奇景光電 (HIMX) 2013 Q1 法說會逐字稿

Greetings. Welcome to the Himax Technologies Incorporated first quarter 2013 earnings conference call. At this time all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. (Operator Instructions). As a reminder this conference is being recorded.

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

Thank you operator. Welcome everyone to Himax's first quarter 2013 earnings call. Joining us from the Company are Mr. Jordan Wu, President and Chief Executive Officer and Ms. Jackie Chang, Chief Financial Officer. After the Company's prepared comments, we have allocated time for questions in a Q&A session. If you have not yet received a copy of today's results release, please call MZ Group at 212-301-7131 or 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 with the formal remarks, I would like to remind everyone that some of the statements in this conference call, including statements regarding expected future financial results and industry growth, are forward-looking statements that involve a number of risks and uncertainties that could cause actual events or results to differ materially from those described in this conference call. Factors that could cause actual results include, but are not limited to, general business and economic conditions and the state of the semiconductor industry, market acceptance and competitiveness on 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, the capability to maintain the two-way fungibles between the Company's ordinary shares and ADS 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, 2012 filed with the SEC as amended.

Except for the Company's full year of 2012 financials which were provided on the Company's 20-F filed with the SEC, the financial information in this conference call is unaudited and consolidated and prepared in accordance with US GAAP. Such financial information is generated internally and has not been subject 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 audited financial statements and the notes to those statements. In addition, the financial information included in this conference call is not necessarily indicative of its 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. We have some very exciting developments to report.

As usual, I will provide some preliminary review on our first quarter of the year and then our outlook for the second quarter. I will also comment on a few of our product areas of focus for the year. Our CFO, Jackie Chang, will then provide further details on our financial performance for the period ended March 31, 2013.

In addition, on April 30, we filed a Form F-3 shelf registration statement with the SEC. We will give you some details on that.

I am pleased to report that our first quarter revenues, gross margin and GAAP and non-GAAP earnings per ADS all exceeded the guidance we provided on February 7. For the first quarter, we reported net revenue of $175.7m with gross margin of 24.6%.

Our GAAP gross margin for the first quarter improved from the previous quarter by 130 basis points.

First quarter GAAP earnings per diluted ADS were $0.082 and non-GAAP earnings per ADS were $0.088, which surpassed the top end of our guidance by 9.3% and 10% respectively.

These positive performances are the result of our diversification of customer base and expansion of product portfolio to more exciting and high growth areas of small and medium-sized driver and non-driver businesses.

Our first quarter revenues of $175.7m represented a 5.4% increase from $166.7m in the fourth quarter of 2012 and a 7.8% decrease from $190.6m in the fourth quarter of last year. The sequential decline was expected due to the short quarter and seasonality in our business.

Revenues from large panel display drivers were $60.1m, down 15.8% from a year ago and down 22.5% sequentially. While large panel driver IC will continue to remain a major part of our sales, it accounted for just 34.2% of our total revenues for the first quarter compared to 42.8% a year ago and 40.7% in the fourth quarter of 2012. The significant sequential decrease was the result of slow monitor demand, high customer inventory, seasonal slowdowns and reduced sales to our related party customer. Among all our large sized panel market regions, China continued to show impressive growth year over year.

Sales for small and medium-sized drivers came in at $91.3m, up 26.1% from the same period last year and up 6.9% sequentially. As a segment, driver ICs for small and medium-sized applications accounted for 51.9% of total revenues for the first quarter as compared with 43.4% a year ago and 44.8% in the previous quarter. Our small and medium-sized driver sales reached another record high in terms of both absolute value and percentage of total revenues, thanks mainly to the fast-growing smartphone sector that has become our single largest revenue contributor.

Small and medium-sized applications accounted for over half of total revenue for the first time in our history. Despite of fewer working days due to Chinese New Year, we managed to achieve a sequential growth, mainly because of the strong sales to first tier international smartphone brands. The strong year over year growth is a result of the robust sales of smartphone, tablet and automotive display applications.

Revenues from the non-driver businesses were $24.3m, up 6.2% from the same period last year and down 12% sequentially. Non-driver product revenue accounted for 13.9% of total revenues as compared with 13.8% a year ago and 14.5% in the previous quarter. The sequential decline is mainly the result of weak sales CMOS image sensor, which we predicted in the last earnings call. We will elaborate on this later.

Our first quarter non-driver businesses overall grew a mere 6.2% year over year. We believe the less than ideal growth of the Q1 non-driver products was a temporary setback. We are confident that our non-driver products will resume their strong growth momentum during Q2 and throughout the rest of the year. I will discuss more on some of these product areas a bit later after Jackie's remarks on our financials.

While revenues from our related party continued to decline, we saw strong growth from other customers. Related party sales were down 27.4% from the previous quarter and down 30.4% from the same period last year.

In comparison, revenues from non-related parties went up 1.3% quarter over quarter and grew 27.3% year over year. Related party sales accounted for 25% of total sales in the first quarter compared to 37.9% a year ago and 31.8% in the previous quarter. This related party customer remains our single largest customer with sales made to them mainly in large panel driver IC products. 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 first quarter 2013 was 24.6%, a 170 basis points expansion from 22.9% a year earlier and a 130 basis points improvement from 23.3% in the previous quarter. This is the sixth consecutive quarter of gross margin improvement and the highest gross margin level since the third 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 which are trending towards higher resolution. Gross margin improvement will continue to be one of our main business goals going forward.

Our GAAP net income for the first quarter was $14m or $0.082 per diluted ADS up from $11.3m or $0.066 cents per diluted ADS for the same period last year and slightly down from $14.8m or $0.086 cents per diluted ADS in the previous quarter. GAAP EPS beat our guidance as a result of higher sales and better gross margin.

In summary, we are pleased with the top and bottom line performance of the first quarter of 2013 when, during a low season period, we achieved both margin expansion and profitability improvement. We will continue to execute our strategy and are excited about further growth opportunities ahead of us.

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 outlook for the remaining quarters of the year and our second quarter 2013 guidance. Jackie.

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

Our GAAP operating expenses were $26.4m in Q1 2013, up 11.8% from $23.7m a year ago and up 4.9% from $25.2m in the previous quarter. The increase was mainly resulted from higher expenses related to salaries for R&Ds, new hires and new product developments.

GAAP operating income for the first quarter of 2013 was $16.8m or 9.5% of sales, up $2.3m compared to the same period last year and down $2.5m from the previous quarter.

Non-GAAP net income in the first quarter was $15m or $0.088 per diluted ADS, up from $12.1m, or $0.071 per diluted ADS for the same period last year and down from $15.7m, or $0.092 per diluted ADS in the previous quarter. Non-GAAP net income represents a growth of 23.6% year over year and a decrease of 4.4% as compared to the previous quarter.

Our cash, cash equivalents and marketable securities were $158.9m at the end of March 2013, a significant increase from $102.1m for the same time last year and $138.9m a quarter ago due to the substantial net cash inflow from operations during the quarter.

On top of the above cash position, restricted cash was $74.1m at the end of the quarter, down from $84.2m during the same period last year and no change as compared to the last quarter. The restricted cash is used guarantee the Company's short-term loan for the same amount. We wanted to stress that Himax remains debt-free.

Inventories at March 31, 2013 were $138.3m, up from $118.5m a year ago and up from $116.7m a quarter ago. We raised the inventory level to accommodate for the expected increase of shipments during the second quarter.

Accounts receivable at the end of March were $189.9m as compared to $189m a year ago and $209m last quarter.

Day sales outstanding were 97 days at the end of March 2013 as compared to 103 days both a year ago and at the end of the last quarter. The 97 day sales outstanding signifies an improvement compared to the level between 103 to 109 days over the past four quarters.

Net cash inflow from operating activities for the first quarter was $29.4m as compared to $3.6m during the same period last year and $52.4m in the previous quarter.

Capital expenditure was $4.7m in the first quarter versus $1.6m a year ago and $2.2m last quarter. The capital expenditure was mainly for the purchase of some in-house driver IC testers to cope with higher demand anticipated due to strong smartphone and tablet driver sales. While we outsource the majority of our driver IC testing, we have always maintained a certain level of in-house testing facilities for the purpose of both R&D and mass production.

We paid an annual dividend of $0.063 cents in July 2012, which equals to 100% of our net income for the year ended December 31, 2012. The Board will decide on our 2013 dividend soon.

With regard to our $25m share buyback program, we have purchased a total of $13.4m, or approximately 9.5m ADS, through March 31, 2013. No ADS were purchased in first quarter 2013 because our share price appreciated significantly in the quarter.

As of March 31, 2013, Himax had 169.6m ADS equivalents outstanding. Out of the total share repurchase plan of $25m announced in June 2011, $11.6m remains unused. We will continue to execute the remaining share repurchase program in accordance with Rule 10b-18 and in compliance with any other applicable legal, regulatory and contractual restrictions.

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

Thank you, Jackie.

As detailed on our last call, 2012 was a year of transition when we delivered robust revenue and earnings growth on the back of successful customer and product diversification. Throughout 2013, we are seeing strong fundamentals across many of our product lines and will continue to execute our strategy to focus on image processing related technologies while diversifying our customer base and product portfolio.

Large panel driver IC remains one of our major businesses and will continue to be part of our major revenue streams. As expected, first quarter large panel driver IC sales declined amid a seasonally weak market featuring reduced working days, slow monitor demand and high customer inventory. The sales to our related party customer also declined.

We are confident we have maintained a competitive position in the large panel segment and will continue to pursue new growth opportunities presented by China's continued expansion of their overall panel production capacity and potential new business from Korea.

The prospect of our small and medium-sized panel driver business remains a focal point of our business in 2013. We are in a strong position in the smartphone sector with leading technologies, competitive products and good customer line-up. We will further expand our smartphone customer base, which has already covered first-tier international and Chinese brands as well as the fast-growing Chinese white-box market.

Smartphone applications has been the largest revenue contributor among all panel applications since the third quarter of 2012. We expect the sales for the smartphone application will continue its growth momentum throughout the rest of 2013. In addition to volume growth, we are also benefiting from the industry trend towards higher resolution as mentioned in our last call. Higher resolution will not only benefit our revenue but also gross margin.

Beyond smartphone, tablet and automotive displays are the two other major applications where our small and medium-sized driver ICs enjoyed the strongest growth. Although the first quarter is usually a low season, the sales for both applications still grew significantly during the quarter.

In the tablet market, our penetration covers both international brands and the low cost white-box market which surged in 2012 with growth continuing into the first quarter of 2013.

We also enjoy a leading market share in automotive display in both before and after markets with leading end user brand customers stretching across all continents. With further design wins and shipments in the pipeline, we expect these two product lines will continue their growth momentum throughout 2013.

Our non-driver products as a whole declined in the first quarter compared to the last quarter. However, we expect this is a short-term setback and growth momentum will return starting Q2 and going forward. I will now highlight some of the non-driver product lines below.

We pointed out in the last earnings call that our CMOS image sensor business would suffer from a weak demand during the first quarter of 2013 as many of the customers adopting our new sensor products would still be finishing up product tuning and those using existing products were affected by China market's correction and low season.

However, we expect our CMOS image sensor product line to rebound strongly in Q2 with sales expected to triple from the previous quarter to become our single largest non-driver segment. Sales are to be boosted by shipments of our 1 megapixel sensor for Tier 1 laptop customers and growing demand for our 2 and 5 megapixel sensors from smartphone and tablet makers in China, Taiwan and internationally.

With more complete product offerings covering newly launched 8 megapixel and solid shipping track records of our existing products, we expect to break into new and leading smartphone brands in the second half of 2013 and continue to penetrate the tablet, IP cam, surveillance and automotive markets.

We also continued to make good progress in our ASIC service and video processing IP licensing businesses by winning new projects from top tier customers. Our execution for the ASIC projects won last year was highly praised by our customers. We have therefore not only obtained additional projects from those existing customers, but also leveraged our track record to win new projects from new international brand customers in Q1, some of which involved projects of massive scale and complicated features.

These accomplishments proved our strong R&D capability and competitiveness in this area. We are excited by this progress and expect this product line to generate more development fees which will contribute to better overall gross margin in 2013.

In several of our previous earnings calls, we updated on the progress of the LCOS technology for new application development. Specifically, we highlighted our collaboration with certain top-tier customers on the new head-mounted display application. I would be remiss not to address the attention lately on our rumored work with certain customers on head-mounted display products.

As a general disclosure and PR policy which the members our team and our IR coordinators abide by, we do not disclose and comment on specific customer information unless it is required by the SEC reporting guidelines or the customer themselves publicly identifies us as a supplier. While the discussions about the head-mounted display have reached fever pitch, our focus remains to continue to work with our customers to try to bring new head-mounted display products to the market as soon as we can. All such development projects are under strict non-disclosure agreements.

As we mentioned in earlier earnings call, head-mounted display is a new and exciting product area with a great deal of potential and is an application where we believe our LCOS technology is superior to other competing technologies. We have worked on the application for a long time and actually pointed out in the Q2 earnings call of 2012 that head-mounted display will be the new focus of our LCOS micro-display business. In anticipation for potential product delivery ramping, we have recently embarked on certain capital expenditure to upgrade our in-house LCOS facilities.

In addition to head-mounted display, our LCOS micro-displays are applied by numerous partners to create other new application products such as pico-projector, head-up display for automotive applications and projectors for toy applications. We remain committed to the long-term development of LCOS micro-display technology and its exciting new applications and market potential. We believe these developing applications will augment Himax's long-term growth and further diversity our revenue stream.

With all these new developments and design wins of our non-driver products, we expect our non-driver businesses to grow strongly in Q2 2013 and beyond. We will continue to lift the non-driver's percentage of total sales to further diversify sales base and improve gross margin.

Now, I would like to spend a few minutes to talk about the shelf registration statement which we filed on April 30, 2013. The filing was mainly in response to the request of Innolux Corporation, one of our major shareholders to register its entire shareholding in Himax, in order for it to facilitate an SEC registered offering. We have been advised that Innolux intends to dispose of its entire holding of Himax shares.

The shelf registration will expire in three years regardless of whether the Company and/or Innolux will have taken down the entire registered number of shares. The shelf registration statement allows Himax and Innolux to offer and sell shares from time-to-time before the registration expires in one or more public offerings, of up to 25,472,473 ADSs (sic - see presentation '25,472,673') and 25,399,753 ADSs respectively. For more details regarding our shelf registration statement you may also refer to our press release on April 30.

Absent Innolux's planned sale, we would not have filed the shelf registration statement at this point. We decided to file for our own primary shares because the shelf registration statement, once declared effective by the SEC, would remain in place for a period of three years, during which time we may offer and sell new shares at any time without going through the registration and SEC review process.

Himax does not currently intend to issue any of the primary shares registered under the shelf registration statement. If we should do a primary offering in the future, we will decide on the timing and specifics of any such offering, including price and use of proceeds on a case by case basis for each offering and these will be set out in a prospectus supplement filed with the SEC at the time of the future offering.

Innolux has publicly stated that the planned disposal of shares is part of its divestment strategy as it intends to focus on its core business of TFT-LCD manufacturing. We will continue to work hard to be a value-added supplier to Innolux so as to continue to keep Innolux a significant customer after the sale of shares.

Since we are not issuing new shares, Innolux's sale of shares will not result in dilution of our outstanding shares. We should also point that Innolux's sell down will significantly increase our public float, potentially boosting Himax's share liquidity and broadening our shareholder base.

After this offering, in accordance with US GAAP ASC 850, we will no longer consider our transactions with Innolux as related party transactions. Our current director, Mr. Tien-Jen Lin, a special assistant to the General Manager of Innolux, will leave our Board of Directors after the completion of the sales. We intend to elect a new and independent director to fill the vacancy during the next general shareholders meeting in the third quarter.

Finally, for the second quarter, we expect a 17% to 20% growth in our revenues compared to the last quarter.

Gross margin is expected to be around flat compared with the first quarter of 2013.

GAAP earnings attributable to shareholders per diluted ADS are expected to be in the range of $0.105 to $0.115 per diluted ADS based on 171.9m outstanding ADSs.

Non-GAAP earnings attributable to shareholders are expected to be in the range of $0.111 to $0.121 per diluted ADS based on 171.9m 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.

Thank you. We will now begin the question and answer session. (Operator Instructions).

Our first question is from the line of Anthony Stoss of Craig-Hallum Capital. Please proceed with your question.

Hi Jordan and hi Jackie. Congrats on the strong results again. Two part question. Jackie, on the gross margin and OpEx front, how do you see that trending in the second half of the year on additional volume ramps?

And then Jordan, on the LCOS side, I know you can't talk specifically about customers but can you talk about your current capacity? If you're satisfied with what you've got right now heading into the second half of the year. Thanks.

I'll first take the first question about our LCOS project prospects for the second half of the year. You'll appreciate we don't give guidance for this but there's no reason, if we did, why this should deteriorate from the first half because I think the panel industry, in general, is likely to remain robust and we are seeing the trend towards high resolution and smartphone and tablet. All these trends are to our benefit. And, also, we do expect to our non-driver products percentage of total sales to increase compared to the first half. So both I think would hopefully contribute to a good gross margin. S, again, we're not providing the guidance, but there's no reason why we should be pessimistic at this point.

For the LCOS, it's kind of a tough question to answer because we have, basically the front end capacity pushes primarily the process and the back end capacity which is the module process. The module process is small operators and (inaudible) remains relatively (inaudible) certainly we don't need so many operators to run the fab. But so our first step of debottlenecking is to look at that process which is certainly relatively easy, relatively low cost and it's relatively short lead time and it's something actually we are already starting to see.

And in my prepared remarks, I talked briefly about our R&D, (inaudible) and expenditure measures to basically improve the facilities of our LCOS production line, which will also provide some -- release our capacity a bit. But all I can say is that in the foreseeable future I think our continuing focus on (inaudible) our facility improvement position and also we -- our total capacity far exceeds the budget which we can see for any -- in the immediate future.

So to give you a more precise answer, again it depends on how much measure -- how many measures we have taken to (inaudible) or to increase operators and whatnot. I think we can do about in between 1m and 2m panels per month quite easily without major setbacks.

Okay. Thank you Jordan. Appreciate it.

So what we're trying to do is to ramp it stage by stage according to the customers' forecasts. And we are now already foreseeing major CapEx let's say, before the (inaudible) reduction before the module reaches between 1m and 2m panel a month.

Thank you. Your next question is from the line of Kyna Wong of Bank of America. Please proceed with your question.

Hello Jordan. Hello Jackie. Thanks for taking up my questions. I've got a couple of questions I want to ask in short.

The first is about the sell-through during the Labor Day's holiday in China. Is this good for the large panel like TV drivers as well as the small and medium like smartphone drivers?

I'm sorry, you have to speak up a little bit. We can hardly hear you.

Okay. Can you hear me clearly now?

That's much better now.

Okay, I want to ask about the sell-through in the beginning of May in -- during the Labor Day holidays in China. So was it the TV sales or smartphone sales which will help in the large panel driver and smartphone drivers' demand? And this is the first question.

And the second question is about the gross margin guidance in the second quarter. It's around flat quarter over quarter. But as I see there's more 1m driver as well as the non-driver business should need the revenue contribution. So which part will suffer margin or gross margin pressure in the second quarter?

Well, your first question about sell-through for the holiday in China, but we didn't bother about sell-through (inaudible). I'm afraid we don't update this. We are (inaudible) so it is our end customers. But we're providing our guidance for Q2 and, as you guys see, that we are pretty confident about the growth for Q2. But I can't really answer your first question.

For the second question, I think it's really a matter of product mix. The trend, I think you are right. We are seeing non-driver percentage to go up and we are seeing continued strength for our small and medium-sized panels.

But I think -- but we are not guiding for the gross margin to decline. We are guiding for gross margin to remain flat. And that is after quite a few quarters of sequential growth already. Sometimes, for example, most people believe large panels will suffer from lower gross margin. However, it really depends product by product. So, I think it's just a matter of product mix. Let's say a certain high-end large panel from a certain customer percentage wise growth compared to last quarter end. So that's not going to impact our gross margin.

So it -- I think you can just take a simple look by trying to analyze the percentage for our small and medium sized panel and also then try to -- although I'm sure in the long-term we'll be (inaudible). But, in the short-term, I think there is a lot more detail and several factors involved. So, at the moment, all we can guide is for the gross margin to remain flat. And there won't be any reason I can provide. The only explanation I can provide is it must be some product mix.

Got it. Can I just ask more about the ASP then, besides the margins? So the trends of the ASP in large driver IC and small, medium driver IC in 2Q, could you give us some color?

For ASP it has become more and more (inaudible), as we repeated in our previous call in Q&A, because our driver IC is priced primarily on number of channels. And for various reasons, the customer may, because of the requirements to improve their product quality, turn back to smaller channel products for IT. But it's not because their balance sheet declined, but because actually they are trying to make some improvement to their product.

And therefore, (inaudible). Then you are shipping smaller ICs with higher channel product and your ASP will increase (inaudible), although higher channel product also require small number of ICs. So you cannot simply compare ASP by product.

But typically, all we really look at is on an apple-to-apple basis what is percentage price erosion quarter over quarter or year over year. And in this case I think certainly, every quarter we have some price erosion because of customer [requests]. What we try to do is to try to mix it up with our own cost-down measures and certainly, our product mix will also help improve our gross margin.

So again if your question is what is the apple to apple price trend, then I would say over the past few quarters, and this current quarter as well, quarter over quarter we did see some small price erosion as reported, but not too significant. I'm afraid I cannot give you a lot of specifics on that. So I think it is mature, healthy price erosion which we try our best to make up through our cost-down measures.

Thank you. Our next question is coming from the line of Jay Srivatsa of Chardan Capital. Please proceed with your question.

Yes. Thanks for taking my question. Congratulations on a good quarter, Jordan and Jackie, and good guidance as well. Let me ask you a few questions in terms of mix. As you look at Q2, it looks like the large panel business was down a little bit on Q1. Are you expecting it to pick up in next quarter?

And how do you see the small panel business going next quarter?

I think the trend is likely to continue. I think our small and medium-sized panel combined will, percentage wise, based on our current forecast, will rise slightly further from the first quarter. And then for large panel percentage will continue to grow fast. And we mentioned in Q1 (inaudible) accounted for some 13.7%, right of total sales and that number is very likely to go up by quite a bit in Q2.

Alright. Speaking on the non-driver business, it looks like image sensor the business is a little weak. Can you speak specifically to the micro-display side? Were you seeing sequential growth in Q1 and do you expect that to continue in Q2?

We did enjoy the real potential -- sequential increase for image sensor display sales in Q1, sequential increase. We didn't really report a number because we're in a stage where it's still a small increase [and insignificant] compared to our total sales. So we felt it could be misleading if we pick up that signal and we put a number to report a very strong growth.

And we actually reported in our last quarter earnings call that we were going through heavy production together with our customers. And for that we've been making shipments and that is going to be the sequential increase for micro-display. We already see this trend in Q2 and it's there's again in Q3 and the trend again in Q4. In other words, we are expecting a pretty significant quarterly growth throughout this year and hopefully next year as well. But that again is coming from a small base which is the current level.

All right. Specifically on the micro-display side, could you talk to us on how many customers you have lined up and how many are ramping currently?

We have actually a very good number of customer lined up. Here we talk primarily of our end-user customers, the [client demand] and we did not believe that at this early stage of their product development. I'm talking about head-mounted display. It really takes a very -- it really takes customers of very substantial means to form and develop such a product, and to promote such a product. It involves a very complicated combination of hardware, software at the edge and marketing also, and therefore, financial means.

So we are very careful in choosing our customers. I pointed out in my prepared remarks that we are in a very strong position in -- compared to our position in other displays. So we tend to becoming quite -- what kind of customers we want to work with. And with the limited resources we have, we can always stretch ourselves. So we do have top tier customers (inaudible) for leading edge. But their projects are in evolving in different stages. And there are only a very small number of them which are already in delivery -- production delivery stage.

But the interest the market generates, I think it's fair to say that the interest is very high. So we are approached by a lot of customers. I think that is a fair statement.

All right. Competitors in that space, Jordan, how do you see yourselves relative to some of the other guys who have similar types of solutions. Are you -- do you get the sense that the competition is going to pick up in the later part of this year or do you feel pretty comfortable in terms of where you're at relative to the overall marketplace?

I think there are two types of competition. The first one is (inaudible) providers and the other one is other micro-displays (inaudible) [electronic] technologies. We believe with those technologies it's secured them by far, at least for the foreseeable future. So (inaudible). And for that we (inaudible) the whole industry certainly enjoys the benefits.

As far as our competitors in the (inaudible) sector is concerned, I think we do enjoy a lot of advantages which are very unique. Firstly, we have two different types of applications. Historically we have shipments overall of more than -- greater than 2m panels which is very rare in the industry, which has been, to be honest, struggling over the years for length of consumer [demand].

And secondly we have our in-house plant, whereas many of our competitors actually outsource their manufacturing, which in the panel industry is very meaningful. And we have also the advantage from day one in ourselves because we believe that this manufacturing processing is where the know-how is. So that is the only business model you can survive and prosper in the long-term. So we are sticking to that business model and I think so far we have proven that we are right.

And on top of that, we enjoy a lot of IP which are very fundamental. And we have been working hard to continue to enlarge our IP portfolio, to building IPs on top of the existing ones in an effort to try to raise our [barrier] furthermore.

So, so far we -- I think, customers come to us. This is an industry very different from [China IC] because it is quite mature and customers come to us; come to people for quotations, for a design project and for fast turnaround and for mass production. But here, people come to us to really to discuss jointly on the process costs, or process specifications and technical variables and trade-offs. And, so, we are a very critical part in their development, how they handle the display. Engineering-wise, the whole thing is about trade-offs. So, if larger display happens to be core to the whole head-mounted display, so you're talking about trade-offs for cloud consumption, for size, for the [COGS], or your physical dimensions, etc, etc. So I think being a leader at this stage we enjoy a lot of advantage. So I really don't see competition as a really potential threat to us for the time being.

All right. Switching topics, in terms of revenues from related parties, obviously your largest customer seems to be declining quarter over quarter, at least from Q4 to Q1. Could you give us some insight on what the dynamics there is with your largest customer and how do you expect that revenue to go as you see the rest of the year?

I think two or three years ago I think we repeatedly mentioned to the market that our customer has made it quite clear that their strategy is to diversify. And we -- then the [ship] will account for a very high percentage of their sales are in the past. Certainly, we're very impacted because of their intention to diversify.

So now the question is whether they have finalized their diversification equation; they've reached a point where they believe it is now the right balance. And for that, I'm not sure I know the answer exactly because, one, is dynamic and, two, they are my customer. They don't necessarily share everything with me, right.

So -- but I believe -- I think it is very -- But having said that though, I think they have mentioned publicly that [details shared] has nothing to do with the business, rather it is part of their diversification or strategy. So I don't think one should take this into the -- of sales shares as an indication of their (inaudible) one way or the other. So I think how we can perform in the long-term is really up to us and certainly up to them as well. So it's really very hard to say.

And for this year, as far as this year is concerned, I think it is probably fair to say Innolux, our sales to Innolux will probably be slower compared to our sales to other parties, one, because our sales to Innolux is primarily on large panel. And as we all know, our small panel and driver business are growing faster. And, secondly, we are sure that we can -- new businesses for the new major customers so hopefully starting some point this year. So this reason will also contribute to a further decline of percentage sales to Innolux. But it's very -- all very hard to say. We still enjoy a very comprehensive design engineering, and shipping relationship with Innolux, so it's really very hard to say.

All right. Jackie, in terms of inventories, it looks like it creeped up quite a bit in the quarter. Can you give us a sense on what the composition of the inventories was in terms of the increase?

Yes. I think that in the script we earlier discussed that we prepare all the higher-level inventory in anticipation of a higher demand in the second quarter. And, although we don't give guidance for the third quarter, but third quarter usually is our high season and quarter as well, so we really have to prepare for that. We're very confident that the current inventory level can support our anticipated higher shipment and revenue. So, we're comfortable about it. And mainly it's smartphones I think.

The composition of the quarter-end first quarter inventory, a very big chunk of it actually was work in progress -- finished goods.

Okay. And then last question on the shelf itself, Jordan, can you give us some sense on timing? When do you expect Innolux to plan on exiting the position and when do you expect yourselves, in terms of Himax, looking to raise capital, but around the shelf?

Well, I will answer the second question first. We have said quite clearly in the remarks that there is no plan for us to raise capital. So there's no plan. So we are doing it because we are piggy-backing on the effort and money we have already spent for doing this exercise for our major shareholder. So there is no plan for Himax. We are cash rich. We continue to generate profits. There is no CapEx requirement in the foreseeable future. So there's no plan.

As far as Innolux is concerned, to be honest, I don't know. If I had known I wouldn't have told you anyway. It's very confidential, so I don't know. When they launch they will launch. They'll announce it.

Fair enough. Thank you. Appreciate it. Congratulations, good quarter and guidance.

Thank you Jay.

Thank you. Our next question is from the line of Jun Zhang of Wedge Partners. Please proceed with your question.

Hi Jackie, Jordan; Jun. Good quarter. I have a couple of questions. First of all, do you have the data about how much more panel driver business coming from China handsets and tablets markets?

You mean you're -- can you repeat the question about China?

Yes the China handsets and tablets market, how much of panel driver business coming from the China tablet -- smartphone market.

Tablet and smartphone, not much from China.

Right.

You're talking about the first quarter, right?

Yes, first quarter. Yes.

We are looking for the numbers.

Yes. The smartphone, for first quarter, was about close to 70%. 70% are sold to the Chinese customers. And tablets about are over 45%.

Okay, 45%, 70%. And, second question, could you comment on the overall large panel driver IC demand in Q2? And when do you expect your Chinese clients, the BOE, ChinaStar, going to ramp their capacity so that you could offset the weakness from Innolux?

So, we mentioned earlier, in addition to China, we are looking for -- we are looking to penetrate into new customers and new markets, including Korea.

And as far as BOE and ChinaStar are concerned, I think they are -- we are certainly one of the major suppliers to them. And I think they -- especially BOE, I think they do have plans to [increase] their capacities. So I think, especially towards the later part of the year and throughout next year and the year after, I think we can expect to see further new capacity coming from BOE which provides new product demand.

So while we are seeing demand from our large panel driver business for now, I think but in the long run I think we are still very hopeful. And I think the key is to keep ourselves competitive, which we are. So I think hopefully, give us a few quarters, we will hopefully report some good news on large panel drivers because again there are new capacities, there are new markets, new markets and new customer potentials for us.

Okay. Okay, thanks. So my next question is you mentioned the CMOS sensor business. It's a little weaker in Q1. So I think you're planning to launch the 8 megapixel, the BSI CMOS sensor in Q2, late Q. Is that still on the page? And what do you expect the 5 megapixel and 8 megapixel capacity ramp in the next few quarters?

Well, actually, we're going to wait for our two 8 megapixel products. One is FSI which is already in the market, so we guided. And the other one is BSI which not really in Q2. I think it is probably safer to say Q3 for the launch.

Now, 5 meg product has been around since Q4 last year, [segment wise]. And we mentioned in our previous quarter and [now] we have to say that we suffer in Q1 because our customer, especially customer of [IMX] will go into design stage. So -- and then the shipment to those customers are likely to pick up in Q2. That on top of 2 meg and 1 meg explains our optimism. We expect -- our early remarks we talk about (inaudible) sales, Q2 versus Q1, I think it's a combination of 5 meg, 2 meg and 1 meg.

As far as 8 megapixel is concerned we will have to wait and see in the next quarter. So FSI, and for BSI probably there will be some small volume for Q4.

Okay, okay. And so what's the current status of your touch phone business? It's still doing pretty well?

On touch phone business?

Yes.

At the moment we are suffering from some shipment slowdown because -- we talked earlier of our strategy to focus firstly on making sure top tier brand name, top tier brand name in smartphone, which we have. And we are hoping that we can take one (inaudible) track record and copy that and use it in the China LCOS market.

And we have been hitting a wall in the China LCOS market, because the technology requirement over there are somewhat different from that required by our first tier smartphone customers. For example, their capacity requirement may not be as high. However they are all designed, they are system designed; are also strong. So many problems we're going encounter vis-a-vis the first tier phone customer. We have to deal with the China LCOS market. On top of the fact is that in China you're talking about meaning you are talking about dealing with [24] customers as opposed to just (inaudible) to just one.

So we are going through this learning process, but we are confident that starting from the second half, it will pick up as we pick up sufficient experience dealing with the LCOS customers in China.

Okay. Thanks. So to switch the question, so I think your competitor -- some of your competitor claim there are independent panel driver suppliers. So do you think, after Innolux sold all their shares, you will become more independent and that you're going to benefit from more orders from the Korean and strategic players with more independence to grow? Do you think that's true?

That is the plan, what we definitely will plan. So we certainly need to go out and try to make it happen. Anything I believe is (inaudible) because it's our -- we are facing a decline because of their intention to diversify, but I think that doesn't impact the opportunity (inaudible). So we actually derive value with respect to our clients.

Thank you. Our next question is from Scott Bishins of Caffeine Holdings. Please proceed with your question.

Yes, hi. Thank you very much for taking my call. Congratulations on a great quarter. I see you bought some driver IC testers to use in-house for some mass production. Are you seeing a tight capacity at ChipMos and [ChipOn]?

Yes, on the high end in particular. What we call high [TCON HD] they are priced, they are for high end smartphone and tablet products.

So you are seeing tight supply then. Is that -- do you intend on buying more testers as the quarters go on?

Yes. Don't get me wrong, percentage wise, our in-house facilities are still a small percentage, small proportion compared to the total. But you are right, part of the reason why we are doing this is because we are seeing tight capacity. And, in a way, our partners -- because Innolux has encouraged us to do some as well -- so the business model is for us to make the (inaudible) and then we can find the equipment with our vendors for them to offer it partly -- for partnership for partnering the machine to offer them what we have (inaudible) and expect them to m modify their sales (inaudible) to (inaudible) accordingly. So, yes, there is tight supply. Both on the supply side and on the demand side, I think the two factors combined I think we're seeing a tight supply.

Are you seeing tight supply also in gold bumping; 12 inch gold bumping?

Not bumps, no. I think gold bumping still has a lot of capacity although our -- you go through many (inaudible) for awhile. But with all those vendors on a combined basis, the capacity, I think is quite sufficient for the market right now.

Okay. Thank you very much for taking my call and good luck for the next quarter. Thank you.

Thank you.

Thank you. Our next question is from the line of Jerry Su of Credit Suisse Group. Please proceed with your question.

Hi Jordan and Jackie. Just one follow-up on the tester capacity you have bought. Could you clarify how much capacity does it account for in the total demand you need? And also what is the impact to your margin or financial or P&L going forward.

My second question is regarding 4k2k. Could you give us your thoughts on what you think is the penetration rate this year and also next year? Thank you.

I'm sorry your first question, the capacity is related to what product?

It's the tester capacity you plan to install this year. What percentage will that account for the total testing demand due to (inaudible) and how does that impact your P&L?

I don't think it's going to have a major impact on our P&L. We have basically spent some money on (inaudible), but I think we are comfortable it's less than 10% of our total [industry], so it's not going to have a major impact on our P&L.

And for 4k TV, I think 4k we're seeing a lot of discussion about this. In fact, if we (inaudible) if it enjoys some trade volume shipment, we will benefit because you are talking about four times the resolution. I believe three to four times the (inaudible) of IC. So it will be certainly a good thing for guys like us.

How much penetration, if that's the question? I think this year it's really the first year of 4k TV. And also people are talking about a lot of TV, talking about video monitors, all-in-one, all in one, P3 and even notebook.

I think the industry is still facing a lot of challenges. Firstly ,it is very difficult. And secondly, as you all know, there's not really -- not much coverage for 4k TV yet. So and then if you -- if the panel size, suddenly goes further down, you need a (inaudible). Probably you want to get wider. Then for example if you try to get that into a notebook, then a lot of content such as YouTube are going to have -- you're going to have trouble viewing because with that (inaudible) additional media coverage you are going to -- you're going to not enjoying the benefit of higher resolution. Probably, on the contrary, you'll probably suffer from a worsened display quality experience.

So I think the industry collectively challenges. It's fine with the 4k TV already in place, but how do you, for example, use the 4k TV panel in place, but how do you measure 4k TV as a convincing product for the consumer to be able to -- to be willing to pay the premium. I think the industry has a horrible experience; it has a long way to go.

So I think we feel -- I think we are looking at probably 3m, 5m, this kind of level, but for how long compared to the whole TV market. Certainly, if you look at the monitor and other products, certainly the TV number will be much smaller.

So I think while we are very excited about the potential, I don't want to mislead our investors by saying 4k TV is going to contribute tremendously to our future because it's not.

And that being said, we talk about our AP business. One of our major arguments to our end-user customers is that you have a 4k TV panel, but you don't have 4k TV content, then you are (inaudible) can only be (inaudible) 4k TV. So what do you do? You work with us to put together a solution so that you can scale it up, you can reduce the noise, you can reduce -- you can enhance the color, you can do a lot of things to basically really take full advantage of the high resolution or high focus 4k TV. If we don't touch additional video processes, your viewer experience is not going to be great and therefore consumers will be reluctant to buy it.

Okay. Thank you.

Thank you. Our final question for today is from Jay Srivatsa of Chardan Capital. Please proceed with your question.

Yes, thanks. Thanks for taking the follow-up. Just a question on the dividend, when do you expect to be able to announce it and what are you thinking in terms of the payouts?

I really can't make a statement here regarding our (inaudible). So certainly you shouldn't expect our [90%] payout along the last year. Last year the profit level was lower and so we decided -- and the prospect was extremely strong so we decided to have one dividend payout. But I believe, hopefully, compared to our prospective earnings, I believe you will not -- you will still see a strong payout. And I believe we cannot --

We usually announce the dividend program in May, June and then the actual distribution end of July.

Yes. So the announcement will be made by the end of the quarter.

Right, before the quarter end.

Okay. Thank you.

We will be basing it on 2012 net income.

And certainly 2013 prospects.

Thank you. At this time I will turn the floor back to management for closing comments.

Thank you everyone for taking the time and for the questions. We look forward to talking with you again in our upcoming earnings conference call in early August.

As a final note, Jackie Chang our CFO will be on a roadshow in the US on during the fourth week of May. And we offer (inaudible) to attend (inaudible) hosted by various banks. So please contact Jackie or John Mattio and we could, if you're interested in making this in person. Thank you and have a nice day.

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