奇景光電 (HIMX) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Himax Technologies full-year 2015 earnings conference call.

(Operator Instructions) As a reminder, this conference is being recorded.

I will now turn the call over to your host, John Mattio.

Thank you, operator.

Welcome, everyone, to Himax's fourth-quarter and full-year 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 in a Q&A session.

If you have not yet received a copy of today's results, please call Lamnia International at 1-203-885-1099 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 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 driver and non-driver products developed by Himax; demand for end-use application products; the uncertainty of continued success in technological innovations; as well as other operational and market challenges and 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 yet 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.

At this time, I would now like to turn the call over to Mr. Jordan Wu, President and CEO of Himax Technologies, to detail the Company's fourth-quarter and full-year 2015 financial results.

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 fourth quarter and full year of 2015 and provide our first-quarter 2016 guidance and outlook.

Our CFO Jackie Chang will also detail more specifics on our financial performance after my review.

We are pleased to begin by saying that our 2015 fourth-quarter results beat our guidance as preannounced on January 7. Our 2015 fourth-quarter revenue was $178 million, representing a 7.5% sequential increase.

It is in line with our preannouncement and outperformed the original guidance of flat to 5%, up quarter over quarter.

Gross margin for the quarter was 22.9%, also beating the original guidance to slightly up sequentially.

Fourth-quarter GAAP earnings per diluted ADS came in at $0.036, reaching the high-end of our preannounced GAAP EPS range of $0.033 to $0.038, and beat our initial guidance of $0.01 to $0.03.

Our fourth-quarter revenue of $178 million represented a 7.5% sequential increase from the previous quarter and a 21.7% decrease from the same period last year.

Overall, sales came in better than guided across all three product lines during the quarter.

Notably we saw increased market share of our large panel driver ICs, new addition of a major smartphone customer for small- and medium-sized driver ICs, and shipments of AR/VR related products.

Revenues from our large panel display drivers was $62.1 million, up 22.9% sequentially and down 5.2% from a year ago.

Large panel driver ICs accounted for 34.9% of our total revenues for the quarter compared to 30.5% in the last quarter and 28.8% a year ago.

Notebook demand remained weak, yet our driver IC business for TVs and monitors grew more than 20% sequentially.

While according to the market research firm IHS, worldwide TV and monitor panel shipments decreased 2% during the same period.

This bright spot, as we have repeatedly emphasized, came from our long-standing DDIC market share in China's fast expanding panel manufacturing base.

If we look only at China, our driver IC revenue grew close to 40% sequentially for each of notebook, monitor and TV applications in the fourth quarter.

Overall, large panel driver ICs for Chinese panel customers grew 16.9% year over year.

Our leading market share, coupled with rapid capacity ramping of Chinese panel customers and more insourcing from their local set maker customers, have led to this favorable result.

It is especially worth highlighting that our engineering collaboration and design-inactivities with Chinese panel customers remain robust, despite the soft market sentiment.

Revenue for the small and medium-sized drivers came in at $81.9 million, down 2.9% sequentially and down 28.7% from the same period last year.

Driver ICs for small- and medium-sized applications accounted for 46% of total sales for the fourth quarter as compared to 50.9% in the previous quarter and 50.5% a year ago.

The main reason behind the weak performance was the loss of business from our primary Korean end customer as they replaced the use of LCD displays for which we were a major IC vendor by AMOLED displays for their smartphone products, thereby creating a gap in our small- and medium-sized business.

While with a much reduced volume, we remained a major IC partner to the said Korean customer for their LCD displays and are working on AMOLED projects with them.

I will provide the latest development on this a bit later while giving outlook for the coming quarter.

However, business from Chinese smartphone makers grew significantly over the last quarter due to their new model launches and inventory replenishing, as well as the addition of a new top-tier Chinese customer for one of their high-volume models.

Compared to the same quarter last year, revenues for Chinese smartphones stayed around flat.

For automotive applications, we continued to see solid momentum, growing high teens from the third quarter and around 3% year over year.

Our revenues for tablet segment grew around 9% sequentially, thanks to strong shipments to certain international brand customers.

Yet, the tablet sector registered a year-over-year decline of around 17%, a reflection of the overall weakness of the market.

Revenues from our non-driver businesses were $34 million, up 10.5% sequentially and down 27.4% from the same period last year.

Non-driver products accounted for 19.1% of total sales as compared to 18.6% in the previous quarter and 20.7% a year ago.

CMOS image sensor business was the main factor behind the year-over-year decline.

As mentioned in our previous earnings call, our CMOS image sensor business suffered because we didn't ramp our 8 megapixel and 13 megapixel sensors as planned due to a lack of Phase Detection Auto Focus or PDAF, a new but nowadays required feature for high-end smartphones.

We remained one of the market share leaders in notebook sector.

The sequential growth of our non-driver segment was mainly contributed by AR/VR related businesses.

Our LCOS and WLO revenues started to show growth as we started to make shipments to certain leading customers in September.

Development fees from AR/VR project engagements with both current and new customers also worked in our favor.

Among the non-driver products, power management ICs also delivered impressive growth sequentially.

Our GAAP gross margin for the fourth quarter was 22.9%, a 110 basis-point increase from 21.8% in the previous quarter and down 180 basis points from 24.7% in the same period last year.

The gross margin beat our initial guidance, mainly due to a more favorable product mix, including more high-end smartphone and tablet driver IC shipments and higher development fee incomes from our LCOS and WLO businesses.

Such increased development activities will eventually lead to mass production of these products, which will enhance our gross margin even further in the long run.

Gross margin expansion was also a testament to our costs-down measures.

Gross margin improvement remains one of our business focuses.

Our GAAP net income for the fourth quarter was $6.1 million or $0.036 per diluted ADS compared to GAAP net loss of $2.3 million or $0.014 per diluted ADS in the previous quarter and GAAP net income of $15.6 million or $0.091 per diluted ADS for the same period last year.

GAAP EPS exceeded our $0.01 to $0.03 guided range.

In our last earnings call, we estimated $3.1 million of additional income tax charges caused by the NT dollar depreciation based on the exchange rate of 32.66 on November 12, the date of the EPS guidance.

As it turned out from November 12 to the year-end, the NT dollar further depreciated to 32.83 against the US dollar, resulting in an additional $0.5 million or $0.03 per diluted ADS of income tax charges.

If the NT dollar US dollar rate had stayed at 32.66, our EPS would have been $0.039 , outperforming our original guidance, even more.

The sequential profit increase was a result of higher revenue and gross margin, together with lower operating expenses.

The year-over-year profit decline was due to a decline in revenue and gross margin, but lower operating expenses helped offset some of the bottom line decline.

Jackie Chang, our CFO, will now provide more details on our financial results.

After Jackie's presentation, we will further discuss our full-year results, our 2016 outlook and then first-quarter guidance.

Jackie?

Thank you, Jordan.

I will now provide additional details for our fourth-quarter financial results.

GAAP operating expenses were $32.1 million in the fourth quarter of 2015, down 16.6% from the previous quarter and down 3.8% from a year ago.

The sequential decrease was primarily the result of difference in RSU charges.

In accordance with our protocol, we grant annual RSUs to our staff at the end of September each year, which given all other items equal leads to higher third-quarter GAAP operating expenses compared to the other quarters of the year.

The fourth-quarter RSU expense was only $0.3 million, while it was $4.5 million in the third quarter.

Excluding the RSU expenses, operating expenses decreased 6.5% from last quarter and down 3.3% year over year.

The sequential decrease was the result of streamlining core business R&D activities and other expense control measures.

GAAP operating income for the fourth quarter of 2015 was $8.6 million or 4.8% of sales, up 449.9% sequentially and down 62% year over year.

The sequential profit increase was from higher revenue, enhanced gross margin and lower operating expenses, including less RSU expenses.

The year-over-year decline was, on the contrary, a result of lower revenue and gross margin, but offset by lowered operating expenses.

Fourth-quarter non-GAAP operating income, which excludes RSU and acquisition-related charges, was $9.1 million or 5.1% of sales, up [239.6%] from the previous quarter and down [60.9%] from the same quarter of 2014.

Fourth quarter non-GAAP net income, which excludes share-based compensation and acquisition-related charges, was $6.5 million or$0.038 per diluted ADS compared to $1.7 million last quarter and $16.1 million in the same period last year.

As Jordan mentioned earlier, our fourth-quarter EPS reflects an adjustment of an additional $0.5 million or $0.03 per diluted ADS of expected income taxes.

This is a direct result of NT dollar devaluation against the US dollar between November 12, 2015 and year end.

We would like to emphasize that the exchange rate has very little effect on our margins and operating results as we maintain the 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 denominated ROC GAAP accounting.

In general, as the NT dollar depreciates against the US dollar, 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.

I will go through 2015 full-year financial results and a balance sheet analysis a little later after Jordan's 2015 full-year business review.

Thank you, Jackie.

2015 was a difficult year with different challenges every quarter.

Despite themes of a continued market softness and tougher competition in mobile devices and TV, we were able to exit the year of 2015 with decent sequential growth.

We believe such strength will continue into 2016.

During 2015 our increased large panel driver IC market share in China has helped solidify our foundation of core business that has brought in the strong flow of sales and new opportunities as our Chinese customers continue to expand their panel capacities while Chinese TV makers are sourcing more panels locally.

Equally important, following quite a few quarters of sales declines in small and medium-sized driver ICs, we finally saw smartphone order rebounds coming from the industry's restocking and new model launches in the last quarter, especially from our leading brand customers.

Two of the key achievements of our smartphone driver IC business are the completion of our qualification by a primary Korean customer for our OLED driver IC design and the successful launch of our TDDI or Touch and Display Driver Integration products in 2015.

Both products were actively sought after by mobile device makers, module houses and panel makers.

Last but not least, some of the world's largest and most impactful technology companies have continued to work closely with us on our AR/VR devices using our LCOS, WLO and/or driver IC solutions.

Some of them have announced the launch of their products in 2016.

We are seeing strong momentum across all our major product lines and feel excited about the growth prospect of 2016, despite the uncertain economic environment.

Now, we will have a quick overview of the 2015 full-year financial performance.

Our revenues totaled $691.8 million in 2015, representing a 17.7% decrease over 2014.

Revenues from large panel display drivers declined 0.7% year over year, representing 32.4% of our total revenues as compared to 26.9% in 2014.

Notably, TV application grew over 20% year over year, the highest growth since 2011.

Such strength was originated from our focus in China starting 2012 as we bet on China's long-term prospect and sought to diversify customer base.

We believe that panel capacity expansion in China is a tailwind ride uniquely for us, and our large panel driver IC sales and market share will further improve as we move into 2016 as a result.

Small- and medium-sized driver sales declined 24.7% year over year, representing 48.6% of our total revenues as compared to 53.1% in 2014.

As I mentioned earlier, our key Korean end customer decision to substantially increase a portion of AMOLED panels in their smartphone portfolio was the main reason that caused our smartphone drivers to decline.

Our driver sales for small- and medium-size panels were also hit by the weak smartphone sales in China, where smartphone vendors lacking new government stimulus, turned conservative while trying new sales channels such as e-commerce and direct sales point to replace the previous approach of selling through telecom operators.

Worse yet, exports were also weakened by the relatively strong RMB over the full year.

However, as we indicated earlier, the Chinese smartphone market started to rebound in the fourth quarter.

Smartphone aside, our driver IC sales into the tablet market also declined significantly year over year while those for automotive applications grew double-digit.

We would like to reiterate that despite the fast changes in the smartphone makers' competition landscape, we remain the leading supplier of small- and medium-sized driver IC for panel makers and module houses across Taiwan, Korea, China and Japan.

Now that our smartphone end customers have recaptured the market with refreshed marketing strategies, new model launches and better grasp of Internet sales channels, and with our latest addition of a major brand customer, we are well-positioned to grow again in 2016.

Non-driver products declined 22% year over year, representing 19% of our total sales as compared to 20% a year ago.

As explained earlier, CMOS image sensors' decline was the main reason behind the poor performance.

LCOS, WLO and timing controllers actually grew strongly last year.

We launched eDP 1.4 timing controller, targeting high-end monitors, notebooks and tablets, and have received positive feedback and strong customer adoption as we were the first to launch such timing controller capable of supporting resolutions up to 4K for medium-sized panels.

We indicated before that our LCOS and WLO businesses hit inflection in September 2015 with pilot production shipments made to a major customer.

The increasing shipments of our LCOS and WLO products to some industry heavyweights in the fourth-quarter 2015 and the additional design engagements with current and new customers are evidence that Himax is uniquely positioned as the provider of choice for microdisplay and related optics to enable AR applications.

Separately, we have officially broken into the VR space with major design wins taking place toward the end of 2015.

Our expertise in customized display solutions in OLED driver IC timing controller and power management ICs have led to ASIC developments that will go into the next generation panels of several VR devices.

With multiple AR/VR players announcing their product launches in 2016, we stand to benefit from these new businesses.

I will elaborate more when providing first-quarter outlook.

On top of these products, our touch panel controller sales remained flat year over year in 2015.

The introduction and mass shipments of our on-cell and pure in-cell products have led to fast customer additions in our touch business in 2015.

We continue to believe that TDDI will start to take off starting in the second half 2016.

Gross margin in 2015 was 23.6%, a 90 basis point decline from 24.5% in 2014.

The margin decline was mainly the result of pricing pressures passed on to driver IC vendors from cost-sensitive panel makers.

Pressure on gross margin was partially offset by higher development incomes from our LCOS and WLO products and higher sales of driver ICs for high-end smartphones in the fourth quarter.

Our GAAP net income for the year was $25.2 million or $0.146 per diluted ADS, down from $66.6 million or $0.387 per diluted ADS for the same period last year.

The exchange rate impact on income tax was $3.6 million for 2015 as NT dollar depreciated to 32.83 against the US dollar at the end of 2015 and from 31.65 at the beginning of the year.

In July of 2015, we paid an annual dividend of $0.30 per ADS equal to 77.5% of 2014 GAAP earnings per diluted ADS.

We remain committed to paid annual dividends, the amount of which is paid primarily on our prior year's profitability.

The high payout ratio in 2015 is an illustration of our confidence in our future profitability.

I will now ask Jackie to go through some details of our full-year financial results.

Thanks again, Jordan.

For 2015 our GAAP operating expenses were $132.5 million, down $0.7 million or 0.5% compared to last year.

We have repeatedly indicated that we only intend to increase our expenses in LCOS and WLO sectors where we are seeing a lot of growth opportunities.

GAAP operating income of $30.7 million represented a 57.8% decrease versus 2014.

Non-GAAP net income for 2015 was $30.6 million or $0.178 per diluted ADS, down from $76 million or $0.442 per diluted ADS for 2014.

The decrease in non-GAAP net income was mainly the result of lower revenue in this year.

Our cash, cash equivalents and marketable securities were $148.3 million at the end of the year compared to $187.8 million at the same time last year and $126 million a quarter ago.

On top of the above cash position, 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 very strong balance sheet, and we remind investors that we remain a debt-free company.

Inventories as of December 31, 2015, were $171.4 million, up from $166.1 million a year ago and down from $177.7 million a quarter ago.

We were able to further lower inventory levels sequentially because of demand rebound.

The higher inventory year-over-year was the result of our measures to counter the relatively low customer demand visibility in a volatile market.

Accounts receivable at the end of December 2015 were $177.2 million as compared to $219.4 million a year ago and $168 million last quarter.

Days sales outstanding was 93 days at the end of December 2015, little changed from 95 days a year ago and 89 days at end of the last quarter.

Net cash inflow from operating activities for the fourth quarter was $25.9 million as compared to an inflow of $38.7 million for the fourth quarter of 2014 and an inflow of $14.1 million for the third quarter of 2015.

Cumulative cash inflow from operations in 2015 was $22.5 million as compared to $93.7 million in 2014.

The decrease in cash flow is mainly due to lower net profit and higher working capital.

Capital expenditures were $3.6 million in the fourth quarter of 2015 versus $2.4 million a year ago and $2.6 million last quarter.

The capital expenditure in the fourth quarter consisted mainly of the manufacturing tooling of our CMOS image sensor products and facility updates and capacity expansion for LCOS and WLO product lines.

Total capital expenditures for the year was $10 million versus $10.9 million a year ago.

As of December 31, 2015, Himax had 171.9 million ADS outstanding, unchanged from the last quarter.

On a fully diluted basis, the total ADS outstanding are 172.3 million.

I will now turn the floor back to Jordan.

Thank you, Jackie.

We are mindful that 2016 will likely be a year of macro uncertainty, marked by currency fluctuations and the risk of China slowdown.

However, looking into the new year , we believe our businesses will be resilient to macro headwinds for reasons set out below.

Our large panel driver ICs for TV application will grow from higher 4K TV penetration and the added capacity from China.

In terms of small and medium-sized driver ICs and those for automotive applications, where we have a leading market share, will continue to show strong growth as more panels are going into vehicles.

For smartphone applications, we believe that the adoption of 4K network should rise in China, stimulating demand in 2016.

We are also a believer in technology integration such as TDDI in smartphones.

Revenue contribution from TDDI will likely take place in the second half of 2016.

Non-driver products wise, 2016 will be the year for us to see a bigger revenue percentage generated by LCOS and WLO product lines as shipments to our major customers start to take off.

We will also tap into new territories such as IoT and machine vision with our latest CIS and WLO product offerings as stated in our recent press releases.

Overall, 2016 will be a year of growth for both top and bottom lines.

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

For the first quarter of 2016, we expect revenue to be down 1% to up 4% sequentially.

Gross margin is expected to be around 25% as opposed to 22.9% in the previous quarter, depending on our final product mix.

GAAP earnings attributable to shareholders are expected to be in the range of $0.055 to $0.075 per diluted ADS based on 172.3 million outstanding ADS.

In providing the above earnings guidance, we have assumed a 20% income tax rate calculated based on exchange rate of NT dollar 33.45 against the US dollar, which is also the exchange rate as of beginning of this February.

Now let me provide you with some details behind our guidance and trends that we see developing in our businesses.

Following the strong fourth quarter, large panel driver ICs should continue to grow around 10% sequentially and high teens year over year with China and 4K TV still the major growth engines.

We expect our 4K TV to double in the first quarter sequentially and close to triple over the same period last year.

In our previous earnings calls, we mentioned that large panel makers are increasingly demanding a total solution from IC vendors.

We are experiencing accelerated demand from panel manufacturers seeking IC vendors who can provide driver ICs, timing controllers, Gamma OP and PMIC as a total solution.

Meanwhile, timing controller is getting more and more technologically advanced with high-end models integrating sophisticated functions such as MEMC.

This positions us very well in the high-end 4K TV market.

As the industry migrates to 8K TV, which is already in product development, our business and technology strengths and integrated product solutions will be a significant differentiator against the competition.

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 remain flat, despite fewer working days around Chinese New Year.

Our end customers, including a newly added first-tier player, are launching new models and replenishing inventories ahead of the holidays.

Furthermore, we are seeing accelerating full HD shipments and design wins in our pipeline, a testament to the trend that full HD is quickly becoming the new mainstream display resolution for smartphones, replacing HD720.

We're also pleased to report that our shipments of AMOLED driver IC to a key Korean customer will start later this quarter, reaffirming our technology leadership in the area.

As we are collaborating with multiple customers, both in Korea and China on AMOLED product development, we believe AMOLED driver ICs will be one of the critical future growth engines of our small panel driver IC business, especially with quite a few new AMOLED fabs being built in China where we have the most comprehensive coverage.

Among driver ICs used in small- and medium-sized panels, the best performing category has been automotives in recent years.

We anticipate Q1 shipments to be slightly higher than the previous quarter, growing double digit year over year.

We expect the growth to stay robust throughout the year.

As numerous top automotive brands are our indirect end customers, we are well-positioned to take advantage of the growing market in 2016 and beyond.

The driver ICs used in tablets as previously indicated remain weak and will decline double digit in the first quarter, resulting in a declining in small- and medium-sized driver IC segment in the first quarter of around mid-single digits sequentially.

For the past few years, our non-driver business segment has been our most exciting growth segment and a differentiator for Himax.

New product development continues to evolve and gain traction, and we remain positive on the long-term growth prospect of our non-driver businesses.

We expect mid-single digit sequential growth in our non-driver products for the first quarter.

Looking ahead, many of our non-driver products, including our CMOS image sensor, timing controller, touch panel controller, PMIC, ASIC series, WLO and LCOS microdisplays are all set to grow significantly in 2016 and the years ahead.

I will now highlight some of the non-driver product lines.

First, onto our touch panel controller product line.

We exited 2015 with our touch panel controller sales flat year over year as the industry shifted to on-cell and pure in-cell TDDI.

We expect on-cell to become the mainstream touch technology in 2016.

We have also launched force touch products, the new feature to the touch panel, and already secured high design wins from leading smartphone makers for their 2016 models.

Our on-cell sales will significantly accelerate starting late first quarter with shipments to Chinese and Japanese smartphone makers.

Furthermore, we are one of the pioneers in offering TDDI solutions for the state-of-the-art pure in-cell panels, which have started small volume production in 2015.

We are in partnerships with essentially all of the panel manufacturers in pure in-cell touch for joint technological development and believe there is a strong market for us going forward.

We expect to see contributions starting the second half this year.

Moving on to our most exciting AR/VR related businesses, the recent CES Show showcased the fast-growing, multibillion-dollar AR/VR sector under development.

Participants included leading multinationals in gaming, search, mobile, social media, military and consumer industries.

Having invested in the technologies for over 15 years, we are uniquely positioned as the provider of choice for microdisplays and related optics to enable AR.

As some of our major customers have already announced further launches, revenues from LCOS and WLO are expected to double sequentially in the first quarter of a small base, marking the beginning of mass production for some of our leading AR device customers.

While most customers don't expect big volume for the early generation products, we have been working with many of them for future generation devices.

We are also seeing constant additions of new customers using our LCOS and/or WLO for a variety of new applications.

We currently have more than 30 customers using our LCOS and/or WLO for their AR devices and optical engine designs, with the vast majority of them coming from the US.

When adopted, our LCOS and WLO typically represent two of the parts with the highest value in an AR product's bill-of-materials.

As for VR applications, as mentioned in our press release in January, we have had new driver IC design wins with two top-notch VR players in the next generation OLED panels for their VR devices.

In addition, in a recent press release, we introduced WLO laser diode collimator with integrated Diffractive Optical Element or DOE.

We believe this is the most effective solution for 3-D sensing and detection.

Our technology can reduce the size of the incumbent laser projector module by a factor of 9, actually making it smaller than conventional camera modules.

This breakthrough allows the solution to be easily integrated into next-generation smartphones, tablets, automotive, AR/VR devices, IoT devices and consumer electronic accessories to enable new applications in the consumer, medical and industrial marketplaces.

To be paired with the laser projector module mentioned above, we are also developing a Near Infrared sensor or NIR sensor to provide customers with a total solution.

Additionally, in January, we announced an ultra-low-power QVGA CMOS image sensor, which, we believe, is by far the lowest power CIS in the industry with similar resolution, while offering outstanding sensor performance and high level of feature integration.

It can be in a constant state of operation, enabling always on, contextually aware, computer vision capabilities such as feature instruction, proximity sensing, gesture recognition, object tracking and pattern identification.

Likewise, it can be applied in new applications across smartphones, tablets, VR/AR devices, IoT and artificial intelligence.

This series of smart sensors will open a new business territory for our CIS products.

In terms of our 8 megapixel and 13 megapixel CMOS image sensors with PDAF features, we are catching up very 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'll report progress in due course.

And that will conclude our non-driver business segment.

Thank you for your interest in Himax.

We appreciate you joining today's call and are now ready to take questions.

(Operator Instructions) Suji De Silva, Topeka.

Congratulations on the good results here.

On the smartphone-- I just want to be clear on your comments here.

Was the smartphone market flat for you guys versus the industry declining in the first quarter, and if you are gaining share in here, which you talked about, is that sustainable through the remainder of 2016?

I'm sorry.

I didn't quite get the latter part of your question.

Oh, if you are gaining share, is that sustainable throughout the remainder of 2016?

There's no reason to believe why not.

We mentioned, well, firstly the overall market is not going to -- nobody expects good growth for the overall market as we all know.

But we believe branded phones in China are now competing a bit favorably compared to iPhone, and that is certainly good news for us.

And so for 2016, I think Chinese smartphone market is likely to see a rebound again, actually starting from last quarter.

And I mentioned earlier we believe quite likely there will be more 4G adoption.

Even potentially-- I say potentially because certainly I don't know for sure, but potentially new subsidy program by the government as a way to stimulate their economies.

And certainly export.

After a rather turbulent RMB fluctuation, Assuming RMB gets to the bottom price and starts to stabilize, we are certainly expecting good growth opportunities for Chinese smartphone vendors.

So yes, we think it's sustainable.

Last but not least, we mentioned a new addition of a major Chinese brand customer, which is certainly likely to sustain us if we are only in the beginning (inaudiable) in cooperation with them.

And then I appreciate you guys talking about the China growth in large and small.

Can you talk about what percent of your large and small businesses are coming from China versus non-China?

It's over 60%.

Jackie, that's for both large and small?

Yes.

Okay.

Great.

And my last question is about the AR/VR categories here.

You know, the NRE you are getting now, is that a sustainable run rate, or would that be lumpy, and how many customers are shipping today versus how many you expect in 12 months?

Thanks.

I don't want to mislead anybody.

Certainly it is not going to be -- in theory an NRE is not a continuous business.

However, we do have new models from existing customers and new customers.

And for minor modifications, we are -- we charge this NRE,but for major modification or even rework of a panel of a solution, then there will be -- it could be millions of dollars of NRE charges for a project.

So, I think for at least for 2016, after a pretty strong NRE income last year, we actually expect growth in NRE for LCOS and WLO for AR specialty products.

Now, that hopefully will be a foundation for future mass production, and then once mass production really takes off, NRE income hopefully will account for a smaller percentage of our AR/VR related areas.

But last year and we expect this year, it is quite important.

Okay.

Thanks.

Congratulations.

-- fluctuation.

Actually this quarter, Q1, our expected NRE income is a bit less than last quarter.

But we are actually getting good NRE income every quarter over the last year and certainly expecting this year.

Okay.

Thanks, guys.

(Operator Instructions) Tristan Gerra, Baird.

Could you talk a little bit about your wafer lens uptake business that you see starting to ramp in augmented reality devices?

Is there a lower ASP version that eventually could target high-volume application, including cameras and smartphone, and what type of timing are we looking at for that type of development?

Well, there are two major categories.

The first one being for micro-display, to couple with micro-display, to provide wave-guide.

As you know, in AR device, you need to have a small micro-display, and to be clear, you need a wave guide to be coupled with the micro-display to enlarge for the projection.

So that is one area, and actually in that area we are starting mass production right now as we mentioned in our prepared remarks.

Again, I want to say we are in very early stage of AR devices, although I believe AR will be the most significant head mounted display in a longer-term.

But we are, indeed -- but it's more complex for our customer to decide.

So we are in beginning stage.

So and actually for the products -- for most of the products that you see in the marketplace, AR devices are -- tend to be in the early generation, which I mentioned in my earlier remarks that our customers tend to believe that they don't expect very big volume in the first generation.

But very importantly we are already working with many of our customers for next generations.

And, the second area for our WLO to be potentially in AR or VR device is to be coupled with the camera.

Our early announcement -- we have two recent announcements, which are both very good examples.

The first one is WLO-enabled structured light projector.

So basically you have a laser diode emitting a invisible light through certain collimator lens and DOE that you can project a invisible pattern onto the objects which after reflection will get received by another CIS device that we are developing, which is our NIR sensor.

So to enable the projector, WLO technology is the core.

So we are very uniquely positioned for this area.

And now we are working with some of the most powerful partners around the industry, and we're hoping that later this year or maybe early next year we'll start to see mass production.

And the purpose of this is to -- for a user to be able to sense your 3-D map around your environment, whether for picture taking or for other applications such as gesture recognition and so on.

And another interesting recent announcement we had was ultra-low power sensor.

This sensor, when operating at QVGA each year, will be running at about 2M watts of power consumption.

You are talking about a differenct magnitude compared to ordinary sensors in a similar resolution category.

Now, to -- the best way to have -- to go with this ultra-low-power sensor is to have the WLO based lists so that the whole package or the whole module can be very, very small.

That is certainly very, very important for devices such as smartphones.

So, all this -- and then why do you need the ultra low power sensor in your smartphone?

Because with 2M watts or even lower power consumption, you can actually turn it on constantly, and that is why we call always on sensor.

And for that, you then have a lot of potential applications, including to wake up your cell phone and run, rather than turning on your display.

You can actually have a sensor sensing the environment and knowing when to wake up the device.

And the potential application we have seen range from TV to smartphone to computers and AR/VR and other devices.

And the last thing I want to emphasize is that especially when adopted actually just about across all the examples I mentioned, the ASP for WLO is always very high.

So, we account for a pretty significant portion of the bill of material for AR device.

Okay.

That's very useful.

And then just a quick follow-up question on the large panel situation at China makers that you say you have had some very good momentum since last quarter.

Any sense of whether you think inventory levels at those panel makers are basically in line with normal levels or whether you feel that there could be some buildups?

Obviously given your Q1 guidance, you don't seem to be concerned too much about potential inventory deleveraging post-Chinese New Year.

But just interested in your view as to how we are entering the year from a panel inventory standpoint in the channel?

Actually the way we see the inventory level across the supply chain is actually quite thin at the moment, and as a result, we are actually, you know, constantly prepared for customers fresh orders.

So, I think inventory wise the industry is a lot healthier compared to the same time last year.

Actually if you record recall the situation of last year, starting from late 2014 and into first quarter last year, the whole industry, I guess, was too excited about the growth, and people built too much inventory as a result.

The whole industry suffered in Q2 and Q3.

And then after that, we started to see a little bit of rebound in Q4.

And this year's situation is rather different.

So last year, the same period last year, we are actually suffering from shortage of our capacity from our vendors.

But not anymore this year.

So many indications point to the same thing, which is the supply chain channel actually has healthy inventory status.

And another thing people talk about, concerned about, China's is building so much capacity creating oversupply in the whole industry, which is certainly true.

I cannot predict the future, but one thing for sure, when my customers build capacities, they need to buy more driver ICs, which benefit us given our relatively large market share in China.

And another thing to point out is that Chinese TV set makers are in-sourcing, meaning buying TV panels from China a lot more than before.

There's a little bit of government, you know, subsidy or encouragement, and certainly being Chinese, the vendors do provide better and friendlier services to the overall customers.

I know there all these reasons, but what we're seeing, this in-sourcing trend is actually also an important factor.

So if there is an oversupply situation, if there should be an oversupply situation, I think it is -- it would be too easy to ride off the Chinese panel makers, so to speak, because they do have good support from their local customers.

Great.

Thank you very much.

Tom Sepenzis, Northland.

Good morning.

Thanks and congratulations on the quarter and the guidance.

I'm just wondering if you could give us an idea of the mix in the small to medium panel business between smartphone, tablet and automotive.

Smartphone is about 50% of our small medium, and tablet is about 30%.

And automotive is about 20%, and the rest are other consumer electronics.

Great.

Thank you, Jackie.

And then just in terms of the LCOS and WLO, obviously that's going to have a nice move here at the beginning of the year in the March quarter.

I'm just curious as to what the rest of the year in terms of visibility -- what you might have, and do you expect that to continue to increase linearly as we go through the year, or is there an initial order here that's helping out the March quarter?

How should we be thinking about that business moving forward?

Clearly with 30 customers, it has an opportunity to keep moving higher as we go through the year.

Yes, I mean 30 plus customers, and the number is increasing actually constantly with new applications.

But I think in terms of -- again, I mentioned in my prepared remarks and I kind of repeated it in just a bit earlier in the Q&A, our volume this year, given the fact that these are early generation devices, we don't want investors to over expect too much.

So we keep advising don't expect very big volume as you already mentioned with the consumer electronic device for general public.

So now, it is more of device targeting the developers and industrial users, so don't expect very big volume.

However, again, I want to emphasize our content, our value content in each device is probably higher than you expect.

Although I mean for confidential reasons, we can't really specify too much, but it's in the hundreds of dollars.

And so we are bound by NDA, and we don't want to kind of preannounce the volume for our customers.

But we -- I mean we mentioned Q1 is going to be double from last quarter because it is -- start from a very small base, and Q2, Q3 we'll see some more increase over the year.

But, I would say for the whole year, in terms of percentage contribution to the revenues, it will be much higher than any of the previous years.

But with the fall in NRE income, I would say -- I would say it is 5%-ish.

But bear in mind, many of our so-called 30 plus customers would not have entered into mass production this year.

So --.

Great.

Thank you.

That's very helpful.

So a very slow pickup in our activities.

Thank you, Tom.

Charlie Chan, Morgan Stanley.

Congratulations for the very strong fourth-quarter results.

So my first question is really on the margin trend for your LCD driver IC business because some of your key customers are still posting losses in the fourth quarter.

So what do you think about the pricing pressure going forward, especially into 1Q and in the second quarter?

The margin pressure here is, you know, there it is a constant in the industry.

And I mean, this is not the first time our customers are losing money.

So yes, indeed, every quarter we do offer some cost downs to our customers.

And we try to compensate that by different things, and while we expect to support our gross margin for this year includes among others resolution migration trend for all sizes of panel in the case of TV 4K.

In the case of smartphone, it's full HD I mentioned earlier.

And secondly, for our overall gross margin, non-driver percentage is going to go up.

So, stuff like TDDI, LCOS, WLO, on-cell, touch, TCON, all these enjoy substantially higher gross margin compared to our driver IC.

And I also mentioned about NRE incomes, which certainly have the highest gross margin.

And certainly our continuous costs-down measures.

So I just want to emphasize GM improvement, gross margin improvement, has always been one of our major business goals.

Now I also want to mention we are guiding for 25% gross margin for this quarter, which is a pretty significant jump from the last quarter and actually the last few quarters.

I just want to emphasize that there's no one particular one-off item to boost our gross margin within this quarter.

So, it is really across the board we are seeing driver and non-driver and both panel sizes margin becoming more healthy.

And I think last but not least, if you compare right now with last year, I mentioned earlier in another question, earlier in the year, we suffered -- the whole industry, including ourselves, suffered from high inventory levels.

Meaning in the following two quarters, i.e.

Q2 and Q3, we are actually trying to digest our own inventory, which inherently has higher cost for us.

But that's just something we need to digest.

So that is also a major negative factor for last year.

Okay.

Thanks, Jordan.

It's very helpful.

So, my next question is really on your non-driver IC business.

So, first of all, for your WLO, for the 3D depth sensing, for the smartphone, is there any significant design win in the smartphone or tablet for these product lines?

Let me put it that way, we are booking with -- we actually worked a long time with a -- let me put it that way, a super heavy weight platform provider for IC, for smartphone in particular.

So we are in the process of launching the solution together and as a total solution.

So it's going to be a joint marketing program.

So in terms of major design wins, the answer is no, not yet, but we are seeing very strong early interest from some of the big-name customers.

So that is very encouraging, and I think people are attracted to this solution because of the form factor, in addition to the potential application.

Actually, that is one thing that customers are still working on, which is to create very good applications for this, you know, using this device.

So people have known about the potential for a long time, but people have not seen any solution, which is small enough to fit into a smartphone.

And now they are seeing the first one with a pretty reasonable price -- total price.

So people are excited, and people are thinking about how to use it.

So hopefully there will be good news to report over the next quarters.

We are expecting, again, you know early mass production.

I would say the earliest would be end of this year or early next year.

But I think both us and our partners feel the potential of this market is a very, very big.

Yes, thanks.

We wish your success in this product line.

So lastly, after the CES Show, we do see lots of interest in the other augmented reality smart glasses.

So with booming demand, do you see any respectful competitor in micro projector area?

I mean a similar cost technology or other alternative technology, or is Himax still the only game in town for the micro projector technology?

We have not really seen a -- I don't want to boast, but we are not really seeing a meaningful competitor at this time for micro-displays.

Okay.

Now we are seeing most of ARs are using -- I am sorry, VRs are using AMOLED, and now we just announced major design wins in non-driver IC for AMOLED panels.

But ARs will have to use micro-displays, but for micro-display we have not really seen a meaningful competitor at this point.

Okay.

Got it.

Thank you very much.

Jerry Su, Credit Suisse.

Jordan and Jackie, first question from me is on the AMOLED.

I think you mentioned that you are going to start shipment from later this quarter.

I'm just wondering how do you see the volume for the full year because you also mentioned that last year you suffered from the customer shifting to OLED.

So do you think that the smartphone driver IC business this year, you can make up the gap by shipping the OLEDs?

No.

Because the LCD driver to set Korean customer, the volume was so big that I don't think in our first year of mass production for AMOLED with that Korean customer, I don't think we will be awarded with such a major share.

That is highly, highly, highly unlikely.

Okay?

But I think -- and then I would also comment that there is uncertainty to that because that really depends.

We are still early in the year.

So that really depends on our shipping track record in our early shipment with them and a ton of other factors.

So, it's a matter of how many more projects will be awarded by the Korean customer, which admittedly still use Korean vendors as their primary sources.

Now, we like to think that the successful qualification and shipment track record with that Korean leading customer is very important.

Because, as we all know, Chinese are building a lot of AMOLED fabs, big time actually.

So it's going to in particular -- it's been rumored that Apple is going to use AMOLED at some point in the future.

We don't know, but there is a strong rumor for that.

And if that is true, then certainly AMOLED will be gaining more and more penetration into smartphone, and Chinese are building new fabs and we are their IC partner, just about every one of them.

So having experienced a track record from the leading players right now I think will fully enhance our position in China.

And I think if that really takes off, it's going to be major for us.

The Chinese.

Okay.

And then in terms of pricing and margin, how should we think of the OLEDs versus the TFT driver IC or versus the corporate average?

It depends product by product, but in general, in general OLED is higher followed by LTPS, followed by a-si, and then certainly OLED is always higher.

But there are exceptions, among other reasons, but that is a general trend.

So OLED has better margin versus LTPS and a-si?

Yes.

And that should be better than your corporate average?

Yes, definitely.

Okay.

Thank you.

Then last question from me is, can you talk a little bit about the capital expenditure on the LCOS side for this year?

It depends largely on our customer's plans.

So, firstly, I mentioned earlier don't expect big volume.

Although we cannot go into specifics, but don't expect it to be big volume.

And our customers are asking us to get ourselves prepared without getting too much Capex, real Capex spending right away.

So we are actually asked to get ready and wait for their signal.

And depending on how -- what kind of expansion you're talking about, the lead time range from six to nine months to a year to two years, depending on whether you need to build a new building altogether.

So we mentioned a couple quarters ago that we have secured a pretty sizable piece of land, which is very close to our current headquarter in Thailand right now.

The size of the land is actually bigger than our headquarter.

So I think all our customers are very pleased with that, but we are not saying we will dive into CapEx spending right away.

So again, we are waiting for our customers' signals.

So, we have done all kind of simulations.

You know what to do when there is a green light, what equipment to do and the construction.

So we have pretty much completed our planning stage, but we're not saying this year there will be a major CapEx.

And again, it depends on our customer's demand, and it's still too early.

And I think, again I mentioned, we are working on the next generation, which is certainly a lot more hopeful in terms of volume.

I mentioned, again, first generation don't expect very big volume but maybe next generation.

And assuming next generation, the customers are targeting -- I'm talking about multiple ones -- are targeting Christmas next year launch.

Meaning we will probably have to start the CapEx plan at the cross of this year and next in order to get ourselves ready for the Christmas launch.

But again, that is still an unknown.

Okay.

Got it.

Okay.

Thank you.

Thank you.

I'm showing no further questions.

I will now turn the call back over to Jordan Wu for closing remarks.

I think as a final note, Jackie, our CFO, will maintain investor market activities [tend to share] investor conferences in the US.

So 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 the management.

Thank you and have a nice day.

Thank you, ladies and gentlemen.

That does conclude today's conference.

You may all disconnect, and everyone have a great day.