奇景光電 (HIMX) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Himax' Fourth Quarter and Full Year 2018 Earnings Conference Call.

(Operator Instructions) Now I'd like to hand the call over to John Mattio with Lamnia International.

Please, go ahead.

Thank you, operator.

Welcome, everyone to Himax' Fourth Quarter and Full Year 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 a question-and-answer session.

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

Before we begin the formal remarks, I would like to remind everyone that some of the statements in this conference call, including statements regarding expected future financial results and industry growth, are forward-looking statements that involve a number of risks and uncertainties that could cause actual events or results to differ materially from those described in this conference call.

Factors that could cause actual events or results to differ materially from those described in this 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 nondriver products developed by Himax, and demand for end-use application, also the uncertainty of continued success in technological innovations as well as other operational and market challenges and other risks described from time to time in the company's SEC filings, including those risks identified in the section entitled Risk Factors in its Form 20F 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 yet been subjected to the same review and scrutiny, including internal auditing procedures and external audits by 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'd like to turn the call over to Ms. Jackie Chang.

Chief Financial Officer of Himax Technologies.

Jackie, the floor is yours.

Thank you, John.

And thank you, everyone, for joining us.

Our outline for today's call is first to review Himax consolidated financial performance for the quarter and full year 2018 and to provide you with our outlook for the first quarter of 2019.

Jordan will then give 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 fourth quarter 2018 revenues and gross margin met our guidance issued on November 8, while EPS exceeded the guidance.

For the fourth quarter, we recorded net revenues of $191 million, an increase of 1.4% sequentially, an increase of 5.5% year-over-year.

The revenues increase in the quarter was attributed to the production outputs of newly added foundries for both large display driver ICs and TDDI chips.

Our WLO shipment volume to an anchor customer also increased sequentially.

Gross margin was 24.3%, up 90 basis points sequentially, due to more favorable product mix.

IFRS earnings per diluted ADS were $0.049, better than the guidance range of $0.015 to $0.036.

The better-than-expected earnings were due to a reevaluation gain of $0.017 per diluted ADS from the AI start-up investment made in November 2017.

Non-IFRS earnings per diluted ADS were $0.05, outperforming the guidance range of $0.017 to $0.038.

The better-than-expected earnings were, again, due to the revaluation gain mentioned above.

Revenue from large display drivers was $74.2 million, up 12% sequentially and up 27.1% year-over-year, driven by Chinese panel customers' continued ramping of new LCD fabs, where we have solid design-in penetration.

Large panel drivers’ ICs accounted for 38.9% of our total revenues for the fourth quarter, compared to 35.2% in the third quarter of 2018, and 32.3% a year ago.

Revenue for small-, medium-sized display drivers came in at $79.8 million, down 6% sequentially and down 1.8% year-over-year.

The driver ICs for the segment accounted for 41.8% of total sales for the fourth quarter as compared to 45.1% in the third quarter of 2018, and 44.9% a year ago.

Sales into smartphones were up 20.1% sequentially.

Thanks to higher sales from TDDI but offset by a decrease in shipment in traditional driver IC for smartphones.

Display drivers for tablets and other consumer products also declined over 30% sequentially.

With the major addition of capacity, we're optimistic about the TDDI business growth in 2019.

Jordan will elaborate on this a bit later.

Our driver IC revenue for automotive applications stayed strong for the fourth quarter, reaching $32.9 million, down 3% sequentially, but up 33% year-over-year, accounting for 21% of driver IC revenue.

Revenues from our non-driver businesses were $37 million, down 25% sequentially and down 10.8% from last year.

Non-driver products accounted for 19.3% of total revenues as compared to 19.7% in third quarter of 2018 and 22.8% a year ago.

The fourth quarter saw continued growth of WLO shipments sequentially, but CIS and timing controller experienced some decline in revenue.

The year-over-year decrease was due mainly to lower WLO and timing controller shipments.

Our IFRS gross margin for the fourth quarter was 24.3%, up 90 basis points sequentially, and down 30 basis points from the same period last year, both a result of product mix.

Our IFRS operating expenses were $41 million in the fourth quarter, down 5.3% from the preceding quarter and up 1.8% from a year ago.

The year-over-year increase was primarily a result of increased R&D expenses.

The sequential expense decrease was mainly caused by the difference of the $3.9 million of RSU charge, offset by R&D and salary expenses increase of $1.6 million.

As an annual practice, we grant annual RSUs to our staff at end of September each year, which given all other things equal, leads to a higher third quarter IFRS operating expenses compared to the other quarters of the year.

The fourth quarter RSU expense was $0.02 million, while it was $3.9 million in the third quarter.

Excluding the RSU expense, operating expenses increased 4% from the previous quarter, up 2% year-over-year.

The quarter-over-quarter increase was mainly the result of higher R&D expenses during the fourth quarter.

IFRS operating margin for the fourth quarter was 2.8%, up from 2.4% in the same period last year and up from 0.4% in the prior quarter.

The IFRS operating income increased 575.8% sequentially and increased 24.8% year-over-year.

The sequential increase was primarily a result of higher gross margins and lower RSU expense.

That year-over-year increase was a result of higher sales offset by higher operating expenses.

Fourth quarter non-IFRS operating income was $5.7 million or 3% of sales, up from 2.6% for the same period last year and up from 2.9% a quarter ago.

IFRS profit for the fourth quarter was $8.5 million or $0.049 per diluted ADS, compared to $0.9 million or $0.05 per diluted ADS in the previous quarter, and $23.5 million or $0.136 per diluted ADS a year ago.

The sequential increase was a result of higher sales, lower RSU expense and the revaluation gain on investments that I have mentioned earlier.

The year-over-year decrease was, however, mainly the result of an investment gain of $20.7 million booked in the fourth quarter 2017 as we disposed of a direct investment in Q3 '17, which accounted for $0.12 per diluted ADS.

Excluding the investment gains, IFRS profit for fourth quarter 2018 was $5.6 million or $0.032 per diluted ADS versus $2.8 million or $0.016 per diluted ADS for the fourth quarter of 2017.

Fourth quarter non-IFRS profit was $8.7 million or $0.05 per diluted ADS compared to $4.5 million or $0.026 per diluted ADS last quarter, and $23.8 million or $0.138 per diluted ADS the same period last year.

The sequential and year-over-year variance were from the same reasons stated above.

Excluding the investment gains, non-IFRS profit for fourth quarter 2018 was $5.8 million or $0.033 per diluted ADS versus $3.1 million or $0.018 per diluted ADS for the fourth quarter 2017.

Now let's have a look -- quick overview of the 2018 full year financial performance.

Revenues totaled $723.6 million in 2018, representing a 5.6% increase over 2017.

Revenue from large panel display drivers totaled $260.5 million, an increase of 15.9% year-over-year, representing 36% of our total revenue as compared to 32.8% in 2017.

Small- and medium-sized driver sales totaled $325.7 million, an increase of weeks 6.8% year-over-year, representing 45% of our total revenues as compared to 44.5% in 2017.

Non-driver products sales totaled $137.4 million, a decrease of 11.6% year-over-year, representing 19% of our total sales as compared to 22.7% a year ago.

The year-over-year decrease was due mainly to certain one-off customer reimbursement totaling $13.3 million booked in the third quarter 2017, in relation to the AR goggle business.

Excluding the $13.3 million, the year-over-year decrease was 3.3%.

Gross margin in 2018 was 23.3%, down from 24.4% in 2017.

The year-over-year decrease was due primarily to the one-off customer reimbursement in 2017, mentioned above.

IFRS operating expenses were $165.5 million, up $6.9 million or 4.3% compared to last year.

The increase was primarily the result of increased R&D, salary and depreciation expenses offset by reduced RSU charge.

2018 IFRS operating income of $3.4 million represented a 59.5% decrease versus 2017 mainly for higher operating expenses.

Our IFRS profit for the year was $8.6 million or $0.05 per diluted ADS versus $27.7 million or $0.161 per diluted ADS, a decline of 69% from last year.

Excluding the investment gains that I have mentioned earlier, our IFRS EPS for the year was $0.038 versus $0.041 from the last year.

Non-IFRS profit for 2018 was $12.9 million, or $0.75 per diluted ADS, down 61.9% year-over-year.

Again, the year-over-year decline was due mainly to the investment gains mentioned above.

Excluding the investment gains, non-IFRS EPS for the year was $0.063 versus $0.077 from last year.

Turning to our balance sheet.

We had $117.7 million of cash, cash equivalents and other financial assets as of the end of December 2018, compared to $148.9 million at the same time last year and $102.9 million a quarter ago.

On top of the cash position, restricted cash was $164.3 million at the end of the quarter, same to the preceding quarter and up from $147 million a year ago.

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

Our year-end inventories were $162.6 million, up from $145.8 million a quarter ago and up from $135.2 million at the same time last year.

Accounts receivable at the end of December 2018 were $189.3 million as compared to $188.8 million a year ago and $187.6 million last quarter.

Day sales outstanding was 95 days, as compared to 101 days a year ago and 96 days at end of last quarter.

Net cash inflow from operating activities for the fourth quarter was $2.3 million as compared to the inflow of $8.3 million for the same period last year and an inflow of $2.2 million last quarter.

Cash inflow from operations in 2018 was $4 million, as compared to $29.4 million in 2017.

2018's operating cash flow was lower mainly because in response to capacity shortage of foundry and certain packaging material, we had to keep the inventory level higher than usual.

The trend may continue into this year.

Fourth quarter capital expenditures were $5.2 million versus $15.5 million a year ago and $8.2 million last quarter.

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

Total capital expenditure for the year was $49.7 million versus $39.3 million a year ago of which, $7.6 million was for the investment of design tools and R&D-related equipment related to our traditional IC design business.

Other capital expenditures mainly investment in land, a new office building and capacity expansion for 3D sensing business was $42 million in 2018 versus $33 million in 2017.

In 2019, we anticipate continued payments for the above CapEx items to be totaling around $39 million, including the payment of $27.7 million for the land, which will conclude the current phase of capital expenditure.

As of December 31, 2018, Himax had $172.1 million ADS outstanding, unchanged from last quarter.

On a fully diluted basis, the total ADS outstanding are $172.6 million.

The first quarter is traditionally the bottom of the year in terms of sales because it has fewer working days, due to the lunar and new year holidays.

Customers' inventory correction on smartphone drivers reflecting their conservative views for the smartphone market will also negatively impacted our first quarter sales.

We expect the first quarter revenue to decrease around 14% to 19% sequentially.

Gross margin is expected to be around 23%, depending on the final product mix.

IFRS loss attributable to shareholders are expected to be in the range of around $0.01 to $0.03 per diluted ADS, based on $172.6 million outstanding ADSs.

Non-IFRS loss attributable to shareholders are expected to be in the range of $0.008 to $0.028 per diluted ADS, based on $172.6 million outstanding ADSs.

I will now turn the call over to Jordan.

Thank you, Jackie.

In the fourth quarter of 2018, we delivered solid growth in the areas of TDDI, WLO and large display driver IC despite weak sentiment in the overall consumer electronics market.

Looking into 2019, on the backdrop of an uncertain global economy, the TV market -- TV panel market is overshadowed by concerns of oversupply and the global smartphone sales are projected to suffer some decline.

We are, however, still targeting some top line growth with upside momentum coming from TV and automotive markets as well as significantly more TDDI shipments for smartphone application, where we only met a small amount of shipment last year when we suffered from foundry capacity shortage.

We will continue to advance our technologies across key strategic areas.

These include, among others, next generation display driver technologies for 8k TV and AMOLED, 3D sensing for both mobile phone and non-mobile phone applications and ultra-low power smart sensing, where we are seeing rising momentum in new applications such as smart home.

Fully aware that we are operating in an uncertain macro environment, we also put in cost control at the top of our agenda list, targeting to continuing R&D activities across all our strategic areas without raising R&D expenses from the last year.

The total CapEx -- the total OpEx is budgeted to be at around the same level as that of last year excluding the anticipated increase in depreciation arising primarily from the construction of the new fab described above.

Now let me give you further insights behind our Q1 guidance and trends that we are seeing developing in our businesses.

Our large display driver IC business enjoyed strong growth in second half of 2018 as 4K TV penetration continued to rise globally and China continued to ramp brand new advance generation LCD fabs.

Looking into 2019, while the market is facing the challenge of potential oversupply, we are seeing continued strength in our business, backed by strong design-ins with certain LCD makers who are leading the market in capacity and brand customer engagements.

Equally important, after a lot of engineering efforts, we are now better prepared than last year in terms of getting the necessary capacity support from our strategic vendors.

Notably, most of our panel customers have completed qualifications of our new foundry with their key customers, and we have also successfully secured additional COF package capacity to meet our customers' TV and monitor demands.

Nevertheless, for the first quarter, our large display driver business is likely to decrease by high single digit sequentially due to seasonality and customers' inventory correction.

A number of TV makers showcase their 8k TV technology at the recent CES.

I'm pleased to report that one of our industry-leading customers will be launching a new 8k TV model with Himax Technology inside in March.

With its cost still high and true 8k content still scarce, 8k TV is unlikely to generate much sales in 2019.

But 8k TV is a strategic area for Himax because of its much higher display driver and timing controller contents and high technical barrier of entry.

We are encouraged by the recent establishment of the 8K Association to help develop 8K TV ecosystem and accelerate its adoption.

Besides TV, we are working with panel customers to deploy 8K technology to new areas, such as high-end gaming PC and professional-purpose monitors.

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

With the ramping of the newly added foundry, our capacity constraint for TDDI shipment has largely been deviated.

In Q4 2018, we're able to fulfill more customer orders with improved supply, thereby, greatly increased the TDDI revenue from the previous quarter.

Another notable milestone for TDDI during Q4 was that we secured a marquee design win from a major Korean smartphone maker and are already making mass production shipments in the first quarter, although starting with a relatively modest volume.

While we are positive on the trend of higher TDDI penetration in smartphone in 2019 and our much improved TDDI supply, our TDDI business will nevertheless be challenged by the anticipated lackluster sales of global smartphone market and the expected decline of TDDI's average sales price as competition intensifies.

To gain market share in 2019, we are working to secure more design wins by offering new generation TDDI solutions.

The new solutions can enable narrow bezel design -- narrow bezel panel design with the usage of COF -- without the usage of COF packaging, which not only is costly but also suffers from serious laws of supply constraint.

Several leading panel makers are now sampling panels with our new TDDI solution.

As expected, our traditional discrete driver IC sales into smartphone declined by over 25% sequentially in the fourth quarter as the market is being quickly replaced by TDDI and AMOLED.

This segment accounted for less than 6% over total sales in the fourth quarter and will further shrink in 2019.

Combining TDDI and discrete smartphone driver, our Q1 sales into the smartphone market is expected to decrease close to 30% sequentially due to seasonality and weak global smartphone market.

However, we expect a strong second half rebound in 2019.

On AMOLED product line, we have been collaborating closely with leading panel makers across China for product development.

We believe AMOLED driver IC will be one of the long-term gross engines for our small panel display driver IC business.

During the fourth quarter, our automotive business delivered a solid 33% year-over-year growth.

The demands for our more sophisticated and higher performing displays are still rising with automakers.

We are pleased to see our state-of-the-art technology for super large, end-to-end automotive displays showcased at CES.

In addition, we launched the world's first TDDI design for automotive displays and the technology is scheduled to start shipping within 2019.

Our technological prowess will continue to separate us from the rest as, for the next generation display for automotive.

We are the leader in all key technologies, including TDDI, AMOLED and local dimming timing controller.

Our first quarter revenue in this segment is, however, set to decrease by close to 10% sequentially, impacted by panel customers' inventory adjustments in response to the weak car sales momentum caused by the U.S.-China trade tension.

Our tablet and consumer electronics businesses declined more than 30% sequentially in Q4 2018, driven by weak overall market sentiment.

We accounted for less than 10% of our total sales in the first quarter.

We expect business in both segments to further shrink in the first quarter by around high single digit sequentially.

For our first quarter small- and medium-sized driver IC business, we expect revenues to decrease by high teens sequentially.

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

Now the issue with some of the progress we made in the last quarter as well as our views on future growth opportunities.

First on 3D sensing business update.

We are participating in most of the smartphone OEMs' ongoing 3D sensing projects covering all 3 types of technologies, namely structured light, active stereo camera or ASC and time-of-flight.

Depending on the customers' needs, we provide 3D sensing total solution or just the projector module or optics inside the module.

We have highlighted in the last earnings call that the 3D sensing adoption for Android smartphone market remains low.

The adoption is hindered primarily by the prevailing high hardware cost of 3D sensing, and the long development lead time required to integrate it into the smartphone.

Instead of 3D sensing, most of the Android phone makers have chosen the lower-cost fingerprint technology, which can achieve similar phone unlock and online payment functions with somewhat compromised user experience.

Reacting to their lukewarm response, we are working on the next generation 3D sensing with our platform partners, aiming to leapfrog the market by providing high performance, easy to adopt and yet cost friendly total solutions, targeting the majority of Android smartphone players.

We have a solid product roadmap and plan including new architecture, new algorithm to make it happen.

The development progress is on track and the new solution is aiming for smartphone customers 2020 models.

We believe that 3D sensing will be widely used by more Android smartphone makers when more killer applications become available and the ecosystem is able to substantially lower the cost of adoption, while offering easy-to-use, fully integrated total solutions, for which Himax is now playing a key part.

In the meantime, we are working closely with a number of leading smartphone makers on multiple projects by providing projector module or critical optical components targeting their 2019 or 2020 models.

I have mentioned previously that 3D sensing can have a wide range of applications beyond smartphone.

We have started to explore business opportunities in various industries by leveraging our SLiM 3D sensing total solution.

Such industries are typically less sensitive to cost and always require a total solution.

We are collaborating with a Kneron, an industry leader in edge-based artificial intelligence in which we have made an equity investment, to develop an AI-enabled 3D sensing solution, targeting security and surveillance markets.

We are also working with partners/customers on new applications covering home appliances and industry manufacturing.

We'll update our progress in due course.

As anticipated, the shipment volumes to our WLO anchor customer for the fourth quarter recorded a double-digit sequential growth as a result of the customer's large-scale adoption in more models.

The overall 2018 shipment increased considerably year-over-year.

However, lower first quarter volume compared to the previous quarter is expected as per the customer's demand forecast.

The much-reduced shipment will negatively impact our Q1 gross margin as lower utilization will lead to higher equipment depreciation and factory overhead on a per-unit basis.

Nevertheless, the Q1 revenue will still record a significant increase from the same time last year.

In addition, we are encouraged by the progress of the ongoing new development projects with the said customer for their next-generation products centering around our exceptionally -- exceptional design know-how and mass production expertise in WLO technology.

On CMOS image sensor business updates, we continue to make great progress with our machine-vision sensor product lines.

Combining Himax' industry-leading super low power CIS and ASIC designs with Emza's unique AI-based, ultra-low power computer vision algorithm, we are uniquely positioned to provide ultra-low power, smart imaging sensing total solutions.

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 are seeing strong demands in laptop and increasing shipments for multimedia applications such as car recorders, surveillance, drones, home appliances and 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 display, or HUD, for automotive.

In 2018, many AR goggle devices were launched, targeting primarily niche industrial business applications while top-name multinationals continued to invest heavily to develop an ecosystem -- applications, software, operating systems, system electronics and optics.

While AR goggle will still take a few more years to fully realize its market potential, we believe LCOS remains the mainstream technology in this space.

Our technology leadership and proven manufacturing expertise are evidence by the growing list of AR goggle device customers and ongoing engineering projects.

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

One of our customers has demonstrated their state-of-the-art HUD product with Himax LCOS inside at the 2018 CES (sic) [2019 CES], with extremely positive market reception.

LCOS for both goggle device and HUD represents much higher ASP and gross margin for us and represents the long-term growth driver for us.

In the meantime, we are working with various OEMs to bring LCOS micro display to mini projectors with revenue contribution to start from 2019.

For non-driver IC business, we expect revenues to decrease by over 30% sequentially in the first quarter, driven primarily by lower WLO shipment.

That concludes my report for this quarter.

Thank you for your interest in Himax.

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

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

Jordan, just wondering if you could comment on what's behind your confidence in the smartphone rebound in the second half.

Is this just based on normal seasonal patterns?

Is this based on design wins you have in the pipeline?

Any additional color would be helpful.

I think it's primarily on the design pipeline we have with the customer.

And also, the projects being discussed with the customer which, hopefully, many of them will soon become true, real design wins.

And certainly, in the second half or later of the year, particularly, I think our new technologies are for higher-end full HD+ is primarily what we call [mass] 6 design which -- in which we are leading the charge in the industry, which basically enables further reduction on display bezel.

Without the need to use COF package material, which as you know, is both very expensive and also is having a lot of surprise or just concerns.

So we are trying to narrow the gap of bezel -- of narrow bezel design in between ICs without COF package and COF package.

So that is for the higher-end full HD+ technologies that we are focusing on at the moment.

And on the lower-end HD+, the effort there is primarily to further reduce cost.

So in our next-generation design, we have so-called the [pure gate] design which, again, we are leading the charge in the industry.

So we are already engaging customers, we are starting different projects with customers, we anticipate low-scale designs, we are starting to make [conservative] contributions from second half of the year.

So for all these various reasons, I think, we are committed for a strong rebound in the second half.

Not to mention the fact that we have been, hopefully, successfully trying to convince the customer that capacity shortage -- foundry capacity shortage of last year, which was very bad, is already probably behind us.

So I think we are ready to go with the customer.

Okay, that's helpful.

And along the capacity constraints' lines, just curious if you could quantify what sort of capacity on the TDDI side you expect to have in Q1?

And then, how that will ramp throughout the year?

In terms of -- we are, firstly, on the -- on our target for the year.

We are targeting to reach on a monthly basis over $10 million per month in the second half, which is going to represent about 25% of global TDDI market at a time.

So as far as the capacity is concerned, certainly, our prepared capacity is over or above that number, meaning more than $10 million per month.

So we are ready to take more of this if we can so that is exactly what we are trying very hard on, which is to try to be aggressive and to get out there and win more design projects with the customers right now.

But out target I think is achievable, it's readably achievable, more than 10kk a month and, again, our capacities is way above that.

Our next question comes from the line of Tim Savageaux with Northland Capital Markets.

Couple of questions.

You'd mentioned that the -- despite the sequential decline, you expect year-over-year growth in wafer level optics.

I imagine through a greater number of devices that your large customer -- I wonder if you could talk about your expectations and growth trends for WLO for the year, both as a result of increased number of devices that your large customers as well as any potential traction on the Android side at the WLO level as the year progresses.

So we actually -- we didn't specifically say we expect WLO to grow this year -- this past year.

The reason being -- what we did say this that the -- our overall revenue, overall sales for this year we expect for a couple -- for a number of reasons we expect to see some growth despite the macroeconomy uncertainty.

So that we did say.

But we didn't specifically say that we're always going to do -- which is our growth this year.

That is primarily because, admittedly, our WLO business in terms of business in terms of shipment -- although we have good design pipelines and collaboration, our project with multiple customers.

But in terms of actual shipments, we are highly dependent on one single customer -- anchor customer, which provides very big volume and we have been very solid vendors to them.

But -- and certainly, our first quarter compared to first quarter of last year because of more models adoption -- the volume is becoming increased, but I think we are not providing full year visibility because we honestly -- we don't have -- and we are just building according to their demands.

So that's subject to our -- by our WLO outlook.

Now we do have -- enjoy customers in the pipeline.

But the Android customers for 3D sensing are -- the volume is ready to happen.

They are small for this year compared to the [inter-customer] slice expected volume.

So I think, the main driver of revenue for WLO, within this year, is going to be that anchor customer, again, for which, we don't pretend to have good visibility for the whole year.

Having said that, we are working with multiple projects with that anchor customer and also other android customers.

So hopefully, starting from next year, we will have a more diversified balanced sales portfolio as well as projects portfolio and even customer portfolio.

So that is the end for next year and beyond.

But for this year is highly dependent on that one anchor customer.

Understood.

And if I could follow-up, despite the sequential decline forecast in large driver, looks like you're growing pretty good pace on a year-over-year basis.

I think to your point, you've mentioned the overall expectations for revenue growth.

Would you say large driver is the biggest part of that?

And it looks like you're growing more than, based on what you're guiding, 20% in Q1 and then, you had a stronger second half of '18.

But what, sort of, growth expectations -- or would you expect that type of year-over-year growth to continue in large driver?

Perhaps -- Tim, I appreciate the question.

In addition to large driver, perhaps, I can give a quick overview of both on large driver and small-, medium-sized driver and a little bit on nondrivers, so you get a full picture -- fuller picture on how we're thinking for the whole year.

Again, we appreciate -- fully appreciate the macroeconomic uncertainty, so that is going to impact the market demands.

And we also appreciate the fact that people are generally not so bullish of smartphone market, which for Himax is the single biggest end market.

So this will affect us certainly negative.

We have to bear that in mind in our projection.

And also by providing some colors for the projection, we're not providing solid guidance for the whole year numerically.

Now for a large display driver, our target is hopefully double-digit growth year-over-year.

Chinese panel makers, their ongoing capacity expansion certainly is going to help.

And also I mentioned in my prepared remarks, our -- we suffered last year a lot by capacity shortage firstly in -- on the foundry side and thereafter on the COF packaging material side.

And for both, I think we are leading the industry in terms of resolving those issues.

So we feel we are very well prepared, and we are actually ready to -- we start preparation compared to our peers, ready to pitch aggressive to customers, try to win more design wins because of our stronger business support for the second half.

So -- and also, I think our China, for large panel, has been our largest market.

And within China, there are actually upper-tier customers and lower-tier customers.

And our focus has a lot more upper-tier customers, who typically enjoy better customer engagement or relationship, they enjoy better technology and they enjoy better market share in the high end and they enjoy more diversified product portfolio.

So I think we benefit by supporting all those efforts to those upper-end customers.

So the concern for the whole year for large display is capacity oversupply.

And I think it is the industry consensus that somehow, somebody at some point has got to reduce their capacity.

But I think our focused customers, peers are the less likely to do that compared to those lower-tier customers.

And also I think Korean customers, who are in large display driver -- in large discrete driver business is suffering from higher cost compared to Chinese.

So our market share for Q4 is already more than 20% globally, and we expect that market share.

So they will not decline, we -- our aim is to further grow that market share.

So that's -- I think that's the color for large display.

And for small display, the biggest drivers, obviously, is going to be TDDI, which I just mentioned already in Jaeson's question.

And so we expect TDDI to more than double from last year.

However, for smartphone overall, the growth certainly will be much smaller than that because we do expect the traditional discrete driver IC for smartphone to further decline.

So overall, we think the year-over-year increase of around -- more than 25% can be expected for smartphone.

For automotive, the growth will not be significantly small, likely to be single digit, because after quite a few years of strong growth for the automotive display market, the market has started to become mature and the growth rate is likely to be single digit this year and even for the next year.

And also the fact is that the Himax market share is already very high, well over 30% globally.

So with that high market share and maturing market, I think after quite a few years of phenomenal growth for Himax in the automotive display driver business, I think we are going to remain in the market either with the committed market share position, but the growth for the year is only likely to be single digit.

Other sectors in small- and medium-sized display driver would not look so -- as so exciting or promising.

I'm talking about tablets, which is likely to be down, hopefully single-digit.

Electronic paper, EPT, also likely to be down, perhaps single-digit.

And other consumer electronics, I think, would be probably even worse.

So all these smaller sectors in small- and medium-sized display drivers are likely to suffer some decline this year.

So overall, we believe putting all this together, probably single-digit growth, although it's still very early stage to say, but for small- and medium-sized driver, probably single-digit growth for the whole year.

Nondriver, 3 biggest segments for now are WLO, which I have already mentioned.

So we have not many incumbents or indications because of lack of visibility.

And then CMOS image sensor, strong growth expected because of better product portfolio into multimedia products and notebook end market.

More product offering, more customer engagement.

There are a lot of small applications, smaller engagements, but they are -- it's quite a diversified portfolio, but we have seen strong growth momentum this year and more so next year.

So CIS would definitely be a double-digit growth for this year.

And lastly is our timing controller business for TV, which I think you can pretty much follow my comments on large display driver because they typically go side-by-side.

So I think that kind of covers all our major product areas, our indication for growth prospects for the whole year.

I hope that more than answers your question, Tim.

Our next question comes from Jerry Su with Crédit Suisse.

Jordan, I would like to ask you about OLED progress, because you made in the prepared remarks about the OLED driver IC, especially with smartphone, you've been working with customers.

I remember several years ago, you had been shipping the OLED driver IC.

So I would like to know what's your latest progress and then approximate timing for this to see sound revenue contribution?

I think many of our revenue contribution is going to be next year, little within this year.

This year we do have -- across major OLED customers in China, we do have collaboration projects, we do have engagements.

But it really depends a lot on also the -- our customers' progress, and in some cases, the specs of the [passive] market last year been changed.

So for smartphone market, which certainly is the major part of the market, we have a lot of activities.

But unfortunately, in terms of actual sales contribution, I think it is more safe to say, in your model, it should be next year's story rather than this year.

Now we do have OLED projects into automotive as well.

Certainly, in terms of production timing, even later than smartphone.

But we do have engagement, again, with Chinese leading customers on that as well.

Over there, you basically talk about even higher-end displays compared to our TFT-LCD.

And even with the benefit of -- we're talking about plastic OLED.

So freeform designs, which will be very important for automotive.

So I think OLED, there are activities both in smartphone and automotive.

But in terms of regular contribution, it will not be until next year.

And then probably a follow-up question for Jackie.

I think in the prepared remarks, you mentioned OpEx you're targeting for flattish, excluding the increase in depreciation.

But for the -- I think if you -- could you let us know what is the amount of the depreciation increase in the OpEx line?

Or more easily, can you just give us a rough idea about what's OpEx spending for this year?

And also, any comment on the effective tax rate for this year?

Yes.

The total OpEx for 2019 is budgeted to be around $175 million IFRS basis, of which we see $8 million more depreciation -- incremental depreciation versus the last year.

And of the $8 million incremental depreciation, $2 million really comes from the capitalized lease.

So basically, we're capitalizing our lease, right?

So I think that represents about 5.6% year-over-year increase.

As far as the effective tax rate, right now we're projecting about 3% because if you put everything together, I think that right now because of the low visibility and the uncertainty of the macroeconomics, right, we try to remain conservative.

Therefore, our driver IC division may not be as profitable this year.

So the effective tax rate will be lower because we'll be paying less taxes.

At least that's in the current assumption right now.

Okay, about 3%, I should say.

Yes, 3%, yes.

Our next question comes from Donnie Teng with Nomura.

My first question is related to TDDI.

So looks like the TDDI shipment will sequentially decline into first quarter from fourth quarter last year.

And you mentioned about your changing the new design, so probably that's the main reason.

But I'm not sure whether there is still some capacity constraint, particularly in the back end.

So that is another reason you cannot get enough capacity.

Because it looks like Novatech's market share is still meaningfully pretty high in the first half.

And also wondering when will we see the TDDI shipment to pick up this year.

Will it be in the second quarter?

Or it will be more like a back-end-loaded in the second half?

Certainly, very much second half back-end-loaded, but certainly, you should expect further pickup second quarter from first quarter.

First quarter will definitely be the buffer.

And I think first quarter is low because of serious capacity constraint.

We really had to -- last year, fourth quarter in particular, we really have to exclude the lower customers in order to just focus to satisfy the demands of one major Chinese end customer.

That is unavoidable and difficult decision to make because we simply didn't have the capacity to satisfy everybody.

So with that major customer that we had, we focused on end of last year.

Everybody was pretty much in a panic mode.

So -- because capacity is -- was so, so short across the board.

So I think the end result was that they ended up taking what they really needed from us in the Q4 last year.

And therefore, we have seen some inventory correction from that major customer.

And now we're fully diversified into other customers.

But this diversification process, because admittedly, we did have a high degree of dependency on one single customer.

So the fluctuation, I think, compared to our competitors -- our leading competitors, you mentioned, I think is certainly not in our favor.

But hopefully, when we have a more balanced customer portfolio and product portfolio, starting from now actually, the situation will improve.

Now we talked -- I just mentioned about our new generation of design.

We're not saying our sales will have to count on those designs.

I think with those designs, we hope to win more design win sockets.

But I think with this current generation design, we will continue the next shipments.

And again, last year, the concern was primarily capacity.

It took a little bit of time to really convince the customer that the concern is already gone and then you'll be a design engagement stage and then lead to shipment.

So there will be some lead time required for us to diversify our customers.

But I think the fact that we were able to support high-end products Full HD+ with an industry-leading customer, I think that kind of demonstrated our capability.

And we just have to start from there and try to win more projects with small customers.

And I think for TDDI, I also want to talk about other potentially other applications, not actually -- not potentially, they're happening right now.

TDDI is going to be more and beyond just smartphone.

We talk about automotive, 10 or higher tablet or larger display with active stylus and even 2-in-1 notebooks.

Such products industry is already adopting TDDI.

And I think we are in the frontier in terms of exploring those opportunities and engagement with those customers.

So with automotive -- I think to give you a rough idea, automotive, we expect shipment started -- starting from 2 -- from second half this year.

Starting small, but next year will be a lot more programs starting mass production.

That is from automotive TDDI.

From high-end tablet, again, under development and verification by panel makers, we expect revenue contribution from 3 -- from the third quarter or second half of this year.

And active stylus TDDI actually, this is where we are within the industry.

We had -- together with our key partner, we made an announcement and demo at CES.

We got a pretty good response.

So the engineering sample will be ready in the second quarter OEMs' evaluation and design.

So hopefully, again, mass production by the end of this year.

2-in-1 notebook solution will be ready by end of this year, mass production is expected next year.

So although any one of these single segments in terms of volume is starting to compare with mobile phone pricing, for long term, I think they also represent good growth areas for us.

Got it.

So one follow-up question on the competitive constraints.

So this year, can we say that the foundry capacity is not -- is no longer a constraint, but probably more likely in the back end?

Is that a fair comment?

For very high-end TDDI, you talk about COF packaging.

The COF, certainly capacity is a constraint.

I know for sure.

Quite a number of leading -- even leading smartphone customers, they are hesitant to go bid into such designs simply because of capacity concerns.

And we also know of probably 2 or 3 leading smartphone customers, they have to go straight to -- through the ecosystem and go secure COF capacity directly by themselves.

So the -- it's very offensive, and it's got a lot of capacity constraint.

So in our projection for this year, although we do have such technology and we do have some shipment records for COF.

But again, we are suffering from the same capacity constraints.

So in this year's projection, we're not really counting on that.

So that is -- if you -- what you mean by back-end is COF package, then yes, it's got a COF capacity constraint.

But in terms of testing, indeed, it requires higher testing, and testing is -- always is a long-term issue.

But it's an issue that has always been resolved.

And it's always the issue -- it's always been resolved.

And it may represent some -- a little bit of shortage, but it is not a big-scale shortage such as our -- how we saw in terms of foundry capacity or how we're seeing right now in terms of COF.

We're talking about very different story.

So those testing capacity constraints, I think it's only marginal, and they can be resolved.

Got it.

My second question is pretty simple.

I think we have some long-term growth drivers like OLED, display driver ICs, 3D sensing and LCOS.

So if you look at coming 1 to 2 years, when -- what product lines should we expect to see more meaningful sales contribution at the earliest?

And if you -- wondering if you can bring these 3 product lines, so when will we have better visibility on these products?

I think in terms of shorter-term visibility, certainly the best potential come from 3D sensing, where we provide critical optical components or projector modules to both Android and non-Android smartphone markets, covering ToF and structured light and all these solutions.

So there we're talking about a very small number of leading customers who have their in-house technology depth to provide their own total solution.

So we, along with some of our peers, will be called in to provide certain critical components of technologies to go with their total solution, right?

So that, if you like, is certainly the major revenue contributor last year, this year and next year.

That is the most short term.

So I think in terms of 3D sensing, we talked about in my prepared remarks, admittedly, the first generation, arguably, the technology development was a reasonable success.

But I think we probably didn't do well enough in terms of cost.

And also easiness for customers' integration.

So that is where we're working on at the moment together with our platform partners.

So the target is end of this year to early next year, certainly, for our new total solution.

And mass production, it's likely to be second half 2020.

Okay?

So -- and also, we do have existing technology, existing solutions, which we are using to explore opportunities, primarily on nonsmartphone sectors.

Again, they are less cost-sensitive, but they do require a total solution.

So only a very small handful of vendors around the world can supply that.

But the difficulty here is -- the fact that you need to meet their requirements, both technical and commercial requirements, and you need to put together a true total solution for them in order to start generating revenue.

By saying that, we're talking about not just our total solution.

Also, our total solution needs to work with their, for example, their central controlling SoC platform or IP and so on and so forth.

So -- but I think -- so our targeting -- target market for now in the short term is primarily security and surveillance because in terms of use case scenario, they are quite similar to face unlock requirable smartphone, meaning the hardware and spec our revision required is the smallest in those segments.

Because in surveillance and security, what happens in most cases, you -- basically you also try to do face recognition with NIR, [ride pin] and so on and so forth, which is quite similar to smartphone.

And we're also engaging manufacturing factory kind of customers, but I cannot elaborate more details.

Hopefully, somewhere within this year, we'll probably make more information available to the market.

But I do respect confidentially for now.

But what I'm trying to say is that with AIoT applications, they are more fragmented, but they do represent a tremendous market potential for us.

We are, if you like, still going through the learning process in the sense that we do -- over here we do have a total solution and there will be next-generation total solution developed for smartphone, will be also applied over here.

But what we are going through right now is really to learn from real design activities, hardware, software and system integration, all this together, right?

So it's a necessary know-how accumulation process to meet.

But again, for such applications, we are in the forefront of the industry's development.

So I think we see 3D sensing as a new and tremendous market for the long term.

So we are in a very real position, where we have 3 critical technologies under the same roof, being optic, CIS and algorithm and even ASIC.

So very few people in the world can do that.

So I think we are seeing 3D sensing as a very long-term fit for Himax.

So I think that is the first major area for nondriver.

I think what you didn't mention and we did mention in our prepared remarks, I think I will try to take a few minutes to explore another major AIoT opportunity for us, which is ultra-low power sensing.

Similar to 3D sensing, the reason why we are into this big time is because we, firstly, it's a new market, a tech new market with a tremendous long-term potential.

And secondly, we have some very unique technology in the marketplace.

And certainly, our technology and our position is already highly recognized in the industry, evidenced by the fact that we're already approached typically by their respective industry leaders for collaboration.

So because of this unique position that we enjoy, we are also seeing ultra-low power sensing for AIoT as a very long-term growth engine for Himax.

Do you remember we acquired this Israeli software company called Emza?

Emza specialized in providing algorithm, AI-based algorithm, for ultra-low power image sensing, intelligent ultra-low power image sensing.

So together with simultaneous sensor and our ASIC design, we can -- we are probably the only one in the world which can put together such solution with such amazing ultra-low power specification.

Right now, it's primarily for people detection, limited people recognition and people counting.

I'll probably try to give you -- our focus area for the short term this primary surveillance and security market, where very often, you need to have better recharge solution, which requires super-low power, and that is where we come in.

I'll give you probably a rough example of security and surveillance market, or smart door open, smart door lock or office entering [controls].

Such markets, you eventually -- it's already happening in right now -- this will be upgraded to 3D face recognition for access control because of higher requirement for safety, right?

Imagine it's your door, you only see a hole.

You want to have something electronically and intelligently replace your traditional key.

Actually the industry is now being upgraded from 2D face recognition to 3D.

Now the problem is, with your 3D sensing, you can't have 3D sensing always on because it's simply too power consuming.

In addition to 3D sensing, you also don't want to have your centralized SoC always locked.

So what you need is a supplemental ultra-low power image -- smart image detection device sitting on the side to basically screen and recognize there are human being approaching.

And that's when you decide to wake up the central SoC and 3D sensing, which are again power consuming.

So we have still a lot of inquiries coming from a customer approaching us for such developing programs.

So I'm pretty sure we will have more news to report, better progress to report in the due course for ultra-low power sensing as well.

So in terms of revenue contribution, I would say this will also start from next year.

Primarily, we have a lot of engagements and design activities together with our customers.

And lastly, on LCOS.

We emphasize that for -- we're talking about 2 major markets, right, AR goggle devices and those for HUD for super high-end automotive HUD application.

Those will take a few years to materialize.

So what we're doing in LCOS for now is really trying to minimize our cost, because we do have a technology ready, we do have a lot of displays already developed.

Whenever customers want us to develop a new display, which is still happening by the way, from some top tier names, they are still paying us NREs to -- for new panels with their specification requirements.

So whether it's new panels or existing panels, but customers simply want us to support them in their development effort, we charge NRE.

So we try to minimize our cost.

We try to utilize our existing technology and products portfolio, and we try to charge NRE for whatever big effort or small effort services that we provide to customers, hoping to get to see the real combination of both these sectors, being AR goggle devices and HUD.

By the way, HUD, we are really seeing -- a lot of people are saying they've never seen this before.

They haven't imagined these can be made so brilliantly.

But again, it's -- for automotive, it's going to take a few years to materialize.

So that kind of covers our nondriver effort.

So again, these are unique.

We are already in the leading position, highly recognized by the industry and the market may be small for now, but we feel they are new market and they are long-term growth areas.

And with that, I will now turn the conference back over to Mr. Wu for any closing remarks.

As a final note, Jackie, our CFO, will maintain our investor marketing activities.

And we will continue to attend investor conferences.

And we'll announce the details as they come about.

Thank you, and have a nice day.

Thank you.

Ladies and gentlemen, that does conclude today's conference.

Thank you very much for your participation.

You may all disconnect.

Have a wonderful day.