奇景光電 (HIMX) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Himax Technologies first-quarter 2016 earnings conference call.

(Operator Instructions).

As a reminder, this conference call is being recorded.

I would now like to introduce John Mattio, US-based investor relations for Himax.

Please go ahead.

Thank you, operator.

Welcome, everyone, to Himax's first-quarter 2016 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 1-203-855-1058, access the press release on financial portals, including fcc.gov; 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 to differ include, but are not limited to, general business and economic conditions; the state of the semiconductor industry; market acceptance and competitiveness of non-driver and driver product 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 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, 2015, filed with the SEC, as amended.

Except for the Company's full year of 2015 financials, which were provided in the Company's 20-F with the SEC on April 13, 2016, 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 these results 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.

Now, I would 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 today for our earnings call on which we will detail results from the first-quarter 2016, and provide our second-quarter guidance and outlook.

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

We are pleased to begin by saying that both our 2016 first-quarter gross margin and EPS exceeded our guidance, while revenues came in within our guided range.

The first-quarter revenue of $180.3 million represented a 1.3% sequential increase, and 0.7% increase from the same period last year.

The sequential growth was due mainly to China's panel capacity expansion, coupled with Himax large panel driver IC share gains.

We also benefited from stronger-than-expected small-and medium-sized driver IC momentum, including the addition of a new major smartphone customer since the fourth quarter of 2015, and accelerating AR/VR-related business.

However, the earthquake that hit in Tainan on February 6, did cause some delayed shipments of large panel driver ICs to one of our major customers during the quarter.

Without the earthquake, we could have been at the high end of, if not beat, our revenue guidance.

We do not expect further negative impact from the earthquake, as that customer's facilities have recovered entering the second quarter.

Our revenues from our large panel display drivers was $65.7 million, up 5.8% sequentially, and up 14.1% from one year ago.

Large panel driver ICs accounted for 36.4% of our total revenues for the first quarter, compared to 34.9% in the last quarter, and 32.2% one year ago.

Without the earthquake mentioned above, we could have achieved double-digit sequential growth that we indicated earlier for this product line.

Monitor demand continued to show strength for the past few quarters as USB resolution models started to outgrow legacy models.

TV remained the bright spot, as in the last few quarters, with 4K TV penetration doubled from the previous quarter.

To sum up, if we look only at China, our driver IC business for TVs and large panel overall grew phenomenally, both sequentially and year over year.

In comparison, worldwide TV panel shipments actually declined over 10% during the same period compared to the previous quarter, according to market research from IHS.

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

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

Revenue for small- and medium-sized drivers came in slightly better than guided at $79.4 million; down 3% sequentially, and down 8.7% from the same period last year.

Driver ICs for small-and medium-sized applications accounted for 44.1% of total sales for the first quarter, as compared to 46% in the previous quarter, and 48.6% one year ago.

The main reason behind the year-over-year decline was the slowdown of business from our primary Korean end customer, as they replaced much of the use of LCD displays, for which we were a major IC vendor, with AMOLED displays for their smartphone products.

We only started the shipment of AMOLED driver IC in March 2016, thereby creating a gap in our small- and medium-sized business compared to the same period last year.

I will provide more update and illustrate our competitive strength in AMOLED driver ICs a bit later, when giving outlook for the coming quarter.

Without this, however, our small and medium drivers grew mid-teens versus the same period last year, while smartphone driver ICs grew over 20%.

Sequentially, first-quarter sales for smartphones grew low single-digit, despite fewer working days around Chinese New Year.

The positive momentum came from our Chinese smartphone customers, including a first top-tier player that we added at the end of the fourth quarter of 2015, launching new models, and replenishing inventories.

But again, the strength was offset by double-digit sequential decline in tablets.

As in the last few years, the best-performing category among driver ICs using small- and medium-sized panels continued to be those used in automotive with Q1 revenue up 4% from the previous quarter.

It grew double-digit from the same period last year.

Revenues from our non-driver businesses were $35.2 million; up 3.4% sequentially, and up 2.2% from the same period last year.

Non-driver products accounted for 19.5% of our total sales, as compared to 19.1% in the previous quarter, and 19.2% one year ago.

The sequential growth in our non-driver segment was mainly driven by our AR/VR related businesses as LCOS and WLO revenues more than doubled during the quarter.

We have been making shipments for multiple customers, including a major US customer who has recently started shipping their new AR device.

Additionally, timing controller, ASIC service, and CMOS image sensor product lines also enjoyed sequential growth, due to mass production of new design wins.

The year-over-year growth was also led by AR/VR related businesses and timing controllers, partially offset by the deceleration in out-cell touch controllers.

Our GAAP gross margin for the first quarter was 26.2%; a 330 basis point increase from 22.9% in the previous quarter, and up 50 basis points from 25.7% in the same period last year, exceeding our original guidance of around 25%.

The margin improvement came mainly from better product mix in small-and medium-sized driver ICs and non-driver product segments.

Major contributors included the accelerating higher-end driver ICs for smartphones, and strong development fees from AR/VR related businesses, as well as improving gross margins for the CMOS image sensor and touch controller product lines.

Our gross margin expansion was also a testament to our cost reduction efforts.

Gross margin improvement remains one of our major business focuses.

Our GAAP net income for the first quarter was $13.1 million, or $0.076 per diluted ADS, compared to $6.1 million, or $0.036 per diluted ADS, in the previous quarter; and $12.6 million, or $0.073 per diluted ADS, for the same period last year.

GAAP net income increased 113.5% from the previous quarter, and increased 4.2% year over year.

GAAP EPS exceeded our $0.055 to $0.075 guided range.

In our last earnings call, we have assumed a 20% income tax rate, calculated based on the exchange rate of TWD33.45 against $1, which is the exchange rate at the beginning of February.

As it turns out, the NT dollar has actually appreciated against the US dollar since February.

We have, therefore, adjusted our income tax to 15%.

The sequential and year-over-year profit increase was a combination of higher revenue, much improved gross margin, together with low income tax rate.

Jackie Chang, our CFO, will now give more details on our financials.

After Jackie's presentation, we will provide our second-quarter 2016 guidance and insight on our business markets and strategies going forward.

Jackie.

Thank you, Jordan.

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

GAAP operating expenses were $32 million in the first quarter of 2016; down 0.4% from the previous quarter, and up 5.3% from one year ago.

First-quarter operating expenses included a one-time donation of TWD10 million, or $300,000, to the earthquake relief fund, initiated by the Tainan Municipal Government.

Operating expenses increased from the first quarter of 2015, due to higher expenses for additional headcount to support our new AR/VR projects, annual salary increases, and increase in R&D expenses.

We continue to streamline core business R&D activities, and implement other expense control measures.

GAAP operating income for the first quarter of 2016 was $15.2 million, or 8.4% of sales; up 76.3% sequentially, and down 3% year over year.

First-quarter non-GAAP operating income, which excludes the share-based compensation and acquisition-related charges, was $15.7 million, or 8.7% of sales; up 72.1% from the previous quarter, and down 4.1% from the same quarter of 2015.

First-quarter non-GAAP net income, which excludes the share-based compensation and acquisition-related charges, was $13.5 million, or $0.078 per diluted ADS, compared to $6.5 million last quarter, and $13.1 million the same period last year.

This represents an increase of 107.2% sequentially, an increase of 2.9% year over year.

Our cash, cash equivalents, and marketable securities were $168 million at the end of March 2016, compared to $178.8 million at the same time last year, and $148.3 million one quarter ago.

On top of the above cash position, restricted cash was $180.5 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 remind investors that we remain a debt-free Company.

Inventories at March 31, 2016, were $182.8 million; down from $186.1 million one year ago, and up from $171.4 million one quarter ago.

We were able to lower the inventory year over year because of demand rebound.

The sequentially higher inventory shows our confidence in strong quarters to come.

Accounts receivable at end of March 2016 were $173 million, as compared to $192.7 million one year ago, and $177.2 million last quarter.

Days sales outstanding was 87 days at end of March 2016, as compared to 97 days one year ago, and 93 days at end of the last quarter.

The decrease of DSO was due to more efficient cash collection from credit sales.

Net cash inflow from operating activities for the first quarter was $21.5 million, as compared to outflow of $3.7 million for the first quarter of 2015, and an inflow of $25.9 million for the fourth quarter of 2015.

The year-over-year increase is mainly due to lower working capital, lower receivables, and lower accounts payables.

The sequential decrease in cash flow was a result of higher net profit, offset by higher working capital.

Capital expenditures were $2.2 million in the first quarter of 2016 versus $1.8 million one year ago, and $3.6 million last quarter.

The capital expenditure in the first quarter consisted mainly of facility updates and capacity expansion for LCOS and WLO product lines.

As of March 31, 2016, Himax had 171.9 million ADS outstanding, unchanged from the last quarter.

On a fully diluted basis, the total ADS outstanding are 172.4 million.

I will now turn the floor back to Jordan.

Thank you, Jackie.

In our last call, we provided an overview of the trends developing in the industry, and how we could stand out as a unique beneficiary from such trends, and keep our business resilient to the current macro headwinds.

I am glad to say that we had a good start this year, and that should be the beginning of a long-term growth ahead of us.

The impressive momentum of our large panel driver ICs for TV application will continue to come from accelerating 4K TV penetration.

We are a unique beneficiary of our Chinese panel customers' continued capacity expansion, at a time when Chinese TV makers are sourcing more panels locally and starting to make more exports.

Equally important, we finally saw smartphone driver IC order rebounds in China coming from end customers' restocking, and new model launches in the first quarter, backed by more 4G smartphone proliferation.

Small revenue contribution from TDDI will start in the second quarter, and we believe it will accelerate thereafter.

Sales for automotive applications, where we have a leading market share, will continue to show strong growth as more and larger size panels are going in to vehicles.

For non-driver products, 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 started to take off.

We are also on track regarding tapping in to new territories, such as IoT and machine vision, with our latest CIS and WLO product offerings, as stated in our recent technology press releases.

Other non-driver products, such as timing controllers and ASIC services, will also continue their growth momentum as they are adopted by panel manufacturers for many new product areas.

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

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

For the second quarter of 2016, we expect revenues to be up 7.5% to 12.5% sequentially.

Gross margin is expected to be around 26%, depending on our final product mix.

GAAP earnings attributable to shareholders are expected to be in the range of $0.085 to $0.105 per diluted ADS, based on 172.4 million outstanding ADSs.

In providing the above earnings guidance, we have assumed a 15% income tax rate, calculated based on exchange rate of TWD32.4 against $1, which is also the exchange rate as of the beginning of May.

Now, let me give you some more details behind our guidance and trends that we see developing in our businesses.

Following a strong first quarter, though somewhat dented by the earthquake, large panel driver ICs should grow again by high single-digit sequentially, and more than 25% year over year, with China and 4K TV still the major growth engines.

For reasons detailed earlier, we expect sales from our Chinese panel customers to almost double year over year.

The other segment in our driver business is ICs, used in small- and medium-sized panels for applications, including smartphones, calculators, and automotive.

Second-quarter smartphone sales look set to continue its growth, to be up more than 20% sequentially, as the outlook for end-market demand is turning positive, and China's local mobile operators have started to offer subsidies on smartphone purchases.

Many of our end customers in China are aggressively launching new models, replenishing inventories in an effort to gaining market share.

Now, switching gear to AMOLED market, since we are an early mover in the related driver IC technology we have been collaborating with multiple panel customers across Korea, China, and Japan for AMOLED product developments, and are seeing more design-ins at these panel makers, reaffirming our technology leadership.

We believe that 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 automotive in recent years.

We anticipate its Q2 revenue to grow more than 30% year over year.

In this product segment, after two strong years, we still expect to see robust and sustainable growth throughout 2016, and beyond.

Our confidence comes from the fact that higher resolution and larger panels are becoming mainstream for automotive applications.

With numerous top automotive brands having been our indirect end customers, we are well positioned to take advantage of this fast-growing market.

Tablet market, as previously indicated, remained weak in Q2.

Although the decline will likely slow down, overall, we expect small- and medium-sized driver IC segment in the second quarter to be up double-digit 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 developments continue to evolve and gain traction, and we remain positive on the long-term growth prospect of our non-driver businesses.

We expect around 20% growth in our non-driver products for the second quarter sequentially, and more than 30% year over year.

Looking ahead, many of our non-driver products, including CMOS image sensor, timing controller, touch panel controller, power management IC, ASIC service, WLO and LCOS microdisplay, are all set to grow sequentially in 2016, and the years ahead.

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

First, on to our touch panel controller product line, we expect on-cell to emerge as the new mainstream touch technology in 2016.

Our on-cell sales started to accelerate in late first quarter with shipments to Chinese and Japanese smartphone makers, and we expect the momentum to be carried in to the second quarter.

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

Furthermore, we are one of the pioneers in offering TDDI solutions for the state-of-the-art in-cell panels, and are in partnerships with essentially all of the panel manufacturers in pure in-cell touch for joint technological development.

As announced on April 19, we started mass production and volume shipment of TDDI for a leading Chinese smartphone customer.

We are seeing the use of in-cell display with TDDI rapidly becoming the preferred choice for end product customers' new high-end smartphone designs.

The volume shipment record validates our leading pioneer position, and confirms the industry's trend towards pure in-cell panels.

We anticipate several TDDI design wins to enter mass production at additional Chinese and Korean smartphone customers and panel makers this year, and expect meaningful contribution from TDDI in late 2016, and beyond.

Moving on to our most exciting AR/VR related businesses.

The AR/VR era of technology is upon us.

Over the last quarter, the level of excitement in the industry, as well as capital markets, reached a new high as numerous new AR/VR devices were launched, with some of them even started making shipments.

New applications and markets are being explored.

Our design engagements with current and new customers now covers leading companies in gaming; search; mobile; social media; military; automotive; and consumer electronics industries.

Many of them have committed huge amounts of R&D and capital to capture the rapidly expanding future of this game-changing product category.

Having invested in related technologies for over 15 years, we are uniquely positioned as the provider of choice for microdisplay and related optics to enable AR, which is projected by many market research firms to be grabbing a lion's share in the addressable market of AR/VR in the long term.

As some of our major customers have already started shipments, we saw phenomenal growth from LCOS and WLO product lines in the first quarter.

And in the second quarter, revenues from LCOS and WLO are expected to triple again sequentially.

Though we don't expect big volume from the early generation products of our customers this year, we already see positive top-line and bottom-line contribution from these two product areas this year.

We are confident that LCOS and WLO will account for a significant portion of our business longer term.

Over the past couple of months, we have been seeing constant additions of new or existing customers concurrently working on multiple future-generation AR designs or devices using our LCOS and/or WLO for a variety of new applications.

These applications range from various glass-type AR devices to toys, industrial helmets, and head-up displays for automotive.

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 in the US.

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

The models we are jointly developing with some of these largest, most recognized companies in the world for consumer market launches will advance the entire sector.

We believe this is just the beginning of a long-term growth story.

As for VR applications, our customers' continuous efforts in introducing new products aiming for consumer market are also are encouraging.

We have been developing customized [driver] chips with high refresh rate to perfect the performance of VR displays in the next-generation AMOLED panels with two top-notch VR players.

This reaffirms our leading position in AMOLED driver IC technologies.

We expect mass production to start in late 2016 to early 2017.

Additionally, certain of our VR customers are also showing strong interest in our AR-related product offerings as they work towards their AR product line.

It is also worth highlighting that our CMOS image sensor product line bottomed out in the first quarter, rebounding from its trough in 2015.

Looking in to the second quarter, there will be mass production of several design wins for notebooks and increased shipments of multi-media applications.

In recent press releases, and the last earnings call, we briefly introduced our new smart sensor product lines targeting new applications across smartphones, tablets, AR/VR devices, IoT, AI, and UMTV.

This includes the ultra-low-power QVGA CMOS image sensor, and the diffractive optical element, or DOE, integrated WLO laser diode collimator to be paired with a near IR sensor.

We believe the former is by far the lowest power CIS in the industry with similar resolution.

It can be applied in a constant state of operation, enabling always-on, contextually-aware, computer-vision capabilities.

Regarding DOE integrated WLO laser diode collimator with NIR sensor, we believe this is the most effective total solution for 3D sensing and detection in the smallest form factor.

This breakthrough allows 3D image-sensing feature to be easily integrated in to next-generation consumer electronics.

Currently, we are making good progress, and have seen encouraging and increasing customer responses.

We will report the developments in this new territory 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 we are now ready to take questions.

(Operator Instructions).

Anthony Stoss, Craig-Hallum.

Nice execution, guys, especially on the gross margin front.

Two-part question.

Jordan, maybe you can chat a little bit more about your expected AMOLED wrap with your Korean customer in Q2, how you expect that to continue throughout the year.

And then, related to your AR/VR customers, what kind of visibility do you have to the back-half ramps?

Maybe, more specifically, of the 30 different customers that you have designed wins with, do you have any sense on how many will launch products this year?

Thanks.

If I may, I will start from your second question about the AR/VR.

We have -- obviously, you will appreciate we are restricted by many of our customers with their NDA requirements.

But we have way more than 30 customers, and vast majority of them are based in the US, where, actually, it is where real innovation really comes from.

And the customers are actually exploring new applications.

They are trying to encourage developers to join again, and industrial users to try industrial applications, and so on, and so forth.

So we are actually really seeing a lot of new innovations which actually varies sometimes quite widely one from another.

And certainly, we have a major customer already started to -- starting mass production in this year.

But we keep emphasizing to our investors that, in this early stage, don't expect much volume, because it really involves a lot of customers testing the waters, trying the market.

But it's also worth mentioning that I actually mentioned, and commented on in my early prepared remarks that our share in the total bill of materials is very, very significant.

It is -- we are not even talking about the same order, compared to our driver IC or timing controller.

So we are really quite uniquely positioned in this segment.

Even in this very, very, very early stage with, as I said, rather limited volume, we are already seeing a very encouraging top-line and bottom-line contribution, even this year, or this quarter.

If you look at LCOS and WLO combined, it's already over 5% of our total sales if you mention with only this limited number of shipments.

So this is very encouraging.

Now, as for the real launch dates, and so on, and the expected volume, we really can't comment much beyond what I just said, because it really involves many of our customers' launch plans, marketing plans.

But we -- I think it's fair to say that we do expect much higher percentage in revenue in 2016.

But this is only the very, very beginning stage of a long-term story.

So, hopefully, barring any major, major surprises, next year you should see a much more significant contribution for us, and the same in the years after.

Your first question is about our Korean customers, AMOLED.

Again, we don't really comment on the specific customers' activities.

And AMOLED, as we all know, really is a technology started from Korea and, as of today, dominated by the Koreans and with their IC vendors coming exclusively from Korea, and I think it's probably fair to say that we are the first non-Korean IC vendor to qualify and to start shipments, although I really can't comment on specific customers' shipping volume revenue.

But I think, probably, more significant for us in the long term is the fact that, as I mentioned earlier, China is now building AMOLED fabs very aggressively.

Some expected to start ramping later this year, and some more in 2018, and so on.

And if the early ramps are successful, we certainly do see more consumptions to come from China.

And we are working with literally every single one of Chinese companies while they are building their fabs and developing their technologies.

And they do need driver IC partners in early stage, because driver IC for AMOLED do require a lot of tailor-made, customized designs.

So, we are working with literally every one of them in China.

I think the fact that we are an early mover in Korea for non-Korean vendors, I think it says a lot about our technology leadership, and something that helps enhance our position in China a great deal.

China, we expect some ramping in later this year, although it certainly depends on how the customers react.

But I think more meaningful volume will probably not happen until next year.

Thank you, Jordan.

Suji De Silva, Topeka.

I'd like to offer my congratulations on the margins and the cash generation in the quarter.

The earthquake impact you had in the first quarter, does that -- is there some kind of snap-back benefit from that in the second quarter?

Or did any of that business go to other vendors?

How did that play out?

None for us, or for other vendors.

Because what happened is our customers' production line got really badly impacted, so they had to clean facilities, and work in progress, goods, and so on.

Really, the earthquake caused quite a bit of damage.

So the customers just have to clean up their fabs and throw away whatever work in progress that is not usable and restate.

As a result, their production line has had to be suspended for some time.

And certainly, they work hard trying to get it recovered a.s.a.p.

So, at the time, we actually got the weekly, or even daily, or even more frequent updates than daily, for customers' new demands, because as they work on their fabs reconstruction or recovery, they have to move around their production line.

And then, their customers are jumping up and down so they had to be really quite flexible in dealing with their in-house problems and customers.

And, as a result, they have to move around their sourcing as well.

So we work very, very closely with that customer in the aftermath of the earthquake.

But once that is over, that is over.

So whatever is scraped is scraped; you cannot reuse that.

But the good news is that everything has been fully recovered, so we don't expect further impact this quarter.

Appreciate that color.

And then, on the AR/VR, do you anticipate having to hire additional engineers to support the many customers you seem to be taking on at this point?

We are adding engineering resources in to this area, as we speak.

But if you look at our total R&D, the size of our R&D chain, you'll appreciate the core of the R&D has long been developed.

So we are talking about marginal increase of our team, for example, to improve the yield rate to cope with the customers' increasing demands.

And also, this is a very new product category, so as we are doing production we are also, in the meantime, trying to fine-tune our production, increase our yields, and sometimes even improve our product quality, or some other things.

So you are really talking about an increase of not the mainstream, not the core of our R&D team, but, certainly, marginal increase of the team to enhance the production.

That is needed, so we are doing that.

And certainly, I'm talking about short-term production rate.

In the meantime, we are working with customers for their next-generation designs.

Furthermore, equally important, we are actually providing our customers with even longer-term technology road map.

We are really -- we and our customers combined are taking a very long-term view for this.

So, for example, major customers are very anxious on what the Himax microdisplay technology is going to be like three years, five years down the road, right.

So we are talking about current R&D activities, and one or two years for the next generation, and a three, five years technology road map, that, based on which, the customer have to design their long-term products.

So, yes, some increase, but only marginal increase.

Jaeson Schmidt, Lake Street Capital.

Just curious how much in NRE revenue you recognized in Q1, and what your expectations are for that going forward.

Jason, we usually don't disclose the amount of the NRE.

But we -- in our prepared remarks, that is higher than last year; and we expect the whole of this year in NRE to be larger than last year.

In NRE, certainly, we enjoyed a good margin.

And NRE is a margin enhancer for our overall business.

However, we don't really count on NRE to make profit for the business on its own, right.

I think a more important implication for NRE is the long-term prospect; the fact that the customer, one single customer is willing to pay you millions to develop projects.

It says a lot for their commitment.

So we appreciate that.

And we certainly -- and that is also kind of counting our financial support from our customer at a time when the industry is still in early stage.

And so the fact that we are getting more NREs from more customers, across more applications is a very, very encouraging sign for the long term.

And certainly, in the short term it helps in our gross margin, which is nice.

But I think the long-term implication is even more important.

Okay.

And then, looking at your LCOS/WLO, do you think you have enough capacity to support the current design win pipeline?

Good question.

We tell customers we are where we are, right.

We have the capacity, and we can't deal too much capacity because it involves really too much risk, and we don't want the capacity to be ready too early.

So we work very closely with major customers, with real products ready for ramping, or to be ready for ramping in any foreseeable future, and we discuss in detail with them, once their order comes in, how we're going to fulfill them.

And if they expect a more meaningful or significant amount of orders then maybe if the situation where our current capacity is not sufficient, so what do we do?

We tell them the lead time required, with how much of a volume we're talking about, and how much real lead time is required, i.e., and so, at the moment -- and not just right now, we have been doing that for quite a while.

We are very thorough in terms of getting ourselves fully prepared for Q2 if certain big volume of certain size is going to come in six months, nine months, or a year down the road.

And the good news is we do have the land, which is the most important -- which is very close to our current headquarters, within walking distance, which is convenient.

So, customers love it.

And the customers love the fact that we are very prepared.

We have four different kinds of capacity requirements we can give you within days.

We can give you detailed plan, including even fab layout, and equipment, and investment, and so on; and certainly, most importantly, the lead time.

So I think developing at this current stage, developing a brand new AR device is not an easy task.

And development typically involves a pretty long time.

So we believe with any sensible customer, during the time of joint development they will have -- be able to come up with a ramping plan, and the ramp-in plan should give us sufficient time for expansion, if so required.

Typically, even for major expansion, we are talking about -- I'm talking about really major expansion, we are talking about one year, slightly over one year of early ramping in the lead time.

And that will be sufficient for us, because we are very ready.

So we are -- there is no shortage of capital, so we are just waiting for that to happen.

And having said that, though, we don't want to be in a position where we are sitting on a big chunk of idle capacity, and then where we are at our customer's mercy.

So, we'd rather be the other way around.

The customer has to really work with us to expand the capacity when they are ramping really takes place.

And the good news is that for WLO and LCOS, for microdisplay, and for AR devices we are really, really the vendor of choice.

So it's not like they have a lot of places to go around for, so we are in a good position.

We can afford to say come to us, we'll work with you, and give us, depending on your volume requirement, six months, nine months, or a year and we'll get the stuff for you.

Tristan Gerra, Baird.

You've talked about notebook design wins ramping for your CMOS image sensor business this year.

Could you talk a little bit about your mix, and, notably, the [13 megapixel] (corrected by company after the call) and higher product offering; and the type of traction you expect for those products later in the year; and also, if you see any potential in the automotive market, notably, for ADAS-type of applications?

Right, we have -- in our CMOS image sensor business there are a few major application areas.

The first one, certainly, is smartphone, where our major product offering includes the 8 megapixels and 13 megapixels.

And we are recently ready for PDAF, which is a very important feature.

I have to say, however, though, we are becoming more and more cautious in this market.

The fact is that the market is becoming mature and the CMOS image sensor business in smartphone, while it's very important and is super big, as we all know, it's also super-competitive.

So we are -- in terms of our 13 and 8 megapixels sensor for smartphone, our current focus is primarily in China.

And we are working with a few existing customers.

And we don't really over commit.

And in the meantime, we are really switching our focus to a few other areas.

The first one is multi-media, including surveillance, drone, artificial intelligence, and stuff.

And in those markets, China is still being a major -- IoT certainly is one of them.

China is still a very important market.

And in that particular market, we are actually gaining very good traction.

And we realized, actually, the market's a lot less demanding, and less competitive, and we actually get to enjoy the good position with a better gross margin, and so on.

And the second thing is automotive, which has to take a lot of patience, as we all know.

But we have been in -- committing to this area for quite a few years already, so we are already seeing some shipments.

And we are -- we have penetrated in to Korean and European markets, US markets in encouraging design win projects.

As for exactly when we will start to see meaningful volume from automotive sector for CIS, I can't really say.

It could be as early as next year, but it's automotive.

So we get very good appraisals from our customers, that's all I can say.

As for exactly when it will start to ramp is another story.

Now last, but not least, very importantly, we are turning our attention to what we call niche market products, where we find it to be very exciting, with very little competition.

Two product examples, our early examples for this new effort, the first one is what we call ultra-low power, always on sensor.

It involves the QVGA sensor with about 95% more -- about 5% of power consumption compared to typical RGB sensors of a similar resolution.

And the idea is you can keep it always on to provide wakeup and other features.

So once we launch that people are excited.

Some top tier customers initially, when they see the -- when they saw the specs, they didn't believe us because they couldn't believe a sensor could be so power efficient.

And now we are -- we have got certain very big, good names, designs wins with applications across TVs, drones, and other things.

I think this could be a very long life product.

And it's a very -- and also, we are working with certain IoT and other things, IC platform, SOC platform providers who can also help us reach in to their customer markets.

And the last thing I want to say, it's also a good example, is our so-called structured light projector.

Basically is -- we offer a total solution of optics, structured light with near IR sensor, even with the silicon for algorithm.

So, we are going to offer a combined module total solution to our customers.

Now, we are working with some of the biggest name in smartphone SOC market.

So there will be a joint effort, promotion program, hopefully, to be announced in the near future.

What we are trying to do is to create a new feature, firstly, probably starting from smartphone or your tablet.

And the good thing about the solution is that we are the only one in the world who can provide a whole module of this feature with a total module height of around 5 millimeter or 6 millimeter, which is good enough for cell phone.

It's very difficult criteria to meet.

What we realized is that once we enter in to such markets there is actually very little competition, and that's where we really provide value for our customers.

I think in the longer term, hopefully, you will see our CIS turning in to such directions and moving gradually more away from smartphones, because we believe it's really overly competitive.

Now we cannot just cut it off, because we do have existing customers.

We need to continue to provide service.

And we do have a pretty competitive product line of 13 megapixel and 8 megapixel, so we can always take advantage of these existing products.

But I think in the long term our focus are going to be IoT niche markets, multi-media, and surveillance, and, certainly, automotive.

Great.

That's very useful.

And then, as a follow up, the Chinese Government initiating subsidies for smartphones that you've mentioned during the call, when did it start?

And do you expect this to last for the rest of the year?

We really don't know.

We really don't know.

Certainly, they started probably early this year.

And it's still ongoing.

Certainly, the scale of the subsidy is not as significant as what we saw two years back.

And certainly now, with the economy not going very strongly, and, certainly, the Government is still trying to encourage 4G penetration, so there's a new round of subsidies.

Certainly, that is very good news for us.

I think we are -- the subsidy aside, I think what's important, more important, for our current momentum in smartphone is the fact that we are very thorough design in, or design wins, starting from six months, nine months ago, with the top Chinese brand names, covering the two mainstream product specs, being HD and 4HD.

The kind of name we talk about include people like Huawei, Xiaomi, Oppo, Vivo, Gionee, Meizu, ZTE, and so on, and so forth.

So it's a pretty comprehensive coverage.

And so once they get the momentum, we get our momentum.

We take the ride along the way.

Actually, I try to find out from my customer recently, but nobody can really tell exactly how long the subsidy is going to sustain.

Tom Sepenzis, Northland Capital.

I know you addressed this earlier, but I just wanted to see if I can understand it a bit better.

The product that was impacted by the earthquake, that is not being made up for in the June quarter, or it is?

Are you seeing a one-time benefit there in June?

No.

What we said was it's been over with our customer, which was impacted by the earthquake in the first quarter.

So in the second quarter there's no impact, it's business as usual.

Now, it did hit our customer, and, indirectly, kind of impacted us.

So we did say in our preparatory remarks that without the earthquake I believe in our first quarter we could have beat our revenue guidance, and we didn't because of the earthquake.

But the good news is it's been over with.

So it's all business as usual, so there'll be no further impact from the earthquake.

Okay.

But are they ordering more in June to make up for what they weren't able to produce in March?

No, because it's about their capacity.

There's only so much capacity, right?

Part of that capacity during first quarter was impacted and was not productive, so what they did was try to recover those capacities.

So what happened during the first quarter was they were able to ship less and, therefore, they bought less.

But capacity is capacity, it's there, so you cannot really use your lost capacity in the first quarter and use that for second quarter, because they are running pretty full capacity right now.

So it's not an issue where they can (multiple speakers).

Great.

Thank you.

Actually, with the earthquake, a lot of their so-called work in progress, semi-finished goods, including some glasses, actually were shattered.

So they are shattered, they are gone, and so it's lost revenue for them, it's lost revenue for us.

And they cannot be, kind of -- that cannot be additional demand for second quarter, because it's just gone.

Got it.

Thank you very much on that.

And then, just in terms of inventories, which went up, I believe you stated that that's a signal of your confidence going forward.

How much of that -- I guess, where are you building inventories?

Is it across the board, through all your products?

Or is there any color you can provide in terms of what type of inventory you're building?

We typically build inventory in accordance with customer's forecast.

So we have a long-standing forecast system with our customers, especially major customers.

They give us a certain amount of projection, and we build our inventory accordingly.

So now, the slightly high inventory level is, I would say, across the board, because, as we indicated earlier, the strength of our current business is pretty much across the board.

I do want to add that in smartphone business, actually, we are running some shortage.

Because I think it's an indication that the supply chain across the board, in the industry, the inventory level is quite lean.

And the economy is weak, and the inventory is low, but end customers are still very cautious.

So once they see demand, they want their goods by provided immediately.

And in some cases, it just cannot happen.

So we actually, over the last few weeks, are seeing an increasing situation where we actually failed to meet some of our smartphone customer's demands, because they are just very short notice.

So, again, it's good and bad.

If we have had the inventory, we could have met more shipments; but certainly we don't, because without the projection we just didn't want to build too much inventory because of the risk.

So across the board, I think we are increasing our inventory level in accordance with customers' forecast.

And particularly in smartphone, we actually run in some shortage right now in the short term.

Jerry Su, Credit Suisse.

Just two questions on the driver IC side.

First is that I think in the past one month, or so, there are some more discussion on the technology, such as gate on array , GOA; or dual-gate; triple-gate , which I think some people mentioned that this might impact the long-term growth, or content per panel for the driver IC industry.

I don't know if you are agree with this comment and what you are really seeing at your customer side of these technology deployment.

The second question is can you comment a little bit about your market share in China?

Do you have any more room to grow?

And then, are you seeing any competition from the local driver IC suppliers in the near term, and also in the longer term?

Thank you.

I will start by addressing your question about GOA, or dual-gate, triple-gate technology.

Actually, GOA is nothing new, and has been around for more than 10 years, starting from Korean panel makers; and then, Taiwanese; and then, right now, also Chinese.

If you keep all other factors intact, certainly, GOA -- GOA, for those people who are not familiar with the technology jargon, GOA is in large panels, typically, where we can provide is a source driver and a gate driver.

And GOA is so-called gate on array, which, in essence, is taking our gate driver IC away and has a driver IC circuit imbedded in panel-maker's panels.

And so, once that is successful then, in theory, the demand for driver IC gate driver decreases.

So, certainly, that impacts our business negatively, the whole driver IC industry.

But again, I would emphasize that it has been around for more than 10 years, and is an ongoing thing, and with a very high percentage of monitor, and smaller size TVs having adopted GOA already.

I would say if you look at very large size panel, TV panel in particular, GOA is still difficult to get adopted, because of cost issue.

And so the trend has been around, and certainly it has a negative impact on industry.

But there are also positive trends, such as high resolution, and 4K TV, and smartphone becoming FHD, and so on, which are the only positive signs.

So, net-net, this is effectively what you see for our industry over the last 10 years.

I think it is certainly correct to say that without this GOA technology the driver IC industry would have been even bigger; but it's not, because GOA does exist.

But it is -- what I want to emphasize.

It's nothing new, and it's been ongoing, and with a very high percentage of panel already adopted GOA.

So I don't think it has a major impact in the short term or long term in our industry, or us.

And we have actually built our business model and business projection with the consideration of GOA having been adopted by our customers, certain percentage of them.

I would say the same for dual-gate, triple-gate, although these are two more recent technologies.

By saying recent, I really don't remember exactly the time when it got started, but I would say at least four or five years already.

So, it's something that we have to deal with.

And actually, we have to be in the leading position to be providing such driver IC technology to our customers for their future GOA or dual-gate panels.

So we know about the trend inside and out; actually, we are part of the trend.

Certainly, we don't like it, but it is where it is.

It is the technology trend.

It's something we cannot resist, so we just have to work with our customers.

I want to emphasize that one should not overplay all of a sudden the impact of this technology, because it's been ongoing for a long time.

And your second question is about China.

Yes, Jerry, I'd like to make sure that you want us to comment on the market share position globally, or in China?

In China, I think.

Just in China.

Just in China.

Well, I think for our large driver IC, because of the Chinese capacity expansion and their in-sourcing initiatives started earlier on and will continue through future years, we have gained new allocation from the Chinese capacity expansion.

We were able to improve our overall market share in China from about 40% to probably close to 50% right now.

And we have certainly over 50% market share with the largest panel maker in China, and about 45% with the second-largest panel maker in China.

And for our small, medium driver IC, we had over 50% before 2015.

And because of the competition landscape change in 2015, our customers have lost some market share to two brand customers, brand OEMs: one in the US, the other one is Xiaomi.

And we added a new customer December 2015; and also, we started shipping AMOLED driver ICs to our Korean customer end of the first quarter.

So we were able to improve our market share from about 35% in 2015 to now over 50%, because we're adding some major customers in China.

So we would expect our market share continuing to grow throughout 2016, because of the new product shipment.

Got it.

Ricky Lee, Goldman Sachs.

My first question is regarding the technology road map for your AR device microdisplay system.

I'm just curious about could you comment a bit about what is the key product differentiation and the spec upgrade for your new product shipping this year compared to the earliest version of the microdisplay module you shipped two to three years ago for your main customer?

I think the current generation which is in production is -- certainly, if you look at our current major customers' products, the microdisplays are of much higher resolution compared to some of our previous major customers.

And certainly, it's got two eyes, rather than one eye; it's binocular, rather than monocular, with high resolution.

It's certainly more power effective.

I think the trend that is happening right now, there are a few folds.

One is to improve the FOV, the field of view.

And for that reason, the customer would need a much bigger microdisplay.

So that is something that we are working with certain of our major customers for next-generation products.

We have certainly tried to better the -- I'm talking about optics, WLO for microdisplay.

We are trying to -- right now, it's really first generation.

For next generation, we are trying to substantially better the scale-up capability and cost of our technology, which is now very welcomed by our customers.

So we are making some rather exciting progress here.

So, that is one thing.

And another thing is that, with the current technology, it is the more classical LCOS design.

And our next-generation LCOS design, our front lit technology, which involves, basically, having a layer of light rod on top of the microdisplay so that you can actually eliminate, or simplify the optical design substantially and make the whole design more compact and easier for mass production.

And that technology is now being adopted by quite a few of our major customers for their next generation.

Now, in next generation, it will be of color sequential type.

But we are also working longer term with our customers, and certainly with -- our team is now working on color-sequential LCOS.

And bear in mind, from this front lit technology, and it does provide a lot of benefits to enable easier to assemble, and lower cost, and more compact design of the whole optical engine.

So, all these are major trends.

Certainly, we are also providing smaller pixels for our customers.

However, I mentioned earlier, now the customers actually require larger FOV.

So, in some of them, they actually have to enlarge the pixels.

But that is another story.

We actually can provide smaller pixels compared to before.

Last, but not least, I think for next generation people are talking about high resolution as well.

Right now, it's more of HD, or above; but in the future, there'll be FHD, or even higher resolution.

It's all on the horizon.

So there are a few major directions we are working on with various of our customers, so I think we have very exciting technology road map to go.

The industry is going to be very exciting.

Yes, thanks for the color.

And just a follow up.

Considering all the upgrades and the areas for improvement, how do you think your ASP to increase in next one, two years compared to what you have in last few years?

We don't really worry about so-called ASP that much, because the driver IP, for example, you've seen 10 -- is most of them is well within $1 per piece.

However, if you look at LCOS, or WLO, or sometimes on a combined basis, they can range in the area of hundreds of dollars a set.

So, how do you compare the two together?

And then, I mentioned, for example, some of our niche market sensors, they are a few dollars per piece, automotive as well.

And then, I mentioned earlier, socialized module.

The whole module will start from, I don't know, at least $15, $20 per piece, and so that involves quite a few different components provided by us.

So our future business will be rather different compared to the past, when we had primarily driver IC in our business, and one can really compare ASP.

And certainly, semiconductor, most -- always -- the cost always goes down; however, you have high resolution, driver ICs, so the price goes up.

So it is the two trends conflicting each other and determining the ASP.

But in the future, driver IC certainly will carry on this trend.

So if you look at driver IC, I would say, ASP would probably remain pretty much unchanged with the per-channel cost being lower over time, but the number of channels being higher each IC.

So, net-net, ASP probably remains the same.

However, our other new areas of business will involve very different kind of ASP concept.

Thank you.

I'm showing no further questions.

I'd like to turn the call back to Mr. Jordan Wu, for closing remarks.

As a final note, Jackie, our CFO, she will certainly maintain our investor marketing activities, and she's going to attend the investor conferences in the US, and Hong Kong.

We will announce the details as they come about.

Thank you very much today for your time and your patience.

And have a nice day.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference.

This does conclude the program, and you may all disconnect.

Everyone, have a great day.