奇景光電 (HIMX) 2013 Q2 法說會逐字稿

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

It is now my pleasure to introduce your host, Mr. 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 second 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 following the Company's prepared remarks. If you have not yet received a copy of today's results please call MZ Group at 212-301-7130 or access the press release on financial portals like Bloomberg, Yahoo, Google, or you could download a company -- copy from Himax's website at www.himax.com.tw.

Before we begin the formal comments 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 the conference call. Factors that could cause actual results include, but are not limited to, general business and economic conditions and the state of the semiconductor industry, market acceptance and competitiveness of the driver and non-driver products developed by the Company, demand for end-use 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 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, 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 included in this conference call is unaudited and consolidated and prepared in accordance with US GAAP. Such financial information is generally -- 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 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 today. As usual, I will provide some preliminary review on our second quarter and then discuss our outlook for the third quarter 2013. I will also comment on a few product areas of focus. Our CFO, Jackie Chang, will then provide further details on our financial performance and the sale of Himax stocks by Innolux Corporation.

I'm pleased to report that our second quarter revenues, gross margin, GAAP and non-GAAP earnings per diluted ADS all met our guidance. For the second quarter we reported net revenues of $207m with gross margin of 24.6%. Second quarter GAAP earnings per AD -- per diluted ADS were $0.112, and non-GAAP earnings per diluted ADS were $0.117, both coming in at the upper end of our earnings guidance.

These positive performances are a 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 second quarter revenues of $207m represented a 9.2% increase from $189.5m in the second quarter of 2012 and a 17.8% increase from $175.7m in the previous quarter of this year. Our second quarter revenue was the highest since the fourth quarter of 2008.

Revenue from large panel display drivers was $64.3m, down 19.3% from a year ago and up 7% sequentially. Large panel display driver accounted for 31.1% of our total revenues for the second quarter compared to 42.1% a year ago and 34.2% in the last quarter. The sequential increase was mainly a result of seasonal demand for TV panels.

The year-over-year decrease was caused by reduced sales to Innolux, the formerly related party. Among our large panel market regions, China continued to slow -- to show impressive growth, both sequentially and year over year.

Sales for small- and medium-sized drivers came in at $110m -- $110.9m, up 32.3% from the same period last year and up 21.5% sequentially. As a segment, driver ICs for small- and medium-sized applications accounted for 53.6% of total revenue for the second quarter as compared to 44.2% a year ago and 51.9% in the previous quarter.

Our small- and medium-sized driver sales reached another record high in terms of both absolute value and percentage of our total sales thanks mainly to the fast-growing smartphone sector that has become our single largest source of revenue.

This is the second consecutive quarter for our small- and medium-sized driver sales to account for over half of total revenues in our history. And the sales increase was a result of the robust sales from the smartphone sector, as mentioned, but also tablet and also automotive display applications, which all grew substantially during the second quarter both sequentially and year over year.

Revenue from the non-driver businesses was $31.8m, up 22.3% from the same period last year and up 30.4% sequentially. Non-driver product revenue accounted for 15.3% of total revenues, also [reconciled] as compared to 13.7% a year ago and 13.9% in the previous quarter.

CMOS image sensors, wafer level optics, LCOS micro-display, ASIC services and power management ICs were among the non-driver products which delivered outstanding growth. I will discuss more on some of these product areas a bit later.

Innolux disposed of its entire equity holding in Himax on June 19, 2013, thereby ending its status as a related party. We therefore give you two sets of figures for the second quarter related-party sales. By counting the sales to Innolux only up to June 19, the related-party sales accounted for 20.6% of our total sales in the second quarter. However, on a comparable basis, the sales to Innolux in the second quarter accounted for 25% of our sales compared to 33.4% a year ago and 25% in the previous quarter.

Going forwards, Innolux is no longer related party. Jackie will provide more details of the transaction a bit later.

Our GAAP gross margin for the second quarter of 2013 was 24.6%, a 160 basis points improvement from the 23.1% a year earlier and a slight increase from the previous quarter. This is the seventh 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 better product mix. Gross margin improvement will continue to be one of our major business goals going forward.

Our GAAP net income for the second quarter was $19.4m or $0.112 per diluted ADS, up from $15.1m or $0.089 per diluted ADS for the same period of last year and up from $14m or $0.082 per diluted ADS in the previous quarter.

GAAP net income improved 28.1% year over year and 37.9% from the previous quarter.

GAAP EPS per diluted ADS grew 27% from the same period last year and 37.9% over the previous quarter.

In summary, we are pleased with our second quarter performance where we achieved significant top-end bottom line growth. We will continue to execute our strategy and excited about growth opportunities going forward.

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

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

Our GAAP operating expenses were $27.2m in Q2 2013, up 15.6% from a year ago and up 2.8% from the previous quarter. The increase was mainly resulted from expenses related to salaries for R&D new hires and new product development. GAAP operating income for second quarter of 2013 was $23.7m or 11.5% of sales, up 17.5% compared to the same period last year and up 41.7% from the previous quarter.

Non-GAAP net income in the second quarter was $20.1m, or $0.117 per diluted ADS, up from $15.9m, or $0.093 per diluted ADS for the same period last year and up from $15m or $0.088 per diluted ADS in the previous quarter. Non-GAAP net income represents a growth of 26.1% year over year and growth of 33.8% as compared to the previous quarter.

Non-GAAP EPS per diluted ADS grew 25.6% from the same period last year and 33.4% over the previous quarter.

Our cash, cash equivalents and marketable securities were $147.1m at the end of June 2013, a significant increase from $103.2m at the same time last year and slightly down from $158.9m a quarter ago. The decrease is related to free cash flow, of which I will provide more details shortly.

On top of the above cash position, restricted cash was $74.1m at the end of the quarter, up from $63m during the same period last year and no change compared to the last quarter. The restricted cash is mainly used to guarantee the Company's short-term loan for the same amount. We continue to maintain a very strong balance sheet with no debt.

Inventories at June 30, 2013 were $142.9m, up from $139.2m a year ago and up from $138.3m a quarter ago.

Accounts receivable at the end of June were $219.2m as compared to $204.9m a year ago and $189.9m last quarter. Day sales outstanding was 104 day at end of June 2013 as compared to 109 days a year ago and 97 days at end of last quarter. The DSO increase was attributed to increased sales quarter over quarter from large panel customers who are granted extended payment terms.

Net cash outflow from operating activities for the second quarter was $2.7m. The net outflow is mainly due to difference in AR and AP terms. We raised the inventory level at end of the first quarter in prepare for the expected increase of shipments during the second quarter. While we had to pay for those goods in second quarter, we will not get paid for our sales until the third quarter. We expect to generate a substantial net cash inflow from operations in 2013.

Net cash used in investment activities in the second quarter includes capital expenditures of $6m and a guarantee of $2.9m provided by our LCOS subsidiary for R&D grant from the government. In comparison, capital expenditures were $1.0m a year ago and $4.7m last quarter. The guarantee for the government will be returned to us upon the completion of the R&D project.

The capital expenditure in the second quarter consisted mainly of purchase of in-house testers for driver IC, R&D design tools and LCOS manufacturing equipment. 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.

During the second quarter we declare our annual cash dividend of $0.25 per ADS totaling $42.4m. The dividend were already paid out in July. Our dividend is determined primarily by the prior year's profitability. Our decision to pay out 83.3% of last year's net profit signifies our confidence in the business outlook of 2013.

As of June 30, 2013, Himax had 169.6m ADS equivalents outstanding, unchanged from the last quarter.

On June 10, 2013, Innolux Corporation, being a 14.98% equity shareholder, announced its plan to dispose of its entire stake in Himax through a marketed offering. The transaction was successfully priced at $5.25 per ADS on June 13 and the syndicate exercised its 15% greenshoe option on June 19. Innolux raised a total of $133m gross proceeds.

Following the completion of the transaction, Mr. Tien-Jen Lin, Innolux's appointed representative, resigned from Himax Board of Directors. This was effective on June 28, 2013. The transaction only involved selling of existing shares and therefore did not result in any dilution in our outstanding shares. We should also point out that our public float was significantly increased to 68.3% from 53.3% previously. The shares were placed mainly to broad-based, high-quality institutional investors.

Before I turn the floor back to Jordan let me quickly summarize our financial results for the six months ended June 30, 2013. Revenues were $382.7m and gross profit were $94.1m representing growth of 7.4% and 15% over the first half of 2012 respectively. Our gross margin increased to 24.6%, a 160 basis point improvement from the same period last year.

Our GAAP operating expenses were $53.6m for the first six months of 2013, up 13.7% for the same period in 2012. The increase was mainly resulted from higher expenses related to salaries for R&D's new hires and product development.

Operating income of $40.5m represented a 16.8% increase from the first half of 2012. The improvement in operating income was mainly the result of higher sales and gross margin expansion, which was, however, somewhat offset by higher R&D expenses.

GAAP net income for the first half of 2013 was $33.4m or $0.194 per diluted ADS, up from $26.4m or $0.154 per diluted ADS for the same period last year. GAAP net income for the first half of 2013 grew 26.4% over the same period last year. GAAP EPS per diluted ADS for the first half of 2013 grew 25.9% from the same period last year.

Non-GAAP net income for the first half of 2013 was $35.1m or $0.204 per diluted ADS, up from $28.1m or $0.164 per diluted ADS for the same period last year. Non-GAAP net income for the first half of 2013 grew 25% over the same period last year. Non-GAAP EPS per diluted ADS for the first half of 2013 grew 24.6% from the same period last year.

Net cash inflow from operating activities for the first half of 2013 was $26.7m as compared to $6.8m for the same period of 2012.

I will now turn the floor back to Jordan.

Thank you, Jackie. We are pleased with our second quarter results where we achieved record high sales in terms of both absolute value and percentage of sales in two of our focus growth areas, small and medium panel driver IC and our driver products. However, we have seen a short-term slowdown ahead of us in the third quarter for which I will elaborate further shortly.

In addition to the Innolux equity sale in Q2, which Jackie just covered, another major event was Google's investment in Himax Display, our LCOS micro-display subsidiary, which took place in July. I will also talk about that a bit later.

Whilst panel drivers' Q3 prospects looks sluggish due to the global weakening demands of TV and laptop, this was worsened by the termination of China government's TV subsidy program, effective at the end of May. However, we believe that this is a temporary setback and we are confident about the long-term growth prospect of driver IC in TV application, which remains one of our major business focuses. We have maintained a competitive position in the segment and we will continue to pursue growth opportunities presented by China's continued expansion of their panel production capacity, as well as potential new businesses from other major panel makers in Korea and China and Taiwan.

The short-term prospect of our small- and medium-sized panel driver business is also softening. China market slowed down in June and July due to the smartphone makers' model transitioning and the overall market's inventory direction. However, our smartphone panel resolution continues to rise, which is a trend that has benefited our gross margin as we are among the leading players at the higher end of the market.

In comparison, we are seeing intense price competition and margin pressure in the lower-end smartphone and feature phone markets; areas where we have lost some market share. Despite this market condition in smartphone, our small- and medium-sized driver ICs for tablets and automotive displays are yet growing quite strongly so far this year.

Our non-driver business enjoyed a 30.4% growth on a sequential basis in the second quarter. It remains our most promising product category in 2013 and beyond. As we predicted in the last earnings call, CMOS image sensor product line rebounded strongly in Q2. It has become our single largest non-driver segment starting from Q2. The second quarter sales were boosted by shipments of our 1 mega-pixel sensor for top-tier laptop customers and growing demand for our 2 and 5 mega-pixel sensors from smartphone and tablet makers in China and internationally.

Armed with a more complete product line, including the newly launched 8 megapixel sensor, we expect to break into smartphone -- to new smartphone names in the second half of 2013 and continue to penetrate the tablet, IP cam, surveillance and automotive markets. We are confident that CMOS image sensor will be a fast-growing area for us going forward.

Our execution in the ASIC projects awarded last year was highly praised by our customers. Leveraging the track record we have won new projects from both existing and new customers during Q2. Both of them are leading international brands. This accomplishment validates our IP capabilities and competitiveness in this area. We are excited by this progress and expect this product line to generate more development fees, which will improve our overall gross margin in 2013. Our ASIC service business line will enjoy a more stable revenue stream once the projects progress to the mass production stage.

For power management, IC and the LED driver, our sales has more than doubled in the first half of 2013 thanks to the shipments of a new -- of a few new products for TV and monitor application. We continue to expand our customer base, especially in China and Japan. We are also seeing rapid growth in China for our power management IC used in the tablet market. We have also expanding our product coverage to the LED license market.

On July 22 we announced the signing of an agreement under which Google will invest in Himax Display Inc. or DHI (sic), our core subsidiary. The purpose of the investment is to fund production upgrades, capacity expansion and further enhancement of production capabilities at our in-house LCOS fab.

Such products are used in applications, including head-mounted display such as Google Glass, head-up display and picoprojector. Upon closing, Google will hold a 6.3% interest in HDI. Google also has an option to make additional investments at the same price within one year from closing. If the option is exercised in full, Google will own a total of up to 14.8% in HDI. We hold 81.1% of HDI at present and will remain the major shareholder of HDI after the transaction.

Google's investments in HDI will not have a dilutive effect of our NASDAQ traded shares. This investment signifies a strategic partnership that we formed with Google, a pre-eminent global technology leader.

Beginning of the second quarter of this year, we have already begun expanding and upgrading our LCOS capacity. This investment from Google further validates our commitment to developing breakthrough technologies and state-of-the-art production facilities for LCOS micro-display.

We look forward to leveraging this investment and our collective expertise with Google to create unique and transformational LCOS technologies for many years ahead. We believe that Google's investment will further solidify our long-term growth prospects in micro-display business.

We mentioned in our earlier conference calls that our LCOS micro-displays are applied by numerous customers and partners to create products targeting a wide range of applications. In addition to head-mounted display, such applications also include picoprojector, head-up display for the [multis] and projector portfolio application. Our strategy is to maintain global leadership in micro-display technology by working with multiple customers for multiple applications. We believe our LCOS micro-display business will be one of the most important areas for Himax long-term growth.

With all these new developments and a steady stream of design wins for our non-driver products, we expect our non-driver businesses to grow strongly in Q3 2013 and beyond. As a result of all that I mentioned above, we expect our non-driver's percentage of total sales will continue to increase as we further diversify our customer base, improve our gross margins and contribute to our profitability.

Last but not least, some color now on our Q3 guidance. The current market environment shows relatively poor visibility. We therefore give a wide range in our guidance for the quarter. For the third quarter, we expect a 5% to 12% decline in our revenues compared to last quarter. Gross margin is expected to go slightly up from the previous quarter.

GAAP earnings attributable to shareholders per diluted ADS are expected to be in the range of $0.065 to $0.08 per diluted ADS based on $171.6m outstanding ADSs, 6.6% to 30. -- 31.1% increase compared to the same period last year.

As we have done in the past, our third quarter GAAP earnings per diluted ADS guidance has taken into account our expected 2013 grant of restricted share units, or RSUs [2013] at the end of September. The 2013 RSU, subject to our Board approval, is now assumed to be valued in the range of $13m to $14m, of which approximately 55% will be vested and expensed immediately on September 30, the grant date. Excluding this share-based compensation and acquisition-related charges, our third quarter 2013 non-GAAP earnings attributable to shareholders, I expect it to be between $0.102 to $0.117 per diluted ADS based, again, on one year 171.16 (sic) outstanding ADSs, about 5.2% to 20.6% increase compared to the same period last year.

Our accumulated debt net income per diluted ADS through the nine months of 2013 is projected to be in the range of $0.259 to $0.274, 19.9% to 26.9% increase year over year.

Our non-GAAP net income per diluted ADS is expected to be in the range of $0.307 to $0.322, or 17.6% to 23.4% increase year over year.

Operator, we will now open the floor for questions.

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

Thanks for taking my question. Jordan, in terms of your guidance, it looks like June and July months have been a little soft on the large panel and small panel. There seems to be a sense that with the holidays coming up in October in China that the second half of Q3 could potentially see some ramp-up towards that holiday. Can you set the stage for what you see in terms of demand patterns as you look at the rest of the quarter?

Jay, thank you for the question. As you said, there could be early -- well, in China we all know in China early October always presents a very big holiday and shopping season and i.e. big demand in theory for the end of Q3. But this year I think on the whole we are seeing is the visibility seems to be a bit slow compared to last few years. We are not holding out that there could be a demand pickup towards the -- over the later part of the quarter, but we are now sitting right in the middle of the quarter. But, as I just said, we see the visibility is low, so we are not really that certain about that, although we don't rule out that possibility.

And that is why I actually highlighted in my remarks that we intentionally tried to widen our bridge for the present because I also said earlier the inventory level across the industry right now appears to be slightly on the high side and also, end customers and therefore, our direct customers' demand or forecast for the rest of the quarter so far has been conservative. So again, we don't rule out the possibility of not having -- that being picked up later in the quarter.

All right. In terms of the non-driver products, it looks like it grew pretty nicely to almost $7.5m sequentially in Q2 versus Q3. Do you expect further growth in Q3 on your non-driver products? And if so, what segment of the non-driver products do you expect the growth to come from?

Absolutely we do expect Q3 the non-driver products to continue to grow sequentially and obviously year over year quite strongly. And so, both in terms of its absolute amount and also in terms of the [conversion] of total sales non-driver in Q3 I think we are hopeful that it will be another record high.

In terms of the slow areas of growth, certainly the CMOS business, the product line, the air con [ratio] and in particular our -- also our (inaudible) IC [visualized] (inaudible) that will be reflective of the strongest growth for Q3.

Okay. And just a last question. In terms of the investment from Google, can you give us some clarity on what do you expect in terms of utilization of the cash do you expect to invest? And what -- if you are investing in the fab capacity could you give us some timelines on when you hope to ramp-up capacity. And ultimately, what level of capacity do you expect to be able to get to with the investment coupled with your existing capacity?

We actually mentioned quite a few times in the past, in the conference calls, that we are working with certain top tier customers, some of which have started mass production. Now, what is not so clear to us is how long that mass production is going to take before natural ramping. Bear in mind we are really talking about a very new product concept one of which has not referenced before and one which involves a high degree of technical difficulty.

So we are, together with our customers, we are working diligently and yet patiently to make sure everything is in order before we start mass production. And ultimately, the trend for mass production is the decision of our customers not ourselves. So what we can do is to get prepared.

At the moment I can tell you the fab which is in-house is theoretically, relatively empty. And, so, the first bottleneck will be our operator because when the demand is there, now there is no reason for us to hire too many operators. And assuming demand comes, starts to come in we'll certainly hire more operators and therefore, push our throughput.

And then thereafter there are several stages of debottlenecking in our existing capacity. And also, along the line, we are also operating our facilities in a sense that we are trying to improve the quality of our product and also improve the yield rate. So full debottlenecking and improvement in our facilities are the two major uses of proceeds for Google investment.

So, at the moment, our -- considering the low base of our operators, our current capacity is actually less than 200,000 a month. But, upon more hiring of operators and then further increase of capacity or debottlenecking of our facility with certain investments, we can actually increase our existing facility. We can actually upgrade the capacity all the way up to 2m panels per month.

And after that, if we see more, which we certainly hope will be the case, there will a need for us to build a new fab. And we have detailed plans for how we do that, how we go about all these different steps, step by step being very detailed. So we have got plans for all that so we know effectively how to achieve that.

We have also -- actually also got a very nice piece of land which is right next to our headquarters which is now probably empty waiting for the ability for expansion to come. As far as the factory plan, this will be -- the capacity will be assured or even when we will start to see the building of a second fab and so on. Certainly, it is too early to tell and it is something we have to wait for more clarity for the demand.

But, finally I think it is important that I should highlight we are very honored to be associated with Google Glass and I must be one of the earliest guys to have witnessed the development of that very unique and interesting, exciting product. And I feel very excited about the potentials.

And not just about Google Glass, but, overall, the panels, the displays [will come with that]. And we also mentioned in my prepared remarks that we are actually working with multiple customers. So we feel this is very exciting and also growth opportunity for Himax.

Thank you. That's it.

Thank you. Our next question is coming from the line of Anthony Stoss with Craig-Hallum. Please proceed with your question.

Hi, Jordan and Jackie. Three part question. Jordan, if you wouldn't mind talking about what you're seeing on the LCOS side in terms of competing solutions.

Also, Jackie, if you wouldn't mind taking us through on the display driver side, as resolutions are increasing, can just your average ASPs, if you can help us with any kind of color on they are increasing.

And lastly on the 8 mega-pixels CMOS image sensor side, just a sense of smartphone traction via designs. Thanks.

Thank you, Tony. I will start by commenting on the competitive solutions for head-mounted display. Well, I think I should talk about two potential areas of competition. One is other providers and the other one is competitive technologies. I think, well actually, I will start by talking about competitive technology.

Actually, if you consider the cost, the simplicity of manufacturing, the performance including resolution, the unit's quality and also, very importantly, power consumption, not just power consumption on the panel but power production on the entire optical system. If you put all this together it will, of course, actually represents a very, very nice sweet spot when it comes to head-mounted display.

Now, head-mounted display arguably is another type of picoprojection. And certainly we are aware of the, what we call picoprojector market which we have tried very hard and we have worked with various top tier names for the end products and, unfortunately, they didn't really become a mainstream product.

But, also for our -- those experiences we got to pick up a lot of lessons and, therefore, improve our product competitiveness along the way. We have actually, for all those years, for those long head-mounted display applications which are primarily picoprojector applications, we have shipped a total, well over 2m panels already. So we did pick up quite a bit of the experience.

And along the line, we realized when you need to operate a very tiny metal display very close to your head or your eyes or even your brain, it will cause actually sitting on a very nice sweet spot. So, today, what we are seeing, the model or customers where we have, whether they are optical makers, optical engine makers or more importantly, the end product makers, when -- if you ask them about picoprojector, they are profiting from the competing technologies.

But when it comes to head-mounted display only, I think LCOS is almost the choice of everyone so ar. So I think partially out of luck and partially out of diligence I think it causes this -- is the right technology to use for head-mounted display which is the most exciting market.

And in terms of other LCOS makers I think it's fair to say that Himax arguably is the only with a potential shipping track record, as I mentioned earlier. We also enjoy the benefit of having our in-house fab, have the experience of reputation top tier names into the market and, therefore, we are able to deliver a very competitive total package compared to our peers which, by the way is very, very few by number. So I think the thing about this industry is that this is so new and yet to create such a product from scratch is a major task for any company. I am talking about end user products, the final product.

So, our strategy is to pick and choose the ones which we believe are the most helpful. And bear in mind this is very new so the ones which will deliver hopefully, those which success, potential financial and technology means to make this happen. So we are very careful not to over-stretch our efforts to cover too many.

Let's promise you then smaller customers by focusing primarily on those very exciting goals and promise the companies. And I think we are in a very good position right now talking with, as I said, multiple customers in this regard.

And your last question about our 8 mega-pixel CMOS image sensor is that right?

Yes that and also just your average ASP on the driver side. If Jackie has got those handy, that would be helpful.

Okay. The impact on ASP.

Well, Tony, I think that what we are seeing now is the higher resolution driver IC for smartphone is the trend. And we can see -- continue to see the trend going up. Especially Himax has been benefiting from that higher gross margin resulting from the higher ASPs.

I think depending on the resolution between the 2HD and the HD720 and FHD in the future, the price, every sale price can range anywhere of 25% higher than the average WVGA all the way to double the price. So you can see the gross margin is quite different. So, as this trend continues, we should continue to be benefiting from that.

Okay.

Thank you. Our next question is coming from the line of Daniel Heyler with Bank of America. Please proceed with your question.

Hello Jackie. This is Tina. I'm asking on behalf of Daniel. And my question is about the visibility. Actually, yes regarding your guidance, because I remember somewhat maybe in June timeframe you were saying like teen percent growth in the third quarter and then later in late July and maybe early August you would see maybe [higher teen] down. But know you see another 5% to 12% decline in third quarter to the revenue growth. So I would like to get more color from the actual market situation and the worst scenario that you probably expect.

Right, well actually, both large panel and small panel drivers I think are probably within a section of tablet and automotive going down at the moment. And I think the fact is our visibility is low for just about everybody across the supply chain. And, certainly, I mentioned earlier the demand for the October shopping season for China hasn't really picked up yet.

And another thing about the total visibility comes from the fact that customers tend to give us rush orders. We mean they are probably less able to see the picture of their demand two, three months or even one month ahead. And, therefore, sometimes -- more often right now than before, that they have to come to us for a short-term revision of their forecast or orders. And, unfortunately, that sometimes represents loss of revenue capability in the short -- for us.

For example, if a customer wishes to put a product in the forecast and now suddenly they say we don't need any for the short-term but we are -- we are switching our demand to B, B product. But because of their previous forecast for A, we have to make alterations manufacturing for A and we may not necessarily have inventory available for them for B.

So, unfortunately, that is happening right now to us somehow where we have seen to a certain extent, because of this low visibility, inventory of certain products essentially (inaudible). We are also facing a shortage because of our supply because of our customers' short-term orders.

So I think all these are indications that people are -- already have -- already seen a good visibility in the marketplace. We have -- and this is not just China's (inaudible). We are even talking about prime land as well.

And again, our long visibility means the visibility is slow meaning it can actually go further down where they are. It could be a surprise. There could be a surprise upside in the short-term as well. But, the answer is we really don't know at this stage even though we are already standing at the middle of the quarter.

Okay. Thank you. Another question is about the interest income. This quarter I saw around [$230m] gain from the interest income. Is this sustainable? How can I model maybe for the future the long -- operating income for that?

The interest income for this quarter are $256,000. I think that that's probably not going to be the same level each quarter. But I think that we can -- you can pretty much model in your financial model probably half of that as the average because we do use our funds in different -- we are making different deposits and stuff and we do generate certain interest income. But that's not really a stable income for us each quarter, so it varies so I would just use the average.

But you talk right. We place our funds in a safety deposit box which obviously also means low interest. So I think it should also be over time, a direct function of our cash position because we do place our deposits in the safest possible way.

Oh, I see. And on that, I have one more question about the OpEx for the R&D expense. And which product that you will place more R&D on? Likely 90% of your new additional R&D spending will be placed in the long driver side, can I say this?

Well, yes and no. We are -- I mean certainly in LCOS, for CMOS image sensor and also even our ASIC services where we have seen very [deep] activities. This is opportunity coming to us. So, we are expanding quite aggressively over there. However, in our -- for example, in our smartphone and tablet market, or even touch panel controller business, we are actually also seeing -- seen a lot of new activities coming to us.

So, I think in terms of the growth in R&D expenses, certainly non-driver will be a bit higher than driver. However, it doesn't mean driver is not growing. It's actually growing fast as well. So, I think overall, while we are seeing this in our view, or as you are all well aware, we -- our business rebounded very strongly in last year. So, towards the end of last year, so well into this year and perhaps even next year I think we are seeing a lot of great opportunities ahead of us and certainly to fully take advantage of them we have to expand our R&D base. So, we do understand that will impact our short-term P&L, but I think it's something we just had to do.

So, in comparison to the year before last year and a few years back, when our business was on the low side and we -- if you look at our financials we maintained a pretty stable and -- R&D expense over those few years. But starting from summer of last year and certainly well into this year, I think we are more aggressive in total R&D expenses. We are kind of all in a tech mode right now.

Got it. Thank you.

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

Thanks for taking my question. So, in terms of a slowing down TD market and there is some smartphone inventory correction, Jordan, do you expect this to kind of only be a one quarter issue or it will continue into Q4? That's my first question. Thanks

Thank you, Jun. Well, that will be the [fitting] the key order so we really don't want to comment too much on Q4 right now.

Okay, sure. So also on the CMOS 8 mega-pixel I know someone already asked the question, but I think what's your custom to protect your CMOS image sensor market especially in the 5 and 8 mega-pixel image sensor markets? Thanks.

We are certainly starting from -- in terms of kind of the mainstream main camera for smartphone, that's our current target. I mean by mega-pixel and 8 mega-pixel which are the two product specs for the mainstream smartphones', main cameras.

And for this market we are certainly starting from kind of second tier brand names in China and [WiVOX] we are in discussion with very top names. However, we are not hopeful that -- because designs, even if we are very successful, design stage will take quite some time. So I think that in the next two quarters you should not expect to see Himax breaking into top tier names. But certainly prime names which are not necessarily top tier but still offer exciting volume potential for us which we do have good design activities going around at the moment.

Okay. Thanks. My last question is that do you see the growth momentum from the LG, other panel makers in China or in Taiwan got potentially offset coming from in the next few quarters?

That's the time.

Okay.

So -- yes I hope that's answers your question. Yes, that's the time and we are working very hard on that.

Okay, thanks. Thanks a lot. That's all my questions.

Thank you, Jun.

Thank you. We've reached the end of our time for the question and answer session. I would now like to turn the floor back over to Mr. Jordan Wu for any concluding comments.

Okay. Thank you everyone for taking the time to join today. We look forward to talking to you again at our upcoming analyst call in early November.

And Jackie, our CFO, will attend Oppenheimer's conference in New York City and be on the roadshow in September. So you can contact John Mattio at MZ Group or our IR department if you are interested in meeting with us in person. So, thank you again, and have a nice day.

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