Himax Technologies, Inc. (HIMX) Q3 2014 Earnings Report, Transcript and Summary

Greetings. And welcome to the Himax Technologies, Inc. Third Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. A 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, Scott Powell, Managing Director with PCG Advisory Group, LLC. Thank you. You may begin.

Thank you, Operator. And welcome everyone to Himax’s third quarter 2014 earnings conference 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 remarks, we have allocated time for questions in a Q&A session. If you have not yet received a copy of today’s results release, please call PCG Advisory Group, LLC at area code 1 (646) 780-8850, or access the press release on financial portals like Bloomberg, Yahoo or Google or you can 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 in this conference call, including statements regarding expected future financial results and industry growth, are forward-looking statements that involve a number of risks and uncertainties that could cause actual events or results to differ materially from those described in this conference call. Factors that could cause actual results 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 applications products; the uncertainty of continued success in technological innovations; and other operational and market challenges, and other risks described from time-to-time in the company’s SEC filings, including those risks identified in the section entitled Risk Factors in its Form 20-F for the year ended December 31, 2013 filed with the SEC as amended. Except for the company’s full year 2013 financials, which were provided on the company’s 20-F, filed with the SEC on April 15th, 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 subjected to the same review and scrutiny, including internal auditing procedures and audit by independent auditors 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. At this time, I would now like to turn the call over to Mr. Jordan Wu. Jordan, the floor is yours.

Thank you, Scott, and thank you everybody for being with us for today’s call. As usual, I will provide some preliminary review on our third quarter then discuss our outlook for the fourth quarter of the year and then I will also comment on a few product areas of focus. Our CFO, Jackie Chang, will also provide additional details on our financials. I am pleased to report that our 2014 third quarter revenues, gross margin, GAAP and non-GAAP earnings per diluted ADS, all met our guidance for the quarter. For the third quarter, we reported net revenues of $222.3 million with a gross margin of 24.5%. Third quarter GAAP earnings per diluted ADS were $0.065 and non-GAAP earnings per diluted ADS were $0.111. Our third quarter revenues of $222.3 million, represented a 15.3% increase from the third quarter last year and a 13.2% increase from the previous quarter. The third quarter revenues were the highest since the fourth quarter of 2008, equally important to the sales growth, if the mix of revenues which are a lot more diversified than before. The non-driver products accounted for 21.5% of our total revenues in the third quarter of 2014 versus just 5.1% in 2008. Likewise, the drivers for small and medium-sized panel represented 51% of the third quarter revenues, as opposed to just 16.7% in 2008. Revenues from large panel display drivers were $61.2 million, up 6.1% from a year ago and up 20.5% sequentially. Large panel driver IC accounted for 27.5% of our total revenues for the third quarter compared to 29.9% a year ago and 25.9% in the last quarter. This is the first quarter when sales from large panel driver IC enjoyed a year-over-year growth since Q1, 2013. We are happy that our large panel driver business has resumed growth starting this quarter as a result of increasing shipment to both new and existing customers. Sales for small and medium-sized drivers came in at $113.3 million, up 12.8% from the same period last year and up 5.9% sequentially. Driver ICs for small and medium-sized applications accounted for 51% of total revenues for the third quarter as compared to 52.1% a year ago and 54.5% in the previous quarter. Driver IC sales for smartphones rebounded strongly from both of Q2 mainly as a result of the demand from our Korean end-customer coming back from last quarter’s unusually low level. We also enjoyed strong growth in Chinese smartphone market, especially in the higher end segments. However, as expected, this growth was offset by the sequential decline for tablets due to slowing demand in China’s white-box market and stagnant tablet market in general. Revenues from our non-driver businesses were $47.8 million, up 37.9% from the same period last year and up 23.8% sequentially. Non-driver products accounted for 21.5% of total revenues, as compared to 18% a year ago and 19.6% in the previous quarter. Our non-driver product sales reached another record high in terms of both absolute value and percentage of total revenues. CMOS image sensor, touch panel controllers, timing controllers and power management ICs were the main contributors to the growth of non-driver product segment. I will discuss more some of these product areas a bit later. Our GAAP gross margin for the third quarter was 24.5%, down from 25.3% a year earlier and up from 24.2% in the previous quarter. We guided for a slightly improved gross margin in the last earnings call, anticipating benefit from better product mix, including higher resolution CMOS image sensor, high end smartphone driver ICs, and certain NRE incomes. GAAP operating expenses were $41.8 million in Q3, up 22% from a year ago and up 44.1% from the previous quarter. The significant sequential increase was caused by the higher RSU expense in the third quarter. As an annual practice, we provide annual bonus compensation to employees at the end of September each year which always leads to a substantial increase in the third quarter GAAP operating expenses compared to the other quarters of the year. This year, the annual bonus compensation, including shares and cash payout, totaled $15.1 million which is in line with how we indicated in providing the guidance. However, $9.3 million of the total RSUs was vested and expensed in the third quarter of 2014, a bit higher than the $8.7 million that we assumed in coming up with the EPS guidance. The difference of $0.5 million represents $0.03 of earnings per diluted ADS. Therefore, the Q3 EPS came in at low end of the guided range. Jackie will also add more details on this later. Excluding the RSU charge, our third quarter operating expenses were $32.5 million, up 22.6% from the same quarter 2013 and up 12.1% from the previous quarter. The increase was related to higher salary expenses caused by additional engineering headcount and annual salary raises and more new project tape-outs. This is in line with the repeated indications we made earlier, but we intended to expand our R&D team to capture the increasing business opportunities. Despite significant increase in operating expenses, our operations remained robust. Excluding RSU charges, non-GAAP operating income for the third quarter was $22.8 million, up 10.2% of sales and up 20.1% -- sorry, it was $22.8 million or 10.2% of sales, which is up 20.1% from the previous quarter and down 3.4% compared to the same period last year. Jackie Chang, our CFO will now provide more details on our financial results for the quarter. After Jackie’s presentation, we will further elaborate on our thoughts of the third quarter results, detail our 2014 outlook and then provide fourth quarter 2014 guidance. Jackie?

Thank you, Jordan. I will now provide additional details for our third quarter financial results. GAAP operating income for the third quarter of 2014 was $12.6 million, or 5.7% of sales, down 13.1%, compared to the same period last year and down 31.9% from the previous quarter. As Jordan mentioned earlier, the sequential decline was mainly a result of the higher RSU expense in the third quarter. Our GAAP net income for the third quarter was $11.1 million, or $0.065 per diluted ADS, compared to $12.3 million, or $0.072 per diluted ADS, for the same period last year and $24.1 million, or $0.14 per diluted ADS in the previous quarter. GAAP net income declined 9.2% year-over-year and was down 53.8% from the previous quarter. The year-over-year decline was a result of higher operating expenses. The sequential profit decline on the other hand was caused mainly by a $10.7 million one-time gain booked in Q2 for disposal of an investment, on top of the higher RSU charge in the third quarter as mentioned before. GAAP EPS per diluted ADS declined 9.3% from the same period last year and declined 53.7% over the previous quarter. Excluding share-based compensation and acquisition-related charges, non-GAAP net income was $19.1 million, or $0.111 per diluted ADS. This represents a decline of 0.9% year-over-year and a decline of 21.8% sequentially. Again, the sequential decline was mainly due to the investment gain of $10.7 million booked in the last quarter. Excluding the aforementioned one-time investment gain, non-GAAP net income for the third quarter of 2014 grew 20.3% sequentially. Our cash, cash equivalents and marketable securities were $147.7 million at the end of September, up from $133.9 million at the same time last year and down from $172.9 million a quarter ago. We made a cash RSU payment of $9.3 million and a dividend of $46 million during the quarter. On top of the above cash position, restricted cash was $140.5 million at the end of the quarter. The restricted cash is mainly used to guarantee the company’s short-term loan for the same amount. We continue to maintain a strong balance sheet and we remind investors that we remain a debt free company. Inventories as of September 30, 2014 were $157.1 million, down from $159.6 million a year ago and down from $166.3 million as of June 30, 2014. The lower inventory was a result of increased shipments in the quarter. We expect inventory to be at about the same level by year end. Accounts receivable at the end of September were $218.8 million as compared to $202.2 million a year ago and $199 million last quarter. Day sales outstanding was 97 days at the end of September, 2014, as compared to 96 days a year ago and 92 days at end of the last quarter. The sequential increase of DSO was due to higher driver IC sales for large panel customers who tend to have longer credit terms. Net cash inflow from operating activities for the third quarter was $22.8 million, as compared to $26.2 million for the third quarter of 2013 and $22.9 million for the second quarter of 2014. Cumulative cash inflow from operating activities through the third quarter was $55 million, as compared to $52.9 million in 2013. We expect to generate a substantial net cash inflow from operations in 2014. Capital expenditures were $2.1 million in the third quarter versus $3.8 million a year ago and $3.8 million last quarter, bringing the total capital expenditures to $8.5 million through the first three quarters of 2014, as compared to $14.5 million a year ago. We purchased less CP testers this year, resulting in the difference in capital expenditures year-over-year. As of September 30, 2014, Himax had 171.2 million of ADS outstanding, little changed from the last quarter. On a fully diluted basis, the total ADS outstanding is 171.8 million. Looking ahead, we like to point out that our fourth quarter EPS guidance, which Jordan will provide in a few minutes, has taken into account an adjustment of additional $1.5 million, or $0.87 per diluted ADS, of income tax charge. This is to reflect the impact of NT dollar depreciation against the US dollar so far this year. While we make timely adjustments, when deemed necessary, to reflect the effect of NT dollar versus US dollar exchange fluctuation on our taxation, it is our usual practice to make final adjustments in the fourth quarter for the whole year. As of November 10, the NT dollar stood at 30.55 against the US dollar, significantly depreciated against the 29.805 at the beginning of the year. This would lead to approximately $2.3 million more income tax charge for us than otherwise. As we have already made approximately $0.8 million, or $0.44 per diluted ADS, of adjustment previously, we are now providing another $1.5 million, or $0.87 per diluted ADS, of additional income tax charge during the fourth quarter of 2014, assuming the exchange rate at the end of the year stands at exactly the same level as that of today. Obviously, the final outcome will depend on the actual exchange rate at end of the year. We would like to emphasize that exchange rate has very little effect on our margins and operating results, as we maintain that majority of our cash conduct all our buy and sell activities and keep our books all in US dollar. The only major impact it does have is on our effective income tax. This is because we pay literally all our taxes in Taiwan where the tax authorities determine our taxation based on our NT dollar denominated ROC GAAP accounting. In general, as NT dollar depreciates against the US dollar, as is the case this year. Especially starting from mid-September, we are worse off in our US GAAP effective tax rate and vice versa. We choose to maintain natural hedge in our operating activities as we believe it minimize the overall exchange rate impact over time. I will now turn the floor back to Jordan.

Thank you, Jackie. Our Q3 operational results were in line with our guidance made in the previous earnings call. Business recovered from Q4, mainly as a result of strong rebound from our Korean end customer, our exciting growth of 4K TV and our non-drive products. The fourth quarter is typically a low season for semiconductor and we do see many of our semiconductor peers driving conservatively for the quarter. Nevertheless, we are seeing business slightly above typical seasonal level. All of our sales for the second half 2014 is still looking strong, compared to the first half and definitely so relative to the same period last year. We expect the growth momentum of the second half to continue in 2015. However, we do see Q4 revenue and gross margin being constrained by shortage in foundry capacity. It is now difficult to meet short lead time demands on 8-inc wafers. Himax has foreseen this coming since more than a few quarters ago, and has been proactively adding new supply partners to secure more capacity. It has been a long and challenging process, but we are confident that such strategic planning will position use well with a more stable and diversified supply chain as we enter into 2015. Our large panel driver IC business in the fourth quarter remained stable. Fourth quarter is expected to be the second consecutive quarter when sales from large panel driver ICs achieved year-over-year growth since Q1 2013. We see driver IC sales for 4K TVs being the strongest area in this segment. As we expected, 4K TV penetration has increased greatly in 2014. However, seasonal adjustment in inventory from various customers in the fourth quarter will temporarily slow down the pace of growth. Despite inventory adjustment and the fact that the large panel driver IC market remains competitive and seasoned, our capability to provide total solution covering sophisticated timing controller and driver IC positions us very well in the 4K TV market. For example, 4K TV requires point-to-point high-speed interface between timing controller and driver IC. We are one of the very few houses of bringing the whole solution. The capability has certain businesses from customers who adopt our interface as their standard. We are also in partnerships with customers, using their own interfaces where we stand out for being able to provide reliable, flexible and timely engineering support. We believe this total solution approach represents a high barrier inventory for many of our competitors, as 4K TV continues to proliferate. The total solution approach is also valuable for customers in our shifting notebook products. In the recently launched Yoga 2 which is a multimode laptop tablet, with a 13.3 inch screen. Lenovo came to Himax for total solution of timing controllers and driver IC, which is consigned to their various panel vendors. Thanks to our leading technology and competitive customer coverage. We have confident than we are at the beginning of the long-term growth trend for our large panel driver products, the trend which last for the next few years. Let’s now come to our driver ICs using a small and medium size panels which are primarily used in smartphones, tablets and for the mobile applications. Fourth quarter sales for smartphones are likely to remain stable from our primary Korean client and we’d anticipate the same from the Chinese market. In the short-term, China’s smartphone market is slowing down mainly as a result of change in government policy, which has led to substantially reduced subsidy from cell phone operators. We expect China market to regain momentum by 2015 as retail, ecommerce, and direct sales point channels gradually replace operators at the sales channel for smartphones. Switching gear, we expect to experience sequential sales decline for tablet in the fourth quarter, the second quarter in a row, which is attributed to lower demand both from China’s branded and white-box markets. The weakening tablet demand is mainly a result of recent slowing China exports to the third world countries and the Chinese government’s credit tightening policy, an action that is pushing some smaller and less resourceful companies out of the market. The declining demand might be a result of changing consumer behavior as some consumers are moving to smartphones with screen sizes similar to those of smaller sized tablets. Meanwhile, demand for driver ICs used in automotive displays appears to stay flat in Q4. The non-driver business segment provides us most exciting long-term growth prospect. It is also the key differentiator for us against many of our competitors. Non-driver businesses experienced solid growth in Q3, accounting for 21.5% of total revenues, another record high. Compared to the same period last year, it grew 37.9%. Sales of many of our non-driver products, especially CMOS image sensors and touch panel controllers, will deliver strong growth in the fourth quarter, while the rest of the products may be affected by seasonality and in some cases, capacity constraint. Overall, the non-driver business category will enjoy approximately 35% growth for the whole of 2014. We expect this momentum to continue into 2015. I would now highlight some of the specific non-driver areas. Revenues from CMOS image sensors continued to show strength in the third quarter, increasing more than 20% from the previous quarter. Sales of the 2 and 5 megapixel products were particularly strong, mainly due to demands from select international brands as well as Chinese white-box customers. However, we saw some delays in certain customers’ replacing older generation sensors with lower cost new designs which did have some impact on our gross margin. As expected, our 8 megapixel CMOS image sensors began small volume sales in the third quarter. As you know, 8 megapixel camera has become the mainstream design for smartphones. We are starting to accelerate our sales of 8 megapixel sensors in Q4. We also launched our first 13 megapixel sensor during the fourth quarter. We anticipate 8 megapixel CMOS image sensors to continue to be the mainstream in 2015, and 13 megapixel the rising star in high end smartphones. So this puts Himax firmly in the map as one of a handful of companies capable of offering a comprehensive product portfolio for main cameras of smartphones. In addition, to the above mentioned consumer application, we are also developing CMOS image sensors for non-consumer applications, which typically enjoy higher margins and have less intensive competition. For example, following year of efforts, we now have a competitive CMOS image sensor product line for automotive and surveillance applications, both large, lucrative and fast-growing markets. We will start early shipment to a Korean automotive and customer shortly. Collectively, we expect our CMOS image sensor business to more than double in 2014, making us a fast rising player in the market. As we increase sensor sales for automotive and surveillance applications and continue to turn the bulk of our CMOS image sensor sales from 2 and 5 megapixels to higher margin 8 and 13 megapixels. We said, we expect this business to accelerate in 2015, allowing us also to improve our corporate gross margins. Our touch panel controller product line continued to enjoy phenomenal growth in Q3, increasing 20% sequentially. The sales of touch panel controllers more than doubled for the nine months ended September 30. We expect the strong growth momentum to continue in the fourth quarter, as a result of several major design-wins across both international and Chinese markets. On the back of our rapidly growing market share in the traditional touch panel market, we believes our committed development in the new in-cell and on-cell touch panel technologies have placed us in a leading position for the future. This new touch panel technology that are been treated by leading TFT-LCD makers and we are in close partnerships with many of them in this very promising future technology. We have been working closely with multiple customers in their in-cell touch panel development. We expect the market to see major launches of this new technology very soon and we will be an integral partner in making this a reality. Regarding our LCOS business, we continue to work closely with our existing customers, as well as some exciting new tier-one customers. We are working with them on multiple designs simultaneously, many of which involve custom-built designs that are funded by our customers’ development fees. As mentioned previously, we unveiled the Front-Lit LCOS technology, our latest proprietary and patented LCOS offering. The new design represents one of the biggest technology breakthroughs of the head-mounted display industry. Our proprietary Front-Lit LCOS module enables an ultra-compact and extremely power-efficient optical engine by consolidating two major components of optical engines and integrating them into the micro display module itself. I would now like to address the one topic our investment community cares very much about, which is Google’s decision not to exercise its investment option in our subsidiary, Himax Display Inc, which we announced on October 21st. In our announcement for Google’s decision, we also stated that we were authorized by Google to make the following statement. Google continues to work closely with Himax as a strategic partner on future technologies and products and remain a Board observer. So this above strong message from Google demonstrates the continued close partnership of the two companies, despite of Google’s decision not to exercise its investment option. The ongoing development and collaboration between Google and HDI validates our LCOS technology as the most superior and best suited microdisplay for head-mounted devices such as Google Glass. Finally, we can continue to partner with various industry leading companies using our cutting edge and industry-dominant wafer level optics, or WLO, for the development of three technologies of the future, namely, array camera, special purpose sensors and microdisplay light guides for head-mounted devices. This product development often requires adoption of all you internal CMOS image sensor, LCOS microdisplay and video processing algorithm teams. Himax sits in a leading and unique position with respect to these exciting new technologies and we are the only company in the industry, which is able to offer such a one-stop total solution. To meet the anticipated demand growth for LCOS and WLO products, we are working on new plans to expand our production capacity. We’ll report a progress in due course. As stated in several of our previous earnings calls, we will continue to increase R&D spending in the fourth quarter in order to quickly capture several areas of new business opportunities in front of us. We expect the fourth quarter operating expenses to be the highest among all quarters of the year as certain new high-end product tape-outs are taking place within the quarter in both driver and non-driver areas. Last but not least, we also remained positive with respect to our business outlook for 2015 when we expect both revenue and earnings to -- continue to growth. For the fourth quarter traditionally a low season, we expect our revenue of this year Q4 to reflect to slightly up compared to the third quarter of 2014. Our gross margin is expected to be down with 1% from the previous quarter, depending upon the final product mix. GAAP earnings attributable to shareholders are expected to be in the range of $0.075 to $0.092 per diluted ADS based on $172.2 million outstanding ADSs. Non-GAAP earnings attributable to shareholders are expected to be in the range of $0.078 to $0.095 per diluted ADS, based on the same number of ADSs. Finally, thank you for the interest in Himex. We appreciate you’re joining today’s call. We are now ready to take questions.

Thank you. [Operator Instructions] Our first question is coming from the line of Jaeson Schmidt with Lake Street Capital Markets. Please proceed with your question.

Hey, guys. Thanks for taking my questions. I want to circle back to the comments regarding your capacity. Wondering if you expect the capacity constrains to be finished by Q4 or if you expect those to continue into the first half of 2015?

Ladies and gentlemen, please standby, since we are currently experiencing technical difficulty.

Sorry, we just…

Yeah.

Yeah. We just press mute button, my mistake. Sorry, I would repeat my answer. Jaeson, in -- with respect to your question about capacity. It is Q1 as you know is going to be a little weak because of Chinese New Year and all that. So Q1, the capacity requirement I think will disappear. However, we do think our next year for the whole year 8 inch capacity to remain very tight in general. We are forcing this to happen over a year ago and we have started development with new certain partners for foundry capacity increase and this applied to both our driver ICs product lines and also to some extent CMOS image sensor product line as well. And this, so we do expect starting from early next year, this new capacity to shipping to our supply chain. And so, as a result, we are not going to just have mostly of problem in terms of 8 inch capacity constraint we will also be better of in terms costs because of this new capacity evolve new design.

Okay. And then, Jackie, looking at OpEx in 2015, do you guys anticipate having to aggressively hire additional headcount?

Yes. We do. I think we will expect 2015 operating expense to continue to increase. However, we will manage it in a very discipline way and we will expect the increase in OpEx will be lesser of extent versus the revenue growth next year.

Okay. And then, finally, anything -- any comments you can provide on the current pricing environment in your small and medium-sized panel?

I think, I mean, certainly, if we -- it is far from being the worst. Certainly, certain price pressures still continues, but they are minor in nature. I think probably because of the capacity constraint as well industry overall.

All right. Thanks, guys. I will jump back in queue.

Thank you, Jaeson.

Thank you. The next question is coming from the line of Suji De Silva with Topeka Capital. Please proceed with your question.

Hi, guys. Nice job in the quarter. Can you talk about the 2015 comments you made about continue momentum, which subset, perhaps, would be the most top into visibility you have in that?

You mean 2015?

Yes.

I think, first, the touch panel controller, because we are, this time, this years revenue is on check to above 2.5 times that of last year and next year will continue to be a very exciting year because new designs and new customer engagement, including, in particular certain leading brand names. And on top of that we mentioned especially about our in-cell progress. We believe our -- together with our customer, good samples will be provided to market for what we call pure in-cell which is the multi-advanced in-cell technology the multiyear providing the lowest weight and thickness for the panel. So such new technology products will likely be provided very soon and we do expect mass production in this area to commence in the second half of the year. So, that I cover about in-cell costs. CMOS image sensor certainly as well, because actually this year we -- the revenue from CIS is about growth that of last year. And again, we started about the growth prospect of next year and not just product mix will be substantially different next year against this and in the second half of this year we started a shipment of 5 mega and thereafter, in the fourth quarter 8 mega. But 8 mega we will be able to ship throughout the whole year with bigger volume compared to Q4 and we launched 13 megapixel products in Q4 this year and we expect mass production to commence in the third quarter. So all these new products on top of automotive and surveillance, which I mentioned in my prepared remarks will also chipping to the growth of next year. And finally, I will also point out large panel. After several years of decline, we have now seen -- we have crossed other markets in terms of our revenue evidenced by two consecutive quarters of growth and over there, I think 4K TV will continue to be the driving force and our China customers, capacitive primarily expand somehow and we are getting new customers from both Taiwan and Korea. So all these are -- so we are quite confident in large panel driver segment, we are ready to outperform the market in terms of growth next year.

Okay. And then on small panel, small medium, if there is a share shift in the China phone market between, say the Korean OEMs and the China OEMs, is that neutral to you or positive in terms of your content or your share?

That is pretty much neutral to us. We have very big exposure to Korea unlike many of our competitors and likewise, we have major market share in China as well. So we are not really very worried about our shift, let’s say.

Last question on the capacity constraints. Are there specific products that are impacted or all of the products 8 inch or sensor, just to get some clarity there? Thanks.

They are primarily 8 inch in nature and for the industry in general, I think certainly in large panel driver IC and to some extent lower end smartphone driver IC as well and also typically driver IC, so they all impacted. And on top of that, sometimes in cases where we are actually able to make the supply, our customer, i.e. the panel makers may have a shortage in certain other IC, also impacted by age capacity constraint such as power management IC. So in that case, certainly the demand for products also disappear. So we do have impact. We are seeing impacts across the industry I think.

Okay. Thanks, Jordan.

Thank you. The next question is coming from the line of Mike Burton with Brean Capital. Please proceed with your question.

Hey guys. Thanks. First on the -- following up on the in-cell and on-cell, you mentioned that your thinking with multiple customers for in-cell and expect the launch very soon. What percent of the market do you think that can become in ’15 and further out into the future and then what does that do to your ASPs and margins?

2015 is harder to tell, a lot depends on our customers’ year rate and certainly overall product performance. Bear in mind, this will be very early stage. However, if you look beyond 2015, I think it will be a big ideal for the industry as a total because the offer is how many balances. And we are not promoting and for new in-cell, our approach is to provide an integrated IC covering full driver and touch panel controller in one piece. And that is the major advantage, one of the major advantages for in-cell touch panel. Now in providing such new technologies, such a new design, we are not only offering -- we are not really are pursuing a pure [indiscernible] patented for customers rather it is really value addition. Himax has been amount of very rare number of houses to have both touch panel controllers and driver IC in under one roof. I think we are positioned very uniquely in this regard. So we are one of the early comers in this area and so certainly the gross margin -- in terms of gross margin, certainly touch panel controller has been a great driver and integrated ICs certainly will be better than touch panel controller for sure.

Thanks. That’s helpful. And then, Jackie, following-up on further on the gross margin side you mentioned mix as the primary factor for Q4. But if you hit your guide, you will be at a level you haven’t been in a couple of years. Here we understand a bit more going on in mix in Q4 and how should we expect gross margins to trend next year and going forward? Thanks.

Well, I think the goal is not to miss our guidance. So in terms of guidance for Q4, we actually have provided a pretty conservative objective, okay. So, I think that 1% -- we think 1% range that kind of concerned the analysts and the investors, right. I think that we want to look at growth potential, looking at CMOS sensors, more revenue coming from CMOS sensor and the continued pressure from tablets. I think that’s going to shift the gross margin. Hopefully, if we can avoid a further decline in tablets, certainly we will be looking at a much better gross margin as we provided.

I think Q4, if I can give you a little bit of detail, a little bit of insight why we are providing for conservative gross margin. One of the reason is a, a lower price with respect to NIE income, the seasonal NIE particularly enjoys pretty high margin and they are good incomes but they come from specialized customer designs, coming primarily from our LCOS, WLO and certain ASIC customers. So we do see fluctuation quarter-by-quarter. So that can swing our gross margin sometimes rather significantly. So Q4 as always a naïve income, I think certain price in our conservative guidance. And also foundry constraint, as you know, our foundry you have seen a foundry constraint, your capability to negotiable enterprises. So that is also another reason. We remain positive on our outlook for gross margin for next year.

Thanks.

Long driver too currently percentage and even large panel I think now enjoys such a better margin compared to smartphone because I actually repeated in quit a few of my earlier comments call that large panel driver IC to get early timing controller now represent a pretty high area. And I think as a result, large panel driver actually enjoys better gross margin compared to smartphones these days.

Thanks, again.

Thank you. Our next question is coming from the line of Jay Srivatsa with Chardan Capital Markets. Please proceed with your question.

Thanks for taking my question. Jordan, if we step back a little bit and look at your business, this year the large panel is probably going to be sequentially lower from last year, small panel modestly up, but majority of the growth is really from the non-driver business. So as you look out not just in 2015 but a few years out, do you foresee your business model changing from display driver company to some of the other areas that you’re getting a lot of traction in? And if so, how do you compete longer-term with the incumbent players, the touch panel and the CMOS image sensor space?

I think driver IC was something within a platform of our business. The large panel this year declined a little bit, I think low-single digit compared to last year, but I said earlier that large panel we expect will grow momentum next few years. And I think for driver IC small panels certainly its happening as we all know is suffering from slow demand right now. But I think overall the industry will continue to grow in resolution which always benefit like us. So don’t get me wrong, driver IC will remain the backbone of our business. And certainly, we want to -- we love to see non-driver product areas our growth driver in the next few years. And that is because we -- those are the areas we entering to the new market. And in touch panel for example, I just mentioned this year we grew 2.5 times, 2.5 times the size of last year and next year we expect a very strong growth. And you can see in all sale, we are pretty to our advantage because we are one of the few houses been able to offer both driver and very solid track record. First year customers are reckoned for large panel controller and you can find those two on the one roof. You have a very strong case. And I think CMOS image sensor is the very big partly, sales growing rapidly and we have entered into 30-megapixel kind of clock as I mentioned earlier. And we are talking about handful of companies in the world being able to offer 30 megapixel sensor. So I think we come from small and we have been growing very such and we believe if we look at our current product offerings in terms of performance and cost, and also we saw if it’s in sales channel into many of these module makers who cover all driver touch and panel touch and sensor. So even sales channel I think we will try to take advantage of that. So I think we are quite confident we will grow in the next few years strongly in non-driver products. And there are certainly a few areas where we are very -- we have a very unique position for LCOS and WLO. So all this together all we hope to achieve is to be both comprehensive provider when it comes to image and display image processing semiconductor in the whole world. And I think we are really achieving that. And our end customers in particular are excited about such shopping opportunity when they can actually create really innovative ideas by using multiple of our areas of product expertise. So I think long-term that is how we position ourselves.

Okay. Thank you. In terms of small panel, it appears some of the high end smartphone companies in China, specifically Germany and others are now beginning to look for Japanese panels versus the typical Taiwanese panels or the Chinese panels in the past. What is that due to the driver or display driver business were there are other display private providers catering to that market versus another type? So do you see that dynamic continuing pervade through the industry. And if so, how do you hope to address that?

I think in the case of Xiaomi, it’s probably the opposite. They started by using Japanese and Korean and now they are switching to Taiwanese. And I think our driver IC penetration goal covered across all of China, Taiwan, Japan and Korea. So we are -- I think we -- I mean they are using high-end Korean, and Japanese will probably play to our advantage compared to many of our Taiwanese peers. Our export in Korea in particular is right now far better compared to any non-Korean driver IC vendors. So I think long term China and Korea will continue -- no, sorry, Japan and Korea will continue to be dealing on the high end and China and Taiwan will be on the mainstream. But as I said, we -- our aim is to cover both thoroughly.

Okay. Last question for me, in terms of LCOS with Google passing on their additional investment, what does that do to your own capacity in terms of ramping up in the event, there are other customers that are looking for LCOS. Have you stabilized the production capacity or are you continuing to ramp up. Give us an update?

We have always said our current capacity stands at 300K per month. And if you would expect we are -- the capacity is still relatively empty at the moment. If you look at the global shipments of head-mounted display right now and we can -- with the short-term of somewhere around 100 units of [indiscernible], we can easily extend that capacity to 2 million units per month. So if we look at next year, I think whether it is 300K or 2 million, I think for now it is pretty sufficient. But you will appreciate, we cannot actually disclose more, [Bob] [ph], production ramp as he would give away what is happening downstream with our customer. So I think that is probably as much as I can say about this.

Thanks Jordan. Good luck.

Thank you, Jeff.

Thank you. [Operator Instructions] Our next question is coming from the line of Daniel Heyler with Bank of America Merrill Lynch. Please proceed with your question.

Yeah. Thanks. I had a few questions, Jordan. So first I wanted to get a little color on what you think about the watch market and the wearable market. Is that the market that you can address with your LCOS capabilities and other capabilities?

Thank you, Dan. Watch is one area where we do have long term potentially various opportunities to analyze the touch panel controller even CMOS image sensor. For LCOS, we are typically using ordinary panel whether it’s AMOLED or [indiscernible] or even on silicon. But we do see some real cases of our customers creating really innovative design using our LCOS for watch, not -- nothing unveil to the market. So I’m afraid I cannot disclose too much. I just want to highlight that watch is certainly at very early stage. And I think I am assuming most of the designs were not usually LCOS. However, we do see this rather real but rather innovative design using LCOS already for watch.

Okay. Thanks. And then on the margin side of things, we’ve heard couple of things from you on one hand your capacity, availability improve from early next year. And on top of that, your mix is improving and is in limited supplier base. So should we assume that next year, your large -- for both large panel display drivers and small panel display drivers, shouldn’t those margins actually go up for both large as well as small because your mix is improving and you have more capacity?

Both are correct. So I think -- you mean all of these -- keeping all of those equal, certainly that will be the case. For example, we have very good design coverage base, both China and non-China for HD Resolution smartphone. And that is truly -- that is certainly going to be the mainstream. And so that is one thing and for HD, we’ll increase momentum next year. And for that, we have also recoveries -- full design recoveries as well. So for all those, certainly it’s true but then -- hey you never know how the market is going to fluctuate, going to develop. So keep all of those equal, that is certainly for sure.

Okay. Thanks. And then on CIS, you made an interesting comment. You said that you thought 8 megapixel may become mainstream, 5 megapixel has been very strong this year. But -- so 5 meg, where would you anticipate 8 meg -- 8 megapixel really taking off, is that more first half or second half next year? And then on 13, what kind of penetration rate do you think you see there on 13 and the 13 become mainstream say in 2016? Thanks.

Yeah. 13 is already becoming the desired choice for many peoples flagship product. And if you look at the historical trend, I think, it is quite actually that 13 will be the mainstream for 2016. Our 8 mega will be the mainstream for next year. And I mean, certainly, we admit that we are late comer to this market, so we launched our 8 mega in Q3. We’re starting mass production in Q4 and we launched our 13 meg, sorry, we launched our 8 mega in Q2 and started HD in Q4 and likewise, we launched our 13 mega in Q3 this -- in Q2 -- in Q4 this year and we expect to start HD market in Q3 next year. And I think we started from 2 mega, 1 mega that we targeted next desktop that we shift quite of good market share over there and certainly, we want to repeat the same success we expect to 8 mega and 13 mega for smartphone. Certainly, competition will be more severe over there.

I think and this has been a pretty consolidated market because of challenging technology. So where do you think your market share is right now in CIS? I’m kind of wondering, kind of two part side question, I guess, China have been interested in what you think your share there in that market? And I guess, in the premium brand where you think your share is for CIS?

I think right now our CIS market share is probably above 5% each, given the fact that we are shipping roughly and we spend right now about 15 million chips a quarter, meaning above 5 million per months. I have really done math myself in detail. Certainly, into detail whether you’re talking about laptop or smartphone and different segments, so I think, overall. But bear in mind, we grew -- we double our volume -- our revenue this year compared to last year and we are feeling very good about next year. So we expect our market shares to grow quickly.

Right. Yeah. It makes sense. I mean, the largest player there has massive market share.

Yeah.

So what’s -- so are people coming to you as more a second source and…

Also the players there, I think, we are the only player with driver IC and touch panel solution. And as I said earlier in one of the previous responses, many customers in China actually also in Korea, they module houses and their product area covers across, display module, sensor module and touch panel module. So for us to be the one-stop shop to be their comprehensive partner across different product areas, I think its excluding for them. And also we work together approaching our comp, our joint end user customers. The -- it depend on same design houses or the foreign customers. I think it’s also relatively. So that I think that is very unique advantage for us.

One final quick one for Jackie. You mentioned OpEx, you said you thought revenue will grow faster than OpEx next year. When you’re making that statement on OpEx, are you including everything including bonuses, [RSUs] [ph], salaries?

Yes. That’s correct.

Okay. Thank you.

Thank you. Our next question is coming from the line of Tom Sepenzis with Northland Capital Markets. Please proceed with your question.

Hi. Good morning. Thank you for taking my question. I was wondering Samsung had an announcement the other day saying that it was going to stop production of OLED displays in favor of LCD with [Qanda] [ph] technology and I’m just wondering how that will impact you? What I would think it would be positive for you but I was wondering if you could give us a comment on how that might impact you later on in 2015, ‘16.

I think my understanding is that OLED, AMOLED will continue to be a very unique product area for Samsung and they are not going to slow it down anytime soon. And certainly they are in-house customer. I mean, the brand is suffering from hopefully short-term slowdown in their volume, so as a result the display division meaning Samsung Display Corporation SDC is actually -- we are actively promoting their AMOLED resolution to China market, as far as I can tell. And our coverage with Samsung right now is primarily on the amorphous silicon panel right now. Although certainly it is also -- we are working with them for the future and OLED product as well.

Okay. Thank you. And then, I was wondering if you can comment on OmniVision, obviously China is staring to buy a bunch of different semiconductor companies. China attracted the mobile market, the travel market, the PC market as well and OmniVision obviously in mid centers is the target right now with an offer for that company? And how do you see that potential impacting you, would China mandate use of OmniVision sensors for the Chinese and so the OEMs, is that a risk or not a risk moving forward?

I think the OmniVision certainly is very respected competitor in CIS market and they have a very dominant position. Certainly, they have deal with the Chinese government buyout is not finalized. We tend to see that as -- potentially a long-term positive for us given the fact that actually there are also comments from many of our customers who are watching this closely. We will be surprised that the companies having to move very fast like semiconductor can operate as the same enterprise. I think in a long-term there must be a problem for that to ship the [indiscernible] and send an incentive for their employees and their power management is you make it still be as fast and as effective as before. I think that is yet to be seen, but certainly I think they are some doubts from the market. So we do see that as a potential opportunity. And we do go, talk to our customers that we you want to hedge against that Chinese government on the semiconductor operation and certainly that also plays to our advantage, when it comes to international markets I think for the same reason.

Yeah. Okay. Thank you. That makes sense. And then lastly, I was wondering if you could just provide us a little bit more color on what you are doing with the array lenses. I believe you are spending a little bit more now to build out additional capacity? So just anything you could give us in terms of timing and what the used case might be and also what the gross margins for that product is relative to the corporate average right now?

The margin is much more superior compared to corporate average for sure. And the diversification or the early stage fabrication were likely to be refocusing distance detection and pressure control, all requiring 3D data or we call desk flat of the picture. We are looking closely with -- quite a few lead in 80. I still see providers because we have to work with them on algorithm. And so wholly provide our -- the first thing you saw -- view all our optical mobility. And from a competitive style, we also like to promote our CMOS image sensor as well. And on top of that, we also have an in-house team to offer algorithm. Although we also welcome our partners who have bailed algorithm so that the algorithm can be included a part of the SLC, that way the whole architecture makes more sense in terms of all consumption cost. So we are excited about the progress, however, we do expect given our business is very new, we do expect only small log in next year and hopefully starting from the year after. We start to see this becoming slow, gradually becoming kind of a more visible and hopefully becoming mainstream.

Great. Thank you very much.

Thank you Tom.

Thank you. Our next question is coming from the line of Jerry Su with Credit Suisse. Please proceed with your question.

Hi. Good morning Jackie. Two question for me. The first one is on the operating expense side, Jackie, can you give us an update on the 2014 outlook or for full test?

For the fourth quarter, right?

For the full year?

For the full year. I think we are going to see around 15% increase year-over-year in 2014. As I mentioned a little higher in 2015 but the increase mainly is going to before, what for -- through the nine months salaries and also R&D expenditures. We hire about over 115, what we call year-over-year about 10% increase in the human resource and also new tape out for our new product to capture certainly the future business opportunities.

Okay.

And we have probably minor depreciation increase because of the capacity as well.

Okay. Okay, thank you. On the small medium size of guidance for Q4. I think, Jordan, you’ve mentioned stable for smartphones and/or small automotive or tablet but it will decline. Is that in place the overall small medium fresh revenue in Q4 is going to be down quarter-over-quarter?

No. No, I think, we still -- I think Jordan actually reported our Korean customers business very stable in Q4. And we see the same from the Chinese customer. In fact, we are expecting from our phones our business to grow in Q4, sequentially The tablet, we will continue to expect that it should decline maybe not at a same level, but because automotive business driver, IC business will remain flat versus in the past quarter we have been accelerating compared -- performing accelerating a growth. So I think the overall small medium driver IC what we expect mid single digit a growth sequentially, combining the three product area. So I don’t think it’s going to decline.

Hey. Thank you. That’s very helpful. Last question on the LCOS cost side. I was wondering that for the new design of the LCOS, do you provide the optical engine in this version and also does that mean you can enjoy a better pricing and even higher margins?

No, it’s no. We don’t believe we should provide optical engine because that will make us the competitor to all of our optical engine partners. What we provide the concept from the LCOS. It start the new design consolidate a few key components into our panel including LED. So that the assembly and design for optical engine partners become easier, much easier, they’re now yield will be better and better product size, better cost and most importantly the product becomes not more manufacturable. So we argue it will get the display industry as a total. Optical engine manufacturing has remains the bottleneck hardware. So I think there could be [indiscernible]. So there is software that I pretty pleased, but I’m talking about the hardware, optical engine is the bottleneck. And I think our new offering of the technology can help unlock the bottleneck because you’ll make our optical engine partners job much easier, but that doesn’t mean we are [indiscernible].

Yeah.

It is higher.

Okay.

But it is higher ASP, higher margin, but it is not the whole optical engine network no we provide your.

And so you just did more integration a year rate a better, but that will help your ASP margin?

Yeah. Because our panel improve more things.

Okay. Thank you.

Thank you. We have reached the end of our question-and-answer session. I would now like to turn the floor back over to management for any additional concluding comments.

Well, thank you everyone for taking the time, and thank you everyone for the questions. And as a final note, Jackie, our CFO, will attend investor conferences in December and January. And we'll certainly announce the details as they come about. And you may want to contact our IR department and/or Scott Powell if you are interested in meeting with us in person. And thank you again and have a nice day.

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