Greetings, and welcome to the Himax Technologies Inc. Second Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. John Mattio, Senior Vice President of MZ, North America. Thank you Mr. Mattio, you may now begin.

Thank you, operator. Welcome everyone to Himax’s second quarter 2013 earnings call. Joining us from the company are Mr. Jordan Wu, President and Chief Executive Officer and Ms. Jackie Chang, Chief Financial Officer. After the Company’s prepared comments, we have allocated time for questions in a Q&A session following the Company’s prepared remarks. If you have not yet received a copy of today's results, please call MZ Group at 212-301-7130 or access the press release on financial portals like Bloomberg, Yahoo!, Google or you could download a copy from Himax’s website at www.himax.com.tw. Before we begin with the formal comments, I would like to remind everyone that some of the statements in this conference call, including statements regarding expected future financial results and industry growth, are forward-looking statements that involve a number of risks and uncertainties that could cause actual events or results to differ materially from those described in the conference call. Factors that could cause actual results include, but are not limited to, general, business and economic conditions and the state of the semiconductor industry; market acceptance and competitiveness of the driver and non-driver products developed by the Company, demand for end-use application products, reliance on a small group of principal customers, the uncertainty of continued success in technological innovations and other operational and market challenges; the capacity to maintain the full two-way fungibles between the Company's ordinary shares and ADS, and other risks described from time to time in the Company's SEC filings, including those risks identified in the section entitled Risk Factors in its Form 20-F for the year ended December 31, 2012 filed with the SEC as amended. Except for the Company’s full year of 2012 financials, which were provided on the Company’s 20-F filed with the SEC, the financial information included in this conference call is unaudited and consolidated, and prepared in accordance with U.S. GAAP. Such financial information is generated internally and has not been subject to same review and scrutiny, including internal auditing procedures and audit by independent auditors to which the company subjects its annual consolidated financial statements, and may vary materially from the audited consolidated financial information for the same period. Any evaluation of the financial information included in this conference call should also take into account the Company’s published audited consolidated financial statements and the notes to those statements. In addition, the financial information included in this conference call is not necessarily indicative of results for any future period. The company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise. At this time, I would now like to turn the call over to Mr. Jordan Wu. Jordan, the floor is yours.

Thank you, John, and thank you, everybody for being with us for today’s call. We have some very exciting developments to report today. As usual, I will provide some preliminary review on our second quarter and then discuss our outlook for the third quarter 2013. I will also comment on a few product areas of focus. Our CFO, Jackie Chang, will then provide further details on our financial performance and the sale of Himax stock by Innolux Corporation. I am pleased to report that our second quarter revenues, gross margin, GAAP and non-GAAP earnings per diluted ADS all met our guidance. For the second quarter, we reported net revenues of $207 million with gross margin of 24.6%. Second quarter GAAP earnings per diluted ADS were $0.112 and non-GAAP earnings per diluted ADS were $0.117, both coming in at the upper end of our earnings guidance. These positive performances are a result of our diversification of customer base and expansion of product portfolio through more exciting and high growth areas of small and medium size driver and non-driver businesses. Our second quarter revenues of $207 million represented a 9.2% increase from $189.5 million in the second quarter of 2012 and a 17.8% increase from $175.7 million in the previous quarter of this year. Our second quarter revenues were the highest since the first quarter of 2008. Revenues from large panel display drivers were $64.3 million, down 19.3% from a year ago and up 7% sequentially. Large panel display drivers accounted for 31.1% of total revenues for second quarter, compared to 42.1% a year ago and 34.2% in the last quarter. The sequential increase was mainly a result of seasonal demand for TV panels. The year‐over‐year decrease was caused by reduced sales to Innolux, a formerly related party. Among our large market…

Thank you, Jordan. I will now provide additional details for our second quarter financial results. Our GAAP operating expenses were $27.1 million in Q2 2013, up 15.6% from a year ago and up 2.8% from the previous quarter. The increase was mainly resulted from expenses related to salaries for R&D new hires and new product developments. GAAP operating income for second quarter of 2013 was $23.7 million, or 11.5% of sales, up 17.5% compared to the same period last year and up 41.7% from the previous quarter. Non-GAAP net income in the second quarter was $20.1 million or $0.117 per diluted ADS, up from $15.9 million, or $0.093 per diluted ADS, for the same period last year, and up from $15 million or $0.088 per diluted ADS in the previous quarter. Non-GAAP net income represents a growth of 26.1% year over year and growth of 33.8%, as compared to the previous quarter. Non-GAAP EPS per diluted ADS grew 25.6% from the same period last year and 33.4% over the previous quarter. Our cash, cash equivalents, and marketable securities were $147.1 million at the end of June 2013, a significant increase from $103.2 million at same time last year and slightly down from $158.9 million a quarter ago. The decrease is related to a free cash flow of which I will provide more details shortly. On top of the above cash position, restricted cash was $74.1 million at the end of the quarter, up from $63 million during the same period last year and no change compared to the last quarter. The restricted cash is mainly used to guarantee the Company’s short-term loan for the same amount. We continue to maintain a very strong balance sheet with no debt Inventories as of June 30, 2013 were $142.9 million, up from $139.2…

Thank you Jackie. We are pleased with our second quarter results where we achieved recognized sales in terms of both absolute value, and percentage of sales in two of our focused growth areas, small and medium panel driver IC and non-driver products. However we're seeing a short term slowdown ahead of us in the third quarter which I will elaborate further shortly. In addition to the Innolux equity sale in Q2 which Jackie just covered, another major event was Google's investment in Himax display, our LCOS microdisplays subsidiary, which took place in July. I will also talk about that a bit later. (Inaudible) driver is Q3 prospect was sluggish due to the global weakening demand of TV and laptop. This was worsened by the termination of China government’s TV subsidy program effective at the end of May. However we believe that this is temporary setback and we are confident about the long term growth prospect of driver IC in TV applications, which presents one of our major business focuses. We have maintained a competitive position in the segments and will continue to pursue growth opportunities presented by China's continued expansion of their panel production capacity with potential new businesses from other major panel makers in Korea and Taiwan. The short term prospect of our small and medium size panel driver business in terms of softening. China market slowdown in June and July due to smartphone makers model transitioning and the overall market inventory correction. However smartphone panel resolution continues to rise, which is a trend that has benefited our gross margin as we are among the leading players at the higher end of the market. In comparison we are seeing intense price competition and margin pressure in the lower end smartphone and feature phone markets areas where we have lost…

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (Operator Instructions) Thank you, our first question is coming from the line of Jay Srivatsa with Chardan Capital Markets. Please proceed with your question.

Jordan, in terms of your guidance, it looks like June and July months have been little soft on the large panel and small panel. There seems to be a sense that with the holidays coming up in October in China, that the second half of Q3 could potentially see some ramp up towards that holidays. Can you set the stage for what you see in terms of demand patterns as you look at the rest of the quarter?

As you have said, well in China, we all know, in China (inaudible) represents a very difficult (ph) shopping season in big demand in theory for the end of Q3. But this year on the whole what we are seeing is the visibility seems to be a bit slow compared to last three years. We are now ruling out that there could be a demand pick up in the later part of the quarter but we are now sitting well in the middle of the quarter, but as I just said we feel the visibility is slow. So we are not really that certain about it, although we don’t rule out that possibility. And before I actually highlighted in my remarks that we intentionally try to widen our range for the guidance because, I also said earlier the inventory level across the industry right now appears to be slightly on the high side and also customers end therefore our direct directors demand or forecast for the rest of the quarter so far has been conservative. So again, I mean we don’t rule out the possibility of that being picked up later in the quarter.

In terms of the non-driver products, it looks like it grew pretty nicely at about almost $7.5 million sequentially in Q2 versus Q1. Do you expect further growth in Q3 on your non-driver products and if so, what segment of the non-driver products do you expect the growth to come from?

Absolutely. We do expect in Q3, the non-driver product to continue to grow sequentially and obviously year-over-year quite strongly. And so both in terms of, it's absolutely the amount and also, in terms of the consultation for (inaudible) driver in Q3, I think we are hopeful that it will be another record high. In terms of the strong areas of growth, certainly the CMOS image sensor product, the LCOS module and in particular also our power management ICs with reach our (inaudible) plans, the strongest growth for Q3.

Okay and just last question. In terms of the investment from Google, can you give us some clarity on what do you expect in terms of utilization of the cash? Do you expect to invest and if you’re investing in the fab capacity, could you give us some timelines on when you hope ramp up capacity, and ultimately what level of capacity do you expect to be able to get to with the investments coupled with your existing capacity?

We actually mentioned in quite a few times in the past, in the conference call that we are working with certain top tier customers, some of which have started parallel production. Now what is not so clear to us is how long that parallel production is going to take before actual ramping. Bear in mind, we are really talking about very new sort of concept. One which has been referenced before and one which involves a high degree of technical difficulties. So together with our customers we are working diligently and yet patiently to make sure everything is in order before we stop mass production and ultimately the timing for mass production is a decision of our customers, not of our sales person. So, what we can do is to get repair and the moment I can tell you the effect, which is in-house is still relatively empty and so the first bottleneck will be our operator because when the demand is still slow, there is no reason for us to hire too many operators. And assuming demand start to come in, we will certainly higher more operators and therefore put our throughput and then thereafter there similar pages of the bottlenecking in capacity, and also along the line we are also upgrading our facility in the sense that we are trying to improve the quality of our product and also improve year rate. So both the bottlenecking and the improvement in our facilities are two measures of process for Google’s investment. So at the moment, considering the low base of operators, our current capacity is actually less than 200,000 a month. But upon more hiring of operators and further increase of capacity or the bottlenecking of our facility, with certain investment we can actually using our existing facility, we…

Thank you. Our next question is coming from the line of Anthony Stoss with Craig-Hallum. Please proceed with your question.

Three-part question. Jordon, if you wouldn’t mind talking about what you’re seeing on the out coast side in terms of competing solutions. Also Jackie if you wouldn’t mind take us on the display driver side as resolutions are increasing, kind of just your average ASPs if you can help with any kind of color on how they’re increasing; and lastly on the 8 megapixel CMOS image sensor side, just a sense of smartphone traction via designs?

I would stick by commenting on the competitive solutions for head-mounted display. Well, I think I should talk about the two potential areas of competition. One is other cost providers and the other one is competing technologies. I think for HD I would start by talking about competing technologies. I see you consider the cost, the simplicity of (inaudible) the performance including resolution, the image quality and also very importantly power consumption. Not just power consumption on the panel but power consumption on the entire optical system. If you put all this together, it of course actually represents a very, very key spot when it comes to head-mounted display. Now, head-mounted display arguably is another type of pico-projection and certainly we are aware of the whole pico-projector market, which we have tried very hard and we have worked with various top tier plans for the end products and unfortunately they didn’t really become entering product. But out of those experiences, we have got to pick up a lot of lessons and therefore improve our product competitiveness along the way. We eventually follow for those long head-mounted display applications, which are primarily pico-projector applications, with shipping total well over 2 million panels already. So we did pick up quite a bit of experience. In another line we realized, when you need to well place a very tiny metal display very close to your head or your eyes or even your brain, it of course actually sitting on a very nice sweet spot. So today what we are seeing, in the minds of customers where we are off of whether they are optical engineers (ph) or importantly end product makers. If you ask that about pico-projector they are (inaudible) competing technologies but when it comes to head-mounted display, I think LCOS almost…

Yes that and also just your average ASP on the driver side, if Jackie has got those handy. That would be helpful?

The internal ASP.

Well, Tony I think that what we are seeing now is the higher resolution driver IC for smartphone is the trend and we continue to see the trend going up. Especially Himax has been benefited from that higher gross margin resulted from a higher ASP. I think depending on the resolution between the true HD and HD720 and FHD in the future, every sale price can range anywhere of a 25% higher than the average WVGA to all the way to double the price. So you can see the gross margin is quite different. So as this trend continues, we should continue to be benefitting from that.

Our next question is coming from the line of Daniel Heyler with Bank of America. Please proceed with your question.

This is Kyna. I am asking on behalf of Daniel. And my question is about the visibility actually regarding your guidance. Because I remember somewhat on the June income, you see like 10% growth in the quarter and then later in late July and maybe in August we will see maybe a 5% to 10%, but now you see another 5% to 12% decline in the quarter revenue growth. So I would like to get more color from the actual market situation, and then what scenario that you would probably expect?

Right, well actually both large panel and small panel (inaudible), I think probably with the exception of tablets and automotive goes down at the moment, and I think the fact is that our visibility is low for just about everybody across the supply chain, and certainly I mentioned earlier, the demand for the October Shopping Season for China hasn’t really picked up yet. Another thing about the poor visibility comes from the fact that customers tend to give us rush orders. They are probably less able to see the picture of their demand two or three months or even one month ahead. And therefore sometimes, more often, right now, then before that they have come to us for short-term revision of their focus of this. Unfortunately that sometimes represents lots of regular opportunity in a short term for us. For example if the customer push you to put A product in the forecast and all of a sudden they say oh we don’t need A for the short-term, now we are switching our demand to B-product. But because of their previous focus for A, we are to make preparations for manufacturing for A. And we may not necessarily have inventory available for them for B. So unfortunately that is happening right now for us. Somehow we’re seeing to a certain extent, because of this low visibility inventory on the certain product essentially writing (ph) slightly, we are also facing shortage because of our supply because of our customer’s shook motives. So I think all these are indications that people already seen a good visibility in the marketplace. This is not just China’s whereabouts. We are even talking about (inaudible) as well. So and again low visibility means if the visibility is low, we you can actually go for the (inaudible) or for the up. There could be a surprise upside in short-term as well but the answer is we really don’t know at this stage, even though we already sit in at the middle of the quarter.

Another question is about the interest income. This quarter I saw around $250 million gain from the interest income. Is this sustainable? How can I model, maybe for the future stable operating income for that?

The interest income for this quarter $256,000. I think that’s probably not believed to be the same level each quarter. I think that you can pretty much model in your financial model, probably half of that, as an average because we do use our fund in making different deposits and stuff and we do generate certain interest income but that's not really stable income for us each quarter. So it varies. So I will just use average.

We capitalize that. We put our funds in the (inaudible) possible ways, which I mean obviously also means low interest. So I think it should also be over time a direct function of our cash position, because we do place our deposits in the safest possible way.

And on that I have one more question about the OpEx for the R&D expense. Which product you pace more R&D or likely 90% of your additional R&D spending will be placed in the non-driver side? Can I say that's right?

Well no. I mean certainly for LCOS for CMOS image sensors and also even our ASIC services, where we are seeing (inaudible) activities, business opportunity coming to us. So we are expanding quite aggressively over there. However for example in our smartphone and tablet market, or even touch panel controller business, we're actually also seeing, there is a lot of new activities coming to us. So I think in terms of the growth in R&D expenses, certainly non-driver would be a bit higher than in driver. However it doesn't mean driver is not growing. It is actually growing fast as well. So I think overall what we have seen is as you all are well aware, our business rebounded very strongly in last year. So towards the end of last year, into this year, and prior to even next year I think we are seeing a lot of great opportunity ahead of us and certainly to fully take advantage of that, we have to expand our R&D base. So we understand that will impact our short term P&L but I think it's something we just have to do. So in comparison to the year before last year and few years back, when our business was on the low side and as we look at our financials we maintained a pretty stable R&D expense over those years, but starting from somewhere last year and to this year I think we are more aggressive in terms of R&D spending. We’re kind of tight rope (ph) right now.

Thank you. Our final question is coming from the line of Jun Zhang with Wedge Partners. Please proceed with your question.

In terms of slowing down TV market and there is some smartphone inventory correction, Jordan, do you expect this is going to only be a one quarter issue or will continue to Q4. That's my first question.

Thank you Jun. Low visibility is the key. So we usually don't want to comment too much Q4 right now.

So also on the CMOS 8 megapixel, I know someone already asked a question, but I think what's your confidence to picturing the CMOS image sensor market, especially in the 5 and 8 megapixel image sensor markets?

We have certainly starting from, in terms of mainstream main camera for smartphone, that's our current market in the 5 megapixel and the 8 megapixel which are the two product specs for the mainstream smartphone's main cameras. And for this market we are certainly starting from second year in China and also (inaudible). We are in discussion with certain top brands, however we are not hopeful that given if we are very successful, design stage will take quite some time. So I think at least the next two quarters you should not expect to see Himax breaking into top tier brands. But certain brand names which are not necessary top tier but offer exciting potential for us, which we do have good designer activities going around at the moment.

My last question is, do you see the growth momentum from the LG or the other panel makers in China or in Taiwan that could potentially offset the decline from Innolux in the next few quarters?

That's the plan. Yes that's the plan and we're working very hard on that.

Thank you. We have reached the end of our time for the question and answer session. I would now like to turn the floor back over to Mr. Jordan Wu for any concluding comments.

Okay thank you everyone for taking the time to join today. We look forward to talking with you again at our upcoming earnings calls in early November and Jackie our CFO will attend Oppenheimer's conference in New York City and do a Road Show in September. So you can contact John Mattio of MZ Group or our department if you are interested in meeting with us in person. So thank you again and have a nice day.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation.