous earnings call, sales from smartphone applications remained flat from those of the second quarter because our main clientele in China, many of them leaders in high-end market, experienced competitive pressure from their low-end peers, which undercut the price to penetrate the marketplace aggressively. Notwithstanding the slow short-term momentum, smartphone remains our strongest growing product segment overall. We remain bullish on the growth prospects of the smartphone segment and will elaborate more on this later.

Revenues from our non-driver businesses were $26.6m, an increase of 30.2% from the same period last year and up 2.3% sequentially. Non-driver product revenues accounted for 14% of total revenues as compared to 12.5% a year ago and 13.7% in the previous quarter.

Again, as we have discussed in the last earnings call, sequential growth in the non-driver businesses slowed down mainly because of a couple of reasons. First, the Win 8 launch delay affected our CMOS image sensor business. Second, our Q3 LCOS micro-displays work revenues slowed down due to our decision to reposition the business to focus more on the head-mounted display products, although we remain committed to the new development of particular products.

Notwithstanding the abovementioned negative factors, our non-driver businesses overall still grew 30.2% year over year as many products, including touch panel controller, power management IC, WLED driver, wafer level optics and operational amplifiers experienced double digit growth.

Revenues from related parties remained flat from the previous quarter at 34% of total sales in Q3 compared to 39.3% a year ago and 33.4% in the previous quarter.

Our GAAP gross margin for the third quarter 2012 was 23.3%, a 480 basis point improvement compared to 18.5% a year earlier, and a 20 basis point improvement from 23.1% in the previous quarter. This is the fourth consecutive quarter of gross margin improvement and the highest gross margin level since the fourth quarter of 2008.

The trend in our margin expansion is a direct result of the richer mix of higher-margin products like those in our fast-growing non-driver category. We also focus more on better value-added, higher-end driver IC products which have higher entry barrier. Gross margin improvement will continue to be one of our business goals going forward.

As was the case in the past, [reflected] RSUs, or respective share units, at the end of September, which led to higher third-quarter GAAP operating expenses compared to the other quarters of the year. The total value of our 2012 RSUs is about $11m, of which $6.3m was paid to employees in cash and thus, expensed in the third quarter. Jackie will add more detail on this later.

For the third quarter, GAAP net income was $10.4m or $0.061 per diluted ADS compared to $0.6m or $0.004 per diluted ADS in the same quarter a year ago, and $15.1m or $0.089 per diluted ADS in the previous quarter.

GAAP net income grew 1,521.7% year over year but decreased 31.1% quarter over quarter mainly due to the $6.3m 2012 RSU charge in the third quarter.

Excluding the share-based compensation and acquisition-related charges, non-GAAP net income was $16.5m or $0.097 per diluted ADS, representing a growth of 244.1% year over year and 3.5% sequentially.

In summary, we are pleased with the top and bottom line financial improvements during the third quarter of 2012. We will continue to execute our strategy and are excited about future growth opportunities going forward.

I would now ask Jackie Chang, our CFO, to provide more clarity and details of our financial results. After Jackie's, presentation I will then come back to discuss our outlook for the fourth quarter. Jackie?

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

Our GAAP operating expenses were $31.1m in Q3 2012, up 2.1% from $30.5m a year ago and up 32.4% from $23.5m in the previous quarter. As Jordan mentioned, the significant sequential increase arose primarily from the expense of $6.3m for 2012 RSU grant. Without the RSU charge, our operating expenses were $24.6m in the third quarter of 2012, down 6% from the same quarter 2011 and up 6.7% from the previous quarter. The increase from the previous quarter came mainly from higher expenses related to salary and new product development.

We raised the annual salary in the middle of the year. The total value of our 2012 RSU is approximately $11m, out of which 58% was paid in cash immediately and therefore, expensed in the third quarter. The remainder will be vested equally at first, second and third anniversaries of the grant date and will be paid in shares. The maximum share dilution in the next three years resulting from 2012 RSU grant is about 2.3m ADS in total, or 1.4% of our total shares outstanding.

GAAP operating income for the third quarter of 2012 was $13.2m, representing 6.9% operating margin. It went down $7m sequentially and up $13.7m year over year. The main reason for the sequential decline in operating income is the expense from the $6.3m RSU grant in the third quarter which accounted for 3.3% of sales.

Non-GAAP net income in the third quarter was $16.5m or $0.097 per diluted ADS, up from $4.8m or $0.027 per diluted ADS for the same period last year and up from $15.9m or $0.093 per diluted ADS in the previous quarter.

Our cash, cash equivalents and marketable securities available for sale were $89m at the end of September 2012, little changed from $90.8m for the same time last year and $103.2m a quarter ago. We made a cash payment of RSU of $6.3m and a cash dividend of $10.7m during the quarter.

Inventories at the end of September were $128.3m, up from $104.7m a year ago and down from $139.2m a quarter ago. Accounts receivables at end of September were $218.3m as compared to $174.7m a year ago and $212.9m last quarter. Day sales outstanding were 109 days at end of September compared to 103 days last year and 109 days at the end of the last quarter.

Net cash outflow from operating activities for the third quarter was $7.1m. This is mainly because we had a relatively high inventory level at end of the second quarter as delivery for much goods prepared for shipping before quarter end was postponed into third quarter out of short notice by the customers. As a result, while we had to pay for those goods in the third quarter, we will not get paid until the fourth quarter. We expect to generate a substantial net cash inflow from operations during the fourth quarter.

Capital expenditure was $1.7m in the third quarter versus $7.1m a year ago and $1m last quarter, bringing the total capital expenditure to $4.4m through the first three quarters of 2012.

With regard to our $25m share buyback program, we have purchased a total of $12.7m or approximately 9.1m ADS through September 30, 2012, including $0.4m or approximately 0.3m ADS purchased in Q3 2012. As of September 30, 2012, Himax has [159.9m] ADS equivalent outstanding. 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 first nine months ended September 30, 2012. Revenues were $546.7m, representing a growth of 17.9% over last year. Our gross profits were $126.1m, or 23.1% gross margin. Our gross profit increased $37.9m from $88.2m and our gross margins were up 410 basis points from last year.

GAAP operating expenses were $78.3m for the first nine months of 2012, down $4.5m or 5.4% from the same period 2011. The significant reduction was due to a better overall cost control and a reducing ramp-up cost for production of WLO, WLM and LCOS products at our in-house fab, partially offset by an increase of $0.9m share-based expenses.

Operating income was $47.8m, or 8.8% of sales as compared to $5.4m, or 1.2% of sales for the first nine months of 2011, representing $42.4m or 780.9% increase year over year. The improvement in operating income was a reflection of our overall top and bottom line financial improvement from last year.

GAAP net income for the first nine months was $36.8m, or $0.216 per diluted ADS, up from $7m, or $0.039 per ADS last year. GAAP net income for the first nine months of 2012 grew 427% year over year. GAAP EPS per diluted ADS grew 453.8% over the same period last year.

Non-GAAP net income for the first nine months was $44.6m, or $0.261 per diluted ADS, up from $14m, or $0.79 per ADS for the same period last year. Non-GAAP net income for the first nine months of 2012 grew 219.5% year over year. Non-GAAP EPS per diluted ADS grew 230.4% year over year.

Net cash outflow from operating activities for the first nine months of 2012 were $0.3m. As discussed earlier, we expect to generate a substantial net cash inflow from operations during the fourth quarter.

All of the above are strong indications that our overall business has bottomed out from drought of last year. The management is committed to continuing the improvement of our overall financial performance going forward.

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

Thank you, Jackie. I will now provide an outlook for this year for major product segments in greater detail and after that, our guidance for Q4.

I will start with our now largest business segment, small- and medium-sized drivers. Thanks to our leading technology and strong execution, we've enjoyed a phenomenal growth in this product segment for quite some time. It has not only lifted our overall sales but also contributed to the diversification of our revenues. As recent as Q4 2009, small- and medium-sized drivers' quarterly sales were only $37.7m, or 21.1% of our total sales at the time. In comparison, they were $87.3m in Q3 this year, or 45.8% of our total sales.

Smartphone applications have delivered the strongest growth since the third quarter of last year mainly due to our successful penetration into the first tier brands in China. On the back of this, we've seen success in China and the international brand markets. We have won further design wins from leading global brands where we will start shipment from Q4. We have also started to see positive results from our efforts in working with the fast-growing tier two smartphone customers in China during the third quarter.

We will continue to make progress and gain market share in that area. We expect the smartphone sector to experience double digit growth in Q4 and the growth momentum to continue into next year, driven by strong demand from both international and China markets.

Among small- and medium-sized panel applications we also see tablet and multi-displays growing strongly so far this year and we continue to work closely with numerous customers on these applications. This product will continue to contribute noteworthy growth in 2013. The overall fourth quarter outlook for the small- and medium-sized panel drivers, however, appears lukewarm because of seasonal reasons.

Large panel driver remains one of our main businesses accounting for 41.7% of our total sales in the first three quarters and were up 11.9% from last year during the period. We continue to strive towards winning more market share in this segment. We are a leader in new technologies, such as next generation high-speed interface and super highway solution panel, including roles for the new 4K/2K TV. It is for this reason that companies like Himax have retained a favorable market position and barriers to entry remain high.

Large panel driver IC has been the backbone of Himax since 2001 when we got started, and will continue to be a major business for us looking ahead.

Mainly affected by slow demands for monitor and laptop markets, the large panel driver sales, however, look set for some slight sequential decline during the fourth quarter.

The non-driver category provides the most exciting long-term prospects for growth. Our third-quarter non-driver sales were up 30.2% over the same period last year. I will highlight some of the non-driver areas below. Our multi single capacity touch panel controllers delivered a phenomenal growth during the third quarter. We started shipping to new handset customers in China, in addition to the existing leading smartphone brand customers. We will continue to break into new smartphone brands, the fast-growing tablet market and cache-enabled WinInet type laptops. We believe our touch panel controller will contribute -- will continue to be a long-term growth engine for Himax.

In our CMOS image sensor product line, the delay of Win 8 launch from Q3 to Q4 did affect our shipments of 1-megapixel sensors during the third quarter. However, we expect such demand to resume starting Q4 thanks to our design wins with a number of tier one laptop brands. Beyond laptops, we have also won design wins in smartphone, tablet and several applications from a wide range of customers. We also launched a 5-megapixel sensor in the third quarter of which part is smartphone market. We will begin some shipment in the fourth quarter.

Our wafer level optics is still in double digit growth during the third quarter. The production of VOO for VGA or 300,000 pixel plans in our fab has been made smoothly with higher stable yields. We start -- we are now moving up the scale to start sampling our VOO with HD or 1-megapixel resolution which we believe has a good potential to pick up 1m models in the front camera market for smartphones. We expect our HD VOO to start in production in early next year.

Timing controller, or Tcon, remains the largest product line in terms of revenue among our non-driver businesses. Again, we are the leaders in the new technologies, such as eDP Tcon. The new eDP interface will be applied in high-end laptops and tablet products. It offers the benefit of slim design, high resolution and better power efficiency as compared to the existing stream of eDS interface. Our eDP 1.1 and 1.2 are already shipping track record. Our eDP 1.3 is expected to start up production in early 2013. As the adoption of eDP accelerates, we are well positioned to benefit from this important new technology.

We also continue to make progress in our ASIC service and media processing and IP licensing. During the quarter we won a new ASIC project award from top tier brand name customers. The development fees generated from the engagement of existing projects increased substantially in the third quarter and contributed to our gross margin improvement.

Last but not least, our LCOS business also has exciting opportunities on the horizon. We've been working with top tier customers to develop new head-mounted displays products. We are shipping some early volumes for customers' panel rounds this quarter.

We remain confident our non-driver businesses will continue to account for an increasing percentage of our sales over time.

Now I would summarize our Q4 guidance. For the fourth quarter it is traditionally low season. We expect revenues of this year's Q4 to remain around flat or slightly down compared to the third quarter of 2012. Gross margin to be around flat from the third quarter, depending upon the final product mix, net earnings attributable to shareholders to be in the range of $0.07 to $0.085 per diluted ADS based on [417.5m] outstanding ADSs and non-GAAP earnings attributable to shareholders to be in the range of $0.076 to $0.091 per diluted ADS.

For the full year of 2012, we expect revenues to be around $737.1m, up around 16.4% year over year, gross margin to be around 23.1% as compared to 19.8% last year.

Similarly, Non-GAAP net income per diluted ADS for full year this year to be in the range of $0.286 to $0.301, and cumulative non-GAAP net income per diluted ADS for the full year to be in the range of $0.337 to $0.352.

Thank you for your interest in Himax. We appreciate you joining today's call. Operator, we will now open the floor for questions.

(Operator instructions) Thank you. Our first question comes from the line of Jay Srivatsa of Chardan Capital Markets. Please proceed with your question.

Yes. Thanks for taking my question. Jordan, in China it appears the smartphone market appears to still be ramping up pretty aggressively. China Mobile is giving a lot of subsidies. And there is a sense that Q4, the ramp-up in the smartphone segment could be pretty strong. But yet your comment seemed to indicate that the demand is lukewarm for your small panel products. Can you give us a sense of where you've seen the weakness?

Well actually, Jay, we did mention in our remarks that although the overall small-/medium-sized panel revenue on a sequential basis looked to be lukewarm, we did mention for the smartphone itself we are looking for double digit growth sequentially. So yes, we are aware of that. And the market remains extremely dynamic and exciting and still growing strongly. And I think we are one of the first to enjoy the growth as well in Q4.

But when we made a comment about the overall small-/medium-sized panels, they are other stuff, such as digital CMOS still camera and other stuff that are declining, mainly because of seasonal reasons. So overall, the small-/medium-sized panel segment overall looks to be lukewarm.

Fair enough. In terms of the large panel side, following the October holidays, it looks like some of the manufacturers are now starting to ramp up towards Chinese New Year. How do you see that demand playing? You seemed to indicate that large panels could be sequentially down in Q4? How is that offsetting some of the ramp-up towards the New Year holidays?

I think for international brands, Q4 December will be a relatively short month because of Christmas, whereas for China, certainly December will be hard season because that will be the month when people are preparing for Chinese New Year. And overall, we do see the market overall is strong, and in fact potentially is tight. And we are hearing here and there customers even rating their ASPs. But there are indeed segments such as monitor and notebook which we -- again we reiterated in our prepared remarks that they look set to suffer some decline sequentially. But we do believe TV will have some growth from the previous quarter.

So again, on an all-in basis, large panel segment as a whole, we are looking to have -- to see some decline, small decline. But if you break it down I think TV is relatively strong.

Okay. In the micro-display segment you mentioned that the head-mounted displays, you were starting to ship some small volumes. When do you expect that to become meaningful for you in terms of revenue ramp as well as production volumes?

You will appreciate this is a very, very new application and so the final outcome will really depend on consumer reception to this new product handset. And also, the fact is that we are not the end device owner, so it really depends on our customers' promotion. So where I cannot comment on my customers' behalf, I think we are look -- we did say that we are shipping some small volumes for our customers' panel round production. And so they have a timetable and certainly the product is set to be launched. Some were hopefully early, not too late in the year next year.

And we do get forecast of steady growth month after month next year. However, I do feel, given the fact that again this is such a new -- brand new product concept, I feel -- I would be reluctant to give more concrete indication of the volume next year. But certainly we will see a lot of growth from low level this year that is for certain. But it can vary a lot. Again, I think it depends on a lot of things, among others, long before the notebooks are bought by consumers, [in systems to lead them] how in our customers are going to price it, the applications associated with these and so on and so on and so forth. But for us we are a key component maker.

And so we are very excited about it. We have seen real, real exciting progress based on our customers' end. Having said that, I think it's premature for me to comment too much beyond that.

Fair enough. You've had -- looking at your fiscal '12 guidance it's been a pretty good year for you. You've made a lot of transitions over the last year that has come to pay off pretty well for you, especially in the small panel side. As you look at fiscal '13, how do you see yourself positioned? What are some of the challenges and risks and what are some of the opportunities that you think you can capitalize on to show some further revenue and earnings growth for the Company?

I think next year we are looking for a very, very exciting year sequentially on the back of a pretty decent performance this year. So we are very, very excited about it overall. And if I give you again growth categories, give you some highlights on the growth categories, starting from small panel, smartphone remains extremely exciting, in China in particular. And we also mentioned in our prepared remarks that we have been able to operate in two major projects of certain international leading names, which are -- which looks set to bring us good growth opportunities next year.

And I think smartphone still has at least a couple of years of exciting growth to come because although we were seeing a lot of increase in penetration of smartphones, I think the penetration rate will continue to increase, probably start to saturate towards the end of next year or the year after. However, we are also seeing the resolution and the panel size increase rather substantially and customers are no longer satisfied with 3 or 3.5-inch and low resolution. So that really provides a lot of opportunities for guys like Himax.

And tactically we also mentioned, it's extremely exciting, they are international names and they are Chinese white box markets, which tend to be overlooked, but they are actually very, very dynamic with lots of exciting growth opportunities there. So we are -- I think we are set to capture business opportunities in both.

And having said that though, alternative view is, well, I will comment on the risk or downside, potential downside for the smartphone, I would say, in China, because of the fact it's growing so phenomenally. In particular in middle- to low-end markets the market does attract a lot of competition and some of our competitors are really undercutting the prices just in order to get a piece of the action. So I would say that would be the risk for us for next year. That's why we mentioned, although we don't intend to give away the mid- or low-end markets, we want to ship towards higher markets. We want to move further upward. And that has been our strategy. We have done that successfully in the past few quarters.

And I think in TV, in the large panel overall, I think overall, year over year in terms of unit growth, I don't think panel-wise the market -- the world market is going to grow phenomenally. Probably some single digit growth. However, we do see opportunities for higher-end panels, in particular 4K/2K. Certainly we believe you are not going to see a lot of penetration for such high-end panel, 4K/2K. But when it does happen, it provides a tremendous amount of potential increase in value for driver IC, demand for driver IC.

And also, we are seeing customers which, over the past decade has been trying to have less pieces of IC for each panel by increasing the number of channels for each IC. And that itself has been also the main theme of large panels for the industry, for the IC industry for the past decade. And we are seeing the trend reversing because customers are now looking to create the thin, thick border, narrow bevel kind of design and in order to achieve that they now have to do the reverse, which is to lower the number of channels per IC. And that will be some market growth opportunity for driver IC as well because you are looking at almost same panel size. The same resolution, you are looking at more pieces of demand for driver IC.

And certainly, China remains an opportunity and we will certainly try to broaden out our stretch to not just Taiwan and China and very much so try to break into Korea as well. That will be an opportunity for us.

But overall, I think monitor will continue to remain sluggish. Notebook will be substantially replaced by tablet. In our definition, notebooks is in large panel and tablet is in small panel, so that will be -- the increase in small panel will represent a decrease in notebook in large panel.

And I think I have a lot of confidence to say that the most excitement will come from non-driver next year. This year, we have seen decent growth year over year, 30% some but we're not happy about it. And actually, we are still in quite a few areas in the early ramp-up stage only and we are seeing a lot of exciting design win opportunities, some involving medium lens and exciting new product concepts. And just in about every single category we see very exciting growth potential for next year and going forward. So I would say non-driver represents the best growth opportunity for us next year and going forward.

All right, one last question. In terms of future investments, where do you hope put most of your R&D dollars as you look at fiscal '13, given that you appear to have a whole slew of opportunities that you could go after?

I think we -- if you look at our R&D expenses this year against last year, excluding RSU, which is really a function of our profit -- excluding RSU, we are pretty similar. Even we have a small decline, although our business, our revenue and profit grew so much.

So what I'm trying to say is that for driver IC, there will be some increase of headcount because we are so busy. We are getting more projects in a way than we can handle, so there will be some increase of headcount. But I think the business opportunity should justify the increase. And ditto for non-driver.

Now what I'm trying to say is I think we have pretty much set the groundwork for both driver and non-driver. So we are looking to really capitalize on our previous year's R&D efforts. So I would say the most significant increase of our total investment will be on engineering service, customer service, in the field service, that kind of engineering work rather than pure R&D because we have spent a lot in the past and we are looking to materialize that.

So we don't expect a lot of increase in R&D expenses next year, but there will be certainly some increase because business is looking exciting for us next year.

Thanks Jordan.

Thank you, Jay.

Thank you. Our next question comes from the line of Peter Liao of Nomura Group. Please proceed with your question.

Hi Jordan. My first question is regarding the growing China smartphone market. Just as you mentioned, the price competition there is very severe. But you also target gross margin growth sort of thing for the Company. But if we continue to see that severe price competition and that may negatively impact your margin, what will you do to achieve like market share gain and also the margin improvement?

It's a fine balance we have to make and really I cannot promise too much on this segment alone. I think to enhance gross margin, a better approach is through, for example, non-driver products or tablet products and so on.

But if I address your question directly, I think firstly, we want to move up. We want to be the leader of the market trend to move up the resolution and the sophistication of the product. For example, this year in China, WVGA resolution is considered to be high-end and hVGA is the entry level for smartphone and qVGA is the feature phone mainstream. And next year we are expecting hVGA to become sort of -- to kind of replace the qVGA role in this year and WVGA will take up the hVGA's mainstream for smartphone and the high-end will move up to say qHD or HD720. And in those high-end markets we remain the leader and the entry barrier is much higher over there.

And a lot of people will start to get ready for full HD panel which certainly is unlikely to be the mainstream for next year. But if you ask me, the year after I think it is quite possible. So I think we want to be a leader in leading the trend to migrate towards higher-end for the whole market.

Having said that though, I mean quite often we face the challenge from our customers saying that you can't just want to enjoy the high-end; you have to support us for the low end as well. So whilst in order to be a full solution provider, we do have to also accept the fact that we also have to take up lower end market. We'll continue to improve our design by launching new generations of low-end products to lower the costs. But having said that, a lot of people are doing that and the entry barrier indeed is lower over there and so we do expect the price competition. So overall, with the smartphone we'll be able to steep up some gross margin -- increase our gross margin next year against this year, it's hard to say, I'll be honest. But our strategy is quite clear and I think the high-end market remains a lot less competitive compared to the low-end market that is for sure.

Thank you. And my second question is regarding the breakthrough to the international brand you just mentioned. May I have just a rough idea about as this is a breakthrough for the Company, what's Himax advantage compared to other peers? I think this question probably can apply before to just as you mentioned in the China smartphone market.

Well, actually what I've said -- certainly you'll appreciate I cannot release names and any other details. But there is again it is the high-end and technology leadership that makes the difference. In this case we actually co-develop with our customers to include certain IP to basically enhance the image quality of the panel. So that's why IC becomes a pretty unique driver IC.

So when that is successful, our end customer, meaning the handset maker, start to consign such ICs to various panel customers and then we have a unique position for such opportunities. So this is a very good illustration how we try to break into higher market, break into brand names and also try to maintain our margin. So the uniqueness is the jointly developed IP.

Okay, I see. Thank you. Very clear. Also I have some question regarding the larger size panels, driver ICs. Actually Himax has had several of big customers relocation of driver IC in probably 2009 to 2011 but we have benefited from the growth in China customers. And you just mentioned there's a possibility to even enter like Korea-based panel makers there. But as I know, large size panel driver ICs they usually have like panel chip with their IC companies' vendors. So is this also because you have like a leading (inaudible) over there to gain the market share and even penetrate possibly next year to those Korea panel makers.

Yes, you are -- I think your question is right on. You know for TV, you talk about now, the key thing for the -- among others, is IC interface and again over there, the entry barrier is much higher than the ordinary large panel driver IC. So it is mainly because of this reason, among others, that we feel that there's a real opportunity in Korea for us as well.

Now it's not a promise, but Korea obviously is such a big market. We all know that it remains the biggest share -- occupies the biggest share worldwide. So I think we are trying and we believe, given our technology leadership, there's a real opportunity for us over there.

Thank you. My final question is regarding the tablet market. It's very good to see you have realized strong sales growth from tablet in the third quarter. Tablet is a very -- with a promising outlook device over the next two to three years. May you give us more colors on this segment like your target (inaudible)? I know before this year only a few brands they are working on their tablet, but today there's a big market in China just like China smartphone and the market is quite huge. Is that also your target market?

And also, how about the margin for tablet? It seems like the margin for tablet is higher than [notebook] right?

In terms of margin, I think so far anyway, yes. The answer is yes, so far, but who knows about the future. But as far as whether we'll target the international brands or China, I think we'll certainly do both. And we are making progress on both. But I cannot really give too much detail beyond that.

I also want to -- I'd like to highlight one very important point which is for Himax, tablets becomes -- represents not just opportunity for driver IC. It is also key timing controller. So unlike the cell phone, timing controller is incorporated together with driver IC to make a single SLC solution. But in the case of tablet, you tend to have full driver, [set driver] and timing controller all discretely. So timing controller is a great opportunity for us.

And here you talk about either eDP interface, favored by Intel and eDP interface favored by our own solutions -- own based solutions, so we are leader on both. And beyond that, we also -- we are talking about camera solution and HD is likely to be the mainstream for tablet camera next year. So we already market leader in notebook, so I think tablet represents another big opportunity for us.

And beyond that we also have touch panel controller. Now our shipments are all in smartphone segment, but that doesn't mean we are not entering into tablet. In fact, we believe we are going to provide the unique technology for this particular market as well. So it is just -- it is growing, but we believe that is also an opportunity.

And above all, I think Himax is arguably the only company in the world which can provide competitive technologies on all these fronts. So that puts us in a unique position when we face end-user customers.

So we are increasing our coverage in the US. We are increasing our coverage in China both on engineering trying to really, trying how to capture this market to its full potential.

I see. May I have a follow up on the tablet?

Yes please.

You just mentioned (inaudible) tablet they use these three driver IC, get sourcing also Tcon. But I heard from the market there's also -- there's a possibility that to do a consolidation on the chip maybe like for the cost down efforts. Is that possible and will that negatively impact on your top line growth on the tablet side?

Yes and no. Certainly integration always means less opportunity for us. But when you move upscale, move upper end, higher end you tend to have discrete pieces because the resolution -- the high resolution represents a higher -- more data to transmit and so we tend to have a timing controller and driver IC. So we do offer the so-called integrated solution as well, but it's not over [20]. And there are markets for both and indeed, what we are seeing is tablets are moving -- in terms of panels, I think tablets, the challenge now is to give consumers better stuff rather than cheaper stuff I think it's an overall trend. So you are seeing end customers moving up aggressively the resolution, for example, for their panels.

So I think what you mentioned is correct. If everything moves into integrated solution, then the market opportunity obviously becomes less for us. But we also see it the other way around. There's another trend towards the opposite as well.

I see, thank you. Thank you for taking my questions.

Thank you, Peter.

Thank you. Our next question comes from the line of Kyna Wong of Merrill Lynch. Please proceed with your question.

Hello Jordan and Jackie. Thanks for taking my questions. I wanted to ask the revenue contributions on the smartphone driver ICs as well as the tablet side. Could you give some color on that?

I'm sorry, I didn't quite get your question.

Okay. How much revenue contributed by smartphone driver IC in third quarter and how about the tablet?

We don't really give such specific details.

Roughly I guess.

But for Q3 smartphone, overall about 20%-ish.

20%.

For smartphone yes.

I see. How about tablet? Last time you mentioned about less than 5% in second quarter. How about third quarter?

In the -- around mid range of 5% to 10%.

I see.

At the moment somewhere around half of smartphone revenue.

Okay. And may I ask about the large driver IC business. You mentioned the third quarter suffered from slower demand from the TV modules mentioned in earlier this year. So is that from the major customer like 39-inch and 50-inch and --

I really don't want to comment on specific customers.

I see, okay. And then how about the China panel makers? Any decline from their business in third quarter?

I mean again there are multiple China customers right. So one is ramping up their capacity aggressively, the other one is more mature because they do have the capacity in place for quite some time. So the result is mixed.

Mixed, okay. So may I check the dependency on the largest customer in third quarter? Last quarter you mentioned some -- it will be around threat in third quarter over second quarter from the largest customer.

Yes.

Is that still valid?

You mean in Q4?

Yes, yes.

You mean the Q3 for our major customer is flat sequentially and you ask me about the Q4 trend?

Yes.

The trend is about flat. Flat to slightly up maybe.

I see. And could you -- may I try to confirm the growth driver in each segment, which you mentioned earlier in the conference call. In large driver business, it will be sequential decline in the fourth quarter and in the small and medium it will be [not strong]. But for non-driver it seems you'll continue to increase in fourth quarter. Is it -- could you confirm this, is this right?

I think so. I mean certainly, the product mix can always vary. So none of these three segments will see a major increase or decrease sequentially. But remember our overall guidance for top line is flat to slightly down. So there's got to be some segments which are declining and we've highlighted the large panel. Based on the current forecast it looks to go down slightly. And we also mentioned it is primarily we believe because of a slow demand for monitor and the notebook. And small panel looks lukewarm. By saying that we are not saying that, we're saying it's not very exciting but it's not declining a lot either. So it's about flattish.

But amongst different applications, smartphone remains strong with double digit growth and I think for non-driver, Q4 against Q3 also somewhere around flat kind of level.

I see. Thank you very much.

Thank you.

Thank you. Our next question comes from the line of Scott Bishens of Caffeine Holdings. Please proceed with your question.

Yes, hi. Thank you very much for taking my call. By the way a great quarter and your guidance looks excellent going forward.

Thank you.

I just have one question. What is the status and timing on a potential listing on the Taiwan market?

We don't have an immediate plan for that yet. We believe our stock performance, while we are very unhappy about our current valuation but indeed we are happy that the share price has been rewarded this year against last because of our performance increase. And I think we are set for another very exciting year next year. So we believe given a few quarters of proven evidence that we have indeed turned around and our prospects become -- will be more exciting in the future.

I think the US listing is -- in itself can actually bring us the fair value and the fair liquidity. So until that is tested, at the moment we don't feel the need to come back directly to Taiwan yet. And also, there are recent -- and also -- and I think there is no urgency to come back because another reason is that we are still monitoring the TDR status overall in Taiwan. And that is -- how do I phrase it, it's not the most exciting market in the world, I would say, so far anyway. So we are still wondering whether that is the market we want to get in. So we are not saying we have given up the plan, but there is no immediate plan to come back for TDR listing, that's for sure.

Okay. One other question. I know that I've been a long-term holder of ChipMOS Technology and they've been also trading on the NASDAQ and I know they are looking to move over to the Taiwan Exchange because the valuations over there seem to be so much greater and so much truer to the potential earnings and cash flow. And I was just wondering why do you think that over on the NASDAQ that we don't get that kind of valuation.

I think we have to admit the fact that in-between 2009 and last year our performance was not great and I think we were penalized for that. And people are really waiting for us to really demonstrate that we are much better than that. And so -- and so that is one reason. And we have full confidence demonstrated by this year and we are very excited about next year. I've said it a few times. So we believe if you deliver, NASDAQ will give you the right reward.

On the other hand, in Taiwan, TDR market has not been very exciting to be honest. The government is not looking to be very committed to really develop this market and there are -- recently there are changes in tax regime and so on. So there's been quite a bit of confusion. And the market, whether in terms of productivity or reputation and size is not really very, very exciting for us at the moment.

And NASDAQ is the proper market so we intend to stay in NASDAQ. Not that we'll always stay in NASDAQ, but we intend to stay in NASDAQ solely for the foreseeable future and wait to see how the market reacts to our further performance and demonstration that we are much better than how we appeared in the last two or three years. And hopefully we'll get properly rewarded. And if that still doesn't work, maybe we'll start to consider more seriously about Taiwan.

But in our view, if you compare these two markets, NASDAQ from all aspects is better than Taiwan TDR market. The only thing is that we are a Taiwanese company; that is true. But again, we do have some doubt about the TDR market status at the moment.

Okay, that's fair enough. Thank you very much (multiple speakers).

It's not a decision you want to make lightly right. You cannot say okay we'll get in and we'll test the water, if we don't like it we'll get out. It's not something you can do that like that. So it has to be a very, very serious decision. So I can only say the Board has not made this decision to come back to Taiwan yet.

Thank you very much. And a great quarter like I said and prospects look good going forward and hopefully that we will get the evaluation going forward on the NASDAQ. Thank you very much.

Thank you. Thank you for your comments.

Thank you. Our next question is a follow-up question from the line of Jay Srivatsa of Chardan Capital Markets. Please proceed with your question.

Hi Jordan. On the micro display side, given that you're seeing some modest volumes and obviously you're optimistic about how that could shape up in 2013, could you give us some sense on what's the competitive landscape there? How comfortable are you in terms of your position early in the product cycle and how do you see that playing out as other competitors could likely begin to look at that market as well? So maybe a little bit of a description on the competitive landscape would be helpful.

Okay. Twofold. One is the technology LCOS and our competition over there and the other one is the competing technology. And I will start with the latter.

The only serious competing technology really is TI's DLP. And TI's DLP has been our competitor in Pico projector and certainly may potentially be a competitor for head-mounted display as well. In short, I think while DLP is pretty competitive in terms of its light efficiency in Pico projector market, when it comes to head-mounted display it is not as competitive because its main advantage of light efficiency plays a much lesser role for head-mounted display because the luminous required for head-mounted display for the panel is much, much, much lower because it's near to eye. It's near to eye.

LCOS has a lot of advantages over DLP. I'll give you some examples. Our cost, our flexibility to move up the scale and down the scale in terms of resolution, our ability to tailor-make panels for customers. And so far we have seen -- we have discussed a lot about this with our customers and so far the overwhelming response has been LCOS has advantages that DLP cannot meet for head-mounted display. And that is why we have seen almost without exception LCOS is winning against the other technologies.

In terms of the LCOS camp, it's not really a big market. So there is a very, very small handful of players there only and Himax stands out because of a few reasons. One, we are the most experienced. We've been in this field for almost a decade. We have a ton of experience. And number two, we have our in-house fab compared to others who outsource the LC fabrication to other people. And that itself is a problem because that is the key know-how. That is not something you want to outsource. But so far I think we are the only player in the market who have an in-house fab.

And number three, because of our driver IC and timing controller businesses, we are extremely experienced in all the interfaces, all the media processing know-how, all the power saving tricks and so on. And so other people may be able to make a demonstration, but our end customers are worried about their capability for mass production, the reliability, the robustness of their solution and so on. And Himax is extremely proven because if you want a parallel interface, you want interface whatever, we are the leader because of our driver IC business.

And lastly, compared to our kind of peer LCOS players, we know how to handle supply chain. They tend to be more of -- some of them anyway tend to more of a start-up kind of niche player for LCOS, but we are a different kind of company. We know how to manage our supply chain. We know we have good bargaining power with foundries and so on. So I think that is also a major factor to make us stand out.

So, so far anyway we have not really seen a real completion on the horizon. So the question for us is whether this is going to take off and how fast and how big and how -- but it's not really when we will get it I think, at least in the foreseeable future.

Thanks Jordan.

Thanks Jay.

Thank you. There are no further questions at this time. I would like to turn the call back over to Mr. Wu for any closing remarks.

Thank you everyone for taking the time and for your questions. And we're looking forward to talking with you again at our next call in early February.

I'd like to make a final note. Jackie Chang, our CFO, she'll be on a non-deal roadshow in the US in the first week of December. So please do contact her and/or John Mattio at MZ Group if you are interested in meeting with us in person.

So I thank you again and have a nice day.

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