奇景光電 (HIMX) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Himax Technologies, Inc.

Second Quarter 2018 Earnings Conference Call.

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

I would now like to turn the call over to Greg Falesnik.

You may begin.

Thank you, operator.

Welcome, everyone, to Himax's Second Quarter 2018 Earnings Call.

Joining us from the company are Mr. Jordan Wu, President and Chief Executive Officer; and Ms. Jackie Chang, Chief Financial Officer.

After the company's prepared comments, we've allocated time for questions in a Q&A session.

If you have not yet received a copy of today's results release, please e-mail greg.falesnik@mzgroup.us, or access the press release on financial portals or download a copy from Himax's website at www.himax.com.tw.

Before we begin the formal remarks, I'd like to remind everyone that some of the statements on 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 events or results to differ materially from those described in this conference call 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 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 described in the section entitled Risk Factors in its Form 20-F for the year ended December 31, 2017 filed with the SEC in March 2018.

Except for the company's full year of 2017 financials, which were provided in the company's 20-F and filed with the SEC on March 28, 2018, the financial information included in this conference call is unaudited and consolidated and prepared in accordance with IFRS accounting.

Such financial information is generated internally and has not been subjected to the same review and scrutiny, including internal auditing procedures and external audits by an independent auditor, to which we subject our annual consolidated financial statements, and may vary materially from the audited consolidated financial information for the same period.

The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

I will now turn the call over to Ms. Jackie Chang.

The floor is yours.

Thank you, Greg, and thank you, everybody, for joining us.

Our outline for today's call is: first, review of the Himax consolidated financial performance for the quarter, followed by the third quarter 2018 outlook.

Jordan will then provide an update on the status of our business, after which we will take questions.

We will review our financials on both IFRS and non-IFRS basis.

The non-IFRS financials exclude share-based compensation and acquisition-related charges.

Our second quarter 2018 revenues and gross margin met our guidance while IFRS earnings per diluted ADS exceeded our guidance.

For the second quarter, we reported net revenues of $181.4 million, an increase of 11.4% sequentially, and an increase of 19.5% year-over-year.

Gross margin was 23%, up 0.5% sequentially.

IFRS earnings per diluted ADS were $0.012, better than the guidance range of 0 to $0.01 per diluted ADS.

Revenue from large display drivers was $60.6 million, up 2.2% sequentially, and up 16.3% year-over-year, driven by increasing 4K TV penetration and Chinese panel customers' ramping of new LCD fabs.

Large panel driver ICs accounted for 33.4% of our total revenues for the second quarter, compared to 36.4% in the first quarter of 2018 and 34.4% a year ago.

Revenue for small and medium display drivers came in at $89.3 million, up 24.5% sequentially and up 27.5% year-over-year.

The driver ICs for small and medium-sized applications accounted for 49.2% of total sales for the second quarter, as compared to 44% in the first quarter of 2018 and 46.1% a year ago.

Sales into smartphones were up 54.3% sequentially and up 42.5% year-over-year.

The growth was driven by accelerating TDDI shipments and anticipated smartphone makers' inventory replenishment for new product launches.

Jordan will elaborate on this a bit later.

Our driver IC revenue for automotive applications recorded another historical quarter, up 15% sequentially and more than 35% year-over-year.

The quarterly revenue reached $28.7 million, accounting for more than 19% of our driver IC revenue.

We are happy with the strong momentum in this space.

Revenues from our non-driver businesses were $31.5 million, down 1.1% sequentially, but up 6.4% versus last year.

Non-driver products accounted for 17.4% of total revenues, as compared to 19.6% in the first quarter of 2018 and 19.5% a year ago.

The sequential decline was mainly due to reduced NRE income.

The year-over-year increase was driven mainly by WLO shipment.

We expect WLO shipment to continue to rebound strongly in the second half.

Our IFRS gross margin for the second quarter was 23%, up 50 basis points from 22.5% in the first quarter of 2018, but down 80 basis points from the same period last year.

The sequential increase was due mainly to improved product mix.

Our IFRS operating expenses were $41.3 million in the second quarter of 2018, up 3.6% from the preceding quarter and up 11.3% from a year ago.

The year-over-year increase was primarily the result of rising R&D expenses in the areas of 3D sensing, WLO, TDDI and high-end TV as well as annual merit increase.

IFRS operating margin for the second quarter of 2018 was 0.3%, up from minus 0.6% in the same period last year and up from minus 2% in the prior quarter.

The sequential and year-over-year increase was both a result of revenue increase, but offset by increased operating expenses.

Second quarter non-IFRS operating income was $0.8 million, or 0.5% of sales, up from minus 0.3% for the same period last year and up from minus 1.8% a quarter ago.

IFRS profit for the second quarter was $2 million, or $0.012 per diluted ADS, compared to IFRS loss of $2.8 million, or $0.016 per diluted ADS, in the previous quarter, and IFRS loss of $0.7 million, or $0.04 per diluted ADS, a year ago.

The sequential increase was a result of higher sales and better gross margin.

Second quarter non-IFRS profit was $2.3 million, or $0.013 per diluted ADS, compared to a loss of $2.6 million, or $0.015 per diluted ADS, last quarter, and a loss of $0.3 million, or $0.02 per diluted ADS, the same period last year.

Turning to our balance sheet, we had $126.7 million of cash, cash equivalents and other financial assets as of the end of June 2018, compared to $185.9 million at the same time last year and $151.9 million a quarter ago.

The cash position dropped $25.2 million due primarily to CapEx of $17.7 million, cash outflow of $2.8 million from operations and Emza investment of $3.5 million.

On top of the above cash position, restricted cash was $147 million at the end of the quarter, as compared to $147 million in the preceding quarter and $107.2 million a year ago.

The restricted cash is mainly used to guarantee the company's short-term borrowings for the same amount.

As of June 30, 2018, our inventories were $142.1 million, down from $148 million a quarter ago and down from $147.7 million at the same time last year.

Account receivables at the end of June 2018 were $176.3 million as compared to $164.5 million a year ago and $166.6 million last quarter.

Day sales outstanding was 93 days at the end of June 2018, as compared to 97 days a year ago and 92 days at end of the last quarter.

Net cash outflow from operating activities for the second quarter was $2.8 million as compared to the outflow of $1.2 million for the same period last year and an inflow of $2.3 million last quarter.

Capital expenditures were $17.7 million in the second quarter of 2018 versus $11.7 million a year ago and $18.6 million last quarter.

The second quarter CapEx consisted mainly of ongoing payments for the new building's construction, WLO capacity expansion and installation of active alignment equipment to support our 3D sensing business.

Other CapEx, primarily for design tools and R&D-related equipment for our traditional IC design business, is around $2.5 million during the quarter.

We declared annual cash dividend of $0.10 per ADS during the second quarter, totaling $17.2 million, which has been paid out on July 31.

Our dividend is determined primarily by the prior year's profitability.

Our decision to pay out 61.7% of last year's net profit demonstrated our continued support for our shareholder base and strong confidence in the near-term outlook for our newly increased CapEx and the overall long-term growth prospects.

The CapEx budget for 2018 and the dividend for the year of 2017 will be funded through our internal resources and banking facilities, if so needed.

Jordan will elaborate a bit later.

As of June 30, 2018, Himax had 172.1 million ADS outstanding, unchanged from last quarter.

On a fully diluted basis, the total ADS outstanding are 172.5 million.

For the third quarter of 2018, we expect revenues to be around flat sequentially.

Gross margin is expected to be around 22.5%, depending on our final product mix.

IFRS earnings attributable to shareholders are expected to be around minus $0.01 per diluted ADS based on 172.5 million outstanding ADSs.

Non-IFRS earnings attributable to shareholders are expected to be around $0.015 per diluted ADS based on 172.5 million outstanding ADSs.

As we have done in the past, our third quarter IFRS earnings per diluted ADS guidance has taken into account our expected 2018 grant of restricted share units, or RSUs, to the team at the end of September.

The 2018 RSUs, subject to our board approval, is now assumed to be around $4.5 million, almost all of which, or $0.021 per diluted ADS, will be vested and expensed immediately on September 30, the grant date.

In comparison, the 2017 RSUs totaled $6.5 million, out of which $6.1 million was vested immediately.

The grant of RSUs would lead to higher third quarter IFRS operating expenses compared to the other quarters of the year.

I will now turn the call over to Jordan.

Thank you, Jackie.

Before I discuss about our business outlook, I would like to highlight that our bottom line has been substantially affected by the major increase of R&D expenses since some 2 years ago, when we decided to invest heavily into a number of new areas, something we brought to the market's attention repeatedly before.

We believe our operations will be out of the trough starting from the fourth quarter, initially driven by the anticipated ramping of the new foundry for the TDDI product line, and thereafter, shipment of 3D sensing products next year.

3D sensing, in particular, will represent a paradigm shift in our business when it starts to achieve a broader market adoption.

With that, now let me give you some insights behind our guidance and trends that we see are developing in our businesses.

Our large display driver IC business recorded low single-digit growth in the second quarter due mainly to our Chinese panel customers' ongoing capacity expansion, a more favorable product mix driven by the market's 4K TV demands and shipment to a new panel customer, who recently started ramping up their first fab.

Looking into the third quarter, while the Chinese domestic market is relatively slow for reasons, such as weak currency, the Western markets, especially the U.S., remain robust.

We see single digit growth for the third quarter as we continue to benefit from Chinese panel customers' capacity expansion and ramping of new fabs.

However, foundry capacity shortage remains an issue.

While we are making good progress in adding new capacity into our pool, the ultimate ramping schedule will depend on how fast our panel customers can go through their customer qualification, something all our major customers are working very hard on.

Looking into the future, with the 2020 Tokyo Olympics approaching and more Gen 10.5 fabs coming online to enable very large screen 8K TVs, many TV manufacturers are rushing to introduce consumer-grade super high-resolution -- end products with 8K resolution.

Capitalizing on our 4K TV success, we are strongly positioned for this emerging market opportunity.

Turning to the small and medium-sized display driver IC business.

The trend for full-screen, 18:9 display is already fully in place for smartphone with phone makers now aggressively adopting such screens for 2018 and 2019 models, even for mid-end and entry-level products.

Our comprehensive TDDI product portfolio positions us well to support this trend.

We are pleased that both our full HD+ and HD+ TDDI ICs enjoyed significant growth during Q2, with revenue and shipment volume both more than tripled during the quarter, despite being able to fulfill just a fraction of orders amid severe foundry capacity shortage.

Capped by the very limited capacity, our Q3 TDDI shipment will likely see some 10% decline from that of the second quarter.

TDDI's foundry capacity shortage is even more challenging than that of the large display driver IC.

To capture the TDDI opportunity, we have been working very hard to secure -- to source and qualify additional foundry capacity.

We are on track to complete the porting of our existing products into another foundry vendor and start mass production toward early fourth quarter.

The addition of the new foundry capacity will substantially grow our TDDI revenue starting from Q4 with further growth expected throughout 2019.

In parallel, to further widen our reach, we are working on new designs based on additional foundry partners' processes, which, however, will only be ready next year.

We expect TDDI penetration will reach 40% in 2019, which represents an enormous growth opportunity for Himax.

TDDI has more than double the ASP of the traditional driver IC with better margins.

It will change our product mix for smartphone display driver IC and make a very significant contribution to our growth going forward.

Looking into the third quarter, sales for smartphones are likely to decline around 40% sequentially as the TDDI shipment is constrained by capacity shortage and the traditional discrete driver IC is being quickly replaced by TDDI and AMOLED.

In automotive segment, we continued to have new projects going into mass production, which were design wins of the prior years.

During the second quarter, sales into automotive sector already accounted for more than 19% of our total driver IC sales and close to 16% of our total revenues.

On top of the world's first TDDI projects for automotive, during the first quarter, our team further successfully added AMOLED design wins during the second quarter.

We have achieved a distant #1 market share position, thanks to our superior product quality, service and stable delivery.

Q3 revenue in this segment is set to grow around 20% sequentially.

For third quarter, small and medium-sized driver IC business, we expect revenues to decline mid-single digit sequentially.

The non-driver IC business segment has been our most exciting growth area and differentiator for Himax in the past few years.

Now let me share some of the progress we made in the last quarter as well as our views on our future growth opportunities.

Since we announced 3D sensing as one of Himax's long-term growth initiatives in 2017, 3D sensing, led by Apple's iPhone X, is gradually becoming a new industry trend as major Android smartphone makers beginning to integrate it into flagship models, although most of such projects are still in development stage.

Leading Android smartphone makers are exploring various 3D sensing technologies, namely structured light, active stereo, or ASC, and to a lesser extent, Time-of-Flight, or ToF, trying to strike a good balance of cost, specifications and application.

More software players are entering the ecosystem to develop 3D sensing applications beyond the existing applications, namely facial recognition, online payment and camera performance enhancement.

Being a leader -- being a leading player in the 3D sensing space, Himax is in partnership with several leading smartphone names to enable their 3D sensing by providing optics, projector or total solution, depending on the customer's needs and their in-house capabilities.

The projects we are involved in cover all the 3 types of 3D sensing technologies mentioned above.

These efforts will facilitate a broader adoption of 3D sensing on Android smartphones starting 2019.

Our goal is to ensure that the smartphones backed by Himax 3D sensing technology will deliver the industry's highest standards in all of 3D depth accuracy, indoor/outdoor sensitivity, power consumption, size, data security and eye safety.

Now let me go through the progress we have made in structured light and ASC 3D sensing businesses and our approaches.

SLiM, our total -- our structured light 3D sensing hardware total solution, which we jointly announced with Qualcomm in last August, targets premium smartphone market.

The Qualcomm-Himax solution brings together Qualcomm's industry leading 3D algorithm with Himax's cutting-edge design and manufacturing capabilities in optics, NIR sensors and ASIC, as well as our unique know-how in 3D sensing system integration.

It is by far the highest quality 3D sensing total solution available for the Android market right now.

At present, we are working with customers who are targeting to bring new 3D sensing applications to smartphone, on top of facial unlock and online payment.

We are now targeting the end of the year or early 2019 for shipment to the customers for their product launch in first half 2019, although the actual shipment date will ultimately be dictated by end customers.

Another noteworthy update is that our SLiM total solution can work on Qualcomm's high-end mobile platforms now as opposed to being limited to only the premium Snapdragon platform when we first launched the technology, thereby lowering the total cost barrier of 3D sensing.

Our ASC 3D sensing solution, targeting mass market smartphone models, achieved a significant milestone during the second quarter.

While structured light 3D sensing offers outstanding depth precision for its complex projector design, ASC 3D sensing can also enable facial recognition with a similar -- with a simpler projector.

While it is somehow constrained by its limited depth precision, it is a lower-cost alternative for face authentication and enjoys better software readiness, since it is built on the existing dual camera ecosystem.

We are already working with top tier smartphone makers and leading platform partners concurrently on multiple projects.

Early shipment is targeted to begin towards the end of the year with major ramp in 2019, although, again, the actual shipment date will ultimately be dictated by the end customers.

We expect more design wins in the coming months.

It appears that the ASC 3D sensing, with its lower -- with its cost advantage and the existing dual camera ecosystem, has a better chance of accelerating 3D sensing adoption for facial recognition on Android smartphone market during 2019.

As anticipated, the shipment volume for our -- to our WLO anchor customer for the second quarter was a lot higher versus that of the first quarter and our WLO capacity utilization improved subsequently.

We expect the shipment for the second half to increase significantly versus that of the first half.

The overall 2018 shipment will increase considerably year-over-year.

Meanwhile, we are encouraged by the progress of our new R&D projects with the said customer for their next generation products centering around our exceptional design know-how and mass production expertise in WLO technology.

We are very excited about the significant growth opportunities of these projects.

While 3D sensing is the top priority of our WLO business at present, we also have engineering collaboration with select world-class technology leaders to develop waveguide for AR glasses and micro displays using our advanced WLO technology.

We expect to kick off new R&D projects during the third quarter.

Now some update on our capital expenditure.

We announced the increase of the Phase 1 capital expenditure budget, which is on top of our regular CapEx for the IC design business, from $80 million to $105 million in early 2018.

The majority of the Phase 1 investment is going to land and building, new equipment for the WLO anchor customer and an initial capacity of 2 million units per month for 3D sensing.

Of the $105 million budget, $33 million has been paid out in 2017, followed by $17.5 million made in the first quarter of 2018 and another $15.2 million in the second quarter.

The payment for the remaining 39.9 -- $39.3 million is to be made throughout the rest of 2018.

With the anticipation of broader 3D sensing adoption in 2019, we expect to further expand production capacity towards the end of the second half.

Kick-off timing and amount of the Phase 2 investment is still being evaluated, depending on the customers' projected volume and timetable.

As we mentioned in the previous earnings call, the CapEx budget will be funded through our internal resources and banking facilities.

We have more than sufficient banking facilities with favorable cost for such CapEx budget and will start to draw down some of them in Q3.

In our last earnings call, I reported Himax has been working with an industry leading fingerprint solution provider to develop an under-display optical fingerprint product in the last 2 years, targeting smartphones using OLED displays.

Himax provides a customized low-power image sensor in the solution.

I'm pleased to announce that the solution has entered into mass production with a major Android smartphone OEM for their new flagship model with shipment expected in the coming months.

The CMOS image sensor used in the solution will have a notably higher ASP than the company's traditional display driver IC products.

On other CMOS image sensor business update, we continue to make great progress with our 2 machine vision sensor product lines, namely, near infrared sensor and Always-on-Sensor.

NIR sensor is a critical part for both of our structured light and ASC 3D sensing solutions.

We expect significant growth in our CMOS image sensor business as 3D sensing shipment gets started.

On the AoS product line, the acquisition of Emza enables Himax to be uniquely positioned to provide ultra-low power imaging sensing solutions, leveraging Himax's industry leading super-low power CIS design and Emza's unique AI-based computer-vision algorithm.

We are pleased with the status of engagement with leading players in areas such as connected home, smart building and security, all of which new frontiers for Himax.

For traditional human vision segments, we see strong demands in laptop and increasing shipment for multimedia applications, such as car recorders, surveillance, drones, home appliances and other consumer electronics among others.

I will now give an update on the LCOS business, where our main focus areas are AR goggle devices and head-up-displays for automotives.

While AR will take a few years to fully realize its market potential, we have seen many companies, be the top name multinationals or new start-ups, invest heavily to develop the ecosystem: applications, software, operating system, system electronics and optics.

We are slated to kick off another AR goggle project with tailor-made micro display for a Tier 1 tech name during the third quarter.

In addition, we continue to make great progress in developing high-end holographic head-up-display for automotives.

Timing for such revenue contribution will be 2019, the earliest.

For non-driver IC business, we expect revenue to increase around 15% sequentially in the third quarter, driven primarily by WLO shipment.

That concludes my prepared remarks for this quarter.

Thank you for your interest in Himax.

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

(Operator Instructions) Our first question comes from Jaeson Schmidt of Lake Street Capital.

Wondering if you could quantify the impact to Q3 from the capacity constraints you're seeing.

Right.

Actually the shortage, if you talk about TV and large panel display driver combined, we see the range of between 10 million to 20 million units.

But having said that though, I think it is certainly tricky to so called quantify the shortage, because shortage is a general phenomenon right now in the marketplace for driver IC.

So when there is a severe shortage, customers tend to overbook their demand.

So -- but, to what extent, certainly, we cannot know for sure.

So our 20 million -- close to 20 million units of ICs of shortage can be slightly over -- slightly inflated, but the extent is very severe for sure.

Okay.

That's helpful.

And then Jordan, just want to clarify your comments on the SLiM structured light 3D sensing solution.

Are these wins you currently have?

Or is this timetable to ship towards the end of this year and '19, just based on what you assume customer launches will be?

I'm just trying to get a sense if these are actual wins secured or if there is a risk that these OEMs might look to competing technologies?

I think -- I mean, certainly, they are -- the customers is win-secured and certainly it is already a decision to use structured light as the technology of choice for such customers.

And timetable is more tricky thing to predict, because in addition to engineering per se, our resource mainly is primarily the hardware total solution, but there is a whole bunch of software stuff, the whole entire phone set integration efforts and most importantly, the business aspects, which dictates -- [pencil] dictates the customers' lost timing as well.

So the timetable indication, we mentioned in our prepared remarks is something given by our customers.

But I think we have the understanding that we just have to work with our customer for their extra-long state.

But certainly, our shipment will be earlier than the customer's launch and shipment.

Our next question comes from Suji Desilva of Roth Capital.

For the TDDI market, can you talk about what the unit growth is in the industry and what you think your share will be exiting '18?

Our share will be rather limited, because as I said, primarily of the [statistical] trend.

Our product and technology have been well qualified by quite a number of top tier phone customers, but I actually -- I mentioned -- I answered the same question last quarter in our Q&A.

I'm going to repeat it.

We are in, actually, a slightly unfortunate situation for us, we -- our qualification, I mean, it's a capacity-type situation that everybody knew, and our qualification with the few top name our end customers is behind our major competitor by probably less than a month, but the result -- the difference is enormous because we ended up -- the bulk of the capacity has been secured by our competitor.

So our access tool is in sync, capacity tool, which we share with our competitor is very limited.

And that limits our shipment for this year and that is why I think, we work very hard, and we believe we are ahead of our peers in terms of qualifying and getting ready for new boundaries.

So I can tell you our shipment in -- our target for Q4 will be around 10 million units, which we actually said in our -- in previous earnings calls.

So we are not changing that target.

Although there are 3 months in a quarter, right?

I'm talking about last quarter.

Total 3 million, I would say, actually about 5 million will be the last month, meaning that there will still be a ramping process even during the fourth quarter.

So fourth quarter total will be 10 million units around.

In comparison, third quarter will be about 5 million.

And the biggest quarter, second quarter, will be about 6 million.

The reason why we suffered from some decline is, because our second quarter was our first ramp.

And before the very first shipment, we need to have access to more earlier months of capacity and that is why we get to -- we got to have a little bit more capacity available to us for the first quarter of -- the very first quarter, i.e.

Q2 of shipments.

But in Q3, there's no such luxury.

So our total shipment is expected to speedup decline.

So Q4 is expected to about double from Q3.

And I would say, in between end of Q1 to Q2, beginning of Q2 next year, our single month's shipment, I think, is on track to reach, I would say, about 10 million on single month basis.

And then the next breakthrough of additional capacity will take place, probably in Q3 of next year, when I will say there will no longer a capacity shortage issue for us.

So there will be a ramping schedule of 5 million in Q3, 10 million in Q4.

And then going up to Q1, Q2, continue to increase.

Within the first half next year, we will reach about 10 million per month.

And then the second half, we'll, hopefully, double that.

That is our target -- our goal, and I think it is reasonably achievable.

In short, customer demand and qualification is not really an issue for us right now.

We are suffering big time from capacity shortage.

That's unfortunate, but that's something we are dealing with right now.

Okay, that's very helpful color, Jordan.

And then on the WLO, you guys had a strong 3Q.

Do you have a sense what the follow-through demand would look like in the fourth quarter?

Does it hold at that high level?

Does it drop off from the initial build?

Any thoughts on WLO would be helpful.

The major shipments are to one anchor customer, as I mentioned.

And we have said in our prepared remarks that second half will see a major, major increase from the first half.

So Q1 this year was a low point.

Major increase in Q2, another major increase in Q3 and another major increase in Q4.

So you will see sequential increase quarter-by-quarter within this year.

Our next question comes from Gus Richard of Northland.

Just a quick follow-up on the wafer-level optics.

I believe you mentioned in the press release, you're working with your major customer, can you -- on a new program.

Can you talk about how that might change your content per handset?

I think, it will likely -- be more likely than not to be mass production projects for 2020.

It involves some pretty aggressive improvements in various -- from various aspects of engineering.

The value add or the dollar content of such new optics will be many times that of our -- the [same] products that we are shipping to the same customer.

And I mean, obviously, I can't get into any further details.

But let me just -- it's most important project that we are working always.

There are other projects as well.

So the new project is very challenging, something that is taken very seriously by the said customer.

And we are -- I think, we are just very excited that the long-term relationship is going very well and the project, according to us, is really a big deal in both the dollar contents and engineering challenge.

Got it.

And then can you talk a little bit about expanding your wafer-level optics business to additional handset customers and how that business might grow over the next year?

I mentioned in the prepared remarks that for 3D sensing, there are 3 types, right, structured light and ASC and ToF.

And I also mentioned that we have been involved in all the 3 types of technology, especially the first 2 types.

The adoption of ToF right now is still limited, as far as we can see in the marketplace.

I also mentioned our involvement or participation in the customers' projects.

Industry technologies vary depending on the customers' demands or they are -- most importantly their in-house capabilities.

So the most limited exposure that we have is pure optics, meaning it is WLO thing, or we can be invited to do a bigger role, which is to integrate the optics with laser and put together with active alignment, put it together to form the so-called projector.

And that is the second type of involvement, which is heavier than the first type.

And then there is the third type, which is a total hardware solution.

This can be categorized into 2 different types as well.

Structured light, we talked about a fully -- totally integrated solution involving projector and the sensor on the receiving end and ASIC IC for algorithm.

In the case of ASC, typically, it is a projector and also 2 sensors.

And the -- there is no discrete ASIC for the algorithm, because -- to save costs, now the market tends to have the AP -- smartphone's AP handling the algorithm.

So there are different types of involvement.

But regardless of which type, I think what we're seeing right now is few things.

One, our optics is always involved, whether it's optics only or projector, because projector covers the optics and color solutions, certainly, also covers optics.

So I can say with all the projects we are involved in, optics is always a key item.

Secondly, I also said in the prepared remarks that because of cost issue, ASC now appears to be the more popular solution compared to structured light, which is really limited to very high end premium model.

So in terms of volume ramping, targeting for next year, then you talk about our -- the real capacity.

I think, it will be driven primarily by ASC.

I'm setting aside the anchor customer that I mentioned earlier, right?

That is a different story.

I'm talking about the Android market 3D sensing.

So ASC will drive our capacity expansion next year.

I mentioned it is highly likely that we have to start to retain more capacity.

Our current capacity right now is about 2 million units of optics per month.

It is more than likely that we have to add more capacity into that, starting perhaps later this year, because primarily of ASC where we have multiple customers in multiple projects, as well as a handful of them and they do mass production.

I think it's likely now capacity will have to get increased.

So I hope that answers your question.

Our next question comes from Rob Stone of Cowen and Company.

A couple of questions.

The first one, Jordan, you mentioned the design win for an AMOLED display driver in automotive.

I'm just curious if you have a sense of the time to revenue or mass production, given lengthy design in cycles for auto?

The customer's target is actually end of 2019, but I think more conservatively, I will say 2020.

Okay.

That's helpful.

And on your CMOS in display fingerprint sensor project, which I think you said is in mass production, and it should be launching soon.

Can you provide any color on how you see that positioned in terms of system costs, relative to the option for facial recognition?

And how we should think about volume for that product?

It appears to be -- to enjoy pretty good momentum right now in the Android market, again because of the cost issue.

But these things can change overnight.

They are -- firstly, the cost.

I'm talking about the total solution, which includes, most importantly, the CMOS image sensor and a set of optics, and certainly algorithm chip combined as a module.

Initially, when the technology was promoted, we're talking about $10 in total, but now we are seeing -- $10 plus in total.

Now we're seeing the total cost is now coming down to $10 or even below, and because of certain cost-saving measures adopted by module houses, in particular, in the optics side.

So for that reason -- again, customers want full-screen design, and that is they don't want their capacity touch to be on the back, which is not convenient to use.

So for full-screen design, if you feel structured light is too expensive, ToF is also quite expensive and even ASC is relatively expensive, because ASC now we are still talking about $10 plus.

And this thing, fingerprint at the glass, is already below $10.

So for that reason, it seems to be picking up momentum.

However, I will have to say the limitation of fingerprint is that it can do nothing other than fingerprint, while with 3D sensing, whether it is all 3 kinds of 3D sensing, you can have a lot of other applications beyond unlocking your smartphone and payment, right?

So I think that is the most important thing.

And certainly, under glass fingerprint, one reason why it is getting traction, but it is not really becoming overwhelming.

One of the issues is it still suffers from its lesser satisfactory accuracy, meaning, when you try to unlock your phone, the failure rate is still too high.

And when it fails, you have to -- the user will have to key in the password, which people hate, right?

So in comparison, 3D sensing for face authentication, the accuracy level is a lot higher.

And so they are -- and certainly a big wildcard will be Apple's launch in -- expected September, right?

In the new iPhones, whether they can introduce interesting attractive new features, application to 3D sensing.

So all this combined we are watching very closely and the thing is that we are participating in all the technologies mentioned above.

So I'm not saying we are betting necessarily very heavily on one thing, and we are against other things, not necessarily.

We just have to play along with the market, but I think it is still slightly too early to tell who is going to dominate which segment of the market as of today.

Finally, just a more housekeeping question for Jackie.

So your Q3 guidance revenue about flat, gross margins down some sequentially, but non-IFRS earnings per share up slightly.

So should we interpret that as indicating operating expenses are going to be down quarter on quarter?

Or is there something else going on within OIE and taxes that we should be aware of?

Yes, I think it is operating expenses.

The operating expenses, taking out the RSU portion, the restricted stock unit, in Q3, actually QoQ, we're looking at a decline, the decrease in operating expenses in Q3 versus Q2.

So contributed to a non-IFRS EPS higher than the ones in Q2.

Yes.

Not necessarily higher, but that's right.

Yes.

Our next question comes from Tristan Gerra of Baird.

Looking on the manufacturing standpoint.

Some companies have talked about increases in raw material cost.

As you ramp capacity later this year, could that be any issue?

Could that be a mitigating factor to gross margin?

Not necessarily.

I think, we -- yes, capacity is limited, and we have to accept some price increase from our vendors, but that's something we can always pass on to our customers.

So that factor alone does not really impact, certainly, not negatively, to our gross margin.

Okay.

And then could you talk about your expectation in terms of adoption for bezel-less TDDI and the market share that you expect to have next year in that particular segment relative to the entire TDDI market?

I think, it really depends on the penetration of TDDI, right?

And TDDI's main competition right now, obviously, is the OLED.

So let's take a wild assumption, which is something I don't know for sure, right?

Let's say it's 40% to 50% smartphone penetration be in TDDI.

Now if you take a ballpark number of 120 million smartphones per month, you will be talking about 50 million to 60 million TDDI chips of demand.

So -- per month, 50 million to 60 million per month.

So that compares to my earlier Q&A where I said in -- somewhere in the first half, and probably middle first half, our monthly output should reach 10 million and in Q3, hopefully, more than 20 million.

So if you compare that with start of the -- some 15 million of demand that ballpark, right?

I mentioned earlier.

I think that will give you an idea.

Okay.

And then finally, if you could elaborate a little bit on the outlook that you see for the emerging project in micro display for AR type of applications?

I'm sorry, what for AR-type of applications?

The micro display type of engagements that you have and elaborate a little bit on the trends that you see there.

Okay.

We -- almost every quarter, we have new projects, engagements with various customers.

I think we are still regarded as the industry leader in terms of providing micro display for AR goggles.

We mentioned in my prepared remarks that we are set to kick off another AR goggle project with tailor-made micro display for Tier 1 tech name, because this is something that I think is -- could be quite important.

It's all of the biggest tech names in the world.

They are still putting major resources into developing new AR devices, and I think, we together spend a very long time discussing the specs and technology, and we are ready to kick off major new projects.

So that I think is just a indication that the industry under the water, let me put it that way.

There are no major launches in terms of the eye-catching project such as Google Glass or HoloLens, right, lately.

But under the service, there are still a ton of activities sponsored by such top tier A customers.

And we are still their partner of choice in terms of providing micro displays.

Our next question comes from Charlie Chan of Morgan Stanley.

So my question is also about 3D sensing, because now there is also some new design of under display fingerprint.

So in your view, is that the under-display fingerprint and active stereo camera would be neutral exclusive at customer's design?

That is my first question.

I think so.

Yes.

I mean, for now, because our fingerprint, as I said earlier, right, the only function is to unlock your phone.

And if you already have 3D sensing, which can also unlock your phone, why do you want to double the effort and cost, unless you are not really very confident about your 3D sensing.

So -- I mean, when customers adopt [high-end] solution, it is not happening.

So when you have 3D sensing, I don't see why you should also have fingerprint.

Right.

So where is the string heading to?

I mean, next year, do you expect ASC will outgrow under-display fingerprint?

Or the -- another way, finger print will create the active stereo camera?

I think my view is still too early to say.

I mentioned earlier, right?

Lot of factors can change the picture.

It is quite simple for fingerprint, which is unlocked and it's either glass so we can type into -- on to your display and do unlock rather than to -- like, if you want to have a full screen display, right, if you still adopt the old capacitive-type fingerprint.

The fingerprint has been placed on the back, which is not convenient, right?

So that is the advantage.

That is why we enjoy the major premium in terms of price compared to capacitive type, which is now already very, very low cost as you probably know.

So under-glass has got advantage, but under glass has disadvantage of performing nothing other than the unlock feature.

So assuming 3D sensing, the market can develop some interesting applications.

Then I think that really will outweigh the cost savings provided by under glass fingerprint.

That will be my view.

However, there will also always be more entry level phones, which -- with primary objective being cost saving and they may think otherwise.

So I think they will coexist in the marketplace.

How they will play out against each other, I think the major difference is, in terms of their features and costs, I think I have covered it all.

It's more difficult to tell is, for example, what kind of new and interesting features where it really be a key applications that customer really wants.

And if we develop processing, then certainly, 3D sensing will be more popular than fingerprint and vice versa.

So I think we will find out gradually next year.

And next one would be, so within the ASC 3D sensing, what is the competition now?

We've heard Sony could have the kind of NIR sensor and maybe OmniVision is also doing the similar solution.

So if ASC 3D sensing were to take hold, what kind of market share would you expect?

No.

There are 2 things you must consider.

One is optics fast projector, right?

And your question was about the sensor type.

Yes, we are competing with the names you mentioned, who offer what we call, a global shutter sensor.

And our sensor is rolling shutter.

There are pros and cons in the 2 types.

Rolling shutter enjoys better costs while global shutter is faster in response.

But quite a number of customers adopt our total solution, which covers both projector that includes optics and sensor.

There are also customers who adopt some of our competitor's sensor while adopting our projector.

Or other people's sensors and even other people's projector integration and only adopting our optics.

So I mentioned, we are -- one way or another, we are participant.

We are participant in -- I would say, as long as the ASC for all the projects, I am aware of in the marketplace, we are involved one way or another, right?

But you're right in saying that we do have competition in sensor.

So -- and they are indeed, I know of projects where our competitor's sensor is adopted where our projector is also adopted.

Our next question comes from Jerry Su of Crédit Suisse.

The first question is on Time-of-Flight.

I think, you have elaborated a little bit about the 3 -- the different technologies on 3D sensing side.

But for Time-of-Flight, can you give us more color about the end -- the module cost for this versus the other 2?

And also Himax value add or your role in the Time-of-Flight 3D sensing?

Time-of-Flight is a more uncertain animal as far as we can tell for now.

We'll probably have a better picture next year.

We are aware of a project which the customer -- where the customer adopts Time-of-Flight for main camera 3D sensing.

And the reason why the Time-of-Flight is chosen is for -- to take advantage of this benefit of longer range, whether in structured light or ASC for front camera, for face unlock, right?

It's only within 1 meter.

Then if you use it for main camera, the operating range can be somewhere around 5 meter, or maximum probably 5 to 10 meters.

Beyond that, so far, this is not reachable.

So that is where Time-of-Flight comes in and play a role.

However, the total module cost of Time-of-Flight is still very expensive, arguably, probably more expensive than structured light.

And that is why -- so for 2 reasons.

One, for main camera application, what exactly are the killer apps that consumers will be willing to pay so much to buy?

And -- so that is still a big unknown question.

And secondly, certainly, the less-than-mature ecosystem and the relatively high cost.

All these factors combined are like limited its adoption right now.

And our participation, we are invited to provide optics as usual because we -- our WLO 3D is a leading edge.

So that is the extent of our participation for now.

Okay.

And then just a follow-up question on the ASC.

Can you give us a little bit more color about what is the progress right now?

I mean, you have mentioned about potential design win in the next couple of months and a shipment later this year or early next year.

But what is the progress right now?

Which steps are you or your partners in?

Is it that final reliability test?

Or is it software integration, payment authentication?

Just give us a little bit color on this.

There are 2 types of partnerships.

One is direct engagement with end customers and the other type is partnership with platform, AP platform providers.

And we are very active in both.

I will say now even more, it looks likely that the progress of the first type, i.e., directly with end customers, is faster than the other type for the obvious reason that customers directly take control and they can move the progress more quickly.

So the -- so because it's direct customer, end customers project, I'm afraid I cannot really disclose too much details about the progress of their projects, but I'm talking about multiple customers with certain types of -- even multiple projects.

But then again -- so in terms of ASC, I will repeat again what I just mentioned in response to Charlie's question.

For the projects we know of, we have been able to play a role, whether it's pure optics or projector or a total solution, including projector and sensor.

So we're excited one way or another as long as some of the ASC project take off, we will get to enjoy the benefit.

And as far as timetable is concerned, I will just repeat what I just said in prepared remarks, end of the year, some -- probably small volume early rent in preparation for customer's launch, first half next year.

I think beyond that, I'm afraid I cannot disclose too much, especially for direct customers projects.

Maybe ask the question the other way.

So do you think that the payment qualification is going to be a issue for ASC given that it has less accurate or less data on a depth sensing side?

What is happening right now is that although this is not final, final, final, right?

The thinking for now is to limit the payment amount.

Meaning, it's not limited -- limit the payment amount to x dollar or x renminbi for ASC given that it is slightly compromised 3D depth precision compared to structured light.

But certainly, we took it with our partners that stride us, working very hard to even try to unlock that, but that is the direction we are moving towards right now.

(Operator Instructions) Our next question comes from Donnie Teng of Nomura.

My first question is regarding ToF.

So I noticed that this is the first time you mentioned about ToF from the past few quarters.

And could you elaborate more on your progress right now?

And what kind of component stack you can be reused on ToF from your structured light and ASC solutions?

As I've said, there is a wide array of projects that we are involved in and that is arguably, probably the only project that we know of in the marketplace right now, that involves main camera.

Our participation is in optics.

Although with some other things that's been discussed, we are being invited to have a broader participation.

I cannot elaborate more on that.

So in terms of real project, there is one that we know of, where we are an optics provider.

But there are other R&D projects that are being explored where we can have a bigger role or participation.

My second question is regarding to your project with the U.S. customers.

So I'm just wondering if the U.S. customer have some design change next year, do you think we have more opportunities or risk of -- after all, we have already participating in their project already.

So what do you think about the opportunity and risk next year?

Good question.

I think the opportunity is that things have already evolved, their products will adopt such solutions and also the opportunities that we are being told, our products will be reused for next year's projects.

There will be no change.

And certainly, longer term, as I said earlier, we are working with them for other more advanced projects.

But the portion we play will get carried into next year -- next year's production.

And the volume is likely to be bigger, right, because there will be more phones.

There are no further questions.

I'd like to turn the call back over to management for any closing remarks.

As a final note, Jackie, our CFO, will maintain investor marketing activities and continue to attend investor conferences.

We'll announce the details as they come about.

Thank you, and have a nice day.

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.