奇景光電 (HIMX) 2012 Q4 法說會逐字稿

Greetings, and welcome to the Himax Technologies Inc. full-year 2012 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentations. (Operator Instructions). It is now my pleasure to introduce your host, John Mattio, Senior Vice President of MZ North America. Thank you, sir. You may begin.

Thank you, operator. Welcome, everyone, to Himax's fourth-quarter and full-year 2012 earnings call. Joining us from the Company are Mr. Jordan Wu, President and Chief Executive Officer; and there is Jackie Chang, Chief Financial Officer. After the Company's prepared comments, we have allocated time for your questions in a Q&A session.

If you have not yet received a copy of today's results release, please call MZ Group at 212-301-7130, access the press release 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 and industry growth are forward-looking statements that involve a number of risks and uncertainties that could cause actual results 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 condition and the state of the semiconductor industry, market acceptance and competitiveness of 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, the capacity 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 2012 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 generated internally and has not 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 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, everyone, for being with us for today's call.

In today's conference call, in addition to reporting our performance in the fourth quarter, I will also summarize our results for 2012 and highlight chief milestones we achieved last year. I will then provide our outlook for the first quarter of 2013 and outline our strategic focus areas for the full-year 2013. Our CFO, Jackie Chang, will then provide further details on our financial performance.

Our 2012 fourth quarter revenues, gross margin, GAAP and non-GAAP earnings per ADS, all met our guidance. For the fourth quarter, we reported net revenues of $190.6 million, with gross margin of 23.3%. Fourth quarter GAAP earnings per ADS were $0.084 and non-GAAP earnings per ADS were $0.089, both results falling in the top end of our earnings range.

Our fourth quarter revenues of $190.6 million represented a 12.7% increase from $169.2 million in the fourth quarter of 2011 and a 0.1% sequential increase from $190.4 million in the third 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 $37.5 million, up 15.8% from a year ago and up 1.3% sequentially. Large panel drivers accounted for 40.7% of our total revenues for the fourth quarter, compared to 39.6% a year ago and 40.2% in the third quarter. The sequential increase was attributed to strong TV demand arising from customer's stock preparation for the Chinese New Year sales and China panel customers further new capacity ramp, offset by slower demand for notebooks.

Among all of our large-sized panel market regions, China showed the greatest growth year over year and sequentially. Sales for small and medium-sized drivers came in at $85.4 million, up 6% from the same period of last year and down 2.2% sequentially; and the segment driver ICs for small and medium-sized applications accounted for 44.8% of total revenues for the fourth quarter as compared to 47.6% a year ago and 45.8% in the previous quarter.

The sequential decline was mainly due to the weak feature phone demands as we switched our focus to smartphone. China's white-box market for both smartphones and tablets also experienced some correction towards the end of the fourth quarter. Excluding feature phones, sales for small and medium-sized drivers, especially those for smartphone, tablet and automotive display applications, grew substantially for the fourth quarter of 2012 from the same period last year. We will elaborate more on this later.

Revenues from our non-driver businesses were $27.7 million, an increase of 27.6% from the same period last year and up 4.2% sequentially. Non-driver product revenues accounted for 14.5% of total revenues, as compared to 12.8% a year ago and 14% in the previous quarter. CMOS image sensors, power management IC and IP licensing were among the non-driver products which delivered outstanding sequential growth. Also adding to this growth were our pilot shipments of LCOS microdisplays for the new and exciting head-mounted display application.

Our fourth quarter non-driver businesses overall grew 27.6% year-over-year as many products experienced double-digit growth. Such products include CMOS image sensor, touch panel controller, power management IC, WLED driver, wafer level optics, IP licensing and operational amplifiers.

As a percentage of total revenues, revenues from related parties continued to decline relative to those from other parties. They were down 6.3% from the previous quarter and up 2.2% from the same period last year. In comparison, revenues from other parties went up 3.4% quarter-over-quarter and up 18.3% year-over-year.

Related party sales accounted for 31.8% of total sales in the fourth quarter compared to 35.1% a year ago and 34% in the previous quarter. As recently as Q4 2009, related party still accounted for 68.8% of total sales. This figure has come down to 31.8% in Q4 2012 mainly because of our related party customer that owns 15% of Himax equity undertook to diversify its supply base.

The related party sales as a percentage of total revenues may continue to decline as our other businesses now look set to outgrow the related party business. However, the related party customer remains our single largest customer and we will continue to provide them with the best service in an effort to win the most possible business from them.

Our GAAP gross margin for the fourth quarter of 2012 was 23.3%, a 120 basis points improvement from 22.1% a year ago and a slight improvement from the previous quarter. This is the fifth 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 a richer mix of higher margin products like those in our non-driver categories and the fast-growing small and medium-sized panel drivers. Gross margin improvement will continue to be one of our key business goals going forward.

For the fourth quarter, GAAP net income was $14.3 million, or $0.084 per diluted ADS, compared to $3.7 million or $0.021 cents per diluted ADS in the corresponding quarter a year ago, and $10.4 million or $0.061 per diluted ADS in the previous quarter.

GAAP net income grew 285.8% year-over-year and 37.7% versus the previous quarter. The sequential net income growth was mainly a result of the difference in RSU charges. The third quarter RSU expense was $6.3 million while it was just $0.5 million in the fourth quarter.

The net income surge of 285.8% year-over-year was partly attributable to difference in income taxes and tax credit provisions. Excluding share-based compensation, acquisition-related charges, income tax and tax credit provisions, our non-GAAP adjusted pre-tax income for the fourth quarter was little changed from the previous quarter; but still grew 95.4% from the same period of last year, reaching $20.2 million.

The strong year-over-year growth resulted from a combination of 12.7% top line growth and a 120 basis points gross margin expansion, on top of $1 million operating expenses reduction. GAAP EPS per diluted ADS grew 300% from the same period of last year and 37.7% over the previous quarter.

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

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 full year results and then 2013 outlook and first quarter 2013 guidance. Jackie?

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

Our GAAP operating expenses were $25.2 million in Q4 2012, down 3.8% from $26.2 million a year ago and down 19.1% from $31.1 million in the previous quarter. The significant sequential decrease was primarily the result of the difference in RSU charges. The third quarter RSU expense was $6.3 million while it was just $0.5 million in the fourth quarter.

In accordance with our protocol, we grant annual RSUs to our staff at the end of September each year, which, given all other things equal, leads to higher third quarter GAAP operating expenses compared to the other quarters of the year. Ignoring the higher RSU expenses in the third quarter of 2012, our Q4 operating expenses actually stayed stable comparing to the previous quarter and down $1 million from the same quarter last year.

GAAP operating income for the fourth quarter of 2012 was $19.2 million or 10.1% of sales, up $8.1 million or 72% compared to the same period last year and up $6.1 million or 46.1% from $13.2 million, or 6.9% of sales, in the previous quarter again.

Excluding RSU expenses, operating income for the fourth quarter remained around flat compared to the previous quarter. Non-GAAP net income in the fourth quarter was $15.3 million or $0.089 per diluted ADS, up from $4.3 million or $0.025 per diluted ADS for the same period last year, and down from $16.5 million or $0.097 per diluted ADS in the previous quarter. Non-GAAP net income represents a growth of 252.2% year-over-year, but was down 7.3% from the previous quarter.

I will go through the fourth quarter and full year balance sheet analysis and 2012 full year financial results a bit later after Jordan gives the 2012 full year business review.

Thank you, Jackie. Now let me summarize our 2012 full year performance. I will also take the opportunity to highlight our main business themes going forward.

As we mentioned on our previous calls and in numerous interactions with investors throughout the year, the first and all successive quarters of 2012 demonstrated a successful turnaround in our business from the trough of 2011.

Small and medium-sized driver IC replaced the large panel sector to become our largest source of sales, thanks to the exciting growth in global demands for smartphone and tablet and our leading position in those new applications. Large panel driver IC sales also experienced a double-digit growth last year, benefiting from the growth in China market where most of the new buildings of panel capacity took place.

Last but not least, our non-driver products delivered the strongest growth last year owing to many new product launches and project wins. We expect our non-driver products to continue to outgrowth driver ICs in the years ahead. Our revenues totaled $737.3 million in 2012, representing a 16.5% increase year-over-year. The growth was a result of increasing sales in all product segments.

Small and medium-sized drivers, now our largest product segment, grew 16.6% year-over-year, representing 44.6% of our total revenues. As I reported earlier, our sales into the feature phone sector declined in 2012 as we switched our focus to smartphone. Excluding feature phones, our small and medium-sized drivers grew over 50% year-over-year.

We were able to achieve such an outstanding performance in this area last year because we were able to expand our reach to end customers across China, Korea, and the US. This strong growth momentum will continue into this year, thanks mainly to the rapid growth in smartphone, tablet, and automotive displays.

Revenues from large panel display drivers grew 12.9% year-over-year, representing 41.4% of our total revenues, as compared to 42.7% in 2011. The growth was mainly driven by the sales to China customers. It also led to our market share gain during 2012 in the large panel sector. Non-driver products grew 28% year-over-year, representing 14% of our total sales, as compared to 12.7% a year ago.

Our timing controller IC, touch panel controller, power management IC, WLED driver, ASIC service, IP licensing and wafer level optics all delivered strong growth in 2012. This illustrated our strong R&D capability and our commitment to a more diversified product portfolio.

Revenues from related parties were down $6.3 million or 2.1% from the previous year. In comparison, revenues from other parties went up $110.5 million or 29.5% year-over-year. Related party sales accounted for 34.2% of total sales in 2012 compared to 40.8% a year ago.

Gross margin in 2012 was 23.1%, a 330 basis point improvement from 19.8% in 2011. The significant margin improvement is a result of our product diversification. Our GAAP net income was $51.2 million or $0.3 per diluted ADS compared to $10.7 million or $.061 per diluted ADS last year.

The strong year-over-year growth resulted from a combination of 16.5% top line growth and a 330 basis points gross margin expansion, on top of $5.5 million operating expenses reduction.

GAAP net income for the year of 2012 grew 377.9% year-over-year. GAAP EPS per diluted ADS grew 391.8% year-over-year. In July, 2012, we paid an annual dividend of $0.063 per ADS, equal to 100% of 2011 net income. We remain committed to paying annual dividends, the amount of which is referenced primarily on prior years profitability. The high payout ratio in 2012 is an illustration of our confidence for our profitability to continue to improve.

As I did with our report of the fourth quarter, I will now ask Jackie to explain the details for our full year financial results.

Thanks again, Jordan. In terms of 2012 full year performance, our GAAP operating expenses were $103.5 million, down $5.5 million or 5% from the same period of 2011. Excluding the bad debt collection from SVA-NEC in 2011 and higher RSU expenses in 2012, our 2012 full year GAAP operating expenses were $97.2 million, down $13.3 million or 12% from the same period of 2011. The significant reduction was due to a better overall expense control and reduced ramp-up costs for the production of wafer level optics at our in-house manufacturing facility.

Operating income was $67.1 million or 9.1% of sales, as compared to $16.6 million or 2.6% of sales in 2011, representing 303.8% increase year-over-year. Non-GAAP net income for 2012 was $59.9 million or $0.351 per diluted ADS, up from $18.3 million or $0.103 per diluted ADS for 2011.

Non-GAAP net income for 2012 grew 227.3% year-over-year. Non-GAAP EPS per diluted ADS grew 240.8% year-over-year. Our cash, cash equivalents, and marketable securities were $138.9 million at the end of December 2012, significantly improved from $106.3 million for the same time last year and $89 million a quarter ago due to the substantial net cash inflow from operating during the quarter.

On top of the above cash position, restricted cash was $73 million at the end of December, down from $84.2 million during the same period last year and the same at the end of the last quarter.

Inventories at the end of December were $116.7 million, up from $113 million a year ago and down from $128.3 million a quarter ago. Accounts receivables at the end of December were $209 million as compared to $181.1 million a year ago and $218.3 million last quarter. Days sales outstanding were 103 days at end of December, 2012, as compared to 104 days last year and 109 days at end of the last quarter.

Net cash inflow from operating activities for the fourth quarter was $52.4 million as compared to $17.3 million during the same period last year and the outflow of $7.1 million in the previous quarter.

As indicated in our previous earnings call, we managed to generate a substantial net cash inflow from operations during the fourth quarter due to increased cash receipts from accounts receivable collection and less vendor payments for improved inventory control.

Cumulative cash inflows from operations in 2012 were $52.2 million versus $43.4 million the year before. Capital expenditures were $2.2 million in the fourth quarter versus $1.2 million a year ago and $1.7 million last quarter, bringing the total capital expenditures to $6.6 million through 2012 as compared to $18.9 million in 2011.

With regards to our $25 million share buyback program, we have purchased a total of $13.4 million or approximately 9.5 million shares ADS through December 31, 2012, including $0.7 million, or approximately 0.3 million shares ADS purchased in Q4 2012. As of December 31, 2012, Himax had 169.6 million shares ADS equivalents outstanding. We will continue to execute the remaining share repurchase program in accordance with Rule 10b-18.

I will now turn the floor back to Jordan to discuss our 2013 outlook and first quarter guidance.

Thank you, Jackie. 2012 was a year of successful transition when we delivered robust revenue and earnings growth. Looking into 2013, we are seeing strong fundamentals across many of our product lines and we will continue to execute our strategy to focus on image processing, related technologies, while diversifying our customer base and product portfolio.

Large panel driver business remains one of our long-term focuses. We gained some market share in 2012 and continue to be on the leading edge in key technology trends such as various high-speed interfaces and 4K TV.

However, large panel drivers' short-term prospect looks sluggish. It is likely to experience some sequential decline during the first quarter of 2013 because of slow monitor demand, high customer inventory, seasonal slow-downs and reduced large panel driver sales to our related party customer.

We believe that this is a temporary set-back as we are confident that our competitiveness in this segment remains strong with potential growth opportunities coming from customers in China and Korea.

The prospect of our small and medium-sized panel driver business remains robust and solid in 2013. We are currently in a strong position in the smartphone sector with leading technologies, competitive products, and good customer line-up. We carry a comprehensive range of products covering both mainstream and high-end smartphones. We will further expand our smartphone customer base, which has already covered first-tier international and Chinese brands as well as the fast growing China white-box market.

We believe that our leading position in this segment will be further solidified as the industry moves toward higher resolution where the technical complexity of driver IC is vastly complicated and the barrier of entry is higher than before.

We expect the sales for smartphone application to accelerate throughout 2013. Boosted mainly by the China white-box market, the tablet PC is embarking on a new stage of growth similar to feature phones and smartphone before it. Led by Chinese makers selling to both domestic and emerging markets, the demand of low-cost white-box tablets surged in 2012 and is expected to further accelerate in 2013.

Himax has long been a leading player in Chinas medium-sized panel market and is well positioned to benefit from the new found momentum of the white-box tablet market. Moreover, we have successfully penetrated into several leading international tablet brands and have started to make shipments for some of them since Q4 of 2012.

With further design-wins and shipments in the pipeline, we expect the tablet market will contribute to noteworthy growth for Himax in 2013 and beyond. Our non-driver business provides not only the most exciting long-term growth prospects, but also the synergy of product and knowhow that we can bring to our customers through offering a total solution of image processing related technologies in addition to our driver IC products.

This is one of our key differentiators against our competition. Our goal is to further lift the non-drivers percentage of total sales from the 14% of 2012. We will benefit not only from a more diversified sales base, but also higher gross margin. Many of our non-driver sectors, including CMOS image sensor, wafer level optics, timing controller, touch panel controller, power management IC, WLED driver, ASIC solution and LCOS microdisplay, are on track to enjoy decent growth during 2013.

I will now elaborate on a few non-driver product lines which we believe will see robust growth this year and going forward. The technology of timing controller is undergoing major changes recently in preparation for the industry trend towards higher panel resolution. We are among the leaders in this new technology development. Our eDP 1.1 and 1.2 solutions are already in mass production. In addition, we have successfully developed new eDP 1.3 timing controller IC, which was among the very few solutions to have passed worldwide leading graphic card and chipset company's compliance test.

eDP 1.3 Tcon provides low power consumption and fast interface for high-end notebook and tablet applications. We are working with numerous panel and end-user customers in the development of eDP 1.3 projects and are excited about its long-term prospect.

Our CMOS image sensors delivered a phenomenal growth during the fourth quarter of 2012, mainly due to numerous design-wins in smartphone, tablet, laptop, and surveillance applications. We currently offer mainstream and entry-level sensor products with pixel counts of up to 5 mega and are on track to release a new 8 mega pixel product very soon.

However, the Q1 prospect for CMOS image sensor looks gloomy as China market is going through a correction and many of the customers adopting our new sensor products are still finishing up their product tuning. Notwithstanding the short-term downturn, we do expect the sales of this product line to surge in 2013, boosted by shipments of our new products, many of which were only launched in the second half of last year.

We also expect to break into new and leading smartphone brands and further penetrate the tablet, IP Cam and surveillance and automotive application markets. The sales of touch panel controllers more than tripled in 2012, as we expanded share in our existing leading smartphone brand customer and began shipments to new handset customers in China from Q3 2012. Beyond handsets, we are expanding our product offering to cover larger panel for tablet applications, targeting both international and China white-box markets.

Recently, we were awarded for a new tablet projects from a leading brand customer. We are confident that touch panel controller will continue to deliver growth in 2013 through gaining new customers in smartphone, tablet, and Win 8 laptop applications.

Working with several top-tier customers to develop new head-mounted display products using our LCOS panels, we shipped some early volume for customers' pilot runs in the fourth quarter of 2012. We expect some early stage volume shipments in 2013. In addition, we are still working with numerous partners to create new pico-projector applications using our LCOS microdisplays. We remain committed to the long-term development of LCOS microdisplay and its exciting new applications.

With all these new developments and design-wins of non-driver products, we expect that our non-driver businesses will continue to account for an increasing percentage of our sales and contribute to overall gross margin improvement in 2013. The non-driver products represent our best long-term growth engine.

In the first quarter, we expect a high single-digit to low-teens decline in our revenues compared to the last quarter. The first quarter is likely to be the bottom of the year in terms of sales because it has fewer working days due to Chinese New Year.

Our gross margin is expected to be slightly up from the fourth quarter of 2012. We expect small and medium-sized panel driver sales will contribute to an increasing percentage of product mix and revenue in the first quarter.

GAAP earnings attributable to shareholders per diluted ADS are expected to be in the range of $0.065 to $0.075 per diluted ADS based on 171 million outstanding ADSs. Non-GAAP earnings attributable to shareholders are expected to be in the range of $0.07 to $0.08 per diluted ADS based on the same number of outstanding ADSs.

Thank you for your interest in Himax. We appreciate you joining today's call and we look forward to a productive and profitable year in 2013. Operator, we will now open the floor for questions.

(Operator Instructions).

Jay Srivatsa, Chardan Capital.

A couple of questions here, Jordan. In terms of the mix in Q4, it appears your large panel grew a little bit while the handset business -- while the small panel dropped off a little bit. I think you have talked about the shift from feature phone to the smartphone contributing to the shortfall or the decline in Q4 on the handset side or in the small panel side.

Let me ask a question related to that. How comfortable are you and how well positioned are you on the smartphone business as that ramps up in China?

Specifically for China market you mean?

No, just in general. It looks like the small panel business in Q4 declined versus Q3 and I think you alluded to the shift from feature phone to smartphone to be a part of the reason for that. The question is, how well positioned are you in the smartphone side, given that a lot of the ramp this year could likely come from that side?

Well, I think the trend for smartphone is crucial for the up in panel resolution and we explained in our prepared remarks that we think the higher up it goes, the higher the barrier for second tier driver IC vendors, and so, I think we will be better off in this trend.

So I think the growth this year, both China and international brands will come from higher resolution. So for last year, high VGA was the mainstream followed by WVGA. And this year WVGA I think is on track to replace high VGA to become the new mainstream. The high resolution of QSD and even HD720 will pick up the momentum. And I think we are on track to benefit from the new trend. Hello? And --

Okay. The next question I had was related to penetrating newer panels. It actually looks like you have been able to gain some traction at AUO from what I can tell. I wanted to get some sense of how the business there is ramping up and what portion of the revenues do you expect them to contribute as you look at the rest of the year?

You mean specifically on AUO?

Yes.

We don't really comment on individual customers specifically, but I think all I can say is that we have -- we probably share some leading top-notch end customer in small panel segment. So certainly, AUO is major customer in -- a major panel player in Taiwan and certainly would try to win the best of their business. But I think other than that, I really cannot comment any further.

Okay. In terms of your margin profile, it looks like you have had some pretty decent improvement through the last four to six quarters. As you look ahead to fiscal '13, how do you expect that margin profile to be? Do you expect sequential improvement or is this kind of where you see the margins peaking out? Can you give us some sense on how you expect product mix to impact your margins going forward?

I think if you look at our current portfolio, our non-driver enjoys -- overall enjoys better growth margin compared to driver IC as a total. And we repeated earlier that we do expect the non-driver percentage to further grow this year compared to last. And I will be honest, our performance in terms of non-driver as a percentage of total sales for last year, we are not totally satisfied with that performance.

And I think there are a few -- quite a few segments which we believe are, as we move along to Q2 and second half, will pick up strongly. And they include, among others, CMOS image sensor, LCOS microdisplay, touch-panel controller, et cetera. So I think -- so that will be the point number one.

I think when we are able to raise our percentage of non-driver sales, we should be able to improve our gross margin overall. And secondly, I think part of the reason why we have been able to raise our gross margin in the past few quarters was because feature phone has been declining in our sales. And feature phone -- I mean, in general, low-end products tend to suffer from very low, very poor margin, and we intentionally switched our focus from feature phone to smartphone.

And now low-end smartphone will start to suffer from some margin pressure and our strategy is to move further up. So I think barring a traumatic economic downturn following here, I think we are pretty confident we should be able to further improve our gross margin overall in this year compared to last.

Okay. In terms of the guidance itself, in past years you have -- or in Q1 we have typically not seen the high single-digit to low teens kind of decline. What is different for you this year versus in previous years in terms of the guidance itself?

Typically, Q1 is always a difficult quarter to give guidance, because there are just too many holidays and it is very, very hard to have a solid projection from the customer. And so, typically, we tend to give a conservative guidance in Q1 -- and actually the panel price in the last year and the year before, so we tend to, barring any unexpected major event, we tend to -- I think our intention is to give a conservative guidance and to make sure we can always meet it, because as I said, Q1 is always slow. It's harder to predict.

And if I breakdown into further details, I think we actually said in our script that we do expect the large panel business to suffer from some decline, actually high double-digit decline. But we believe our small panel business to remain relatively robust.

So it's a matter of the prospect for large panel in -- throughout the whole year. And it's a bit difficult to tell at this early stage of the year because on the negative side, the industry is not really growing capacity, unlike last year when China did grow a lot of capacity. I think China will start to see major capacity expansion only until Q4 or even at the end of Q4. So then customers will start to ramp-up their new Gen 8.5 capacity, if everything goes according to plan. So we are not really expecting a large panel new capacity momentum.

However, we also mentioned in our script we do hope to win new businesses from Korea. So we are very hopeful there; for instance, in the top line, we hope we will able to achieve for large panel. So that we will have until second half of this year.

So overall, I think we remained optimistic for the overall growth in 2013, the whole year. Although, I think even what we have right now and given the fact that we believe it is prudent to give a conservative guidance, our Q1 guidance certainly looks exciting.

All right. In terms of the panel business in China itself, it looks like more and more of the handset manufacturers in China are looking to local suppliers as opposed to Taiwanese panel manufacturers. Can you give us some update on how you are positioned with the Chinese panel manufactures and how you hope that will -- what that will mean for you in fiscal '13?

I think China certainly -- Chinese panel makers certainly enjoy an advantage in their home market, but that doesn't mean they don't go export. But having said that, certainly China is now the strongest market overall. And is also a where ranging from high-end to low-end, is a big market. It doesn't just focus on low-end. So I think our China panel customers are expanding aggressively both in terms of capacity build up and also in technology preparation.

For example, if you look at -- if you talk about the new 4K TV, they are all on it. So I think going forward for the next few years, China, still no doubt, will be still the fastest growing market. So I think our intention is to cover them very, very closely and try to maintain our market lead that we achieved last year.

But other than that, certainly in China the government, along with their capacity build up and their ability to serve a higher percentage of their home market demand, I think they will do a lot of things to protect their local players, such as tariff, as we all know, and such as they are forming up the alliance between their local panel makers and TV makers, et cetera. So I think China's panel maker customer will continue to remain pretty competitive in the global market.

Having said that, though, we do see the first few international brands is an area where the China panel makers is not particularly competitive about for the time being. And I think it all makes sense to them because to cover their home turf has kept them very busy already.

All right. On the non-driver side, it looks like last year that business probably out grew your large panel and your small panel, which is obviously very positive. I wanted to ask you within the non-driver business, what segment do you see meaningful growth this year relative to some of the other areas that you are in in that side?

Right. I would just only mention more meaningful items, meaning like large ticket items. And I think we mentioned in our remarks that our CMOS image sensor will be sluggish in the first quarter. However, we are very excited about the rest of the year, because this is -- mainly because, as we said earlier, we launched quite a few new products, the 2-megapixel, the 5-megapixel, now our mainstream product for CMOS image sensor during the latter half of last year. So it did take some time for our customers to get through their engineering stage to enter the mass production. So I think we are very close to finalizing that.

So starting from Q2 and going forward, we are very excited about it. And we are also on track to launch our 8-megpixel sensor in the market where globally the supply is still very limited. So we are quite excited about the prospects of CMOS image sensor this year -- feature phone, wafer level optics.

And in addition to that, touch panel controller, last year was really the first year of mass production, of meaningful mass production when we focused very much on serving our leading international brand customers in their cellphone products. And we have managed to win a major share out of that. And after that, we move aggressively into China.

We have started to pick up some momentum in China market in the second half of last year and we do expect the China sale to accelerate this year. And also is the trend for laptop and tablet to adopt touch-panel. Our controller business over there is also quite promising.

And lastly, I just want to mention LCOS. I think starting second half, hopefully, we will see some exciting growth, but probably -- certainly much less though in the first half when we will still be going through engineering ramp with our customer. But that is having head-mounted display and there are now head-mounted display applications that we will -- with a few leading players in the world. So we are excited about that part. Again, in terms of LCOS, you won't really see a meaningful volume until second half of the year.

All right. Last question on the balance sheet. Jackie, it looks like the cash position increased pretty significantly in Q4 over Q3. Can you give us some highlight on what contributed to the increase in cash?

Yes. I think that we mentioned in the third quarter that we have increased sales in 2012. In preparation for the business growth, we have prepared a lot of inventory about the second quarter of 2012. Where on the receivable side, generated from the higher sales, the collection of the receivables tend to be longer days versus the payables that's due from purchasing of the inventory.

So in Q3 2012, we had a cash outflow in the quarter because of that dynamics of the receivable collection and the payable. So Q4 we were able to collect all of our receivable that's due current and we already paid the payables from the purchase of the inventory in Q3. So we generate -- and plus the good financial result, the net income results from Q4, we were able to really generate a lot of cash inflow and significantly improve our cash position at the end of the fourth quarter as we expected to do.

Okay. Thank you.

And also looking into Q1, I think our cash position will remain strong in the first quarter as we expect them to be.

Okay, thank you. Good luck.

Thank you, Jay.

Peter Liao, Nomura.

Most of my questions have asked by Jay already, so only a few questions here. First is regarding China's smartphone driver IC markets. We notice that there is increase in competition, and I assume the key focus of the investors will be, how could you -- to maintain your margin, or not to mention to improve it, given the severe competition in the China smartphone driver IC markets?

I think the way to maintain it is to move further up in terms of resolution and technology. And I will admit the price competition is very severe, coming from some of our competitors. And we have -- and typically, in early stage -- let's say, our HD720 right now still enjoys pretty decent margins, ditto for QHD. Last year, while WVGA was quite good, now certainly it is not as good as before. So, yes, margin pressure is there. But the way to maintain the margin is to out-compete others in terms of higher end products.

Okay.

And then -- so I think our coverage on the brand name I think is -- comparatively is our strength. So last year when China's brand name slowed down, we slowed down compared to our peers and that was -- so I think while we also cover the white-box market, our strength, comparatively, is on the brand name in China.

Okay, I see. Also regarding China's smartphone market I noticed the increasing trend for RAM-less driver IC starting from second half. But since the penetration will remain very small in second half but I notice that there seems to be increase in demands for RAM-less driver IC, considering low cost. May you give us some color on this and also will RAM-less driver IC will give you better margin?

Not necessarily. Well, actually, we do both driver ICs with RAM and RAM-less, and they are equally important to us. And it is -- as you say, it is actually a choice of the customer. And typically, RAM-less is certainly, without the memory, the IC is cheaper. But then the power consumption for the whole panel module will be higher.

So it is a very easy trade-off. And certainly, when cost pressure becomes high, people tend to move to RAM-less, more than the other way around. And it's hard to comment the margin difference for RAM and RAM-less ICs. I think they are similar. And certainly, our ICs with RAM just give us better ASP. But what we try to do is to provide a comprehensive coverage of products covering all resolutions and both RAM and RAM-less IC.

Actually, we go further than that. For example, we cover both (inaudible) panel and get on array and so on. So for each year the specific resolution, we do have a range of products covering different technologies. So our strategy is to be a leader in high-end products and also to cover a comprehensive range of the products.

Okay. Also I would like to know about -- this year I noticed no growth for first tier when the higher smartphone models start to adopt for full-HD display resolution. I wonder where you have this kind of resolution, or, if no, when could we expect you to have or launch into markets in like what kind of a period?

Full-HD product is still very, very, very small in terms of volume. So we are very close to launch our solution and we didn't want to be too early because we believe full-HD -- there is a lot of technical considerations including cost, including power consumption and certain unique image processing features required by end-user customer. And that we need to be careful about.

We need to clarify before we take a resolution. And that is why we have been in a lot of discussion with certainly the brand name customers on the specifications of full-HD solution. And while we wanted to avoid to take out a pre-mature product -- and bear in mind, full-HD (inaudible) trend, the take off cost is very very high. So we don't want to take off a pre-mature product.

But our full-HD solution will be launched very, very soon. But we are certainly not in mass product stage yet. But we are not very worried about this because we do have the know-how and the market is still, as I said, still very, very limited. And it is not likely to become anything close to a mainstream during this year, in our view.

Okay. Just as you mentioned, they are still certain high-end products which will likely to adopt more advanced technology and may require higher R&D. So could we expect higher R&D spend this year compared to last year to make sure you have leading position in all products?

We will be into higher entry markets -- I mean, it is only one of the parameters for the overall R&D expense. So I don't think our R&D expenses will be higher specifically because of this reason, per say. But I would say, based on our current business plan, we do expect higher operating expenses this year compared to last, mainly because I think we have been running very stretched in terms of product development, i.e., we have always suffered from the problem of having too many opportunities with too few people to cover. So we are embarking on a new wave of some degree of hiring.

And certainly, we will always be -- we must be careful about our expense control. But it's a difficult trade-off decision to make. And I want to highlight that by -- okay, now our problem is we have too many opportunities to cover and we have too few people to cover them. So what we do, we try to hire a little bit more people to cover the opportunities. However, the downside is the short-term, right.

When you start to hire and when those people start to do R&D and development, there is a time lag before any revenue can be generated. So we will be very careful managing this process during this year and we just have to look at that quarter-by-quarter.

So while we have an overall [BT] for the whole year, but we also have an internal decision to follow them very closely to see how fast or how slow we should go along with our plan to hire more people to cover more projects. But at the moment both -- in particular for small panel business and our ASIC service, our CMOS image sensor and our touch panel controller, we have more projects than we can cover right now.

Okay. I see very clear. Thank you. My next question is regarding the combination of touch controller and smartphone driver IC. I know the market industry has talked about a trend for (inaudible). Right now (inaudible) solution for panel makers is still not mature yet. But what is you view on that? And will you -- it seems that earlier you also mentioned that kind of product, so maybe give us some color on that next solution and when do you expect the market to bring up?

Peter, it's a very good question. It actually involves a bit of our trade secret. I am just wondering how I should address this issue. I think in the long-term definitely this should happen because it makes sense to have integrated touch panel controller and driver IC. It's a matter of when, how it will happen. And I think it is probably more of a business decision than a technical decision because people like us are capable of doing that.

It's a matter of whether we are too mature -- we are pretty mature. And indeed there are numerous end-user customers talking to us about this, and I don't think I can elaborate much more than that. But I think the key decision point is whether the industry is ready, right. And I think we are in a unique position to implement this because -- I mean, no doubt we are a leader in smartphone driver IC and we also have pretty solid proven track record in certain leading handset brand for touch panel controller.

So we have sufficient credibility for both to be in a position to integrate that, because if you are only good at one of the two areas, then nobody is going to fully trust you when you try to integrate the two technologies into one piece of IC. So I think that will be a major barrier.

People need to have a lot of trust. Because once you embark on a certain project, it's a lot of cost for all parties involved, particularly I think the end-user customer. So indeed, there are some serious customers talking to us seriously. I think that's probably the most I can say right now. But I am not going to make a prediction as to effectively when that will happen.

Okay. Thank you. I think it's good enough for you to show us this colors. And about -- another I think growth driver in terms volume is the tablet market and I think that we are very happy to see that you penetrated I think both tier tablet brands this year. And considering you have strong position in China tablet market, is there possible to give us some colors on that? Whether for tier one in your global tablet brands their margin [following] is better than China tablet customers, considering for China usually they consider -- cost some more?

At this stage there is no really significant difference in gross margin to be honest. I think China -- the tablet market in China at this stage is a pretty fragmented market. So you are talking about many, many -- our main customers doing lot of different projects, large and small. So in such a fragmented market, the key to cover them is to be able to offer service to cope with the wide range of demands and the fluctuation in their demands, accordingly.

And as a result, one can see these projects, these margin, while the international brands is totally a different story, where you are talking about one or two single customer who are extremely demanding in technology but they are extremely big. So they do have a lot of bargaining power.

Having said that, they do demand higher-end solutions. So as a result, I think they also are willing to pay a certain margin. So I think the nature of the two markets are extremely different. But they come down to, I would say, a similar margin level as of today.

Okay, okay. Thanks, Jordan. And my final question is for Jackie. I notice though the number is small but I just wonder why there is some foreign exchange losses in fourth quarter? I think for all your ASP is mainly based on US dollars and I think most of your costs should be in US dollars and why there would be a small number of foreign exchange losses in fourth quarter? Thanks.

Yes. I think we have some inter-company loan between our Cayman Company and our Himax in Taiwan. So the loan is actually between US dollar and NT. So we have some exchange rate loss. However, we did manage to change the loan agreement in last year. And so hopefully that will take care of the problem going forward.

But Peter, to address your question. We are pretty much foreign exchange (inaudible), as you said, we make all our sales in US dollar and all of our total results are in U.S. dollar, right. So they [net off] each other. So there is no -- on gross profit level there is no foreign exchange exposure. However, on operating level -- for example, we do pay our salaries in NT dollars.

So at the time of the conversion, there could some foreign exchange configuration. We have -- for example, there will be a taxable, which is US dollar, or tax liabilities which US -- which is NT dollar based, right, because we are a Taiwan company still and we pay Taiwan tax.

So we are running on US dollar books. So over there, we do have a small amount of NT dollar assets or liabilities. While I don't know the details, but we are not totally immune from foreign exchange fluctuation. However, we are very, very neutral because it is a US dollar book and all of our sales and cost of goods sold are denominated in US dollars, which you have pointed out correctly.

I think very clear. Thank you, Jordan and Jackie, and congratulations on the good results and also happy Chinese New Year.

(Operation Instructions).

Kyna Wong, Merrill Lynch.

I have just come up with two questions. So first is about the trends on what was the contributions from related party. Last year I think it was around 34% from this related party and how will it be in this year? It is become into second percentage or what's your view?

I think given last two years trend -- I mean, we do -- we have to be prepared that it may continue to decline, although it is really the customers' decision and customers' behavior. So it's literally impossible for me to make any prediction here. And all we can do is try to compete over there and try to provide the best service.

But the fact of the matter is that we try to emphasize this particular point because we are talking about year end result and we look at the whole year -- last year result. And one thing very significant was the decline of related party sales. So we thought it is appropriate that we highlight this major reflector to our investors and analysts.

But certainly we are not saying it will definitely decline further in the year. But having said that, we did highlight that when we look at the first year forecast, it was on track to decline quite a bit further.

Okay. So are you confident that new orders from China customers to offset this decline?

That's how we did in the past and there is no reason to believe why we cannot continue to do that. So both are important to us. We are not saying we will give up on our related party sales. But I mentioned earlier there are opportunities in China, in Korea, even Japan and other Taiwan customers as well. So, yes, there are "new" opportunities for us. Some of the major ones may only start to realize in the second half of the year. But, yes, we have all the intention to gain back the share.

Yes, all right. And another one is about the ASP trends. Could you give me some idea about the ASP changes in four quarter -- fourth quarter and this quarter in each segment, like large display driver IC and also small, medium display driver IC?

Kyna, ASP is becoming a very confusing term because we are talking about, for example, sales from higher and lower end, you talk about one unit of IC. But there are very different ASP. Even large panel, you talk about different channel counts. And we do see interesting trend of the industry in large panels, where the channel count number has been reversed.

Meaning, we were running at the -- for example, last year, the mainstream is probably 9 to 50 channel. But there are good indications that 720 some channel is picking up the momentum again because customers are trying to get [many] frames in their TV set. So all cost structures makes so-called ASP very confusing. But I think to address your question, if you look at it on apple-to-apple basis, with the price erosion Q4 and how we spend in Q1, I think they are somewhere around 1 percentage point on a quarterly basis and probably even less than that. And the moment, it is relatively stable compared to some other timing in the past.

In large display driver or --?

In large display driver, yes.

Okay. So any idea in small to medium or small segment? Can you comment on that?

About the same.

I see. Because I was thinking for large [display] driver and the revenue grew in four quarter, which was also expected because at the beginning of fourth quarter you may expect slower demand. So after that, that should outperform, outgrow your expectation. So but if there is no much change in the ASP, so definitely the upside will come from that shipment and the product mix, is that right?

Yes. I would say smartphone in China, in particular, relative to other segments, we do see a higher price pressure. In comparison, tablet is relatively better.

I see.

And I think probably because of smartphone, as we all know, is -- the whole industry is moving up in terms of volume and technology and resolution and everything else so fast, so dramatically. So inevitably, there is more competitive pressure.

So are you looking for a similar situation in 1Q like more pricing pressure in smartphone, relatively okay in tablet, and quite stable in large display driver IC?

Jordan Wu Q1 is relatively stable. I was making the comments as an overall trend for the whole year, and that would be my prediction and that applies to the whole of last year as well.

Okay, relatively stable?

Yes, relatively stable with smartphone being the most competitive segment in terms of price pressure.

I see. Thank you very. It is a very good result. And Happy New Year Jordan and Jackie and thank you very much.

Thank you, Kyna.

Thank you.

Mr. Wu, we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

Well, thank you everyone for taking the time to join today's call and we certainly look forward to talking with you again in our next call in early May. And as a final note, Jackie Chang, our CFO, will be on a road show in the US in the last week of February. So please contact Jackie or John Mattio and the Group if you are interested in meeting with us in person. So thank you again and Happy Chinese New Year.

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