Himax Technologies, Inc. (HIMX) Q4 2014 Earnings Report, Transcript and Summary

Greetings. And welcome to the Himax Technologies, Inc. Fourth Quarter and Full Year 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, Mr. Scott Powell. Thank you. You may begin.

Thank you, operator. Welcome everyone to Himax’s fourth quarter and full year 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 comments, we have allocated time for questions in a Q&A session. If you have not yet received a copy of today’s results press release, please call PCG Advisory Group, LLC at plus 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. In today's earnings call in addition to reporting our performance in the fourth quarter, I will also summarize our results for 2013 and highlight key milestones we achieved last year. I will then discuss our outlook for the first quarter of 2015 and comment on a few product areas of focus of this year. Our CFO, Jackie Chang, will also provide additional details on our financials. I am pleased to report that our 2014 fourth quarter revenues, gross margin, GAAP and non-GAAP earnings per diluted ADS, all met high end or exceeded our guidance. For the fourth quarter, we reported net revenues of $227.2 million with a gross margin of 24.7%. Fourth quarter GAAP earnings per diluted ADS were $0.091 and non-GAAP earnings per diluted ADS were $0.094. Our revenues – GAAP earnings per diluted ADS all came in at the high end of our guidance, or our gross margin exceeded the guidance for the quarter. In response to market rumors that Himax might miss this Q4 guidance, we pre-announced the Q4 revenues and gross margin on January 14. In respect [ph] pre-announcement, we also provided renewed GAAP earnings per diluted ADS guidance of $0.087 to $0.092, we came in at a higher end of the range. Our fourth quarter revenues of $227.2 million represented a 16.4% increase from the same quarter last year and a 2.2% sequential increase from the previous quarter. Our fourth quarter revenues were the highest since the fourth quarter of 2008. Fourth quarter revenues came in at the high end of our guidance, driven by better-than-expected driver IC sales for TV, smartphones and tablet applications, mainly in the Chinese and Korea markets. Revenues from large panel display drivers were $65.5 million, up 39.9% from a year ago and up 7% sequentially. Large panel driver IC accounted for 28.8% of our total revenues for the fourth quarter compared to 24% a year ago and 27.1% in the last quarter. We've been guiding large panel driver IC to resume a fully growth since early 2014 and as described it, this is the first quarter in a row, the large panel driver IC sales enjoyed sequential growth. The growth was driven by strong shipments to both existing and new customers with 4K TV demand, particularly robust in the second half of last year. We are confident that the positive momentum will continue into 2015, and we anticipate gaining share in this segment. Sales for small and medium-sized drivers came in at $114.8 million, marking a quarterly record-high. These revenues were up 1.7% from the same period last year and up 1.4% sequentially. Driver ICs for small and medium-sized applications accounted for 50.5% of total revenues for the fourth quarter, as compared to 57.9% a year ago and 51% in the previous quarter. Korea and Chinese smartphone customer's demand was robust, especially in the higher end segments. It is worth highlighting that we experienced a nice surprise in the branded tablet market. Despite a slight decline from the last quarter, tablet revenues were actually better than initially guided. We believe that branded tablets, with larger screens and attractive functions such as convertibility, innovative covers and keyboard design, are enjoying a competitive advantage against the white box products. Revenues from our non-driver businesses were $46.9 million, up 32.1% from the same period last year and down 2% sequentially. Non-driver products accounted for 20.7% of total revenues, as compared to 18.1% a year ago and 21.5% in the previous quarter. Touch panel controllers, timing controllers, CMOS image sensors, and LCOS micro display were the main contributors to the growth of the non-driver product segment in the quarter. Among non-driver products, touch controllers showed the strongest growth, nearly tripling from the same period of 2013, and growing more than 40% sequentially. CMOS Image sensor sales nearly doubled year-over-year. I will discuss more about some of these product areas a little later. Our GAAP gross margin for the fourth quarter of 2014 was 24.7%, down from 25.1% a year earlier and up from 24.5% in the previous quarter. We guided gross margin to be down within 1% sequentially in the last earnings call. Gross margin beat guidance mainly due to a more favorable product mix including high end smartphone and tablet driver ICs, and higher NRE incomes. GAAP operating expenses were $33.4 million in fourth quarter of 2014, up 12.8% from a year ago and down 20.1% from the previous quarter. The sequential decrease was primarily the result of the difference in RSU charges. In accordance with our protocol, we grant annual RSUs to our staff at the end of September each year, which, given all other things are equal, leads to higher third quarter GAAP operating expenses compared to the other quarters of the year. The fourth quarter RSU expense was only $0.5 million while it was $9.3 million in the third quarter. Excluding RSU expenses, operating expenses increased 12.3% year-over-year and 3.2% from last quarter. The sequential increase was mainly attributable to certain new product tape-outs, while the year-over-year increase was due mainly to salary raises and more headcounts. The increase was partially offset by lower salary expenses in US dollar terms. We paid the vast majority of our salaries in NT dollar, which represented a lower amount in US dollar in our accounting, as the NT dollar depreciated against the US quarter in a quarter. Excluding the RSU, and acquisition related charges, our non-GAAP operating income for the fourth quarter of 2014 was $23.4 million or 10.3% of sales, up 14% from the third quarter of 2013 and up 2.6% from the previous quarter. Jackie Chang, our CFO will now provide more details on our financial results for the quarter. After Jackie’s presentation, we will further discuss our full year results, 2015 outlook and then provide first quarter guidance. Jackie?

Thank you, Jordan. I will now provide additional details for our fourth quarter financial results. GAAP operating income for the fourth quarter of 2014 was $22.6 million or 10% of sales, up 16.6% year-over-year and up 80.3% sequentially. As Jordan mentioned earlier, the sequential increase was mainly a result of a higher RSU expense booked in the previous quarter. However, non-GAAP operating income still experienced 2.6% sequential growth. Our GAAP net income for the fourth quarter was $15.6 million, or $0.091 per diluted ADS, compared to $15.8 million, or $0.092 per diluted ADS for the same period last year, and $11.1 million, or $0.065 per diluted ADS in the previous quarter. In the last earnings call, we won about a possible negative impact by depreciating NT dollar will have on our income tax. Obviously our fourth quarter bottom line with a total impact of $4.8 million which was $3.2 million higher than the $1.5 million we assumed from providing our EPS guidance last quarter. While our reporting currency is the US dollar, the vast majority of our taxes are incurred in Taiwan on the basis of our NT dollar book, which is the required reporting currency for the Taiwan tax authorities. NT dollar depreciation resulted in foreign exchange gains for our US dollar assets and therefore higher income tax in Taiwan. On the other hand, our income tax will be lower if NT dollar appreciates against the US dollar. In our last earnings call we estimate a $1.5 million of additional income tax charge caused by the NT depreciation based on the exchange rate of 30.55 I want say it of EPS guidance on November 10. However, from November 10 to the year end, NT dollar further depreciated to $31.65 against the US dollar resulting in additional $2.3 million or $0.019 per diluted ADS for income tax charges. If the NT dollar and US dollar rate had stayed at 30.55, our EPS would have been higher by $0.019, far outperforming original guidance. GAAP net income declined 1.3% year-over-year and increased 40.2% from the previous quarter. Excluding the exchange rate impact on our income tax, GAAP net income actually grew 20.8% year-over-year and 80.3% sequentially. The sequential net income growth was mainly a result of the difference in RSU charges, as Jordan mentioned earlier. The year-over-year growth was primarily due to higher revenues. To sum up, excluding the share-based compensation, acquisition-related charges and income tax provisions, our non-GAAP adjusted pre-tax income for the fourth quarter increased 6.9% sequentially, and it grew 13.6% from the same period last year, reaching $25.6 million. The sequential increase was a result of a slight margin improvement on higher revenue, while the year-over-year profit increase was due to the 16.4% higher revenue offset by $4.1 million of higher operating expenses. Amid a slow market environment during the quarter, we managed to achieve significant top and bottom-line improvement year-over-year, thanks to better sales from large panel DDICs, and DDICs for tablets, CMOS image sensors and touch controller ICs. I will go through 2014 full year financial results and the balance sheet analysis a little later after Jordan's 2014 full years business review.

Thank you, Jackie. We are happy that despite a few challenges, we still managed to grow in 2014. Small and medium-sized driver IC remained our largest source of sales. Our market leading position in this business segment enabled us to take advantage of the growing global demand for smartphones and tablets, as well as the industry trend toward higher resolution displays. For our large panel display driver business, we continue to expand our sales to Chinese customers and secured a leading market share in that country. We also gained market share from non-China customers. Meanwhile, our non-driver products continued to outgrow driver ICs and achieve record high revenues. We saw exciting progress on many of our non-driver products. Many of our non-driver products have already penetrated into marquee and globally recognized end customers. Our revenues totaled $840.5 million in 2014, representing a 9.1% increase over 2013. Notably, our customer diversification continued to expand as we added multiple Tier-1 customers across all of our product lines. Small and medium-sized driver sales grew 7.3% and represented 53.1% of our total revenues, another record high. Of the 7.3% growth, tablet and automotives driver ICs showed particular strength, while smartphone driver ICs delivered the modest growth. Tablet driver IC sales grew nearly 10% in 2014. However, sales in the second half of the year declined 20% from the first half, signaling weak overall market demand. Meanwhile, automotive driver IC sales registered the strongest growth in this segment, at approximately 50%, and the momentum is expected to carry over into 2015. We are now the leading suppliers of small and medium-sized driver ICs for panel makers across Taiwan, Korea, China and Japan, covering the vast majority of leading smartphone and tablet end customer names in both China and the international markets. Our leading technology, on the back of the industry's migration toward higher panel resolution over the past few years, has enabled us to achieve respectable growth in this segment. Revenues from large panel display drivers declined 1.2% year-over-year, representing 26.9% of our total revenues, as compared to 29.7% in 2013. However, the business bottomed out in the first quarter of 2014, and we enjoyed three consecutive quarters of growth thereafter. We are able to achieve a more diversified customer base by adding new customers in Taiwan, China and Korea. Being the technology leader, we also benefited from the surging 4K TV demand, a higher dollar content business with significant barriers of entry. We are pleased that large panel driver ICs has once again become a growing segment for us despite the continued soft demand in monitors and notebook markets. Non-driver products grew 33.5% and represented 20% of our total sales, as compared to 16.4% a year ago. Our touch controller, CMOS image sensor, timing controller, LCOS micro display and ASIC service all delivered strong growth. We also experienced growing market interest and deepening customer engagement in our LCOS and WLO businesses. As noted previously, we continue to work with several industry heavyweights in the LCOS and WLO business. These two technologies are being applied in some of their future products, ranging from head mounted displays to next generation mobile devices, and the Internet of Things. We are excited that LCOS and WLO should experience a inflection point within this year. Gross margin in 2014 was 24.5%, a 40 basis-point decline, from 24.9% in 2013. The slight margin decline was mainly a result of higher shipment of older generation CMOS image sensors in first half of last year. Foundry capacity constraint in second half of the year also had some negative impact on gross margin. However, the above mentioned factors were largely offset by growing demand from 4K TV, and NRE incomes from ASIC, LCOS and WLO products. Our GAAP net income for the year was $66.6 million, or $0.387 per diluted ADS, up from $61.5 million, or $0.358 per diluted ADS, for the same period last year. As mentioned earlier, the exchange rate impact on income tax was $5.6 million for 2014 and $2.3 million for 2013. Excluding the exchange rate impact on income tax, 2014 GAAP net income actually grew 13.2% year-over-year. In 2014, we paid an annual dividend of $0.20 per ADS equal to 75% of 2013 GAAP earnings per diluted ADS. We remain committed to pay annual dividend, the amount of which is based primarily on our prior year's profitability. The high payout ratio in 2014 is an illustration of our confidence in our future profitability. I will now ask Jackie to explain the details for our full year financial results.

Thank you, Jordan. In terms of 2014 full year performance, our GAAP operating expenses were $133.2 million for the year, up $15.6 million or 13.3% compared to last year. We have repeatedly indicated since late 2013 we intended to increase our R&D expenses to capture new business opportunities, following several years of stable R&D spending. We believe that such investments will really come to fruition starting in 2015. Due to higher operating expenses, GAAP operating income of $72.7 million represented a 2.2% decrease versus 2013. Non-GAAP net income for 2014 was $76million, or $0.442 per diluted ADS, up from $71 million, or $0.414 per diluted ADS, for 2013. The increase in non-GAAP net income was mainly the result of an $8.6 million net gain from the disposal of an investment in the second quarter. Non-GAAP net income and non-GAAP earnings per diluted ADS grew 7% and 6.9% year-over-year, respectively. Our cash, cash equivalents and marketable securities were $187.8 million at year end, compared to $128.1 million at the same time last year and $147.4 million a quarter ago. This is at historical high in our cash position since the second quarter of 2009. On top of the above cash position, restricted cash was $130.2 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 very strong balance sheet and we remind that, that we remain a debt free company. Inventories as of December 31, 2014 were $166.1 million, down from $177.4 million a year ago and up from $157.1 million a quarter ago. The higher inventory was due to the expected customer restocking of driver ICs for all panel sizes, CMOS image sensor and a few other non-driver products after Chinese New Year and into the second quarter of 2015. This is also a move to counter foundry capacity constraint. Nevertheless, the year-over-year decline in inventory reflects better inventory management in 2014 despite a healthy sales growth in the year. We have successfully reduced average days in inventory by 23 days. Accounts receivable at the end of December 2014 were $219.4 million, as compared to $200.7 million a year ago and $218.8 million last quarter. Day sales outstanding stayed flat at 95 days at the end of December, 2014, little changed from 95 days a year ago and 97 days at end of the last quarter. Net cash inflow from operating activities for the fourth quarter was $38.7 million as compared to an outflow of $1.8 million for the fourth quarter of 2013 and an inflow of $22.8 million for the third quarter of 2014. Cumulative cash inflow from operations in 2014 was $93.7 million as compared to $51.1 million in 2013, the second highest year since the company's inception in 2006. The growth in cash inflow was a result of improved profitability and inventory reduction. Capital expenditures were $2.4 million in the fourth quarter of 2014 versus $3.9 million a year ago and $2.1 million last quarter. The capital expenditure in the fourth quarter consisted mainly of purchases of certain equipments for our driver IC products and facility updates for LCOS and WLO product lines. Total capital expenditures for the year were $10.9 million versus $18.4 million a year ago. We purchased less CP testers in 2014, resulting in the differential in capital expenditure year-over-year. As of December 31, 2014, Himax had 171.2 million ADS outstanding, unchanged from last quarter. On a fully diluted basis, the total ADS outstanding are 172.2 million. I will now turn the floor back to Jordan.

Thank you, Jackie. Following a successful business transformation in 2013, we delivered strong operational and financial results in 2014. Himax continues to execute on our strategy of becoming a more diversified company with regard to product offerings, as well as customers. We are very pleased to be experiencing growth in both our driver and non-driver business segments. We are particularly excited about the prospects for our LCOS micro display and WLO products, which are integral parts of the eco-system for the rapidly emerging head mounted display products and next-generation cameras for mobile devices. Equally exciting is our market leading single-chip solutions for pure in-cell touch display, which we believe will soon become mainstream in portable and wearable devices. In summary, Himax is at a significant inflection point, with many of our non-driver products ready to enter the consumer market after many years of product development and R&D. Looking into 2015, despite the current softness in China's smartphone and tablet markets, which is worsened by fewer working days due to the timing of Chinese New Year, we are excited about our full year outlook and believe that it will experience strong growth across all our business segments. We anticipate 2015 to be another year of continuous revenue and earnings growth. Following a few years of revenue decline, large panel driver IC sales should be a major growth engine for us in 2015. We expect our large panel drivers in the first quarter of 2015 to register strong growth compared to the same period last year, at approximately 25%. We should continue to benefit from the display capacity expansion in China, where we are market leader in driver IC sales. Furthermore, we expect to grow market share in the non-China large panel market in 2015. On the technology front, we remain a market leader in providing state-of-the-art, high-end large panel driver IC solutions. 4K TV penetration should continue to be the driving force for growth in this segment with its sales volume expected to more than double this year. In the previous earnings calls, we mentioned that large panel markets are increasingly demanding a total solution from IC vendors. We are experiencing accelerating demand from panel manufacturers seeking IC vendors who can provide driver IC, timing controller, Gamma OP, and PMIC as a total solution. Meanwhile, timing controller is getting more and more technologically advanced, with high end models integrating sophisticated functions such as MEMC. This positions us very well in the 4K TV market and beyond. As the industry migrates to 8K TVs, which is already starting to take place in product development, our business and technology strength and integrated product solutions will be a significant differentiator against our competitors. Thanks to our leading technology and comprehensive customer base, we are confident that we are at the beginning of a long-term growth trend for a large panel driver of products, a trend which should last for the next several years. Next, I'll turn to our driver ICs used in small and medium-sized panels, which are primarily used in smartphones, tablets and for automotive applications. We expect continued resolution upgrades this year in both the smartphone and table markets. FHD is quickly replacing HD720 to become the new mainstream for high end smartphones. We also expect to begin mass producing of driver IC for the very high end with our QHD resolution panel at the beginning of Q2 this year. A more favorable product mix should help us mitigate margin pressure in the competitive smartphone market. Notwithstanding our positive outlook, first quarter sales for smartphone drivers are likely to decline substantially, which we already indicated in our last earnings call. The weakness is particularly significant in China where smartphone vendors, lacking new government stimulus programs, are turning cautious as they are forced to try new sales channels such as e-commerce and direct sales points to replace the previous approach of selling through telecom operators. Worse yet, exports are also weak because Chinese smartphone manufacturers are worried that the strong MNP [ph] would further compress their already thin profit margin. Following two quarters of market weakness, we have started to build inventory in preparation for a market rebound toward the end of Q1 or Q2. In addition to our leading position in TFT-LCD smartphone driver IC product offerings, we started small shipments of AMOLED driver IC to certain Chinese customers in Q4 of last year. AMOLED is likely to be a future growth engine for our small panel driver IC business and we are collaborated with multiple customers both in Korea and in China on AMOLED product development. It is worth mentioning that quite a few new AMOLED fabs are being built in China and we are the most comprehensive customer coverage over there, although this will not bring in meaningful revenue contribution until later this year. We also expect a significant sequential sales decline for tablets in the first quarter, for reasons similar to those for the smartphone market mentioned above. Moreover, in the Chinese tablet market there are more smaller and less resourceful players, many of them being forced out of the market due to the Chinese government's credit tightening policy, causing further market weakness. The decline in demand might also be a result of changing customer behavior, as some customers are moving to smartphones with screen sizes similar to those of smaller sized tablets. Tablet demand, after a lengthy slump, may improve after Chinese New Year; yet sales visibility is still quite low as we speak. Going forward, mainstream demand will be 10 inch and above with higher resolutions, instead of the once popular sizes of 7 to 9 inches, we are seeing many Tier-1 OEMs pursuing this segment aggressively which may materialize in 2015 and trigger new market demand. Among driver ICs used in small and medium-sized panels, the most noteworthy category in 2015 is the automotive application. We have successfully engaged key panel manufacturers and module houses for long-term partnerships. We anticipate Q1 sales to be slightly stronger than the previous quarter and expect robust sequential growth throughout the year. We believe that with numerous Tier 1 automobile brands being our indirect end customers, we are well positioned to take advantage of the growing market in 2015 and beyond. The non-driver business segment provides our most exciting long-term growth prospect. Overall, our non-driver business category enjoyed around 35% growth during 2014. Amid a weak overall market sentiment and the usual seasonality, we expect a double-digit sequential decline in our non-driver products for the first quarter. However, looking ahead, many of our non-driver products, including our CMOS image sensor, timing controller, touch panel controller, PM IC, ASIC service, WLO and LCOS micro display are poised to grow significantly in 2015. I will now highlight some of the non-driver products areas. Our touch panel controller product line continued to experience significant growth in Q4 2014, increasing more than 40% sequentially. We exited 2014 with our touch controller sales more than doubling from the previous year. We expect this strong growth momentum to continue in 2015. On top of our displaying – of top of our rapidly growing market share in the discrete touch panel market segment, we are extremely excited about technological advances in the latest pure in-cell technology where we are one of the pioneers in offering one-chip solutions integrating driver IC and touch panel controllers, or TDDI. Driven by top-tier TFT-LCD makers, the industry is moving towards pure in-cell panels, which is set to start mass production in the second half of this year. We are in partnership with essentially all of the leading panel manufacturers in pure in-cell touch for joint technological development and expect the market to see major launches of this new technology very soon. Our CMOS image sensors also experienced significant growth in 2014 and should continue to be a fast growing product area for us in 2015. Sales of our 2 and 5 megapixel products were particularly strong, mainly due to robust demand from several international demand, as well as from Chinese white-box customers. Looking into 2015, we expect our sales of 8-megapixel sensors, now the mainstream design for smartphones, to accelerate while high end 13 megapixel sensors to start mass production later in the year. This puts Himax firmly on the map as one of a small handful of companies capable of offering a comprehensive product portfolio for smartphone cameras. In addition to the aforementioned consumer applications, we are also making significant progress in CMOS image sensors for non-consumer applications, which typically enjoy higher margins and have relatively little direct competition. We already started initial shipments to a Korean automotive end customer and are actively engaging more module houses to penetrate into Chinese before market-installation automotive applications. As we grow sensor sales for automotive and other non-consumer applications and continue to turn the bulk of our CMOS image sensor sales from 2 and 5 megapixels to higher end, higher margin 8 and 13 megapixels, we expect our CMOS image sensor business to accelerate this year. Regarding our LCOS business, we are very excited to see major new head-mounted display devices and/or programs unveiled by a growing list of industry heavyweights recently. Some of these devices are truly revolutionary in nature with potentially breakthrough applications which are not possible without a head-mounted display. This is clear evidence that the head mounted display is establishing itself as a new product segment for future computing. Major technology companies are moving quickly to develop HMD technologies and that – this new product category should transform the way people interact with the environment. Being the market leader in the micro display technology, we are therefore in a unique position to benefit significantly from this industry trend, where our products are integral components. As we mentioned typically in previous earnings calls, we continue to work with multiple top tier customers who are committing significant resources to develop cutting edge HMD products. We are working with some of them on multiple designs simultaneously, many of which involve custom-built designs that are funded by these customers development fees. Our Front-Lit LCOS technology which unveiled in the middle of last year, it still represents one of the most significantly more logically breakthroughs in the HMD industry. We are seeing more and more customers adopting our proprietary technology. By consolidating two key components of optical engines and integrating them into the micro display module itself, Front-Lit LCOS enables an ultra-compact, high brightness and extremely power-efficient optical engine which is also easier to manufacture, compared to traditional optical engines. There is essentially no competition to this product. Furthermore, we continue to partner with numerous 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 cameras, special purpose sensors and micro display wave guides for head-mounted displays. This product development often requires the collaboration of our internal CMOS image sensor, LCOS micro display and/or 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 able to offer a true one-stop total solution. As this Tier 1 customers begin to mass produce products embedding these new and unique features, Himax, being in the heart of that supply chain, should benefit significantly. To meet the anticipated demand growth of our LCOS and WLO products, we are expanding our production capacity starting in Q1 2015. We will report our progress in due course. Collectively, our LCOS sales and WLO NRE incomes should more than double in the first quarter of 2015. This illustrates our strong customer engagements with tailor-made designs and represents products in the pipeline which will translate into meaningful sales and profit contribution in the near future. Although we are is seeing weakness in market demand, especially in China, which will lead to sequential revenue decline in the first quarter, we remain confident and excited about all these aforementioned new developments and the increasing business opportunities across every business segment for 2015. We believe Himax is strongly and uniquely positioned for another successful year. We're excited with respect to our business outlook in 2015 and beyond, both in terms of revenue, profitability growth, and the adoption of many of its non-driver products. Well, let me provide on the Q1guidance. Although first quarter is sufficiently the quarter of the year in terms of sales because we had kayos in base due to Chinese New Year, we expect revenue at least here in Q1 to decline 15% to 22% compared to the last quarter. Gross margin is expected to rise 1% to 1.5% from the previous quarter, depending upon the final product mix. GAAP earnings attributable to shareholders are expected to be in the range of $0.07 to $0.085 per diluted ADS based on $172.2 million outstanding ADSs. Non-GAAP earnings attributable to shareholders are expected to be in the range of $0.073 to $0.088 per diluted ADS, based on the same number of ADSs. We provided the top earnings guidance, we have assumed a 20.5% income tax rate, calculated based on exchange rate of NTD 31.65 against the US, which is also the exchange rate of the end of 2014. Thank you for the interest in Himex. We appreciate you joining today’s call. And we are now ready to take your 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. Jordan, I am wondering if you could just talk about how confident you are in your visibility for this year and what kind of gives you that confidence by product line?

Thank you, for the question. I think, if you look at our guidance for Q1, I mean, obviously the visibility is partly covered. So you can argue, it started to be a very below to start a New Year. However, I am going to emphasize that we are – we are excited as ever for the prospect of the whole year. I think the Q1 witness is primarily driven by the very slow tablet and smartphone demand. And I think we have actually said repeatedly in our previous calls and over this course, so we are shifting our growth focus into large panel, because in particular in a high end, 4K TV and the products, the engine [ph] delivery is much higher and we do enjoy a very strong competitiveness. On the top of the fact that, our – the market we clearly have the leading market share by each hand, is still expanding our capacity, large panel and we also penetrate into customers switch, well, not customers – products in the past in both Taiwan and Korea. So we are very steady and above this. Now, in small panel business, growing and I told above the witness in smartphone and tablet, so our focus is to really penetrate into the newer areas, i.e., in in-cell touch and actually before in in-cell touch, we expect to see good sales growth on cell touch, which is rising with a traditional technology in between the tradition of touch panel and the in-cell touch. So in-cell touch is the opponent target and I mentioned in my prepared remark that we expect to start lot of business in in-cell touch integrated to rise with touch panel controllers in the second half of the year. And I did mention in the prepared remarks was on cell touch, because as I said earlier, it was suppose to be a traditional technology. Anyway, so that is in-cell touch, which will be primarily small panel, so that will be – it’s going to be our focus and we are one of the pioneers and we have a very strong vision at market [ph] right now. And also a couple of that enroll it, I think is third way profit to us. We are already in a very good position having engaged with Korean customers, develop, end up for this very positive technology for smart panel and are now its very excited to see that quarter number of new sales are been build in China from disparity governments money. And this really, all this new added 15 players are old customers of Himax right now. So in small panel our strategy is to – certainly we are not going to give up of the traditional driver IC market which but necessarily however is getting more and more competitive. So it’s a same old story of win of the scale in years resolution, which we are one of the leaders and top of that we also have the platform in-cell touch and AMOLED, and large panel vehicles engine, which is very different from our story of the top few years where small panel was the growth engine. Last but not least, simply our long driver and I want to especially emphasize our LCOS and WLO and we mentioned in our prepared remarks that we see its going to be the inflection point by that what it means, is that we expect to see real revenue and real profitability contribution, probably one this year and emerging all this trend this year, therefore next few years will be extremely excited for us. So, all in all, we are really, really very excited about the prospects for the whole year.

Okay. Thanks, to that detail. And can you remind me, what your current LCOS and wafer level capacity is at?

Hello. Yes, Jaeson. Our LCOS capacity is probably at 300,000 units per month and our WLO because we got out, really the government cleared the new technology where we acquired the array main field opportunity have to step in the major launches into a meaning of design. So, depending on where they provide to or provide for, capacity equip and in the quarter around 900,000 per month.

So, its good thing for the company getting a response, because it really depends for us and very large the own customers expectation, which I fortunate to be, we are not really in a position to come along with details yet. But you mentioned LCOS produced from the panel capacity, is perhaps, it really depend upon, quite an excitement you are talking about. So it’s actually a very similar story. Although, here certainly the, probably safe as its, don’t vary as much, excuse me, I am having a cold throat this year, so actually I am having a hard time which I always and I apologize for that. And a couple of that for the customers that, very special applications which we acquire longer part of time and number of part of step and as a result it will depend on our product mix. But I think we'll see – we didn’t see – we are not going to be in shortage of capacity overall. However we'll be expanding probably now in CapEx, largely because for their customers special requirements, we require new equipment to handle. So that’s why there we are probably in new equipments there and large part of this equipment is even from the certain customers. So we are probably part of the equipment and customers are probably part of the equipment. And all this at halt, we'll be able to provide you more details as this out flows. But within this year we are going through different stages of engineering rounds, that hopefully leading to most of that shipped with multiple customers. So it’s really a very sudden year for us on this.

Okay. Great. Thanks, a lot guys.

Thank you, Jaeson.

Thanks.

Thank you. Our next question is coming from the line Suji De Silva with Topeka Company. Please proceed with your question.

Hi, Jordan. Hi, Jackie. So in terms of the tablet and smartphone driver market, can you talk about what percent of those roughly are white box rates versus the high end Tier 1?

It probably happened into – through other lines, because you know, helping you would fringing within white box, because in China actually many men at this global mode consider white box. They are actually competing with leading global demands. And as a company our customer base or the market we serve primarily is the branded bucket in China, either in China. Certainly we almost put a lot of attention on them. So our cute white box is actually rather small.

Okay. Great. And then looking at LCOS and WLO, can you give sense maybe how many customers order magnitude do you think you'd be shipping to like during 2015, if you can give us a sense of how that's going to ramp up and diversify?

Shipping, if you count, overall in engineering’s bundle that’s a luck, but if you change very early some goals and sort of small, some how a small volume is leading to much up change, kind of shipment, then probably you'll talk about three to five.

Okay. Great. And last question on the large panel for China TV, can you…

All right. I would say, design ways, those numbers is much, much bigger than this. So we are seeing a heavy, industry heavy weight, as well as niche players focusing on AMOLED [ph] is great, engaging us. So we are actually, totally level for our new designs simultaneously.

Okay…

I hope that…

Sure. And then large panel versus small panel, what that would be model makers or TV makers that will be affected by the same tightening in markets similar to China or as a phone and tablet guys or they not affected there?

Not exactly, what we mean by government team and its program, in particular for smartphone, we talk about the government sponsored subsidy for LCOS, for operators to get the customer subscription and because of the current change of tax valuation in China last year, the industry have changed fundamentally. So I will also share this space, first through from operators will be much to operate, while those from retail service obviously its worst, with new invention e-commerce will outpace the traditional approach. And by saying that actually, I have to say quite a bit of our customer base in China who are the local leading trend then, are actually struggling with how they have to change their strategy because they are bit ambitionary of the old approach. And certainly I believe because they have technology, advantage, they have capacity advantage, they have the financial results advantage, so very soon they have good job. But I think currently they are – kind of little bit probably in the middle. And certainly with showing first view of iPhone probably from Q4 last year till now, certainly help our overall few customer base as well.

Okay. Great. Thank you, guys.

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

Thanks. Good evening, Jordan and Jackie. Jordan, how you feel better. I wanted to talk about…

Thank you.

The, thanks, the mobile situation, if you could elaborate a bit more because I heard kind of two messages, on the one hand, you said that you – should see a snap out coming in and large predominant and handy side you're focusing on large panel. So, maybe give us sense of what kind of order of snap backing we should see in the second quarter in the mobile display drivers?

First and more foremost, I want to emphasize that we believe we are not covering for a lot shares, lot of market share in smartphone, China or international. So that is very problematic. I will say that, we also have to admit the availability traffic developed at the moment, if you, I can elaborate on this from two perspective. One is phone makers and the other one is China motor makers. In terms of phones makers, I told upon the interest of iPhone, certainly the global poor economy or the rest of the economy. The government policy I also mentioned in the previous question. And certainly for export market, we still are very uncertain, current foreign exchange situation. Phone makers are very reluctant to all the detail of their inventory because all their costs are essentially in RMB. So they are feeling actual conscious in business. And certainly we, the very month over from the past Chinese governments they are tightening quite a policy which are driving out smaller players. So all these impacting phone makers market. On the motor maker side, we are seeing more actually capacity, i.e., more panel demand coming from new fabs of [indiscernible] except from a high end in particular from Japan and also to that extent from China. And so, phone maker see auto makers, motor market is picking up capacity, expanded. So that is yet another reason for phone makers to be conscious of their certain demand through motor makers. And motor makers feel that – are very positive in building their inventory position. So, probably I'll finish that line, seeing a very, very solid demand from their phone maker customers. They are not eventualized from cost of bus, because all I see for last time of our LCD module. So I think one, so I mentioned quite a few factors affecting the stability of cell phone, panel market in total. So, one, in those uncertainties can clear their money situation to improvise. I think we have been cautious. However, I think Chinese premier sales through were the companies that certainly have opportunity to watch very closely. We are still hopeful that there will be good surprise in the Chinese New Year sales through. In that essence, their industry momentum may change dramatically. So, we took and we – some of our customers are watching this very, very closely. So we are kind of making our sales prepared. However, even in this call we don’t want to be – found to be overly committed about this. But longer term – so I think in terms of certainty shift, we are putting a lot more focus on in sale parts, off sales parts and more bit [indiscernible]

Okay. Thanks, Jordan. You had a very strong margin, congratulations on the gross profit margin. And what you said it was driven by mix improvement, what should we think as the year progresses, it seems that you have, your mix continues to improve. So should we see an upside to the margin as the year progresses as you mix improve?

I think the Q1 margin improvement is driven primarily by the change of mix for smartphone and smartphone in particular is coming for smartphone expenditure, product sales, so tend to be at large panel, and those driver in that, in particular these trend, so not changed the mix. Well, we don’t expect the margin to go down totally not go down, but eventually from here certainly we – is part of hard to predict like the margin can improvise as part of what we are seeing right now. And certainly, higher than percentage should help mix our corporate gross margin and the three year which I mentioned, in-cell touch, LCOS and WLO, is flow through, you take those they were all contributing rather significantly to our gross margin.

So your new areas, which your are – what about your corporate average in terms of gross profit margin?

I am sorry, can you repeat the question?

That you indicated, and your last statement that you said, out cost should contribute significantly to gross profit margin as that way around?

Yes, I said the three areas of our R&D and the promotion, new product focuses in-cell touch, LCOS and WLO, is a growth as we hope they should. They will all contribute clearly to our corporate gross margin.

Okay. And then as you look at the – you mentioned an inflection point for head-mounted and LCOS, is that a volume and inflection point expected from one industry headed away, or should we expect to a few industry heavy weight to come in this year?

Really it had come on two months on the – our customers, in those plan, and on top of the fact that these products being so new, they are certainly involved. But why I compare these with smarphone customers, we're looking to vary so far industrial rounds, bid into much potential. And hopefully this will happen within the year.

Your inflection point is…

And its certainly not deduction, compared to if you compare that to last year, the year before growth in our LCOS, our revenue can primarily go in our income due to that space. Certainly which is a significant inflection point. And we creep, we or our customer’s creep, we ahead delaying by a month or two or even a quarter. However, I think if you look from next year’s perspective, I think we do have a pretty heavy growth for [indiscernible] considering the amount of efforts we have all put in and the degree of maturity this product is now visible to be.

Right. So last one, real quick, and so in the event that, let's say, lot of things come together on LCOS relatively quickly. Would you be asking some customers maybe their upfront in the CapEx to meet that kind of demand or are you planning to do all that CapEx yourself. Maybe walk us through maybe brokerage scenario, how you're going to fund that CapEx and how quickly you can add it?

Its [indiscernible] then we thought. We've added the customer. And we do expect next year CapEx certainly next year and we didn’t see there will be compared to next year more minor CapEx increase, partially probably ourselves and partially from the – by our customer. But…

And what is the CapEx for this year?

To really increase, major increase next year, rather than in this year. Because we do have more or less sufficient CapEx to handle this year. However, as I mentioned earlier that total customers, specialty price require these equipments which we call CapEx and top of that is funding by the customer themselves. But this year, next year we don’t expect requirements or capacity expansion.

Okay. And your year end capacity target is what again, your 300,000 now until the year end or…

Yes. 300,000 is what we present right now. However, we feel that customers are on penalty side recurring long-term profits from their long-term profit space which can be reduced by as much as half. However, that also means our ASP could be higher by as much as total.

But I guess, could you clarify, just clarify, could you add about the…

Yes, actually, we are going to settle refinancing, within our premises take over the entire menu right now of our premises, so that we can remain in our space or premier. Its well right now being expanded, right, so this is a very shocking solution and now our customers are happy because we are able to provide such a short end solution. But certainly next year, I think there will need for us to acquire additional end which we have – we have negotiated during the year with [indiscernible] owner and also even new buildings. I think it’s all very, very possible next year.

Okay. Thank you, Jordan.

Thank you. Our next question is coming from the…

Let me just prove to, okay, and this I think is a very important question, I am sure, very concerned about this. We didn’t see it, we will try to scrutiny as much as equipment as possible within our own efficient premises, right. So there is no requirement that we are building as such and there will be certain CapEx probably by on our own and certain CapEx probably by our customers, but all this equipment will be equipped into the additional career we are building within our current premise. Next year you won’t be surprise if we are to acquire [indiscernible] and build new buildings to complete CapEx requirement. That will be really the capacity expansion. Next question please?

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

Thank you for taking my question. I guess, one will have to do, you mentioned in your comments that from your [indiscernible] you expect that to accelerate this year, even the growth rate can accelerate this year. Those were up very close to 100% in 2014. So does that mean end of the year you expect them in terms to double again this year?

Your voice is a bit on and off, so can you repeat?

Yes. I am sorry. You mentioned in your prepared comments that you expect the image sensors to accelerate this year, is that the growth rate is going to accelerate because that was up 100% year-over-year in 2014, so does that mean you're expected to double again in 2015?

Probably, out of pocket, yes.

Great. Thank you.

Thank you.

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

Hi, Jordan and Jackie. Thanks for taking my question. Just question, my question is on the gross margin, I think first in Q1 you guided gross margin will increase by 1% to 1.5%. Can you tell us how much of that is from NIE and then as far smartphone mix or smartphone, recall versus second quarter or mix increased, does that mean that your gross margin took you – could pullback again?

The smartphone percentage is certainly going to decline. So small panel, with us head to a small panel exceeding 60% of overall sales. However, let me call that, including Q4 last year in previous quarter, right now, for Q1 we are looking at small panel to be down to a low 35%. Small and medium type panel, I am sorry, small and medium type panel driver. Last May quarter has exceeded more than half, including last quarter and this quarter we are looking at only 35%. So that is major decrease. Our last panel in Togo [ph] I can't recall how many quarters, maybe so 30%. But this quarter we are looking at somewhere around 35%. So last year had made major difference. In terms of NIE certainly…

NIEs about a similar with Q4, in the Q1 guidance. So again Jerry to engine your attention NIE would remain same level, right, but because of a lower revenue, because we guided 18% to 22% a sequential decline, certainly that would contribute to a higher margin for the company. However, your second quarter about smartphone is they do rebound, where their guiding, quarter the corporate gross margin down. I think there will be some impact because I think smartphone was around 28% of our revenue in the fourth quarter, while in the first quarter we exactly to be down to around 7% through 1Q. So these states do perform better in our guidance, you are only talking, in fact our corporate gross margin by maybe 5% or 10%, so that will lower the improvement of 1% to 1.5% in the guidance to maybe around 1%.

All right. So basically higher than…

Our gross margin improvement because our product mix has shifted.

Okay. Got it. Thank you.

Thank you. [Operator Instructions] Our next question is coming from the line of Don Sue with JLS Capital [ph] Please proceed with your question.

Hi, Jordan. Hi, Jackie. Thanks for taking my question. Just one question really on CapEx again, can you explain or quantify what amount CapEx are you intend to spend this year and also in relation to that, can you quantify on a like-for-like basis, the out cost capacity which is 300,000 per month now, what would it look when you exit 2015?

I think here is first question.

You were bit on my roof as well. Your first question is about CapEx, we do of course, what is exact is exactly the question?

You can tell us what the overall CapEx spend for this year?

Well, our CapEx claim is around $40 million this year. That was to mention already to you, for the year, compare it I think about $11 million last year. So yes, we do have a plan in CapEx of $40 million this year.

Okay. Understand. And in relation to that, in terms of your out cost, I know WLO capacity, I know its – that’s a topic under – there is some cost asset, but you know, like-for-like basis, thoroughly how close it, 300,000 per month, what could it look like by the end of the year, just roughly?

By the end of the year, it will be the same. However we are adding three equipments to cope with certain processes which require new equipment to handle. So its – within this field we are now really expanding our CapEx as such. But as I said earlier, if everything comes as plan, then next year there will be major requirements to extend our capacity. But this year, I am encouraged, we're sitting all pretty idle phase right now hence doing primarily R&D. So it is in fact pretty much end of the volume of the year. However, we achieve – to add new equipments both for LCOS and probably much more so WLO to cope with certain processes that requires for certain customers special requirements.

Okay. Got you then, WLO is a 900,000 per month now?

Yes.

Thank you. We do have a follow-up question coming from the line of Jerry Su with Credit Suisse. Please proceed with your question.

Hi, Jordan and Jackie. Thanks for taking my question again. I look at your inventory level in Q4 was up sequentially, and you mentioned that it was in preparation of another recovery, of course smartphone related to 1Q. But I just want to ask per your thought that I think that for materialize the order panel touching has been declining quite significantly, in the past two quarters. So preparing these kind of inventory enter in Q2, do you think that you'll see some inventory or pricing risks?

Certainly. Yes, always it’s true. However, that another esthetical risk cushioned by the tightening of foundry capacity right now. So, we have to balance both perspectives. And also I think we also have to I mean, by talking to a lot of customers they actually requested that we kept the inventory prepared for them because they are watching, clearly after Chinese New Year, albeit, so up to Q1 they could be probably rebound and certainly [indiscernible] community either. So that is why our efficiency was too prepared.

Okay. And then if that’s the case, the pricing wise, you'll be – it’s already guarantee or you'll be negotiated at the later date?

In many cases, not entirety, but in many cases for our customers, as of total prepared, with a certain amount and we [indiscernible] but certainly not all places, by in many cases this will be the place.

Okay. Perfect. That’s all. Thank you.

Thank you, Jerry.

Thank you. [Operator Instructions] I would now like to turn the floor back over to Mr. Wu, CEO of Himax Technologies for any additional concluding comments.

Well, thank you everybody for taking the time, and for being particular for many questions. As a final note, Jackie, our CFO, will host [indiscernible] conferences in the US in the coming month. And we'll announce the details as soon 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.