奇景光電 (HIMX) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Himax Technologies, Inc. First Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Adam Holdsworth from PCG Advisory Group, the company's external IR representative. You may begin.

Thank you, operator. Welcome, everyone, to Himax's first quarter 2015 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've allocated time for questions and a Q&A session. If you have not yet received a copy of today's results release, please call PCG Advisory Group at 1-646-862-4607. You can also access the press release on financial portals or download a copy from Himax's website at www.himax.com.tw.

Before we begin the formal remarks, I'd 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, the state of the semiconductor industry, market acceptance and competitiveness of the driver and non-driver products developed by Himax, technological innovations as well as 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 the Risk Factors in its Form 20-F for the year ended December 31, 2014, filed with the SEC as amended.

Except for the company's full year of 2014 financials, which were provided on the company's 20-F, filed with the SEC on April 15, the financial information included in this conference call is unaudited and consolidated, and prepared in accordance with U.S. GAAP accounting.

Such financial information is generated internally and has not been subjected to the same review and scrutiny, including internal auditing procedures and external audits by an independent auditor to which we subject our annual consolidated financial statements, and may vary materially from the audited consolidated financial statements 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, Adam, and thank you, everyone, for being with us for today's call. In today's earnings call, in addition to reporting our performance in the first quarter, I will also provide our outlook for the second quarter and update our product areas of focus for this year. Our CFO, Jackie Chang will also provide additional details on our financial performance.

Our 2015, first quarter revenue, gross margin, GAAP and non-GAAP earnings per diluted ADS, all met our guidance for the quarter. For the first quarter, we reported net revenues of $179 million with a gross margin of 25.7%. First quarter GAAP earnings per diluted ADS were $0.073 and non-GAAP earnings per diluted ADS were $0.076, both within our guided range.

As we warned in the previous earnings call, ongoing softness in China's smartphone and tablet markets, which was worsened by fewer working days due to the timing of the Chinese New Year, dampened our first quarter performance and near-term outlook. We'll now review that in greater detail.

Our first quarter revenue of $179 million represented an 8% decrease from the first quarter of 2014, and a 21.2% sequential decrease from last quarter. Revenues from large panel display drivers was $57.6 million, which is an increase of 18.4% from the first quarter of 2014, and down 12.1% sequentially. Large panel driver IC accounted for 32.2% of our total revenues for the first quarter, compared to 25% a year ago and 28.8% in the last quarter. The year-over-year increase in total revenues was a result of market share gains, with the sequential decrease was caused by a slowdown in notebook and monitor markets, and lower shipments of 4K TVs from our customers in this business segment.

Revenues for small and medium-sized drivers came in at $87 million, down 21.5% from the same period last year and down 24.2% sequentially. Driver IC revenues for small and medium-sized applications accounted for 48.6% of total sales for the first quarter, as compared to 56.9% a year ago and 50.5% in the previous quarter. It is our first quarter that we saw substantial quarter-over-quarter and year-over-year decline in our small and medium-sized driver sales since the smartphone boom that lifted this segment in 2011.

As we have forecasted since the third quarter of 2014, the small and medium driver IC weakness is particularly significant in China, and the overall market sentiment is low. China's smartphone vendors, lacking new government stimulus programs, have remained cautious as they are forced to try new sales channels such as e-commerce and direct sales points to replace the previous approach of selling through telecom operators.

Although these new channels represent strong growth engine for the market in the future, they do not yet have the size to offset the loss in the telecom market. Another factor adding to current weakness is the significant decline in Chinese exports due to Chinese smartphone manufacturers' concerns that a strong RMB will further compress the already thin profit margins.

Revenues from our non-driver businesses were $34.4 million, down 2.2% from the same period last year and down 26.5% sequentially. Non-driver products accounted for 19.2% of total revenues, as compared to 18.1% a year ago, and 20.7% in the previous quarter. Within our non-driver business segment, the main contributors included our timing controllers, programmable gamma OP, touch panel controller, CMOS image sensor, power management IC and LCOS microdisplay and finally ASIC services.

As we reported in the last earnings call, many of the growth engines in our non-driver business segment were affected by weakness in the China market of all panel sizes, particularly in the smartphone and tablet segments, which resulted in the sequential decline.

Our GAAP gross margin for the first quarter was 25.7%, a 100 basis point increase from the same period of last year and from the previous quarter both at 24.7%. Gross margin expansion came from lower revenue percentage of driver ICs using China smartphones, it only met the low end of our guidance due to continuous price pressure.

Our GAAP net income for the first quarter of 2015 was $12.6 million or $0.073 per diluted ADS compared to $15.7 million or $0.091 per diluted ADS for the same period last year and $15.6 million or $0.091 per diluted ADS in the previous quarter. GAAP net income declined 20% year-over-year and declined 19.6% from the previous quarter.

Jackie Chang, our CFO, will now provide more details on our financial results. After Jackie's presentation, we will further discuss our first quarter results and second quarter guidance. Jackie?

Thank you, Jordan. I will now provide additional details for our first quarter financial results. Our GAAP operating expenses were $30.4 million in the first quarter of 2015, up 5.1% from the same period a year ago and down 9% from the previous quarter. Operating expenses increased from the first quarter of 2014 due to higher expenses for additional head count to support our new projects and annual salary increases. The quarter-over-quarter operating expense decline reflected decreases in R&D expenses and allowances for bad debt.

GAAP operating income for first quarter of 2015 was $15.6 million or 8.7% of revenue, down 18.1% year-over-year and down 30.9% sequentially. The decline was mainly due to lower sales in the quarter. Non-GAAP net income in the first quarter was $13.1 million, or $0.076 per diluted ADS, representing a decline of 19.3% year-over-year and a decline of 18.9% sequentially. Non-GAAP earnings per diluted ADS declined 19.3% from the same period last year, and declined 19% over the previous quarter.

Our cash, cash equivalents and marketable securities were $178.8 million at the end of March 2015, up from $139.7 million during the same time last year, and down from $187.8 million last quarter. In addition, to our strong cash position, our restricted cash was $130.2 million at the end of the quarter. The restricted cash is mainly used to guarantee the company's short-term loan for the same amount. We continue to maintain a strong balance sheet, and we remind investors that we'll remain a debt free company.

Inventories at March 31, 2015, were $186.1 million, up from $172.3 million for the same period last year and up from $166.1 million last quarter. As mentioned in last earnings call, we foresaw higher inventory as a move to counter foundry capacity constraints in 8-inch wafers, but expected customer restocking after the Chinese New Year and into the second quarter of 2015. The overall market weakness has resulted in less shipment in the quarter thus higher inventories.

When market demand rebounds, we believe we will be able to decrease these inventory levels. Accounts receivable at the end of March 2015 were $192.7 million, as compared to $204.5 million for the same period last year, and $219.4 million last quarter. Days sales outstanding was 97 days at end of March 2015, as compared to 95 days the same period a year ago, and 95 days at end of the last quarter.

Net cash outflow from operating activities for the first quarter of 2015 was $3.7 million, as compared to cash inflow of $9.3 million for the first quarter of 2014, and cash inflow of $38.7 million for the fourth quarter of 2014. Both the year-over-year and sequential declines were mainly due to higher inventory and a decrease in accounts payable, offset by lower accounts receivable in the quarter.

Capital expenditures were $1.8 million during the first quarter of 2015 versus $2.7 million for the same period last year, and $2.4 million last quarter. Among other things, we expanded our clean room facilities for wafer level optic product line during the quarter.

As of March 31, 2015, Himax had 171.2 million ADSs outstanding, unchanged from the last quarter. On a fully diluted basis, the total number of ADSs outstanding is 172.2 million.

I will now turn the floor back to Jordan.

Thank you, Jackie. Following the soft overall market in the first quarter, the semiconductor industry and Himax will likely continue to feel pressure in the second quarter due to continuous weak demand in the China smartphone market. As a result, the second quarter revenue is unlikely to enjoy its usual rebound from the first quarter.

Pressure by the poor market sentiment, our gross margin will also decline during the quarter. Two additional factors that will impact gross margin negatively in the second quarter are a slight decline of non-driver products as a percentage of total revenue and lower NRE income. We expect non-driver sales percentage to rise again in the second half of the year.

As a semiconductor company, we are subjected to customer focused fluctuations and changes in market conditions. We believe this is a normal occurrence in the industry that should not affect our long-term growth prospects. However, we will remain focused on our diversified business model and long-term strategy.

Regardless of the near-term performance, we continue to be committed to our long-term growth strategy. We have successfully implemented a multi-year plan to diversify our products and customer base. China panel manufacturer's aggressive capacity expansion across all panel sizes will also work in our favor. We also see further catalysts for growth in our CMOS image sensor, LCOS and WLO businesses starting in the second half of this year, and we remain positive on the business outlook during this period.

With that, I will now provide our second quarter guidance followed by more detailed outlook for the second quarter. For the second quarter of 2015, we expect revenues to be down 5% to 9% compared to the last quarter. Gross margin is expected to decrease about 2% from the previous quarter, depending on the final product mix. GAAP earnings attributable to shareholders are expected to be in the range of $0.04 to $0.05 per diluted ADS based on 172.2 million outstanding ADSs. Non-GAAP earnings attributable to shareholders are expected to be in the range of $0.043 to $0.053 per diluted ADS.

Now, let me provide you with some detail behind our guidance and trends that we see developing in our business segments. In our large panel driver IC business, TV applications will be the main growth area, partially offsetting in the softness of those for notebooks and monitors. The forces behind growth in the TV application include our market share gains with several customers, sales of 4K TV tracking better than the first quarter, and display manufacturing capacity expansion in China. We are confident that our large panel driver IC business will generate double-digit growth this year.

The other segment in our driver business are ICs used in small and medium-sized panels for applications including smartphones, tablets and automotives. We highlighted in our previous earnings call that we will be monitoring smartphone sell-through in China closely to see if a major rebound is on the horizon. Unfortunately, our Chinese customers did not see strong sell-through during the Chinese New Year and Labor Day holidays, and therefore we remains cautious in our near-term outlook for the smartphone market.

As mentioned earlier, the China market is experiencing sluggish consumer demand in smartphones due to the lack of government subsidies and unfavorable macro factors such as the strong RMB that negatively affects exports.

We believe these factors will continue to impact small and medium-sized panel driver ICs longer than the market has expected. Recent market statistics showed that the number of smartphone subscribers in China is growing at a slow single digit pace in 2015, and analysts are now predicting flat year-over-year smartphone shipments in China for the year.

Our smartphone IC business in China also suffered from the outcome of the recent competitive landscape where our main end customer base, the traditional leading local and Korean names, has been outcompeted by others. Our second quarter outlook is also affected, as many of such end customers postponed their new model launches from the second quarter to the second half of the year.

Regardless of the bearish market sentiment, we're working on three product areas, which will fuel the next growth ride. Further resolution migration to QHD, or quadruple HD, is raising the bar of driver IC design and display development for the industry. Our QHD driver IC shipment will start by the end of the second quarter and we believe this product transition is a promising trend for Himax with less intensive competition.

On top of the expected resolution migration, we're also optimistic about the longer term contribution from two product areas, namely AMOLED driver IC and TDDI, which integrates the driver and touch panel controllers into one. On the AMOLED driver IC front, we collaborate closely with multiple panel customers in Korea and China, some of which are likely to see meaningful volume starting early next year.

AMOLED drivers require rather different know-how compared to those for the traditional TFT LCD displays and often need tailor-made design for each individual panel maker's special technical requirements. There are few competitors in this marketplace and we are well positioned, having been engaged by numerous existing and new AMOLED panel makers in their new panel developments. I will elaborate further on the TDDI opportunity a bit later.

For driver ICs used in the tablet market, the tightening of credit from the Chinese government has resulted in business closures of some white-box tablet customers, which has resulted in a decline of three consecutive quarters, and we are now finally seeing this market improving in Q2.

Our observations remain that the trends in the mainstream tablet market will be upgraded to 10-inch and above from the once popular sizes of 7 inches to 9 inches, with higher resolutions, which is a favorable trend for the driver IC demand. However, its contribution to our sales will not be significant until 2016.

Among driver ICs used in small-sized and medium-sized panels, the best-performing category in 2015 are for automotive applications. We have successfully engaged key panel manufacturers and module houses for long-term partnerships. We anticipate Q2 sales to be slightly stronger than the same quarter last year, although we saw a slight decline sequentially versus Q1 of 2015. We expect this segment to continue to grow in the second half.

Himax ICs are well recognized by numerous tier 1 automotive brands globally, thus we are well positioned to take advantage of this growing market. So compared to the previous quarter, our small-sized and medium-sized driver segment will decline high single digit in the quarter sequentially.

On a side note, we'd like to point out that on the backdrop of soft market demand, we are seeing gross margin pressure in driver ICs used in all panel sizes. However, we remain focused on margin expansion and continue to work on diversifying our products and customer base to achieve this.

For the past few years, our non-driver business segment has been our most exciting growth engine. However, as several main product areas of this segment share similar end markets with small and medium panel driver ICs, a temporary setback in the first quarter and second quarter cannot be avoided this year and we are forecasting a high single digit decline for the quarter. With that said, as new product development evolves, we remain positive on the longer-term growth prospect of our non-driver businesses.

Our touch panel controller product line declined approximately 20% sequentially in the first quarter. We anticipate the softness to be carried into the second quarter. While the discreet touch panel market is sluggish, we started to see our on-cell products making its way into several major end customers with new design-wins on track to start contributing to our top line in the third quarter.

On top of that, we are also excited about our technological advances and product development progress in the latest pure in-cell technology, where we are one of the pioneers in offering one-chip solutions integrating driver IC the touch panel controllers or the so-called TDDI.

Driven by top-tier TFT-LCD makers, the industry is moving towards pure in-cell panels, which is said to start mass production in the second half of this year. We are in partnerships with essentially all of the leading panel makers in pure in-cell touch for joint technological development, and feel there is a strong market for these products ahead.

Our CMOS image sensors also experienced a down quarter since 4G Smartphone adoption in China remained weak. The lack of smartphone replacement demand hurt the shipments of our high-end product offerings. We are optimistic of the positivity of securing significant design-wins in the second half of the year with our 8-megapixel and 13-megapixel sensors.

Regarding our LCOS business, Himax continues to collaborate with industry heavy weights on tailor-made head mounted display designs, and we remain enthusiastic about the products in the pipeline. These products incorporate our LCOS technology and are truly revolutionary in nature with breakthrough capabilities.

Our team continues to push technological limits to new levels and integrate key components to our LCOS modules. As an integral component provider of head mounted displays, we stand by our customers as they work on designs for this new next generation product segment. Recently, our LCOS team has been very busy, gearing up for the early stage pilot production for some of our top tier customers in their new head mounted devices.

Furthermore, we continue to partner with numerous industry leading players using our cutting edge and industry dominant wafer level optics, or WLO, for the development of three technologies of the future, namely array cameras, special purpose sensors, and microdisplay wave guides for head mounted displays.

As our top-tier customers begin to mass produce products embedding these new technologies, Himax, being in the heart of that supply chain, should benefit significantly. To meet the anticipated demand for our LCOS and WLO products, we started to expand our production capacity in Q1 2015.

We will report our progress in due course. However, we would like to remind investors that we believe, like head mounted display, our LCOS can enable cutting edge products, such products are early stage in nature -- while WLO can enable cutting edge products, such products are early stage in nature. Himax, with our partners, are pioneers in these technologies and are committed to bring them into commercialization.

As you may have already seen in our press release issued on May 11th, we are pleased to announce that our annual cash dividend will be $0.30 per ADS in 2015, totaling $51.4 million. The dividends will be paid out in July.

Our dividend is determined primarily by the prior year's profitability. Our decision to payout 77.5% of last year's net profit demonstrates our continued support for our shareholder base and confidence in our long-term profitability.

Thank you for your interest in Himax. We appreciate your time. And we are now ready to take questions.

Thank you. Our first question comes from the line of Jaeson Schmidt with Lake Street Capital. Your line is open.

Hey, guys. Thanks for taking my questions. Jordan, just wondering if you could talk about your visibility into the second half of this year and your confidence within that?

Okay. Thank you, Jaeson. Our target for the whole year is to achieve at least a flat revenue compared to last year, which means around 10% year-over-year growth for the second half. And which also implies around 40% plus to close to 60% spread between first half and second half, meaning we are more optimistic for our second half prospect compared to the very low visibility of the present.

And the opportunities will mainly come from firstly in our traditional driver IC business, the panel resolution upgrades, 4K TV continues to grow, and I mentioned earlier, smartphone, we are one of the early movers in -- now the highest grade QHD panels. And the panel, our driver IC for QHD will start some shipment towards the end of Q2, and we expect to see some volume in the second half.

And on our CMOS image sensor, 8-megapixel and 13-megapixel, we are in the process of finalizing the design phase with some of the heavyweight customers. So we expect to see volume there as well for the second half. On-cell touch, while we are particularly excited about in-cell, and we do expect in-cell to start to see some volume in Q3.

However, the real more meaningful volume for this next-generation touch together with display will be on-cell touch brought in-cell. In-cell is revenue wise will be more of a story of next year. On-cell will make contribution in the second half. And finally, LCOS and WLO, there will be initial ramp-up. They will have marginal contribution only on the top line in 2015, but certainly they will help improve our corporate gross margin in the second half.

Okay. So it's fair to say you think this near-term pause is simply a demand issue and not a market share issue?

No. Definitely not. It's a demand issue.

Okay. And then, Jackie, how should we look at OpEx for this year?

Well, we already are into the monitoring mode to somewhat control our operating expenses. However, we continue to focus on the head counts and resources that's required for our new projects, such as LCOS and WLO. So I think we will expect about $140 million in total operating expenses for 2015, probably mid single digit increase year-over-year.

All right. Thanks a lot, guys.

Thank you, Jaeson.

Thank you. Our next question comes from the line of Daniel Heyler with Bank of America. Your line is open.

Thanks. Good evening, Jordan and Jackie. I had -- first one to ask, elaborate a little bit on the large panel DDI market, because you said that the volume there is picking up, 4K is starting to show positive signs. How should we think about pricing and margins there? On the one hand, you said there is some pricing pressure, but on the other hand I'm wondering whether there is offsetting factors for that, such as maybe more capacity from foundries, perhaps you could get some pricing there, just maybe you could elaborate a little bit on pricing and margins for the large panel DDI?

Pricing pressure remains because of two main factors. One, the market is soft. So the buyer has more bargain power. And secondly, most buyers happen to have big plans for capacity expansion so everybody is kind of after that.

And you're absolutely right in saying that the foundry capacity in particular 8-inch and for large panel driver we use primarily 8-inch. And 8-inch foundry has been loosened, which is a good sign for us.

Although we did mention our inventory level is slightly above our normal range, that means we have to digest our inventory first before we get to use the more kind of price attractive foundry offering, but it will take place in the second half we'll get to enjoy the more loosening foundry situation.

And I would also highlight that large panel, because when you move to 4K, both driver and the timing controller, timing controller in particular, are becoming a lot more technically challenging. So you are limiting a lot of competitors in the marketplace. So there are actually only a very, very small handful of players at the moment. So that is something a very good sign for us. And we are the market share leader in China. And China is the market, which is very expanded. So I think we will benefit from there too.

Great. So on the large side, just to clarify, the 4K definitely more competitive, technically more difficult. Is it fair to say the merchant market provider is excluding the captive suppliers of large panel DDI? When you said handful, is that like two or is it three in your view, from merchant market provider?

We probably could have. (Inaudible) they are too independent. And the captive supplier, they also -- I mean, the group is a major end TV maker, so they get to penetrate into other panel makers quite often by way of kind of a bundle deal. They are the customer and they are the IT suppliers as well. But they are pretty much limited by that. So I would say mainly two competitors, major competitors.

Okay. One quick one on small and then another one on non-driver. So on the small size, clearly, first half data points have been pretty soft. The outlet on the second half looks, I guess, implied by some of the mobile processor companies seems pretty positive actually on the small panel DDI. Yet I'm trying to read kind of your commentary on smartphone.

Do you have confidence that when you see a significant pick-up in second half? In smart, do you think it's going to be remain pretty competitive? And also you did talk about some of your issues may have been some customer related, may be your customers not doing quite as well as maybe your competitors' customers, so does that imply that you may be losing a bit of share short-term and can you take back market share there?

Good questions, Dan. Firstly, on the market momentum, we are just starting to see signs of market coming back the momentum, meaning customers are revising up their forecast. It's just happening right now. And I mean, after almost two quarters of rather dismal atmosphere, I think people remain very, very cautious in terms of the way they provide forecast. So although these are early signs, but we do see a forecast being revised up and momentum coming back. So we are excited about that.

And your second question is about maybe our customers are outcompeted by some others and firstly, I mean, our customers over the years have been those big names, the traditional big names in China and certainly elsewhere as well, but China now being the biggest market is very important. And certainly they were a bit called by surprise, some people -- some exporters come in with a very high end phone, you know who, and then there are some others coming in from e-commerce model and we're seeing literally all of our traditional leading brand Chinese customers getting into e-commerce model of their own by adopting U.S. second brand name, sometime second third brand name. So they are fighting back.

And also some are turning more of their focus to exports, although we explained the difficulty of export market because of currency situation. But I think, I don't believe our customers are going away. I think they are here to stay. And also we certainly -- we talked to everybody. So we cannot talk specific about customer engagement and activities.

But I mean, we certainly -- we take less and we try to penetrate to like non-core, traditionally non-core customers of ours. They have some progress, but certainly, unfortunately, I cannot disclose details. So we believe, our competitive strength remains; and we just have to work hard, helping our customers out.

That's super helpful. Thank you.

Thank you, Dan.

Thank you. Our next question comes from the line of Jerry Su with Credit Suisse. Your line is open.

Hello. Yeah. Hi (inaudible -- microphone inaccessible). My first question, regarding your full year revenue growth, I think you have mentioned (inaudible -- microphone inaccessible).

Jerry, I can hardly hear you. Can you speak up?

Yeah. Hello. Can you hear me now?

Better.

Yeah. Sorry. So my first question is actually on your full year revenue target. You mentioned that you target to stay flat year-over-year. And then I think in the release you mentioned that large sites revenue is going to grow double digit. And also I think you had also said that, the LCOS and WLO is only being a marginal contribution this year. So can you help me to understand does that mean that your small, medium-size revenues going to decline year-over-year? Am I getting that correctly?

Likely, yes. Large panel will grow and whole year will be flat, meaning small panel will decline. Yes.

Okay. Got it. And then on the smartphone business, I think in the second quarter, if we look at the industry and also your peers, I think some of them are saying that second quarter their revenue for smartphone is clearly seeing some rebound already. So I'm just very curious about why your second quarter is declining? And then which customer was seeing a softness? Is it on China or your other bigger customers?

I think -- good question. We enjoyed greatly last year from one of our major Korean end customers. We actually occupied a very, very large percentage of their TFT-LCD shares. And this year, they ship a lot more AMOLED compared to TFT-LCD. So we are affected rather significantly I would say. So you are saying -- so if you take away that particular factor, we are comfortable or better compared to our peers. We've actually done the analysis of sales internally.

And so are we losing shares from that end customer for good? The answer is, no. We are actually working with them. We have a long-term partnership. So the goal both sides is to see Himax covering the whole spectrum of their products and we are working very closely on that together we them. And certainly, on AMOLED, it will take a little bit of time to really take off, but it's something that we are working very hard on.

Thank you. Lastly, I think you have already mentioned on the revenue growth [that you have] but can I also follow up on gross margin? What do you think about your gross margin in the second half? I think, although that non-drive mix will increase, but can your gross margin get back to first quarter level, like, 25.5% to 26%?

We always want to defend our gross margin, but we have to also accept the reality, which is the market is soft and people are competing to win particular business from those who have further upside in their capacity. So I'm afraid, I cannot really give you a very solid guidance for that. So at the moment, gross margin wise, we are lowering liquidity. There are conflicting factors. Dan mentioned earlier, on the foundry side it's probably in our favor, but on the market side the pressure remains. So it's hard to tell at this moment.

All right. Okay. Thank you.

Thank you, Jerry.

Thank you. Our next question comes from the line of Tom Sepenzis with Northland. Your line is open.

Hi. Thank you for taking my question. I was wondering if you could just talk a little bit about your CMOS image sensors, and whether you expect that to be up again this year or if the slow start might keep that more flattish?

We nearly doubled last year as you probably know. And we mention earlier, first half this year has been poor. I think part of the factors being that, for us to continue to the momentum, we have to move up the ladder by selling high-end products such as 8 megapixel, 13 megapixel.

And we do as a product offerings, but in the down market situation, people tend to open to the mainstream suppliers and Himax being the newcomer in this space, this finds the market situation to be against us. In particular, the situation worsened by the fact that the first half was very -- market situation very poor and some mainstream suppliers were sitting on inventory and also they are customer focused.

So the customer feel the obligation to help them sell the inventory. So this all hurt our 8 megapixel and 13 megapixel product sales in the first half. But we are fairly confident they will start to pick up starting from Q3. It will be in Q2, but many from Q3 and Q4 and onward. So they do enjoy a lot better ASP and a lot better gross margin, 13 megapixel in particular, with actually very -- they are relatively without competition in the marketplace.

But, again, we are newcomers. So I don't want to comment on the whole year revenue, size of revenue compared to last year and I think probably hopefully next year we are here in the next call, we'll give you better visibility, but I think 8 megapixel, 13 megapixel certainly would take off in the second half.

Thank you. That's helpful. And then just in terms of TDDI, this is going towards the low to mid range devices. Does that -- is that correct, kind of lower 720P capabilities in the second half?

Yes. They will start from HD720, and then move up to full HD and we believe next year you will see it moving both up and down in terms of resolution, eventually covering the whole space; and we are not just talking about smartphone, you'll start from smartphone obviously, then you will move up to tablet and eventually towards a multi as well.

So I think you'll cover literally all of small and medium sized panel applications. That's why we think this is really a true game changer for both panel makers obviously and also for driver IC companies and touch panel controller companies. And I just want to emphasize that some of our competitors have done mergers and acquisitions in order for them to own both technologies.

And Himax 3D is the only halt in the marketplace where we have both technology coming from in-house, and when it comes to integration and design-wins at this stage, lot of technical challenges, a lot of our customers actually favor our approach, because they believe now that M&A our communication -- internal communication will be more effective.

So we are having design-wins with literally every panel maker you can think of in the world right now. Some shipments starting from Q3, but I said in my prepared remarks a more meaningful online contribution will come starting from next year, but we believe this is a big deal.

Good. Thank you. And then lastly, just on the LCOS and array lenses, I think you've mentioned that that's not going to be meaningful this year. So I was just curious because you mentioned that your building capacity. So are you fairly confident that that will start to hit the model next year or how should we be thinking about that?

Yes, yes, yes. That's why we are expanding and we are expanding our clean room and the capacity and whatnot. This is -- you're talking about really pushing the technology -- technological limits together with our customers.

So there is always a higher degree of uncertainty. This is not smartphone or tablet, where the market is already very mature, the technology is very mature and the market is very transparent. This is very much the opposite. So there is always some risk, but we are -- I mean, they don't really show in our P&L right now, but our time is so busy right now.

And I mean, obviously, we are under a lot of pressure to really make this happen, because I mean, the success of our customers' device depend to quite a large degree on our success. And in each particular product, we're talking about head mounted designs, head mounted equipment and our year-end head-mounted materials as well.

But right now, we saw certain key customers; we are pushing towards finishing the engineering, getting ready for mass production run. So would it happen next year, I think we have a very high competence. The answer is, yes.

Well. Thank you so much.

Thank you, Tom.

Thank you. Our next question comes from the line of Jay Srivatsa with Chardan Capital Markets. Your line is open.

Yeah. Thanks for taking my question. Jordan, just in terms of the smartphone market in China itself, what do you think is the reason for the weakness? Is it customers are not transitioning from 3G to 4G or is it the cost of the handsets? And when do you really expect some others issues to be mitigated for the demand to pick up again?

You've actually mentioned a couple of factors yourself; 3G to 4G transition, initially very strong and then kind of slowed down and the current subsidy certainly is a major factor. People are satisfied with their old phone and they're all 3G system. Without subsidy why rush to switch their phone. I think that is really big issue. And certainly Apple is ultimately a very big issue, right, Apple is fairly new to the China market, and yet it has been very successful, so certainly that is a lot of pressure for Chinese names.

Export is also a big issue, we mentioned because Chinese phone makers, all their costs are in renminbi or U.S. dollar, and when they export to several countries, these currencies are depreciating against the renminbi. So with their thin margin, they are very reluctant to pay us for this, that hurts our demand as well.

And certainly within the China market, landscape is changing as well. E-commerce is becoming popular and has grabbed up big piece of the market already. So people who are not catching up with the trend are [gearing up the worst]. So they are creating new brand names, and they are copying those who are successful in the e-commerce market model. So they are doing that.

And we are seeing kind of wipe off market being eliminated, but local brands are getting stronger, by then within local brands, there's this intense competition going on. There are people coming from traditional approach, new commerce from the e-commerce model, and then they're all emerging. So it will be interesting to see how it's going to evolve, but I think there will always be a bunch of very strong Chinese names they will be permanently in the top 10, of the world.

So we think China being so effective and so sizeable in the market in smartphone and tablet, they are here to stay. Our job is to make sure we'll continue to be -- whoever the winner and the loser, we will continue to be among the top tier leaders in driver IC and TDDI and C arrays and whatnot.

All right. In terms of the LCOS business, it appears it didn't materialize to the extent that you'd expected previously, but yet you seem to be continue to make a lot of investments in that in terms of capacity and technology. What gives you the confidence that that business will become material next year and all the investments you're making now will pay off?

We are only as good as our customers and we made it public that we are partner of Google Glass, and certainly Google Glass, we all know the progress, right, which is I think certainly disappointing for everybody involved.

Having said that though we are, I mean, certainly we [can hit well] with Google and we mentioned -- and they mentioned themselves as well that they'll keep pursuing this Google Glass business. So they reorganized their team and they got the new management, new leadership and beyond that I cannot comment on details, but Google remains a close partner.

And certainly there are more names both top-tier mainstream and niche market players announcing different kinds of head mounted displays. And I can only say that Himax being the leader in mounted display, literally everybody comes to us and many of us -- many of them actually use Himax as their co-partner.

So why are we committed and where are we investing in the equipments and whatever, because we know firsthand the progress the customers are making, the key customers. And we discuss above forecast and I mean obviously you discuss something, I can share with the public right now, but that is where we get our confidence covered and strong.

Okay. Just last question from me. If we step back, in the last few years, you've made some investments in some newer areas in LCOS and image sensors and touch panel controllers. Now, as you look out for the next 12 months, 18 months, where do you expect to make your R&D investments? Is it some newer areas or in a developed your existing areas? Help us understand that.

It is in the areas. We have to make that sizable. So I think in any possible future you'll be looking at the same portfolio of technologies, pretty much.

Thank you. Good luck.

Thank you, Jerry.

Thank you. I would now like to turn the call back to Jordan Wu for closing remarks.

Well, thank you, everyone, for taking the time to join today's call. As a final note, Jackie, will attend investor conferences in the U.S., and we'll announce details as they come about. So please contact our IR and/or Adam Holdsworth if you are interested in speaking to us in person. Thank you again and have a nice day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program.