奇景光電 (HIMX) 2013 Q3 法說會逐字稿

Greetings and welcome to the Himax Technologies Inc. third quarter 2013 earnings conference call. (Operator Instructions)

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 third 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 212-301-7130 or access the press release on financial portals like Bloomberg, Yahoo or Google, or you could download a 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 events or results to differ materially from those described in this conference call. Factors that could cause actual results include, but are not limited to, general business and economic conditions and the state of the semiconductor industry, market acceptance and competitiveness of the driver and non-driver products developed by the Company, demand for end-use applications, products, the uncertainty of continued success in technological innovations and other operational and market challenges, 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 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.

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. As usual, I will provide some preliminary review on our third quarter then discuss our outlook for the fourth quarter of the year and then I will also comment on a few product areas of focus. Our CFO, Jackie Chang, will then provide additional details on our financial performance.

Our 2013 third quarter revenues, gross margin, GAAP and non-GAAP earnings per diluted ADS all met or exceeded our guidance. For the third quarter we reported net revenues of $192.8 million with a gross margin of 25.3%. Third quarter GAAP earnings per diluted ADS were $0.072, and non-GAAP earnings per diluted ADS were $0.113.

Our third quarter revenues of $192.8 million represented a 1.3% increase from $190.1 million in the third quarter of 2012. And a 6.8% decrease from $207 million in the previous quarter of the year.

Notwithstanding the sequential decline, the third quarter revenues came in at the high end of our guidance mainly driven by better-than-expected sales of China's smartphone market for most of non-driver products. Revenues from large panel display drivers were $57.7 million, down 24.7% from a year ago and down 10.3% sequentially. While our large panel driver IC will continue to remain a major part of our sales it accounted for just 29.9% of our total revenues for the third quarter compared to 40.2% a year ago and 31.1% in the last quarter. The decrease was mainly a result of the global weakening demand of TV, laptops and monitor.

Sales for small- and medium-sized drivers came in at $100.5 million up 15.1% from the same period last year and down 9.4% sequentially. As a segment, driver ICs for small- and medium-size applications accounted for 52.1% of total revenues for the third quarter as compared to 45.8% a year ago and 53.6% in the previous quarter.

This is the third consecutive quarter that our small- and medium-sized driver sales accounted for over half of our total revenues. The slowdown of smartphone and tablet markets was caused primarily by China's market's overall inventory correction. However the segment still delivered a solid year-over-year growth of 15.1% driven by the sheer volume growth of and sales to the smartphone, tablet and automotive display applications.

Revenues from the non-driver businesses was $34.6 million up 30.5% from the same period last year and up 9.2% sequentially. Non-driver product revenues accounted for 18% of total sales when compared to 14% a year ago and 15.3% in the previous quarter. Our non-driver products sales reached another record high in terms of both absolute value and percentage of total revenues. CMOS image sensors, video SOCs, touch panel controllers, power management ICs, LED drivers and LCOS microdisplays were the main contributors to the growth of non-driver product segments.

I will discuss more on some of these product areas a bit later. Our GAAP gross margin for the third quarter of 2013 was 25.3%, a 200 basis points improvement from 23.3% a year ago and a 70% -- 70 basis point increase from 24.6% in the previous quarter. This is the eighth 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 improved product mix.

As an annual practice we provide annual bonus compensation to employees at the end of September each year which always leads to a substantial increase in our third quarter GAAP operating expenses compared with the other quarters of the year. This year the annual bonus compensation included -- including restricted share units or RSUs and cash payouts totaled $13 million of which $7.8 million was vested immediately and therefore expensed in the third quarter of 2013. Jackie will add more details on this a bit later.

Our GAAP net income for the third quarter was $12.3 million or $0.072 per diluted ADS, up from $10.4 million or $0.061 per diluted ADS for the same period last year and was down from $19.4 million or $0.112 per diluted ADS in the previous quarter.

GAAP net income grew 17.9% year over year and declined 36.6% from the previous quarter. This sequential decline was mainly due to the $7.8 million 2013 RSU charge in the third quarter. GAAP EPS per diluted ADS grew 16.7% from the same period last year and declined 36.4% over the previous quarter.

Excluding the share-based compensation and acquisition-related charges non-GAAP net income grew 17.2% year over year and declined 3.8% sequentially coming to $19.3 million or $0.113 per diluted ADS. Despite the industry-wide slow season in the third quarter we achieved bottom line improvement, thanks to gross margin expansion. We are pleased with the financial performance of the third quarter. We will continue to execute our strategy and remain excited about our future 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 fourth quarter of the year and our fourth quarter 2013 guidance. Jackie.

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

Our GAAP operating expenses were $34.3 million in Q3 2013, up 10.1% from a year ago and up 26.1% from previous quarter. As Jordan pointed out, the significant sequential increase was caused by the $7.8 million 2013 RSU grant we have traditionally spent in the third quarter. Excluding the RSU charge, our third quarter operating expenses were $26.5 million, up 6.4% from the same quarter of 2012 and down 2.7% from the previous quarter.

The increase from the previous year was related to higher salary expenses for additional headcount and our annual salary raise which took place during the middle of the year. We reported earlier that we intent to expand our R&D team to capture the increasing business opportunities. The total value of our 2013 annual bonus compensation is approximately $13 million, including non-cash RSUs and cash payouts, out of which $7.8 million was paid and expensed in the third quarter. The remainder will be invested equally at the first, second and third anniversaries of the grant date.

GAAP operating income for the third quarter of 2013 was $14.4 million or 7.5% of sales, up $1.3 million or 9.7% compared to the same period last year and down $9.3 million or 39.2% from the previous quarter. The sequential decline was mainly as result of lower revenues and the expense from the $7.8 million 2013 RSU charge in the third quarter, which accounted for 4% of sales. In comparison, non-GAAP operating income for the third quarter of 2013 was $23.6 million or 12.2% of sales, up $3.1 million or 15.1% compared to the same period last year and down $1.3 million or 5.4% from the previous quarter.

Non-GAAP net income in the third quarter was $19.3 million or $0.113 per diluted ADS, up from $16.5 million or $0.097 per diluted ADS for the same period last year and down from $20.1 million or $0.117 per diluted ADS in the previous quarter.

Non-GAAP net income represents a growth of 17.2% year over year and the decline of 3.8% as compared to the previous quarter.

Non-GAAP EPS per diluted ADS grew 16% from the same period last year and declined 3.6% over the previous quarter. The sequential decline was a result of lower revenue in the third quarter.

Our cash, cash equivalents and marketable securities were $133.9 million at the end of September, up from $89 million at the same time last year and slightly down from $147.1 million a quarter ago. We made a cash payout for RSU of $7.8 million and the cash dividend of $42.4 million during the quarter.

On top of above cash position, restricted cash was $115 million at the end of the quarter, up from $73 million during the same period last year and up from $74.1 million at the end of 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 as of September 30, 2013, were $159.6 million, up from $128.3 million a year ago and up from $142.9 million a quarter ago. The higher inventory was a result of stock buildup due to temporary business slowdown in the third quarter and the expected increase of smartphone driver shipment during the fourth quarter.

Accounts receivable at the end of September were $202.2 million as compared to $218.3 million a year ago and $219.2 million last quarter. Day sales outstanding was 96 days at end of September 2013 as compared to 109 days a year ago and 104 days at end of the last quarter.

Net cash inflow from operating activities for the third quarter was $27.4 million as compared to cash outflow of $7.1 million for the third quarter of 2012 and cash outflow of $2.7 million for the second quarter of 2013.

Capital expenditure was $3.8 million in the third quarter versus $1.7 million a year ago and $6 million last quarter bringing the total capital expenditures to $14.5 million through the first three quarters of 2013. The capital expenditure in the third quarter consisted mainly of purchases of in-house testers for driver IC, IC store equipments and LCOS and MEMS manufacturing equipments. 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.

Total capital expenditures for the first 9 months of 2013 was $14.5 million versus $4.4 million a year ago. As of September 30, 2013, Himax has 170.5 million ADSs outstanding compared to 169.6 million at the end of last quarter.

Before I turn the floor back to Jordon let me quickly summarize our financial results for the 9 months ended September 30, 2013.

Revenues were $575.5 million and gross profit of $142.8 million representing growth of 5.3% and 13.2% over the first 9 months of 2012 respectively. Our gross margin increased to 24.8%, a 170 basis point improvement from the same period last year.

Our GAAP operating expenses were $87.9 million for the first 9 months of 2013, up $9.6 million and 12.2% for the same period in 2012. The increase was mainly resulted from our higher expenses related to salaries for R&D new hires, salary increases and product development.

GAAP operating income of $54.9 million represented a $7.1 million and 14.9% increase from the first 9 months 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.

In comparison non-GAAP operating income was $66.4 million or 11.5% of sales, up $9,2 million or 16% compared to the first 9 months of 2012.

GAAP net income for the first 9 months of 2013 was $45.7 million or $0.266 per diluted ADS, up from $36.8 million or $0.216 per diluted ADS for the same period last year. GAAP net income for the first 9 months of 2013 grew 24% over the same period last year. GAAP EPS per diluted ADS for the first 9 months of 2013 grew 23.4% from the same period last year.

Non-GAAP net income for the first 9 months of 2013 was $54.4 million or $0.317 per diluted ADS, up from $44.6 million or $0.261 per diluted ADS for the same period last year. Non-GAAP net income for the first 9 months of 2013 grew 22.1% over the same period last year. Non-GAAP EPS per diluted ADS for the first 9 months of 2013 grew 21.6% from the same period last year.

Net cash inflow from operating activities for the first 9 months of 2013 was $54.2 million as compared to cash outflow of $0.3 million for the same period of 2012. I will now turn the floor back to Jordan

Thank you, Jackie. Our operating environment in the third quarter was marked by low visibility as the global economy remained soft and concerns for excessive inventory loomed over China's Tier 2, or what is also known as the white-box market. We therefore provided conservative guidance and are pleased that our revenues came in at the higher end of our guided range and gross margin exceeded the guidance. In line with poor overall market sentiment for large panel demands, our large panel drivers in Q4 are expected to decline by a double digit, dragging down our overall fourth-quarter growth.

The weakness is a reflection of the continued slump of global demand for TVs, laptops and monitors. This was made worse by the termination of China's TV subsidy program in May. However, we do see long-term growth prospects in our large panel driver business. China is the world's largest TV market and the country has continued to grow its large panel capacity.

In addition, consumers' TV demand is trending towards larger screen sizes and higher resolution. We also believe our efforts to penetrate into other non-China large panel customers will start to bring in meaningful results next year.

The small- and medium-sized panel driver business remains a focus in our business. We are in a strong position in the smartphone sector with leading technologies, competitive products and solid end-customer base including first-tier international and Chinese end-user brands as well as the fast growing China white-box market. The growth momentum of our smartphone driver was dampened by the slowdown in the China market in early third quarter, but it is expected to recover during the fourth quarter due to increasing demands from the our Korean and Chinese end-customers.

In addition to volume growth, we continue to benefit from the industry trend toward higher resolution displays as mentioned in our past few earnings calls. We expect the smartphone sector to experience double-digit growth in Q4 and the growth momentum to continue into next year, driven by strong demands from both international and China markets.

Among small and medium-sized panel applications, we also see tablet and automotive displays growing strongly so far this year. We enjoy a solid customer base in both markets.

In tablet market, we have a thorough coverage in both international brands and the lower-cost white-box market. We also command a leading market share in displays used in automotives. We expect the revenues from these two applications to remain flat sequentially in the fourth quarter. With further design wins in the pipeline, we expect these applications to continue to contribute to our long-term growth.

Our non-driver category provides the most exciting long-term growth prospect. Non-driver businesses shows a solid growth in Q3 accounting for 18% of our total revenues (inaudible). Compared to the same period of last year we also grew 30.5%.

I will now highlight some of the non-driver areas results. CMOS image sensor product line has been our single largest non-driver segment since Q2. The third quarter sales were supported by shipments of our 1 megapixel sensor for tier 1 laptop customers and growth demand for our 2 and 5 megapixel sensors for smartphone and tablet makers. We launched a new 8 megapixel sensor this quarter targeting higher-end smartphone and tablet markets. This new 8 megapixel sensor provides a conservative solution featuring ultra low power consumption, smaller footprint, high sensitivity and then embedded high dynamic range engine.

The release of this product positions us as the pioneer of high-end image sensors among Chinese and Taiwanese suppliers, advancing Himax to one of the leaders in our core market.

We started to introduce our multi-finger capacitive touch controllers to China's smartphone market from Q3 last year by trying to leverage the experience we can from serving international smartphone brand customers. However, our touch panel controllers (inaudible) some difficulties there in the early stage as there are differences, we don't know how (inaudible) for the China market against that for international clients.

Having been through a few quarters of learning curve we resumed growth of this product line during the third quarter, and so we made new shipments to handset customers in China and a leading brand customer for several of their tablet projects. We expect to gain more new design-wins and break into a new leading smartphone brand customer in the fourth quarter. By expanding our customer base in smartphone and tablet applications and also our product offering to Win 8 laptop application, we believe touch panel controller is a long-term growth engine for Himax.

Leveraging the track record of our successful execution in the ASIC projects awarded last year, we have won new projects from both existing and new customers this year. All of them are leading international brands. We also started to make shipments for one of the ASICs we developed for a customer back in 2012. We expect to see more such shipments starting next year.

Now a quick update on our LCOS business. Google's investment in Himax Display, our LCOS subsidiary, which we announced on July 22, 2013, was successfully closed in October. Google now becomes a 6.3% shareholder of Himax Display. On the business front, we had new design wins from multiple top-tier customers for new head-mounted display projects in the third quarter 2013. We also continued to make early stage shipments for certain customers' pilot run production.

In addition to head-mounted displays, we're also working with numerous partners to create products targeting a wide range of application, such as pico projector, head-up display for automotive application, and projector for home application.

We will continue to execute our strategy to maintain global leadership in microdisplay technology by working with multiple customers for multiple applications.

We're excited about the growth alternatives to develop this new application with our partners and customers. We believe our low-cost microdisplay business remains one of the most important areas for Himax's future growth.

While the fourth quarter is traditionally a low season, we expect revenues of this year's Q4 to remain around flat or rebound slightly compared to the third quarter of 2013.

Gross margin is expected to be around flat to slightly down from the previous quarter depending upon the final product mix.

Cash earnings attributable to shareholders are expected to be in the range of $0.075 to $0.095 per diluted ADS, based on $172.1 million outstanding ADSs.

Our GAAP earnings attributable to shareholders are expected to be in the range of $0.081 to $0.101 per diluted ADS, again based on $172.1 million outstanding ADSs.

We'd like to highlight a couple of items related to the expenses for the quarter. We had pointed out in our last few earnings calls that in order to capture the increase in business opportunities our expenses for this year will increase from those of the past few years when we managed to maintain our expenses at a rather stable level.

This year's expense increase was due mainly to the expansion of R&D teams and the higher development costs associated with the larger team.

We expect fourth quarter operating expenses to be the highest among all quarters of the year as certain new high-end product tape-outs are taking place within the quarter in both driver and non-driver areas.

Our fourth quarter EPS guidance has taken into account additional $1 million or $0.06 per diluted ADS of income tax charge to reflect the NT dollar depreciation against the US dollar so far this year. The adjusted amount is made based on today's exchange rate, but a final outcome will depend on the exchange rate at the end of the year.

While the exchange rate has little effect on our margins and operating results, if we keep our books in US dollar which is also a functional currency in literally all of our buy and sell activities. It does have some impact on our effective US GAAP income tax rate because we pay the super majority of our taxes in Taiwan where the tax authority determines our taxation based on our NT dollar denominated ROC GAAP accounting.

In general, as NT dollar depreciates against the US dollar, as is the case so far this year we are worse off in our US GAAP effective tax rate and vice versa.

Thank you for your interest in Himax. We appreciate your joining today's call. We are now ready to take questions.

(Operator Instructions) Anthony Stoss, Craig-Hallum.

Pertaining to the LCOS side maybe you can help us understand the ramp in terms of volume production to your customers. When do you expect the volume production from yourselves to kick off, and the number of customers that you expect to ship to in 2014? Thanks.

I'm afraid I really cannot disclose too much about the exact timing of the ramp because this is really fully dependent on our customers. And we can only make our production based on their instructions.

So and if you'll appreciate, we are bounded by our confidentiality agreement. So we really cannot make such predictions, because if we do we will be effectively making predictions for our customers which we are not to -- we're not allowed to.

As far as the second issue, how many customers will ramp, I suppose you are referring to head-mounted display, because this head-mounted products we do have, not necessarily significant volume, but we do have continuous shipments.

As far as head-mounted display is concerned we, I mean we because of the Google investments happening now, now the world knows about our relationship with Google in the Google Glass project. And certainly I think it is publicly known that it is highly likely that they will start to make the mass production next year or start to make the commercial sales next year. Although having said that I am only here to speculate because I don't really have a timetable for their exact timing for their launch of their products.

Other than Google, which is -- which again I'm quoting publicly (inaudible) mention, we do have several other customers which are committing a huge amount of resources into developing new products. However I, again, bounded by confidentiality agreements, we cannot disclose the details which include their timing of (inaudible).

I must lastly also highlight the effect that we -- we are now -- are focusing primarily on leading brand customers across the US, Asia --the US and Asia. These customers they all have committed a lot of resources into developing such projects.

However, given the very nature of the product, which is totally brand new with no reference to make, so the uncertainty of the timetable and also is high and also every single customer treat their project as highly confidential. So I'm afraid at this stage what we can only disclose we are winning multiple new design wins from multiple leading brand customers. I'm afraid we cannot disclose much more than that.

Okay, and then as a follow-up can you update us on your production capabilities on the LCOS side on a monthly basis, and where you expect to be by the end of 2014? Thanks.

It really depends on -- well, we -- all we do is we have the technology, we have the know-how, and we have the (inaudible) which we are upgrading and in the meantime expanding along with the upgrades because we (inaudible) certain equipments primarily for the purpose of upgrade. We are also effectively expanding our capacity.

If I tell you the ongoing process, all we do tell one customers is the lead time required for us to bring up to a certain level, and the lead time we're asking about a year or more. The lead time depend on the amount to be, product it is (inaudible) within the time spent over the year.

So all we tell to our customers is that, we can fill out capacity up to this much as long as you give such and such lead time (inaudible). So we start, and we are -- so we are always close with our customers as they come here to develop their products, right. They will know, hopefully, months before they are actually at mass production. They will notify their schedule and they will give us a warning.

So if you ask me to give you a total number, at the moment our current capacity is about 200,000 panels per month and we can -- again with certain lead time we can bring it up to about 2 million per month, without the requirement for additional new fabs, meaning diluting our existing fab capacity.

And we do have a purchase a piece of land which is right across street of our existing headquarters, that is reserved for expansion.

So exactly how much we will end up with at the end of (inaudible) really depends on the customer schedule as well.

Thank you.

I appreciate your question.

Andrew Uerkwitz, Oppenheimer

How should we think about the first quarter, because there's an inventory issue on the large panel or a demand issue there continuing into the first quarter. Typically it's also a seasonally low quarter I believe. How should we think about that from a panel perspective, and then what offsets you guys can do to, whether it's new customers or market penetration, et cetera, other segments to offset that, how should we think about that?

I think the first quarter is always a low quarter as we all know, right, Chinese holiday and what not. So, I mean, you should not think of first quarter as having some connection from Q4.

And having said that, I think -- I mean it's too early to give a solid guidance for the quarter, for the first quarter. However, I think we have a good reason to believe that we will continually expand our non-driver sales as a total of our -- of our total sales.

Now, in terms of driver shipment, we believe -- I think we -- with small panel including tablet and smartphone continue to look better compared to large panel such as TV and monitor and notebook.

And in the small-panel business we -- our focus is now more and more on the end, end customers, which if you look back 2 years everybody had --- the connection in between components and products such as Himax and end-user customers was quite a lot limited. Now, leading players, leading component suppliers such as Himax now enjoy a much stronger direct relationship with end customers. Although the invoice still comes from our direct customers which are the panel makers but, we have a much stronger link directly to the leading brand names in the world.

So as a result I believe our performance hopefully will be better compared to our peers because the leading brands, they are -- their focus is mainly on more -- on the high-end markets, which enjoy a better margin for us and less competition. But again, who knows, first quarter is still too far away from us to really give a solid guidance.

And then just -- one follow-up up here, I think you guys are gaining new customers on the large panel. You're going to shipping the 8 megapixel CMOS image sensor here soon. So clearly it looks like you guys are gaining market share, how should we think about that through 2014? Should we expect a pop or is just kind of just to continue like a linear -- a linear player?

I think it's more likely to be a linear player. In our prepared remarks we highlighted that now we -- like everybody else, we are not really so excited about the long term, the growth prospects of large panels for next year. However, we believe our market share is going to bottom up from here because of the new customers, and also naturally because of the aggressive expansion plan in China where we have -- we do have a leading market share.

CMOS image censor, we are going to -- after this quarter we are (inaudible) two 10 megapixel sensor products one targeted for very high end, one for a lower-cost product. So with that and with the design progress going on at the moment we think we should expect to see a nice trend next year. We believe 8 megapixel sensor for -- will be the mainstream, main camera for smartphone next year. With only a handful of suppliers really in the world to this market so we are quite excited about this new market for us.

Great, thank you --

But our shares will be a small, will be likely (inaudible).

Perfect, thank you very much guys.

Thank you.

Daniel Heyler, Bank of America Merrill Lynch.

A few questions, first on the large panel market you just mentioned that you think your market share bottomed out due to new customers. So I wanted to get a sense of the pickup, whether or not you currently have much exposure between your national brands and your Chinese customers to the 4K products yet?

We have been a player in the 4K market, both for driver IC and also in the market's current early stage. We also (inaudible) in providing this what we call V-by-One bridge IC which is the interface IC required for 4K TV. So from (inaudible) we have already been a player.

Now, the big question is how fast the focus is going direct next year, certainly the volume is still a bit small so the contribution to us -- while we do enjoy a leading position, the contribution to us this year is limited.

We are seeing certainly, starting from Taiwanese and then Chinese and now Korean panel makers are following aggressively for this market. So I mean I will note our next year will be better than this year. And then as far as how the consumer is going to receive this new product, I think it's still a big question mark. All I can say is that we have good exposure to the market through our design activities with our customers. As far as how much this is going to reach you for next year, I really don't have a very good picture yet at this point.

Yes, I mean (inaudible) that was my question, because the one that's growing the fastest Innolux, you're losing share out, so really my question was are your customers changing their tone? The Koreans have been quite conservative about 4K. I just wondered if you have any specific customers that are aggressive about it, because you sound rather cautious about it, but certainly some of the other players are a lot more bullish about this than you're sounding, so I'm wondering why that --

I think customers are all geared up towards this in the sense that they have -- there are thinking about new projects, how can a 4K TV market and so on. As far as how much they are going to continue, I think there are certainly a lot of things they need to look at, including the market's overall condition, the inventory and so on and so forth, right.

And you mentioned Innolux, certainly Innolux I think is already seen as the pioneer in this market. So I can tell you, I can tell you with a high degree of certainty that all these major panel makers are getting really prepared for it, as far as how much they are going to ship I think really depends on the condition of 4K TV, the market acceptance, their margin and so on and so forth.

Okay, let me ask another --

(Multiple speakers) project -- as well as the projects, as well as the products, how much are we going to (inaudible) flat panel to 4K TV I really don't -- can tell.

Okay, maybe a simple one, do you think the large panel display driver business can grow next year? Roughly, maybe just give us a rough ballpark and where you think -- is this a low single-digit growth market next year? Do you think it could be closer to double-digit next year?

I think to achieve a double-digit market share is very likely, certainly I think -- I mean, I cannot say if the 4K -- I mean 4K TVs, the more the better for guys like us, but it is good for every vendor so not just Himax. And I'm saying we are -- we have good exposure to 4K TV. And secondly, without a major ramp of 4K TV next year I think our market share is likely to see a good growth because I think customers in Korea, Taiwan and also our main market which is China which is expanding. So in all likelihood our flat panel will bottom up from here.

And so we expect our market share for next year I think is still too long. We have been focusing, I will say right now, day and night trying to get more market share. I will tell you it's hard to make a prediction.

Okay, so you think you can grow at least at the market rate and then possibly gain some share back next year?

Yes, we certainly we believe we can grow more than the market rate, more than the market average, meaning we should be able to gain some market share back.

Okay, great. And then second quick question on the, moving into the small display driver, you have international customers, what's the margin profile between say an international customer versus the Chinese customer, since the margins on these small panel smartphones are -- is there a variance there?

The brands names typically are slightly better. But I think the major difference between smartphones -- the major determining effects for smartphone drivers (inaudible) is really the product mix, i.e., the higher the products, the margin -- the better the margin and it is substantially better.

So for example this year or last year WVGA was quite good and this year WVGA's margins certainly deteriorated. And now TrueHD and HD720 are much better, and certainly we believe TrueHD and HD720 are likely to replace somewhat the mainstream market position of WVGA this year. And certainly next year TrueHD being the very high end will enjoy good margin.

So if you look at our gross margin, the key thing to look at is really our product mix rather whether it's China or international brand name. Although international brand name in general we do enjoy the better margin.

And just a final one from me on the non-driver side.

Excluding LCOS clearly because there is some (inaudible) there with your key customer, excluding the LCOS you have a number of other products going on, how -- can you give us a sense on how to model that business, is this going to be -- should we continue to see the growth rate that we have seen this year continue next year for these businesses in aggregate? In other words, should we see another, say 20% growth in the non-LCOS, non-driver business?

I believe in aggregate we should expect better growth next year than this year because our current portfolio will be a lot ready for (inaudible) our product portfolio is a lot more ready now than a year ago, right, and the product portfolio of today will be the sales of next year. And if you look at starting from our CMOS image sensor, timing controller, touch panel controller and the (inaudible) devices and even the HD class products, almost across the floor in this product segment, I think we do expect better growth next year compared to this year. And LCOS, as you pointed out is a wild card, it can be a huge difference, but we need to be patient and for the time being we need to keep quiet.

Right, (inaudible) wafer level optics because you didn't mention that, what do you think of that market (multiple speakers) --?

Yes, thank you, yes, thank you for bringing that up. It's actually (inaudible) we started the business with smartphones (inaudible) as it turns out, and certainly we are -- we have continued to shipping to certain international (inaudible) brand for their sub-camera and there are new potential markets going on -- new potential projects going on as well.

Now, the same technology is being applied to quite a few other areas which we didn't know, we didn't expect, so it is almost like a bonus to us and these areas include -- I will give you one example. Now, the industry is very excited about a camera, it is very excited about a potential for, how do you call, array camera or meaning you -- rather than having a big pixel sensor and a big lens on top of the sensor to make the margin, you break down the sensors into arrays.

For example, it could be a four -- two-by-two array or four-by-four array. It means you, quote-unqoute, compose the pictures out of the (inaudible) the array sensor. And our LCOS -- our WOO is perfect to make such lenses because imagine you have to put four-by-four, meaning 14, or even two-by-two meaning four lenses together [you do] and island precisely. You have to look after all the three dimensions, it shouldn't be hard. But with (inaudible) we can measure it and easily resolve this issue.

So we have exciting projects with (inaudible) so that is one area. And we actually also have (inaudible) apply to our next-generation microdisplay technology as well for which I cannot discuss too much for confidential reasons, but it's something that we have very strong [IP] and also it's something that our leading customers are very excited about.

Jay Srivatsa, Chardan Capital Markets.

Jordon, in terms of the inventories in the channel, your guidance appears to suggest that a lot of that has burned through. Can you give us an update on what the thing are in terms of the channel inventories in the smartphone side?

I think in China it remains an issue, and certainly that coupled with our present demand I think is slowing down the market rather significantly. And I think in general people are uncertain about what is going to (inaudible) could be the next mainstream effect fore smartphone.

Earlier in the year, we all know earlier in the year it was the very high end it was -- which was leading the sales, and then in the second -- later part of the year, the high end, the very high end seemed to slow down potentially in the sales or the midrange smartphones are leading the charge.

And so people are now, I think, a bit confused about what's next. And then probably it's going to cause the major sales again for example, I mean ideally you want to have very high end spec with very low price. But we all know it's very difficult to achieve. So how do you strike a balance and how do you make your tradeoff I think is a very big issue.

And also there are questions about whether one -- whether (inaudible) had only one flagship (inaudible) or they should have like Samsung which have a portfolio of what you call products. And I think people are still uncertain about all these things.

So in general and that coupled with this -- with a soft economy and also the declining consumer excitement over new phones. I think so the whole industry is kind of slowing down. And we mentioned in our (inaudible) that we are -- we expect our smartphone sales in Q4 to be -- to enjoy a very substantial growth, a double digit growth from Q3. I think that is because of our (inaudible) leading brand customers.

But I think as far as the outlook for Q4 and into Q1 next year, as far as we are concerned I think unless all these issues are settled by (inaudible) better picture as to what kind of a phone or what kind of market they should target. I think the industry is likely to remain a bit uncertain. Meaning the industry is unlikely to resume its super growth that we enjoyed earlier in the year.

And don't get me wrong smartphone overall next year will still represent a good growth, but certainly for the growth to be anywhere similar to the year before or beginning of this year, I think it is slight unlikely.

All right. In terms of (inaudible) inventories it appears to have jumped almost, and what's the composition of those inventories in terms of small panel, large panel and other non-driver products and where do you see your inventory levels exit Q4?

If you are asking about our inventory level, I think the smartphone certainly if you look at -- if you ask me (inaudible) as of to date smartphone is the main item because we are expecting good smartphone sales. And also we are kind of asked by our leading brand name customers to get prepared for a bit (inaudible) towards the (inaudible) for the inventory. Having (inaudible) there is a positivity for the excellent result to be a bit (inaudible) forecast because it is (inaudible).

We don't have a problem with that as long as our customer are responsible for the inventories that they ask us to prepare and also as long as the products are not (inaudible). So we kind of go away with what we thought particularly our medium brand customer is that we work very closely together for inventory and earlier in the year we have to -- we worked very hard to ready the production, very, very fast for that. And at this point with me the pace is slowing down somehow and that is causing our high than average inventory level on the smartphone.

Finally, it's not really a issue of particular concern to us because as I said, lot of inventories are made out of the requirement of our customers which I hope to be responsible for the inventories.

All right, last question from me in terms of top 10 customers, who are they and what percentage did they make in Q3?

Top customers?

Top three customers.

Top 10.

Top 10 customers in Q3.

In Q3 and what is the total of the top 10 customers, I think above 75%, I think. I just look at the number a few days ago. Top 10 customers combined, about 75%. Now, our top two customers -- somewhere around 15%, 15 to -- 16% to 17%, our top two customers. But top 10 combined about 75% I think.

Thank you. Ladies and gentlemen, we have reached the end of our question-and-answer session. I would now like to turn the floor back over to management for any concluding comments.

Well, before I make the closing remarks, just get back to Jay's earlier question. I think, I hope you will appreciate that our customer diversification and our sales portfolio now compared to even a year ago is much, much better. Thanks to our hard work over the last few years.

So, thank you again everybody for taking the time to join today's call. We look forward to talking with you again at our upcoming earnings call in early February. And as many of you know, we recently wrapped up a (inaudible) road show in the US, we appreciate the time we had with many of you face-to-face.

Jackie, our CFO, will be on another (inaudible) road show again finally in Asia and then in the US and also as you attend (inaudible) conferences starting mid-November. So we will announce this as they come about, so please contact our IR department and or John Mattio, MZ Group, if you have interest to meet 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.