奇景光電 (HIMX) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Himax Technologies' Second Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference is being recorded.

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

Thank you very much, operator. Welcome everyone to Himax's second 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 the Q&A session. If you have not yet received a copy of today's release, please call Lamnia International at 203-885-1058 or access the press release on financial portals, or download a copy from Himax's website at www.himax.com.tw.

Before we begin the formal comments, I would like to remind everyone that some of the statements in this conference call, including statements regarding expected future financial results and industry growth are forward-looking statements. 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 the driver and non-driver products developed by Himax; demand for end-use application products; the uncertainty of continued success in technological innovations; 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.

Except for the Company's full year of 2015 financials, which were provided in the Company's 20-F filed 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 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 for our earnings call on which we will detail results from the second quarter 2016 and provide our third quarter 2016 guidance and outlook. Our CFO, Jackie Chang, will give further specifics on our financial performance after my overview.

We are pleased to begin by saying that our revenues, gross margin, and EPS for the quarter were as pre-announced on July 5. For the second quarter, we reported net revenues of $201.1 million, with a gross margin of 26.1%, both reaching the high-end of our guidance, while earnings per diluted ADS came in at $0.115, exceeding our guidance.

The second quarter revenues of $201.1 million represented an 11.5% sequential increase and an 18.8% increase year-over-year. The sequential growth was due mostly to strong sales in small and medium sized driver IC, mainly increased orders, order flow from our Chinese smartphone customer base, and their demand for higher resolution display drivers. Accelerating our AR related business from our leading US customer, also contributed to the second quarter growth.

Revenue from the large penal display drivers was $67.5 million, up 2.8% sequentially and up 24.4% from a year ago. Large panel driver ICs accounted for 33.6% of our total revenues for the second quarter, compared to 36.4% in the last quarter and 32.1% a year ago. As opposed to original guidance of high-single-digit sequential growth, our large panel driver business grew just single-digit -- just low-single-digit, due to a certain customer's short-noticed adjustment of production plan for its monitor products. Without the last minute change, we could have achieved high-single-digit sequential growth that we guided.

Despite the lower than expected sales mentioned above, our large panel products actually enjoyed close to 25% year-over-year growth, mainly thanks to strong demands from Chinese panel customers with 4K TV still the major growth engine. In China, our driver IC business for large panel almost doubled year-over-year during the quarter. In comparison, worldwide large-size TFT-LCD panel shipments declined around 3% in the same period, according to market research firm IHS. It is especially worth highlighting that our engineering collaboration and design-in activities with large panel customers across China, Taiwan and Korea all remain robust and we expect these trends to continue throughout the year.

Revenue for small and medium-sized drivers came in at $90.6 million, up 14.0% sequentially and up 9.4% from the same period last year. Driver ICs for small and medium-sized applications accounted for 45% of total sales for the second quarter, as compared to 44.1% in the previous quarter and 48.9% a year ago. Sales into smartphones were especially robust, up more than 30% sequentially and close to 25% year-over-year. We have the most comprehensive coverage of leading Chinese smartphone names and their growing market share has led to our good results this quarter. Additionally, driver ICs for tablets also resumed growth following several quarters of decline, thanks to new product launches from several leading brand customers in the US and Korea.

Revenues from our non-driver businesses were $43 million, up 22.1% sequentially and up 33.6% from the same period last year. Non-driver products accounted for 21.4% of total revenues, as compared to 19.5% in the previous quarter and 19% a year ago. The sequential growth was driven mainly by the LCOS and WLO shipments for AR application.

Our other product lines such as touch panel controller, power IC, ASIC and NRE incomes also enjoyed sequential growth. The performance of LCOS and WLO was phenomenal, increasing several folds year-over-year as our major customer started producing its AR product. The growth was, however, partially offset by the decline of programmable OP or gamma OP and CMOS image sensors. I will discuss more on some these product areas a bit later.

Our GAAP gross margin for the second quarter was 26.1%, around flat from the previous quarter and up 230 basis points from the same period last year. We have been able to maintain a relatively strong margin, mainly thanks to a more favorable product mix in small and medium-sized driver ICs and higher engineering fees from AR/VR related new project engagements. Our gross margin expansion was also a testament to our cost reduction measures. Gross margin improvement remains one of the our main business focuses.

Our GAAP net income for the second quarter was $19.8 million, or $0.115 per diluted ADS, compared to $13.1 million, or $0.076 per diluted ADS in the previous quarter and $8.8 million or $0.051 per diluted ADS a year ago. GAAP net income increased 51.2% quarter-over-quarter and 124% year-over-year, respectively. GAAP EPS exceeded the our $0.085 to $0.105 guided range. The sequential and year-over-year profit increase was a combination of higher revenue and much improved gross margin, together with lower operating expenses.

Jackie Chang, our CFO will now provide more details on our financial results. After Jackie's presentation, we will then discuss about our third quarter guidance and insight on our business, market and strategies going forward. Jackie?

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

GAAP operating expenses were $30.6 million in the second quarter of 2016, down 4.4% from the preceding quarter and little changed from a year ago. GAAP operating margin for the second quarter of 2016 improved to 10.9% from 5.2% for the same period last year and 8.4% a quarter ago. The GAAP operating income increased 44.3% sequentially and 146.8% year-over-year.

Second quarter non-GAAP operating income, which excludes share-based compensation and acquisition-related charges, was $22.4 million, up 42.8% sequentially, and up 133.5% from the same quarter of 2015. Second quarter non-GAAP net income was $20.2 million or $0.117 per diluted ADS, compared to $13.5 million last quarter and $9.3 million in the same period last year.

Turning to our balance sheet. Our cash, cash equivalents and marketable securities were $179.3 million as of end of June 2016, compared to $164.5 million at the same time last year and $168 million a quarter ago. On top of the above cash position, restricted cash was $138 million at the end of the quarter, a decrease of $42.5 million from the preceding quarter. The restricted cash is mainly used to guarantee the Company's short-term loan for the same amount. We continue to maintain a strong balance sheet and we remind investors that we'd remain a debt-free company.

Inventories as of June 30, 2016 were $186.7 million, little changed sequentially and year-over-year. Accounts receivable at the end of June 2016 were $187.9 million as compared to $182.3 million a year ago and $173 million last quarter. Day sales outstanding was 90 days at end of June 2016, as compared to 95 days a year ago and 87 days at end of the last quarter.

Net cash inflow from operating activities for the second quarter was $13.1 million as compared to an outflow of $13.8 million for the same period last year and an inflow of $21.5 million last quarter.

Capital expenditures were $1.7 million in the second quarter of 2016 versus $2 million a year ago and $2.2 million last quarter. The capital expenditure in the second quarter consisted mainly our purchase of R&D related equipment.

During the second quarter, we declared an annual cash dividend of $0.13 per ADS, totaling $22.3 million, which was paid out in early August. Our dividend is determined primarily by the prior year's profitability. Our decision to pay out 89% of last year's net profit demonstrates our continued support for our shareholder base and strong confidence in the outlook for our revenues and earnings growth in 2016, as well as in our long-term growth prospect.

As of June 30, 2016, Himax had 171.9 million ADS outstanding, unchanged from 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. The increasing momentum of our large panel driver IC sales will continue to come from China and the world's accelerating 4K TV adoption. Our smartphone driver IC business has rebounded well this year, reflecting our leading position in Chinese smartphone market where our end brand customers are performing strongly, and better demands are stimulated by rising 4G adoption.

Leveraging on our technology leader and early mover advantage in AMOLED driver and pure in-cell TDDI technology, we are well positioned to benefit from increasing adoption of AMOLED and pure in-cell displays. For non-driver products, the true highlight of the year will be LCOS microdisplay and WLO products, which are integral parts of the eco-system for the booming AR sector.

During the first three quarters of the year, LCOS and WLO combined will grow more than ten times through accelerating shipment to our existing AR customers. We are also making good progress in new territories such as IoT and machine vision with our CIS and WLO products, evidenced by more design-ins and engagements with leading consumer electronic brands and a leading international smartphone chipset maker. Overall, we are seeing strong momentum across all our major product lines and feel very good about the growth prospect of 2016 and beyond.

With that, I would now provide our third quarter guidance followed by a more detailed outlook. For the third quarter of 2016, we expect revenues to be up 5% to 10% sequentially. Gross margin is expected to be flat to slightly down sequentially depending on our final product mix. GAAP earnings attributable to shareholders are expected to be in the range of $0.06 to $0.08 per diluted ADS, based on 172.4 million outstanding ADSs. Non-GAAP earnings attributable to shareholders are expected to be in the range of $0.10 to $0.12 per diluted ADS, based on the same number of outstanding ADSs.

As we have told in the past, our third quarter GAAP earnings per diluted ADS guidance has taken into account our expected 2016 grant of restricted share units or RSUs, to our team at the end of September. The 2016 RSUs, subject to our Board approval, is now assumed to be around $11.5 million, of which around $8.1 million, or $0.04 per diluted ADS, will be vested and expensed immediately on September 30th, the grant date. In comparison, the 2015 RSUs totaled $5 million, out of which $4.5 million, or $0.02 per diluted ADS was vested immediately. The grant of RSUs would lead to higher third quarter GAAP operating expenses compared to the other quarters of the year.

In providing the above earnings guidance, we have assumed a 13.5% income tax rate for 2016, calculated based on exchange rate of NTD31.4 against the US, the exchange rate as of beginning of August.

Now let me provide some details behind our guidance and trends that we see developing in our businesses. For reasons mentioned earlier, our large panel driver IC sales and market share have further increased this year. We expect our large panel IC revenue to grow by double-digit sequentially and more than 50% year-over-year. In addition to benefiting from our leading market share in China and in 4K TV, we're also leading the charge in new technology areas such as 8K TV by working with our Chinese and Korean panel customers.

The other segment in our driver business is ICs used in small and medium-sized panels for applications including smartphones, tablets and automotive. Demand for driver ICs for smartphone has remained strong, but our sales in this area will likely just stay flat sequentially in Q3, as we can hardly make enough delivery for the surging rush orders of late from Chinese and Korean end customers. However, it will still grow around 20% year-over year. We also continues to see resolution upgrade in the second half of the year, which should help mitigate some gross margin pressure for the product segment.

On AMOLED, demand has taken off as smartphone brand customers increasingly adopt AMOLED panels in their premium models. This trend has prompted more panel makers to ramp up their investments in AMOLED manufacturing and accelerate their timetable for the mass production of AMOLED panels. We have been collaborating closely with multiple panel customers across China, Korea and Japan for AMOLED product development and are seeing more design-ins, especially with key Chinese and Japanese panel customers and smartphone makers. Such progress reaffirms our technology leadership. We believes that AMOLED driver IC will kick off a new growth cycle for small panel driver IC business starting 2017.

Automotive has been the best-performing category among driver ICs used in small and medium-sized panels in recent years. We expect the category's Q3 revenue to grow double digit sequentially and more than 30% year-over year. The strong growth will likely continue into the next few years. Our confidence comes from the fact that higher resolution and larger panels sizes are becoming mainstream for automotive. With numerous top automobile brands having been its indirect end customers, we are well positioned to take advantage of this fast growing market. Further, our driver ICs used in tablets resumed growth in the first half and will continue to produce noteworthy growth in the second half of the year, driven by the strength of high-resolution displays of 10 inch and above. Overall, we expect small and medium-sized driver IC segment in the third quarter to be up by high-single digit sequentially.

For the past few years, the non-driver business segment has been our most exciting growth area and a differentiator for Himax. New product developments continue to evolve and gain traction, and we remains positive on the long-term growth prospect of our non-driver businesses. We expects high-single-digit growth in non-driver products for the third quarter. Sales of timing controller, touch panel controller, ASIC chip, wafer level optics and LCOS microdisplay will deliver strong growth this year, partially offset by lower sales of the CMOS image sensors.

I will now highlight some of the non-driver product lines. Numerous on-cell design wins from leading Chinese smartphone names have led to growing sales of our touch panel controller in Q2 and we expect the growth to further accelerate throughout the rest of 2016. We're also one of the pioneers in offering TDDI solutions and are in partnerships with essentially all of the display makers in the state-of-art pure in-cell touch panel for joint technological development.

The volume shipment record from a leading Chinese smartphone customer validates our leading position as a pioneer. We are adding more design wins and will start shipping in mass production of our TDDI solutions to additional Chinese and Korean smartphone customers and panel makers in the second half of 2016. Along with AMOLED driver ICs, TDDI is another major growth engine for our small panel business starting from 2017.

I will now turn to the product lines and AR/VR, their key applications. The recent staggering success of Pokemon Go has provided a looking glass into the future trajectory of the AR technology and given one early answer for why and how you'd want it to. Since its launch just over a month ago, the AR game has taken the digital world by storm with already more than 100 million app downloads and 20 million active users. Thanks to the viral popularity of Pokemon Go, AR is now getting the attention and consumer validation that we, at Himax, have always known to be possible.

While we must give credit where it is due, the AR technology used by Pokemon Go today is actually still quite primitive. Compared to the AR/MR technologies being developed by our customers and partners, Pokemon Go pales in comparison in terms of how AR can bring alive the consumer experience to interact directly with the physical environment with more sophisticated holographic imagery, 3D sensing and real-time surroundings detection. If you have not seen demonstrations of AR devices already, its holographic imagery will actually appear on your desk, your chair or walking next to you on the street. Moreover, the world of AR is much more than just gaming. It represents a next generation computing platform. Future versions of the technology will cover both commercial and consumer uses and will be much more sophisticated and produce an endless stream of uses. These could include daily computing in a virtual office, social networking, teleconferencing, et cetera.

Due to the eye-opening effect of Pokemon Go, those who thought AR required several more years to gain traction are now changing their models as the game, almost overnight, elevated AR to mass-market and added tens of billions of dollars to its market potential in the next few years. A new and lucrative marketing tool on top of AR software and applications are being created that will catapult AR device development and intensify further investment in the sector. We believe the path Pokemon Go started will prompt an AR industry that most didn't think possible before.

Having invested in related technologies for over 15 years, we are now uniquely positioned as the provider of choice for microdisplay and related optics, both critical enablers to the AR device. With little competition, we continue to work with 30 plus new and existing customers for various AR devices, many of which you have seen news from lately. Our design engagement now cover leading companies in a wide variety of industries such as software, gaming, search, mobile, social media, military, automotive, wearable, and toy. Many of our customers have committed huge amounts of R&D and capital to capture the rapidly expanding future of this game changing product category.

We expect revenues and shipments of our LCOS and WLO to continue to accelerate during the second half of this year. Further new launches of AR products from more customers, as well as increasing shipments of existing customers, could greatly lift our sales further of these two product areas during 2017. With little new capital investment, we will be able to substantially enlarge our output to meet additional demands through de-bottlenecking and continuous yield improvement. Looking beyond 2017, however, we feel we will need further capacity for our LCOS and WLO products to address the strong demand anticipated out of the very busy design-in activities that we are having right now.

We are pleased to report that we have just kick-started our expansion plan for next generation LCOS and WLO production lines. Backed upon our customer's demands and feedbacks, the expansion plan includes a major increase of new capacity based upon state-of-the-art processes largely developed from within. The new production lines will not only offer far better cost and product quality for mass production, it is also a major technology advancement for very high-end products of the future.

The total investment is now budgeted to be $80 million to $100 million for monthly capacities of 3,000 12 inch wafer input for LCOS and 6,000 8 inch equivalent mother glass input for WLO. The actually output volume can vary widely, depending on the size of the chips. For LCOS, a 12 inch wafer can yield between 80 chips to 1,500 chips on our existing product designs, while for WLO, an 8 inch mother glass can be produced as many as thousands of chips or as few as less than ten.

The scheduled mass production is end of 2017 to early 2018. The new capacity will be located at a newly acquired land adjacent to our headquarters in Tainan which is five hectares in size, some 1.6 times the size of our current headquarters. The investment will be financed through our internal resources and existing bank facilities. The current plan only uses around 20% of the land, we will therefore still have plenty of room for future expansion. We have also reserved sufficient space in the building for customers' future consignment needs. Part of our existing WLO equipment was purchased by our customer and consigned to us.

To sum up, the next generation expansion will substantially enlarge our existing capacity and lift our technology to another level, thereby further strengthening our leadership position in the AR sector worldwide. We believe this is just the beginning of a very long-term growth story.

Of note, about LCOS and WLO, they enjoy better margin compared to our corporate average. The margin will be further lifted with new designs from a more diversified customer base and, in particular, the commencement of the new fabs' mass production. We expect the expansion project will enjoy a phenomenal return on investment in the years to come. Now, for VR applications, we have been developing customized driver chips for next generation OLED panels with two top-notch VR players. We expect mass production to start in late 2016 to early 2017. Additionally, we have started to engage with certain VR customers to develop their AR devices.

Last but not least, we continue to make good progress in two new smart sensor areas, which we announced earlier by collaborating with certain heavyweight partners, including leading consumer electronics brands and a leading international smartphone chipset maker. By pairing a DOE integrated WLO laser diode collimator with a near infrared CIS, we are offering the most effective total solution for 3D sensing and detection in the smallest form factor which can be easily integrated into next generation smartphones, AR/VR devices and consumer electronics.

Similarly, the ultra-low-power QVGA CMOS image sensor can also be bundled with our WLO module to support super low power computer vision to enable new applications across mobile devices, consumer electronics, surveillance, drones, IoT and artificial intelligence. We will report the business developments in these new territories in due course. Regarding other CIS products, we maintain a leading position in laptop application and will increase shipments for multimedia applications.

And that will conclude our non-driver business discussion. Thank you for your interest in Himax. We're now ready to take questions.

(Operator Instructions) Anthony Stoss, Craig-Hallum.

Hey, Jordan and Jackie. On the $80 million to $100 million capacity expansion, what gives you the confidence in adding that additional capacity in lieu of the AR? It looks like it came up a little short in June. And then secondly, phenomenal growth in the smartphone side, what can you do to expand capacity in Q3 and beyond? Thanks.

The first question. We have been actually pushed by our customers, many customers inquire about the issue of capacity regarding LCOS and WLO. This certainly includes glasses for AR device and also the 3D scanning device that I just mentioned, the DOE collimator with infrared sensing. So both these areas, actually major areas, will require the additional capacity. Now, we are having so many design-ins, design-wins, with many customers expected mass production timetable to be next year and the year after. So, if we don't start now, I think our risk is tremendous in terms of having spent so much time and money on R&D and having cultivated so many top-tier, high-quality customers, and yet don't have the capacity ready for them. Without capacity our design efforts and R&D really means nothing.

So, we actually have gone through very detailed plans and this plan has actually been with us for a very long time and now we believe it is really time for us to get started, because as I mentioned earlier, even if we start the planning now and start to do the construction soon, the commencement of mass production of the new facility will only start about a year and half later. So we actually -- our concern is more on the situation where the capacity does not come along early enough, rather than having been able to find sufficient demands will free up the capacity.

And also another point I want to highlight is that, for LCOS and WLO, certain parts of the capacity can be added incrementally. So if you look at our investment plan I discussed earlier, we acquired a very large piece of land, which actually accounts for a pretty significant portion of the $80 million to $100 million on the investment, because we have to, at this phase, and that also again demand from our customers to anticipate future growth. So right now, the capacity I mentioned, only occupies 20% of the land, meaning, we have plenty of room for future expansion. And then, on the 20% of land we will build a building. The building will certainly, I think, be partially active in the very beginning stage and then, as we start to get more orders coming along, we will start to de-bottleneck our investment and also I mentioned earlier, the building also has reserve room for future possible consignment needs from our customers. So all these are taken into consideration, a very detailed discussion and calculation, and feedback from a lot of our customers.

The second question about the smartphone, we were caught by surprise, back a few months ago, the surging demand mainly from Chinese leading smartphone names. Initially it was just a matter of not being able to deliver in time and over time as -- the demand continued to increase, it became a matter of capacity issue. We are still working very hard to resolve the issue, what I can tell you is that we are very confident that Q4 shipment or capacity available to us will be rather significantly larger than that of Q3.

Now, whether how long the surging demands will continue? That is certainly unknown, but our ICs, which is suffering from capacity shortage right now has such widespread design wins across literally -- every single Chinese brands in their major cell phone models. That we feel we should gear up in full speed and produce as many as possible. Because even if the markets started to turn, I think we are confident given the widespread design wins that the ICs will be consumed very quickly. So, effectively how much growth, in terms of capacity, we can produce next quarter is still a work-in-progress issue, but certainly we'll be able to produce more and we are not worried about inventory at the end.

Thank you. And then as my follow up for Jackie, can you give us the dollar amount, the revenue in AR in the quarter? Thanks.

We're actually not disclosing that, so I think it's now over, close to about 10% for the quarter. And certainly the business will accelerate throughout 2016 and beyond.

I just want to add, bear in mind, the real high-quality AR glasses are still pretty rare in the marketplace without very much shipments. But even with such a beginning stage, small volume, the AR revenue is already close to 10% of our sales, as Jackie just mentioned. This shows the potential -- or that is because our portion in the total bill-of-material is rather significant. And this further evidence the fact that this industry offers tremendous growth for Himax.

Thank you, Jordan and Jackie.

Tristan Gerra, Baird

Hi, just a quick follow-up question on your non-driver business. Would you be able to provide a -- what your outlook from your revenue standpoint is for the non-driver business for the whole year?

For this year?

Correct, yeah, just for us to get a sense as to where we should expect in terms of year-over-year qrowth and whether there was any changes relative to prior guidances in that business.

Actually, we are not really giving the full-year guidance. But I think the non-driver business, overall for this year, should grow probably over 305 to -- to 35% to 40% year-over-year.

Great, that's very useful. And then --

We expect the growth to be much higher next year.

Great. And then as a follow-up, if you could provide what the unit growth was for your small, medium and also large panel business in Q2?

The volume growth.

One second please.

For the second quarter, large driver IC shipment actually grew about -- close to 50%, while the small, medium shipments grew about low single-digit year-over-year.

Great. That's very useful. Thank you very much.

Tom Sepenzis, Northland Capital.

Hey, thank you for taking my questions. Jackie, I think for September, you guided 13.5% tax rate, what should we be expecting -- is that rate going forward or does that bump back up next year?

Well, actually we would expect, assuming exchange rate remain about the same, the tax rate should be actually lower for next year, because our LCOS and WLO division, instead of making little profit, they will probably be contributing to a lot higher profit and that should offset the tax liability for the whole Company, as the subsidiary, does have very high credit -- tax credit that the parent company was not able to utilize in the past years when the subsidiary was actually losing money and now that it turned profitable this year and 2017 certainly is going to improve quite a lot more. We expect income tax rate to -- actually to be a lot lower next year.

Great. Thank you. And then, could you just talk a little bit, Jordan, maybe about what the CMOS issues are?

CMOS image sensor?

Yes.

Okay. We haven't performed well this year in the first half, I mean, certainly and that was the main factor why our non-driver sector overall has not grown even more strongly. And I think one of the issues we face, right now and in the past, was the very intense competition in the smartphone sector. We did offer -- we do, we still do, 5 megapixel, 8 megapixel, and 13 megapixel sensors into the smartphone market. But then, again, we are a late comer and as big as the market size is, the competition is very intense. So, starting from a few quarters ago, we made a major strategic decision to turn our business focus for smartphone to overall non-smartphone, that includes primarily smart sensors, multimedia sensors, and very importantly, for longer term, automotive sensors.

We have actually very exciting progress in terms of interacting projects of automotive sensors, but as you guys will appreciate, automotive takes a very long time from development to mass production. So that is more of a long-term focus. Our shorter-term, multimedia is now a very strong segment for us. Devices such as drones, surveillance, home appliances and others are actually gaining very good traction each quarter.

And also a very, very important decision we made is to define new product specs for potentially niche markets in IoT and other things. So, two of the very significant examples we mentioned, we actually announced some time ago and we integrated just now in my prepared remarks. One is, what we call, ultra-low power always-on sensor. This sensor consumes a fraction of power consumption compared to an ordinary RGB sensor and therefore can be lit up always, all the time, that is why we call the always-on sensor. We have good design activities already into things like TV, refrigerator and drones and other things. Mass production is expected to be next year. And here we are talking about some of the big names of end customers.

And another thing very unique is, what I call, 3D scanning and environmental detection technology. So this involves an infrared CMOS image sensor, which is coupled with laser and an optical collimator and DOE, so the whole thing, and then we -- and also, what happens is, you build a laser light which is invisible and through certain optics and the DOE, you've basically been an invisible pattern if you like, to your surroundings, which when it hits the objects, but gets bounced back the signal received by the infrared CMOS image sensor. And then you compare the out coming pattern with the incoming pattern and we have an algorithm chip to process it, to calculate it and that is when you can actually detect your 3D surroundings.

We are making very exciting progress and expect mass production to start next year. In this total solution, Himax alone developed many or multiple chips to form a module, so the whole module can sell at a pretty high price. We are working with a leading international smartphone chipset maker. With our partner in this technology and now we are talking to various exciting customers, for which the detail I cannot disclose, I hope to report progress in due course. But these are very good examples of our major shift of our strategy, our CMOS image sensor, we kind of admit that we are too late in the smartphone world, but if we utilize certain technology and we turn it around to other niche market applications, this can be very profitable business for us, in particular, for IoT, and machine vision territories.

Great, thank you so much.

Jaeson Schmidt, Lake Street Capital.

Hi guys, thanks for taking my questions. First one, just wondering on gross margin, with the step down in Q3, I assume that's really driven by mix, is there anything else that's contributing to that and how should we look at gross margin than going forward beyond Q3?

It is -- you are absolutely right, it's driven by mix and really there's not much I can add further. Beyond Q3, if you talked about the short-term, like Q4, then it certainly is again and always an issue of the product mix. And admittedly, our price pressure on driver IC remains quite high. Our panel maker customers are working hard to try to turn profitable right now. So, although the panel price for the overall display environment has been much improved from the first half. When they were actually making losses, now they are all geared up, trying to make a profits, so the pricing pressure remains high on our side.

If the more favorable environment persists into Q4 and beyond, which many industry observer believe would be the case, then I believe in Q4 or going forward into next few quarters, our pricing pressure will probably be less, but that's certainly is not something I can be very, very certain about.

Now, if you look at longer term, like, if I take just off the top of my head, say, second half next year or even longer term, then I will feel a lot more upbeat about our gross margin potential, which I think will be lifted by the enlarging sales of our non-driver businesses, in particular AR/VR, and the niche market CIS, I just described. All these issues related to AR/VR, LCOS, WLO and niche markets CIS. All these areas, I think, will produce much better gross margin. And certainly, don't forget on-cell touch and in-cell touch, all these new territories will offer much better gross margins.

Okay, that's helpful. And then, turning to the LOCS and WLO expansion plans, obviously this is being driven by what you're seeing in your pipeline, but just curious if any LCOS or WLO customers' have exclusivity on a certain percentage of this expected expand?

No. Other than the equipment they consigned, for obvious reasons, they have exclusive right to those equipments, but other than that, no.

Okay, perfect.

I mentioned earlier in my prepared remarks, we have 30 plus customers, probably -- and this is increasing, so I probably lost my track already, but we have very comprehensive design-in base across the players that you read every day from news. Just that for obvious confidential reasons, we cannot name names, but we are very comprehensive in the sector's customer coverage. So for the obvious reason, we can not offer exclusivity to anybody.

All right, thanks a lot.

Charlie Chan, Morgan Stanley.

Hi, Jordan and Jackie, good evening. So, my first question is regarding your large panel driver IC business, it has been growing strongly over the past few quarters. So, from your observation, have your customer get enough inventory for large panel driver IC and do you think that business can continue to grow into next quarter?

Our customers in this area, large panel in particular, we operate with our customer on a hub basis. Meaning, we ship our ICs to their hubs and they withdraw the ICs where it's needed just in time basis. So, really there is -- if there is so called quote and quote inventory as such, it's reflected in our balance sheet rather than our customers', so that's one point.

Then if you look at our balance sheet, our inventory level has remained healthy, I would say, nothing out of the extraordinary. And if you look at -- now, I think, another question, so it's about driver ICs inventory on our customer side. Another issue is our customers' panel inventory. I think, the industry has been pretty healthy right now. The inventory across the supply chain is quite lean and with all the reported reduction of Korean panel makers in their panel to try to turn TFT-LCD panels into AMOLED, which for them is more profitable. So it has created a supply tension across the display industry. So, that's why I think on the large panel inventory level, I think the industry has remained pretty healthy right now.

Okay, thanks. And my next question is on your AR smart glasses business, because your customers are exciting, they have a strong commitment for your next technology investment. But at the same time, since some of the smart glasses follow launch at the beginning of the year, so far we haven't seen concrete demand or the sell-through data. So what is the disconnection between customers' plan and the real customer demand. So, if you can share with us, for example, if you get some sell-through data from your customer and why your customer can be so aggressive for future capacity? That will be very helpful.

Well, many of our customers, which are -- which engage us for design activities haven't even started shipment yet. I would say, a vast majority of customers haven't even started shipment. Now, as far as the so called disconnect concerns, I think one has to appreciate that the AR device as of today is actually very difficult to make, which the LCOS display certainty in the very novel area in which, as you all know, we play a major role. So, unlike smartphone, there are so many references, the industry is now so mature. Our AR device, because of the issue -- the reason you mentioned, there are simply aren't that many products around in the marketplace and nobody can claim these products to be perfect or close to mature. There is really no reference, no good reference to which to design your device. So every single customer, big customers in particular, have to design almost from scratch, right. So the design cycle actually takes a long time and what we've seen is also they are investing a lot which is still unvisible to the outside world as to creating a software platform for encouraging app developers, or industrial corporations, or media players, or movie entertainment players to come along. So, there are actually tremendous amount of activity going on under the water right now. And our customers are seeing requested demands from their customers. And they would then in turn come to us and say, hey, where is my capacity? I have been paying you the development fees and this is my expected timetable for rollout and where is my capacity? Do we have sufficient capacity. We are getting so many of such inquiries these days, and that we feel obliged to commit our capital into a major expansion.

Okay, So do you foresee any demand comes from consumer markets or are most of those demands are coming from enterprise users or applications? Thanks.

Certainly the more bit of players now focus on enterprise market first, which I think is healthy and positive for the industry long-term, because while enterprise market tends to grow slower and has smaller size compared to consumer market, it does demonstrate the fact that the AR device is much more than just for gaming, it can be used for many, many applications.

And also with the enterprise kind of wholesale sales, right, wholesale customers, or customers are in better position to debug the device, to improve the device, to get direct feedback and to do co-development on applications with their end customers and get very useful feedbacks for the product category to continue to improve. So we actually are in total agreement with our customers that we should not try to take the product too early, too prematurely to the consumer market. Having said that though, we do have quite a few customers. I mean, again, obviously, I cannot mention names and not let alone their detail plan. They are very seriously getting into -- trying to get into consumer market. Some of them are our existing VR customers, we are developing their AR devices internally.

Okay, thanks. This is super helpful. Thank you.

Jerry Su, Credit Suisse.

Hi, Jordan and Jackie. First question, I would like to ask about, on the capacity expansion plan you mentioned. You have layout an equivalent basis for LCOS and also for the wafer level optics. Could you let us know what is the existing capacity now, the overall LCOS, based on 12-inch wafers equivalent, and also, WLO on 8-inch mother glass equivalent?

I think on average our standard design, because as we indicated, the capacity expansion is basing on 12-inch wafer and 8-inch -- the 12-inch for LCOS and 8-inch for WLO, but we'll cover different levels of designs. But based on the standard design, our current capacity for LCOS is about anywhere from 200,000 to 300,000 ICs per month.

Let me do it this way, our current equipment, firstly on LCOS, the new capacity will involve 12-inch wafer, the current capacity is 8-inch wafer, right. So the per wafer area is about 2.25 times difference. And our current LCOS capacity, our main equipment can accommodate the same 3,000 wafers, but again, it's on 8-inch basis. However, for us to reach the full capacity of 3,000 8-inch wafers, we would need to debottleneck certain back-end facilities. That's how I describe the potential increase of capacity to cover the demand for next year, when our new capacity has not come online, right.

I made some remarks earlier about that, and I also mentioned that such increasing capacity will not take up too much of additional capital expenditure, because the main equipment has already been invested. Right now without de-bottlenecking our 8-inch wafer input capacity, it's only about half of the total capacity of 3,000. Forgive me for the complicated answer, because the issue is rather complicated. So right now it's about 1,500 8-inch. Now with little investment, de-bottlenecking, we will be able to do 3,000 8-inch and the new capacity will be 3,000 12-inch, which implies more than two times the capacity even after de-bottlenecking of the existing capacity. Okay, I hope that is more clear on LCOS.

Now on WLO, now the existing line is on 8-inch glass. I mentioned in my prepared remarks, we are talking about -- when we talk about, we talk about 6,000 8-inch equivalent mother glass input. The reason we add the equivalent in our wording is because in our -- I cannot disclose much detail, because that involves proprietary technology, but our current processing involves 8-inch mother glass. In the future, we should be able to cut from much bigger mother glass and we saw some stability for our production lines. So, that's why we say -- in the new capacity, we say, 6,000 8-inch equivalent. Now, in our existing capacity, there are two portions. One is our own investment and the other portion is customers' consignment. I cannot comment too much on customer consignment on confidential reasons, but the existing one, our overall investment has less than half of this capacity, way less than half of this capacity right now.

So, which means it's less than 3,000 8-inch equivalent?

Yes.

Wafers.

Mother glass.

Mother glass wafers.

Okay, got it. Okay, that's very helpful. Next question on the guidance you provided by segment, it seems like that large size is growing double-digits and then the other two segments is high single digit. I think based on the revenue mix, this should suggest your Q3 revenue should be at very high-end of your guidance or even should be higher. So I don't -- could you help us understand why you guided a 5% to 10% growth? I think you should be ending up like 9% or 10% Q-on-Q.

I think, we mentioned earlier in Q3, the smartphone, which is our number one sector is going to be only flat and that is the main reason. And also, we certainly always like to be a bit on the conservative side. So, I think as of today, when we look at our forecast book, certainly you're right, we are -- our forecast looks to be probably still more towards the high-end of our guided range. But again, smartphone, unfortunately because of our capacity constraint, would not be growing this quarter.

Okay, got it. And then, last question for Jackie. What is the guidance for OpEx for Q3 and also for full year?

For the full year, I think we expect around, probably around $138 million, that's including the RSU, a lot higher level than last year, of probably around $8.1 million that would be charged this year. So, actually, if you take RSU out, our non-GAAP operating expenses actually only increased around 1% year-over-year. So, we continue to monitor our operating expenses very, very closely.

Okay, got it. That's very helpful. Thank you.

(Operator Instructions) Donnie Teng, Nomura Securities.

Hi, good evening, CEO and CFO. My first question is about your strong growth on the large driver IC business. May I ask, except for the potential market share gain, do you think it is related to the Samsung shut down its LCD panel production line, so that is why your China panel makers are also gaining market share?

Not directly. I mean, our China customers have larger capacity this year compared to last year. And in fact, the next two years, they will continue to grow their capacity. And I think that is the main reason. Also 4K TV needs more drivers and 4K TV this year is expected to reach almost a quarter of the total full demand. So that is very helpful for us. So I think that should be the main reason.

Donnie Teng - Okay, Got it

Jordan Wu - And certainly, because of Samsung's decision, we are indeed seeing Samsung now sourcing more panels from China, and that certainly benefit us as well.

Okay, got it. Very helpful. And then my second question is a follow-up on gross margin. So as you mentioned above, it's mainly due to your product mix as large driver IC carries a lower gross margin, but you also mentioned about the ASP pricing pressure, so if we compare large driver IC with small driver IC, which one will have a relatively larger pricing pressure in third quarter or in the coming quarters?

Large panel.

Okay. And my third question is related to your $80 million to $100 million investment for the LCOS and WLO. So since we already had a $20 million CapEx last year, so I'm wondering what is our CapEx plan this year and next year? So is the $20 million CapEx last year already included in $80 million to $100 million investment you announced?

No. It was mainly for WLO and some add-on LCOS equipments. It's certainly our usual CapEx, including our design tools and so on and so forth. But, no, the answer is no, all this $80 million to $100 million CapEx is new.

Okay, got it. So, could you tell us what kind of CapEx number for this year or next year, so we can see this total $80 million to $100 million in the next one or two years?

It will not be very much in this year. This year will be primarily on planning and ordering and preparation, a big chunk of it will be in the next year, next year will be the peak. We will announce further details in due course. And as of today, while we are still talking to our various construction vendors and equipment vendors, we feel it's still a bit premature to give specifics in terms of a timetable for the CapEx. But I can say for certain that the bulk of it will be next year. I mentioned earlier, we feel confident that this can be finance from internal resources and bank facilities.

Yes, got it. So, could you tell us the CapEx number this year? Because it seems your CapEx (multiple speakers)

Yes, hi Donnie, the actual CapEx for 2015 was actually a little over $10 million and then we expect a little higher than that, may be around $11 million to $12 million this year. As Jordan said, most of the new capacity expansion CapEx will happen next year.

Okay, got it. I have no further questions, thank you.

And I'm showing no further questions, I would now turn the call back over to Jordan Wu for closing remarks.

As a final note, Jackie Chang, our CFO, she will maintain investor marketing activities and attend future investor conference in the US and Asia. And we'll announce the details as they come about. Please contact our IR department and/or John Mattio, if you're interested in speaking with the management. Thank you and have the nice day.

Thank you. Ladies and gentlemen, that does conclude today's conference. You may all disconnect and everyone have a great day.