奇景光電 (HIMX) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Himax Technologies Third Quarter 2015 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to turn this conference over to John Mattio, US based Investor Relations for Himax Technologies. You may begin.

Thank you, operator. Welcome everyone to Himax's third 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 have allocated time for questions and a Q&A session. If you have not yet received a copy of today's results, please call Lamnia International at 203-885-1058 or 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 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 can cause actual results and events 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, demand for end use and application products, the uncertainty of continued success in 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 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 in the company's 20-F, filed with the SEC on April 15, 2015. The financial information included in this conference call is unaudited and consolidated and prepared in accordance with US 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 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.

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 our earnings call on which we will detail results from the third quarter and provide our fourth quarter guidance and outlook. Our CFO, Jackie Chang will also give more specifics on our financial performance after my own review.

Our 2015 third quarter revenue was $165.6 million, higher than the guided $154.0 to $160.7 million. Gross margin came in at 21.8% compared to our approximate 22.3% guidance. Third quarter GAAP losses per diluted ADS were $1.4 and non-GAAP earnings per diluted ADS were $1.0, while we guided GAAP losses of $1.5 to $0.9 and non-GAAP earnings of $1.0 to $1.6.

We will review the currency exchange variables which affected our net income a bit later in our financial review.

Let's begin with our sales numbers. Our third quarter revenue of $165.6 million represented a 2.1% sequential decrease from the previous quarter and a 25.5% decrease from the third quarter of 2014. Overall, our Driver IC sales came in better than guidance across all applications during the quarter. The gap between our guidance and actual shipments mainly came from rush orders toward the quarter end. Being a Driver IC industry leader, we were capable of responding to such short-term shipping scheduling challenges and therefore benefitted from the inflow of rush orders.

Let's now review our various business segments in greater detail. Revenue from our large panel display drivers was $50.5 million, a decrease of 6.9% sequentially, and down 17.5% from the third quarter of 2014. Large panel Driver IC accounted for 30.5% of our total revenues for the third quarter, compared to 32.1% in the last quarter and 27.5% a year ago.

Although the overall large panel revenue decreased year-over-year, our Driver IC business for TVs outperformed the market, growing more than 25% during the first three quarters versus the market growth of around 11%. This was due to market share gains in the Chinese panel manufacturer market and increasing 4K TV panel builds in China. The overall weakness in our combined large panel DDIC segment was a result of decreasing demand from monitor and notebook sectors.

Onto revenue for small and medium-sized drivers, revenues from this segment came in at $84.3 million, up 1.8% sequentially and down 25.6% from the same period last year. Driver ICs for small and medium-sized applications accounted for 50.9% of total sales for the third quarter, as compared to 48.9% in the previous quarter and 51.0% a year ago.

During the quarter, geographically, our revenues to Korean end customers grew sequentially while those to Chinese smartphone OEMs declined. On the other hand, the year-over-year decline was a continuous reflection of weak smartphone and tablet markets this year, worsened by key Korean customer strategically increasing the weight of AMOLED panels in their shipments which we haven't be able to been able to service yet.

Revenues from our non-driver businesses were $30.8 million, down 4.2% sequentially and down 35.6% from the same period last year. Non-driver products accounted for 18.6% of total revenues, as compared with 190% in the previous quarter and 21.5% a year ago.

CMOS image sensor business was the main factor behind the decline. CIS aside, the rest of our non-driver products were down only slightly year over year due to a soft consumer electronics market.

Our CMOS image sensors experienced a series of slow quarters this year even though we remain one of the market share leaders in notebook application. The reason for this is found in the weak demand of low end smartphones, the main target market for our 2MP and 5MP sensors.

At the same time, we weren't able to ramp 8MP and 13MP at the pace we planned, for reasons which we will elaborate a bit later. Overall, during the first three quarters of this year, CMOS image sensors sales declined more than 50%.

Our GAAP gross margin for the third quarter was 21.8%, a 200 basis points decrease from 23.8% in the previous quarter and down 270 basis points from 24.5% in the same period last year. As guided, we anticipated this result due to pricing pressure of Driver IC products and lower NRE income during the quarter.

During this quarter, panel makers have become very cost sensitive, pressured by weakening demands and decreasing panel prices. Our gross margin demonstrated this consequence. Various costs-down measures from our end have already been under way, yet cycle time difference between inventory build-up and actual product shipment hindered the benefit from emerging quick enough.

We expect the Driver IC pricing pressure to overhang for the next few quarters. However, we do anticipate increasing new development activities, largely in the areas of LCOS and WLO, which will result in additional NRE incomes to lift our gross margin. More importantly, such development activities will eventually lead to mass production, enhancing our gross margin even further in the long run.

Our GAAP net loss for the third quarter was $2.3 million, or $1.4 per diluted ADS, compared to GAAP net income of $8.8 million, or $5.1 per diluted ADS in the previous quarter and GAAP net income of $11.1 million, or $6.5 per diluted ADS for the same period last year. The sequential profit decline was caused by lowered revenue and gross margin, and higher operating expenses.

Likewise, the year over year revenue and gross margin also declined but lower operating expenses helped offset some of the bottom line pressure. The Q3 2015 GAAP net loss also reflects an additional $3.7 million of income tax resulting from NT dollar depreciation against the US in the quarter, which for the obvious reason wasn't counted in our guidance provided in the last earnings call.

Jackie Chang, our CFO, will now provide more details on the income tax situation and our financial results. After Jackie's presentation, we will further discuss our third quarter results from a sector-view and then fourth quarter guidance. Jackie?

Thank you, Jordan. GAAP operating expenses were $38.5 million in third quarter 2015, up 22.6% from the previous quarter and down 7.8% from a year ago. The significant sequential increase was caused by the higher RSU expense in the third quarter which was considered in our guidance. We managed to keep our year-to-date GAAP operating expenses flat year over year while we continued to pursue new business opportunities.

As an annual practice, we reward employees with annual bonus at the end of September each year which always leads to an increase in the third quarter GAAP operating expenses compared to the other quarters of the year. This year, the annual bonus compensation, including shares and cash payout, totaled $5 million, out of which $4.5 million was vested immediately and expensed in the third quarter of 2015. In comparison, the annual bonus compensation was much higher at $15.1 million last year, out of which $9.3 million was vested immediately.

Excluding the RSU charge, our third quarter operating expenses were $34 million, up 8.3% from the previous quarter and up 4.6% from the same quarter 2014. Both increases were related to increased salary expenses caused by higher engineering headcount, annual salary raises, and continued project tape-outs. This is in line with the repeated indications we made before that despite ongoing expense control in response to macro uncertainty, we are still expanding in our LCOS and WLO businesses. The combined total headcount of the two areas is expected to be up by around 200 during 2015.

GAAP operating loss for the third quarter of 2015 was $2.5 million or minus 1.5% of sales, compared to operating income of $8.9 million last quarter and $12.6 million the same period last year.

Excluding share-based compensation and acquisition-related charges, non-GAAP net income for the third quarter of 2015 was $1.7 million, or $1 cents per diluted ADS, compared to $9.3 million last quarter and $19.1 million the same period last year.

As Jordan mentioned earlier, our third quarter EPS reflects an adjustment of an additional $3.7 million, or $2.2 per diluted ADS, of expected income taxes. This is a direct result of NT dollar devaluation against the US dollar during the course of this year. We make timely adjustments, when deemed necessary, to reflect the effect of NT dollar versus US dollar exchange fluctuation on our taxation.

As of November 9th, 2015, the NT dollar stood at 32.66 against the US dollar, significantly depreciated from the 30.86 at the end of June. This would lead to approximately $5.4 million more income tax charge for us than otherwise for 2015 full year. As we have already made approximately $3.7 million, or $2.2 per diluted ADS of adjustment in the third quarter, we have included another $1.7 million, or $1 per diluted ADS of additional income tax charge in the fourth quarter guidance, assuming that the exchange rate at the end year stands at exactly the same level as that of today. Obviously, the final outcome will depend on the actual exchange rate at the end of the year.

We would like to emphasize that the exchange rate has very little effect on our margins and operating results as we maintain vast majority of our cash, conduct our entire buy and sell activities, and keep our books all in US dollars. The only major impact it has is on our effective income tax. This is because we pay literally all our taxes in Taiwan where tax authorities determine our tax based on our NT dollar [dominated] ROC GAAP accounting.

In general, as NT dollar depreciates against US dollar, as has been the case so far this year and especially starting from July, we are worse off in our US GAAP effective tax rate and vice versa. We choose to maintain natural hedge in our operational activities as we believe it minimizes the overall exchange rate impact over time.

Our cash, cash equivalents, and marketable securities were $126 million at the end of September 2015, down from $164.5 million last quarter and down from $147.7 million during the same time last year. We made a cash RSU payment of $4.5 million and a dividend of $51.4 million during the quarter. In addition to our cash position, our restricted cash was $180.4 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 remain a debt-free company.

Inventories as of September 30, 2015 were $177.7 million, down from $189.6 million last quarter and up from $157.1 million for the same period last year. As indicated on the last earnings call, we were able to lower inventory levels starting the third quarter and we will continuously monitor its progress.

Accounts receivable at the end of September 2015 were $168 million, as compared to $182.3 million last quarter and $218.8 million for the same period last year. Day sales outstanding was 89 days at end of September 30, 2015, as compared to 95 days at end of the last quarter and 97 days the same period a year ago. The decrease of day sales outstanding was due to more efficient cash collection from credit sales.

Net cash inflow from operating activities for the third quarter of 2015 was $14.1 million, as compared to cash outflow of $13.8 million for the second quarter of 2015 and cash inflow of $22.8 million for the third quarter of 2014. The quarter-over-quarter increase was due to lower purchasing costs and income tax payment in the third quarter. The year-over-year decline was mainly due to a decrease in accounts payable at the end of the quarter, offset by lower accounts receivable in the quarter.

Capital expenditures were $2.6 million during the third quarter of 2015 versus $2 million last quarter and $2.1 million for the same period last year. Among other things, we continued to expand our clean room facilities for our WLO product lines, and purchase LCOS manufacturing equipment during the quarter.

As of September 30, 2015, Himax had 171.9 million ADS' outstanding, little changed from the last quarter. On a fully diluted basis, the total number of ADS' outstanding is 171.9 million.

I will now return the floor back to Jordan.

Thank you, Jackie. The past three quarters have been marked by macro uncertainties and soft demand across consumer electronics in general. Amidst the unfavorable market environment, we continue to solidify our leading position through technology advancement and customer engagement. In the meantime, we are still working closely with top tier partners in developing products which are exploring new frontiers of technologies.

Himax stands out from our peers because of such innovative and forward looking activities. Our confidence in growth opportunities are further reaffirmed by the progress of our core business, such as TDDI products for smartphones and tablets, and market share gains for our large panel Driver ICs. Our LCOS and WLO businesses, while still in small volume, entered pilot production with a top tier customer in the third quarter. Equally important for LCOS and WLO, we are pleased to see quite a few new project engagements with exciting potentials during the quarter, some of which involve applications other than head mounted display.

With that, I will now provide our fourth quarter guidance, followed by a more detailed outlook.

For the fourth quarter of 2015, we expect revenue to be between flat to 5% up compared with the previous quarter. Gross margin is expected to be flat to slightly up from the previous quarter, depending on our final product mix. GAAP earnings attributable to shareholders are expected to be in the range of 1 to 3 cents per diluted ADS based on 172.3 million outstanding ADS'.

Now let me provide you with some details behind our guidance and trends that we see developing in our businesses. In large panel driver sector, we are pleased to report that, after a slow third quarter, our Driver ICs for TVs will regain momentum in Q4 as a result of increasing shipments to Chinese panel customers, who have been continually ramping capacity during the year and bringing more on line.

It is especially worth mentioning that our engineering collaboration and design activities with Chinese panel customers remain robust despite the soft sentiment and we are encouraged that there will be additional two to four Gen 8.5 and one Gen 10.5 Chinese panel fabs ready for mass production from now till 2018. This new capacity will translate into future growth opportunities for us.

On top of strong projections for TV, we are also seeing sequential growth for Driver ICs for notebook and monitor, thanks to recovering demand. Thus, we expect to see double-digit growth in large panel Driver IC in the fourth quarter. The large panel Driver IC will remain one of the key growth areas for our business going forward.

The other segment in our driver business is ICs used in small and medium-sized panels for applications including smartphones, tablets and automotive. Fourth quarter sales for smartphones are likely to decrease from our primary Korean end customer. However, we expect the sales for smartphones from our Chinese customers to grow modestly in the fourth quarter as they launch new models.

As highlighted in our previous earnings call, we were positive that the resolutions would trend above HD720, especially to Full HD from the third quarter. This has successfully played out and we expect the trend to continue in the fourth quarter and beyond. As a testament to this trend, we are glad to see key design wins in our pipeline.

For our Driver ICs used in tablets, as previously indicated, demands have stabilized after declining for quite a few quarters and those for 10" and above have been on the rise in China. This is a favorable trend and the momentum should carry through 2016.

Among Driver ICs used in small and medium-sized panels, the best-performing category in 2015 is automotive applications. We remain confident that we should see year-over-year growth for this segment since more and more panels are going into automobiles as navigation systems, central displays, and smart rear-view mirrors. We have comprehensive coverage of all panel makers in automotive sector across Japan, Korea, China and Taiwan, and have successfully secured as many of their key projects pipelined for the next few years.

Despite these positive trends, they are mostly 2016 stories. Looking at the fourth quarter, the market conditions remain lukewarm although we are starting to see signs of recovery. Our small and medium-sized driver segment looks to decline by high single digit in the quarter sequentially.

For the past few years, our non-driver business segment has been our most exciting growth segment and a differentiator for Himax. Now product development continues to evolve and gain traction, and we remain positive on the long-term growth prospect of our non-driver businesses.

Our touch panel controller product line, as mentioned on our last earnings call, grew sequentially since several of our on-cell design wins entered mass production at multiple major end customers. We believe on-cell shipments will continue to grow beyond 2015. On top of that, we are also excited about our technological advances and product development progress in the latest pure in-cell technology.

We are one of the pioneers in offering one-chip solutions integrating Driver IC and touch panel controller, or TDDI. Driven by leading TFT-LCD makers, the industry is moving towards pure in-cell panels, which remains poised to start production this quarter in small volume. We are seeing a growing number of end product customers showing high interest in TDDI as a spec for high end devices. Since we are in partnerships with essentially all of the leading panel manufacturers in pure in-cell touch for joint technological development, we feel there is a strong market for us going forward with less competition. We believe it will contribute more significantly beyond second half 2016.

Moving on to our CMOS image sensors, though a leader in the Driver IC space, we have to admit that we are still a new comer in the high end CMOS image sensor business. We launched 8MP and 13MP in 2014 but missed the market opportunity due to a lack of some of the new product features for high end phones, notably Phase Detection Auto Focus or PDAF, that enables fast auto focus when taking pictures or recording videos.

PDAF was first adopted in iPhone 6 and has since become a popular feature for new designs of high end smartphones. We are catching up fast. We believe we will be one of the few players capable of providing PDAF-equipped CMOS image sensors in the very near future. We will report progress in due course.

During the past few months, we have received concerns from investors about our LCOS and WLO businesses and how things are evolving given we defined the second of 2015 as an inflection point, and yet there are no significant volume results to date.

For the record, we would like to reiterate our confidence and commitment to these businesses. On the horizon of new technologies, we see augmented reality, AR, as one of few disruptive technologies on radar screens of many of our brand customers and consumers. Having invested in the technologies for over 15 years, we are uniquely positioned as the provider of choice for microdisplay and related optics to enable AR. LCOS microdisplay and a highly customized optical system are to account for one of the parts with the highest value in the bill-of-material of any AR products.

In addition to HMD, our LCOS also enables next generation, full color heads-up displays for automotive. Separately, our WLO has been adopted to be microdisplay wave-guides for HMD by some customers. It can also be used in completely different applications, such as array cameras and special purpose sensors.

Our LCOS and WLO businesses hit an inflection point in September with pilot production shipment made to a major customer. We continue to plan our expansion based on indications from our customers. However, we would like to remind investors that our success is tied to our customers'. We will only enjoy mass volume when our customers successfully commercialize this new product concept.

While still in nascent stages, head mounted devices, especially those for AR application, look set to become a valuable enterprise and business tool with consumer adoption to follow a few years later. From where we stand, we are witness to accelerating activity in the AR space along with significant investment activities across leading semiconductor companies and end product players.

Looking back on the past 15 years, Himax has invested more than $100 million in LCOS and WLO technologies, close to $15 million this year alone. We have been careful in these investments as we know we can't risk sacrificing short term profits too much despite our long term optimism. Our commitment and vision have led to a solid and unrivaled top notch customer portfolio.

And that will conclude our non-driver business segment. Overall, we expect our non-driver segment to decline by mid single digit sequentially in the fourth quarter.

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

(Operator Instructions) Our first question comes from the line of Jaeson Schmidt of Lake Street Capital. Your line is now open.

Hey guys, thanks for taking my questions. There has been a lot of concern regarding over capacity and pricing pressure within the flat panel industry. So just wondering if you could talk a bit about your confidence in your visibility, especially on the large panel segment?

Thank you, Jaeson. Total capacity is good and bad for the industry for the obvious reasons. It is positive because it provides more capacity meaning more demand potential for Driver IC. It is bad because when there is lot of excess capacity, competition leads to poor pricing which sometimes leads to loss-making for customers, which may in turn lead to pricing pressure for us.

Now I'd like to emphasize the good news for Himax that they are happening in China, primarily. I should say almost exclusively. China is the place where we enjoy, comparatively speaking, a higher market share compared to Taiwan, Korea and Japan. So the capacity expansion is to our benefit.

That said, we cannot control what our customers do, as all we can do is to play along with them and service their demand as needed. What we are doing right now at this time when our customers in China, some of which are expanding very, very aggressively as we speak, is to make sure we continue to lead in the market share of such customers and also lead in new design wins, especially design wins planned for their new capacity. The downside of which sometimes is that we have to sacrifice our short-term gross margin a bit in order to secure our good position in the long-term. So it is good and bad, (for us) and all we can do is to make sure we get the most out of it. Then you are right, the impact is primarily on large panel.

Okay. Thank you. And then looking at the, can you go to the LCOS segment, can you give us a sense of how the design win pipeline has expanded or help us quantify the number of customers that you're working with?

Firstly on the number of customers, every panel maker is our customer, and a proper statement we can make- In terms of design wins, I believe you are referring to primarily large panel. Interestingly --,sorry, are you talking about LCOS? Sorry, I missed that.

Actually,, as we speak, during the quarter and throughout the half this year, we are seeing increasing new project engagement with many of which we see exciting potential. Certainly one big area is head mounted displays especially for AR. We emphasize AR versus VR because when the requirement is for display to be very, very small, we have a major advantage. When display size is not such a critical issue then we do have other competing technologies, although we are still one of the major players.

So when display size requirement is very tight, which is always the case for AR, we have literally no competition in the marketplace right now.

And the customers span across leading brand names. For obvious reason, I cannot disclose their identity and details of their progress, but we have major coverage in the leading brand name market and also what's less mentioned, but equally important I believe, is the niche players. There are many of them actually some involving helmet for motorbikes or bicycles and for other things.

So, I think while we mentioned we have entered into inflection point because our technology has proven to be capable of mass production during this quarter with a top end customer which requires the toughest technological requirements.

We are actually also very diligent in trying to get as much design coverage as possible at this early stage. So there are actually a lot of activities under the water. We are getting NREs here and there, we are shipping samples here and there, and we are getting inquiries just about every week. But unfortunately in terms of real volume shipment and revenue contribution, we still have to wait a little bit.

But I said in my earlier remarks that we will definitely start to see mass production from at least one of the key customers and whose products were identified primarily in business and industrial applications, not consumer right away, but that will be a very good start for our base line volume next year, but again at this stage, design win is very, very important.

Okay, great. And the last one from me, just Jackie, wondering if you could comment on how OpEx should ramp going forward?

Well, I think that we had indicated in the past that we will manage and control our operating expenses this year. I think we will probably end up flat this year and going forward, I think for 2016, we probably will not exceed more than 5% of the total operating expenses, but a further footnote on 2015 is our salary is up 6.7% year-over-year. Our restricted stock unit is actually down 50% year-over-year. But our tape-out is up 24% year-over-year because we do have more new projects. So that never slowed down, but in other SG&A area, we have less depreciation, less bad debt write off and also other areas where we manage the operating expense to be down around 5.6% year-over-year.

Okay. Thanks a lot guys.

Thank you, Jaeson.

Thank you. Our next question comes from the line of Suji DeSilva of Topeka. Your line is now open.

^ Hi guys. So my first question is on the large panel and driver business, can you talk about what kind of pricing declines you are seeing there versus typical and your confidence that the fourth quarter gross margin can stabilize given the pricing that you are inclined to see?

Large, okay, if I understand you correctly, Suji, you are talking about Driver ICs for large panel, the growth prospect versus the market, is that right?

No, it's the pricing, Jackie, the declines you're seeing there versus typical?

The pricing pressure, okay. Well we are the leader in the component supplier for major Taiwanese and Chinese OEMs, while the China OEM, the China panel makers expand their capacity, we are experiencing pricing pressure. But I think the added volumes as a result of the added capacity will be greater in the overall contribution margin versus the tradeoff in the pricing pressure. So I think looking forward the added volume should more than compensate the lost margin, I guess.

Okay. Now that --

The pricing pressure is quite severe. There is no secret about it. And I think this started from third quarter this year and is very intense this year. This quarter, as mentioned in our prepared remarks we expect this pressure to overhang into next year.

We try to alleviate some of the pressure by passing on this (pricing) pressure onto our suppliers which are also suffering from their overcapacity and certainly that always helps. And I think, in the short term in particular, amidst pricing pressure we cannot play hardball with our customers especially all those who are expanding their capacity fast.

So, while negotiating our pricing with our customers, on the other hand, we are also trying to secure new design wins and short-term volume allocations in return. And I think it is fair to say that we are the first stop for many of key Chinese customers when they are trying to negotiate pricing/short-term allocation and long-term design wins. So it it's not something that we want to avoid rather we have to just deal with it proactively.

Okay, great. And then on the small panel side for smartphones are you seeing the Korean customer here adjusting their inventories into the year-end versus the end demand is that one of the factors here impacting the fourth quarter?

I think Korean, the end customer, in the fourth quarter, will continue to go down for us compared to the third quarter, although third quarter for us it outperformed the Chinese (In the) first quarter, it will be the opposite. And I think end customers from Korea are losing market share overall in the marketplace and what works for us is that they are switching to AMOLED and our main supply to them have been on the area of amorphous silicon in the past.

Certainly, we are catching up on their AMOLED products. In the meantime we are trying to effect get back the momentum in the China market. Our AMOLED with the leading Korean customer in terms of progress, we have been qualified technically by them which is the major news, especially when you are thinking about Chinese building their AMOLED fabs aggressively. So, being able to get qualified by a leading Korean leading customer will be a major plus for our future and our business opportunity in China.

Having said that though, in terms of AMOLED actual order from Korea, it has been delayed for certain business issues, but we certainly we remain the technology leader in AMOLED.

Okay, and my last question was for Jackie perhaps the tax rate. How should we think about the fourth quarter the tax, should we think about it the rate or dollar amount and then how should we model -- how would you suggest modeling then to '16? Thanks.

Well, I think that our tax rate considering the unfavorable exchange rate situation, the overall tax rate this year will be somewhere around 35.3% to 36%, unfortunately, because our overall operating income has also declined this year. But I think going forward with improvement in our non-driver business next year that should help offset the losses next year ,that should really help the tax rate back to a normal level that's probably around anywhere from 27% to 30% assuming the exchange rate remained the same and that our operating income should improve next year.

Understood, thanks, guys.

Thank you, our next question comes from the line for Jerry Su of Credit Suisse. Your line is now open.

Thanks for taking my question. Just want to follow up a bit on the large size as Jordan mentioned there, there are some pricing pressure. Now when we look at your guidance, Q4 large sizes revenue seems to be growing double digits. I think suggest that the mix is also going up, but you also guided margins to improve sequentially. I just want to figure out, does this mean that large size margins, you are seeing some recovery because you are closed down or is there any other reasons for your gross margin to be flat to up in Q4?

Thank you, Jerry. The answer is in the large panel sizes because of pricing pressure, the overall gross margins would decline somewhat despite the fact that we actually have started a lot of cost-down activities. The reason why we are guiding for the gross margin to be slightly up is primarily because of NRE incomes coming from non-driver sectors, primarily from LCOS and WLO which is the indication of the increasing development activities we are seeing right now.

Okay, got it, thank you. And then my second question is on the small medium size, you have mentioned about AMOLED opportunity, but when we look at China besides the aggressive capacity expansion on large size, I think there are several other panel makers including Taiwanese and Chinese have announce several LTPS fab that will be built in the next two years as well. So, how do you look at your position and also your opportunity in these LTPS capacity in the next some few years?

We have always been a major player in providing LTPS drivers and typically when panel customers talk about their new build for AMOLED, it also typically implies addition of low-temp poly capacities as well.

There is a lot of overlap between the two. So when they talk about AMOLED expansion, typically, that implies in earlier stage of the new phase fab mass production low-temp poly opportunities. When their technology matures for AMOLED, the low-temp poly portion will decrease and AMOLED portion will pick up.

So again we have always been the major player in low-temp poly Driver IC for years. So such building is always good news for us because the entry barrier is higher margin is better and value-add is better.

We should not downplay the importance of AMOLED new capacity especially in China. They are strongly incentivized by the government to build such capacities seeing the success of Samsung and Korean makers and certainly they have all the reasons to catch up all on that gap they currently have.

And such AMOLED project inevitably involved ASIC design, meaning design for which we will always, we see some (inaudible) income for development. And we have been the vendor of choice for several of our every single Chinese customer's built-in new AMOLED projects.

So we have conservative NRE incomes this year and there will be more to come the next year. Having said that, the volume for AMOLED will be primary a 2017 story or may be at best late 2016, but it is very important and is a game changer for the industry. It provides all the benefits for us. China is our home turf. We are ahead compared to our peers in Korea market and being ASIC by design implies less competition and better margins. And certainly, Chinese AMOLED will play a very important role in high end smartphone and tablet markets going forward. That's how we see it. So we are putting a lot of resources into AMOLEDs right now.

Although, as I said, it's not something we'll see immediate results this year or even next year.

Okay, got it. Last question is on the guidance, I think revenue guided flat to up 5%, but you also mentioned some rush order in later half of September. I think industry -- some of your peers also mentioned that. I don't know if -- when you provide this guidance, do you consider any rush order for November and also December or these could be some potential upside for your Q4 guidance.

Firstly, we are seeing rush orders right now. I mentioned that in my prepared remarks. Having said that, our guidance for Q4 has not put into consideration potential for rush orders. --

Okay, got it, thank you.

So we are only guiding for what we are seeing right now.

Okay, thank you, got it.

Thank you, our next question comes from the line of Tom Sepenzis of Northland Securities. Your line is now open.

Yes, hi, I was just wondering if you could maybe go a little bit further in terms of AMOLED and when you think that that will become a contributor to your revenue next year, is it second half or are we looking at even beyond that?

I said earlier, it will primarily be a 2017 story in terms of bottom line. However, we expect to see a lot of design activities, i.e some NRE incomes next year.

Okay, thank you. And then, in terms of the non-driver products, I think you stated that you expect that segment to be down in December,does that mean the units -- the LCOS and WLO units are lower than you were previously expecting for the quarter?

Okay, Tom, I think our WLO and LCOS shipment will increase in the fourth quarter. However, although we didn't really put out the formal forecast for the fourth quarter or guidance for the fourth quarter specifically for LCOS and WLO, we do expect that business to increase quite a bit in the fourth quarter. It -- may not be as what some of the analysts have projected, being that we do -- we believe some of the analysts' projections, the number is pretty high.

I think ASP is probably higher, but volume is significantly lower.

Great.

So to give you a full picture for LCOS, the first three quarters of this year has been development, design, so for, which we receive NRE development fees from our key customers. We have mentioned starting from September, we officially entered into a pilot run and we will go through various stages of "pre" mass production volumes. And then, we expect early next year to start the mass production officially.

Obviously, I cannot comment too much especially the projection provided by the customer because -- I'll be giving away their launch plan and trade secret. But I want to emphasize that, the fact is that in the first year or two, the application will be targeted primarily for business and industrial uses. Meaning we shouldn't expect consumer launches any time soon. So I guess, volume wise, we should not be too excited about the volume.

Having said that though, when I look at analyst reports, although we cannot give any comments specifically on the figures as Jackie mentioned earlier, I think our ASP across both LCOS and WLO are much higher meaning our share in the value chain for the hardware device is probably much higher than the outsider thinks. However, the short term volume is perhaps lower.

Thank you. I appreciate the color. And then just lastly in terms of gross margins next year, how should we be thinking about that with the current pressure that you are seeing in CMOS image sensors and the DDIC business?

I think part of the reasons why we are suffering from some pressure this past few quarters on gross margins, one of the reasons was that our non driver segment contributed to less of our total revenue as I indicated earlier. CMOS image sensors have been the main issue and so on and so forth.

We do believe next year non-driver sector will recover percentage wise and volume wise and value wise. But how that will play against the pricing pressure for Driver IC, I think it's still too early to tell. So I'm not prepared to comment on the margin trend of next year yet. Seeing just these macro uncertainties and our major customers new fabs, and demand for their panel and their P&L pressure in all of that.

ButI think it is fair to say that we expect continuous pricing pressure from Driver IC. Having said that, we hope our margin will recover out of more NRE income from LCOS, WLO, and some more shipments for LCOS and WLO, as well as other sectors of our non-driver business.

Great. Thank you very much.

Thank you.

Thank you. Our next question comes from the line of Anthony Stoss of Craig-Hallum. Your line is now open.

Hey Jordan and Jackie, two-part question here, can you discuss your CapEx plans over the next several quarters specific to WLO and also if you could comment about where you stand yield wise right now in WLO? And maybe Jordan, if you won't mind sharing with us in a unit basis right now production wise where you stand? Thank you.

We continue to plan our expansion based on indications from our customers. But bear in mind, we are talking about not just head mounted display or AR, we are also talking about other things. We are not talking just about LCOS, we are also talking about WLO. And we mentioned earlier, we have an expansion plan and we have secured a piece of land close to our headquarters, so that is still ongoing and that is still planned out. But compared to the potential revenue and profit, both WLO and LCOS should be considered asset light with low CapEx requirement and depreciation burden. So they are not -- critical to our business.

And it is also fair to say that our current capacity coupled with our current forecast is already quite tight, so any major addition to our key customers' forecasts will push us into a greater expansion. However, this will all depend on our customer launch and the results, consumer reception and so on, right?

So I can only say we will report in due course, but there are certainly uncertainties. And based on current plan, we have planned to up to $40 million in the next 12 to 18 months. Again, this is based on indications from our customers and it may change.

Okay. Then current yields right now?

Lastly, because this is really not very significant compared to our balance sheet, so we will not do equity raise for this. Excuse me, your next question?

The current yields on WLO, Jordan, if you don't mind suggesting or give us a sense of where you are at and where you hope to get? Thanks.

I really cannot disclose the yield, it is classified for us. But it is more than sufficient for mass production level. And certainly yield improvement is a non-stop job, but it is something that our customers pay a lot of attention to. So it's fair to say it's more than sufficient for mass production.

Thank you.

Yes, ditto for LCOS.

Thank you. Our next question comes from the line of Charlie Chan of Morgan Stanley. Your line is now open.

Hi there. Thanks for taking my questions. So I wanted to understand a little bit there on your LCOS CAPEX and capacity. It seems like you already have sort of capacity for LCOS already. So where would you still need to buy new tools for the LCOS? Does that mean that your previous capacity is not fungible for the new project?

Okay, it is a slightly complicated issue because when we say capacity, it depends very largely on customers' specific designs. And we have stated in the past that our existing capacity for our standard products is 300K per month, but if it is for front-lit LCOS, it is reduced to 200K.

Now because of further technical reasons and based on customer spec, our effective capacity for the major customer for which we are going though pilot right now is much less than that in terms of number of units. However, that is because their panel size and fabrication for the panel is much more complicated because it is a much larger panel size. So you compare it with our standard product capacity, the value for this new key customer, is actually higher compared with the standard products.

Now, in addition to that, some customers require equipment to meet their special product needs, for which we certainly need to invest. And actually some specialpurpose equipments are actually invested by our customers as well, you know, the equipments located in our plants.

So in terms of our current capacity as compared to our customers current forecast for next year, we can handle their forecast, but we are tight, and this is a very early stage. So any change in their projection may lead to us expanding our capacity and for which we need to get prepared and our customers want us to get prepared.

Okay, thank you. So my next question is regarding your view on the Augmented Reality so much appreciate that you share your view. You said the first application would be for the industrial and the business. But in your observation why not this Augmented Reality applies to consumer application as well, because we see several application, gaming seems to be quite appealing. So what would be the roadblock there for the consumer application to take off, is that cost issue, software issue, or any technical issue, can you share your view with us?

I think all of the above, cost-wise, certainly the hardware device, if you like the Gen 1 and certainly there is plenty of room for improvement. In fact, we are in discussion with our key customers for next generation and we are actually currently engaged by several of our key customers for next generation as well. We certainly have to enhance the resolution, increase the view angle, reduce the power consumption and reduce the cost. Hopefully, with better profit for ourselves as well.

So first, our panel display and optics aside, other aspects of the hardware also has a lot of room for improvement in my view. Bear in mind, such customers use, their own design, so their design is on their own and there are a lot technical complications in all the process.

So again point number one, hardware, cost wise and performance wise, I think there is still a lot of room for improvement. And equally important the applications. And applications involved -- firstly, you'll need to know what is going to be the killer apps. And before it is launched, nobody knows right? So people are doing all kinds of research and trying all kinds of things, but really before it is really launched nobody knows. So that is one of the reasons why I think our customers collectively are taking the cautious view at this point.

And once you know about the apps, you need to have somebody to develop the apps and that is why part of the shipments, when our key customers start mass production will go to app developers who are very, very important early audience for our customers to go and convince.

I think the number of our key customers, front end customers, they have been doing promotion on the internet and releasing new applications and product improvements and I think overall the reception has been positive. But I think, again, for more angles, the product needs to be improved and they are still in early stage.

Okay. I see. And then lastly a very quick question to Jackie. So Jackie, if there -- without the NRE revenue, what would be the fourth quarter gross margin level?

With NRE?

Without --

Without NRE, what would be the gross margin for the fourth quarter?

Yes.

Okay, will be probably flat to slightly down

Okay, okay, okay, that is good enough. Okay, thank you very much. Thank you.

Thank you. Our next question comes from the line of Bob Evans of Pennington Capital. Your line is now open.

Good morning and thank you for taking my questions. I want to make sure I heard you correctly, but as it relates to next year due to pricing pressure in various businesses, you expect gross margin to be down, but can you give any quantification in terms of how far down? And then secondly, AMOLED, we don't expect any production ramp until 2017, is that correct?

Well, I guess we didn't say we are projecting for the gross margin for the whole company to go down next year. We are saying from Driver IC, most likely price pressure will continue and certainly that will have a negative impact on gross margin. However, we try to offset that by increasing non-driver revenue and also by increasing NRE income.

So, I mean we are still in November this year, so it is certainly difficult to quantify effectively the so called price pressure. I think it is just prudent for us the management to give early warning so to speak, and in fact, we are discussing with certain of our large panel key customers on pricing for the first quarter and again the pressure persists. But also we have various ways to reduce our cost and certainly we will try to defend our margin as well. So it is too early to tell.

Okay. And then the previous question regarding yields, we've kind of heard through the channel that there might be yield - some yield issues as it relates to LCOS, WLO. Can you give us any clarification there in terms of if you've been experiencing yield issues or customer issues as a result of the yields?

For the record, no, that is a wrong message.

Okay, all right, thank you.

Thank you.

Thank you. And I am showing no further questions at this time. I'd like to hand the call back over to management for any closing remarks.

As a final note, Jackie Chang, our CFO, will maintain investor marketing activities and attend future investor conferences in the US We will announce the details as they come about. So please contact our IR department and/or John Mattio, if you are interested in speaking with Management. Thank you again, and have a nice day.

Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. You may all disconnect. Have a great day, everyone.