Himax Technologies, Inc. (HIMX) Q2 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Himax Technologies Second Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now turn the call over to your host, John Mattio. Please go ahead.

Thank you very much, operator. Welcome everyone to Himax’s second quarter 2016 earnings call. Joining us from the company are Mr. Jordan Wu, President and Chief Executive Officer and Ms. Jackie Chang, Chief Financial Officer. After the company’s prepared comments, we’ve allocated time for questions in a Q&A session. If you have not yet received a copy of today’s release, please call Lamnia International at 203-885-1058, or access the press release on financial portals, or download a copy from Himax’s website at himax.com.tw. Before we begin the formal comments, I would like to remind everyone that some of the statements in this conference call, including statements regarding expected future financial results and industry growth, are forward-looking statements. Factors that could cause actual results to differ include, but are not limited to, general business and economic conditions, the state of the semiconductor industry, market acceptance and competitiveness of the driver and non-driver products developed by Himax, demand for end-use application products, the uncertainty of continued success in technological innovations, 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. Except for the company’s full year of 2015 financials, which were provided in the company’s 20-F filed with the SEC on April 13, 2016, the financial information included in this conference call is unaudited and consolidated, and prepared in accordance with U.S. GAAP accounting. Such financial information is generated internally and has not been subjected to the same review and scrutiny, including internal auditing procedures and external audits by an independent auditor to which the company subjects its annual consolidated financial statements, and they vary materially from the audited consolidated financial information for the same period. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Now, I would like to turn the call over to Mr. Jordan Wu. Jordan, the floor is yours.

Thank you, John and thank you, everybody for being with us for our earnings call on which we will detail results from the second quarter 2016 and provide our third quarter 2016 guidance and outlook. Our CFO Jackie Chang will give further specifics on our financial performance after my overview. We are pleased to begin by saying that our revenues, gross margin and EPS for the quarter were as pre-announced on July 5. For the second quarter, we reported net revenues of $201.1 million, with a gross margin of 26.1%, both reaching the high end of our guidance, while GAAP earnings per diluted ADS came in at 11.5 cents, exceeding our guidance. The second quarter revenues of $201.1 million represented an 11.5% sequential increase and 18.8% increase year-over-year. The sequential growth was due mostly to strong sales in small and medium sized driver IC, mainly increased orders, order flow from our Chinese smartphone customer base and their demands for higher resolution display drivers. Accelerating our AR related business from our leading US customer also contributed to the second quarter growth. Revenue from the large panel display drivers was $67.5 million, up 2.8% sequentially, and up 24.4% from a year ago. Large panel driver ICs accounted for 33.6% of our total revenues for the second quarter, compared to 36.4% in the last quarter and 32.1% a year ago. As opposed to original guidance of high-single-digit sequential growth, our large panel driver business grew just low-single digit due to a certain customer’s short-noticed adjustment of production plan for its monitor products. Without the last minute change, we could have achieved high-single-digit sequential growth that we guided. Despite the lower than expected sales mentioned above, our large panel products actually enjoyed close to 25% year-over-year growth, mainly thanks to strong demands from Chinese panel customers with 4K TV still the major growth engine. In China, our driver IC business for large panel almost doubled year-over-year during the quarter. In comparison, worldwide large-size TFT-LCD panel shipments declined around 3% in the same period, according to market research firm IHS. It is especially worth highlighting that our engineering collaboration and design-in activities with large panel customers across China, Taiwan and Korea all remain robust and we expect these trends to continue throughout the year. Revenue for small and medium-sized drivers came in at $90.6 million, up 14% sequentially and up 9.4% from the same period last year. Driver ICs for small and medium-sized applications accounted for 45% of total sales for the second quarter, as compared to 44.1% in the previous quarter and 48.9% a year ago. Sales into smartphones were especially robust, up more than 30% sequentially and close to 25% year-over-year. We have the most comprehensive coverage of leading Chinese smartphone names and their growing market share has led to our good result this quarter. Additionally, driver ICs for tablets also resumed growth following several quarters of decline, thanks to new product launches from several leading brand customers in the US and Korea. Revenues from our non-driver businesses were $43 million, up 22.1% sequentially and up 33.6% from the same period last year. Non-driver products accounted for 21.4% of total revenues, as compared to 19.5% in the previous quarter and 19% a year ago. The sequential growth was driven mainly by the LCOS and WLO shipments for AR applications. Our other product lines such as touch panel controller, power IC, ASIC and NRE incomes also enjoyed sequential growth. The performance of LCOS and WLO was phenomenal, increasing several folds year-over-year as our major customer started producing the AR product. The growth was, however, partially offset by the decline of programmable gamma OP and CMOS image sensors. I will discuss more on some of these product areas a bit later. Our GAAP gross margin for the second quarter was 26.1%, around flat from the previous quarter and up 230 basis points from the same period last year. We have been able to maintain a relatively strong margin, mainly thanks to a more favorable product mix in small and medium-sized driver ICs and higher engineering fees from AR/VR related new project engagements. Our gross margin expansion was also a testament to our cost reduction measures. Gross margin improvement remains one of our main business focuses. Our GAAP net income for the second quarter was $19.8 million, or 11.5 cents per diluted ADS, compared to $13.1 million, or 7.6 cents per diluted ADS in the previous quarter and $8.8 million, or 5.1 cents per diluted ADS a year ago. GAAP net income increased 51.2% quarter-over-quarter and 124% year-over-year, respectively. GAAP EPS exceeded our 8.5 to 10.5 cents guided range. The sequential and year-over-year profit increase was a combination of higher revenue and much improved gross margin, together with lower operating expenses. Jackie Chang, our CFO will now provide more details on our financial results. After Jackie’s presentation, we will then discuss about the third quarter guidance and insight on our business, market and strategies going forward. Jackie?

Thank you, Jordan. I will now provide additional details for our second quarter financial results. GAAP operating expenses were $30.6 million in the second quarter of 2016, down 4.4% from the preceding quarter and little changed from a year ago. GAAP operating margin for the second quarter of 2016 improved to 10.9% from 5.2% for the same period last year and 8.4% a quarter ago. The GAAP operating income increased 44.3% sequentially and 146.8% year-over-year. Second quarter non-GAAP operating income, which excludes share-based compensation and acquisition-related charges, was $22.4 million, up 42.8% sequentially and up 133.5% from the same quarter of 2015. Second quarter non-GAAP net income was $20.2 million, or 11.7 cents per diluted ADS, compared to $13.5 million last quarter and $9.3 million in the same period last year. Turning to our balance sheet, our cash, cash equivalents and marketable securities were $179.3 million as of the end of June 2016, compared to $164.5 million at the same time last year and $168 million a quarter ago. On top of the above cash position, restricted cash was $138 million at the end of the quarter, a decrease of $42.5 million from the preceding 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 June 30, 2016 were $186.7 million, little changed sequentially and year-over-year. Accounts receivable at the end of June 2016 were $187.9 million as compared to $182.3 million a year ago and $173 million last quarter. Days sales outstanding was 90 days at the end of June 2016, as compared to 95 days a year ago and 87 days at end of the last quarter. Net cash inflow from operating activities for the second quarter was $13.1 million as compared to an outflow of $13.8 million for the same period last year and an inflow of $21.5 million last quarter. Capital expenditures were $1.7 million in the second quarter of 2016 versus $2 million a year ago and $2.2 million last quarter. The capital expenditure in the second quarter consisted mainly of purchases of R&D related equipment. During the second quarter, we declared an annual cash dividend of 13 cents per ADS, totaling $22.3 million, which was paid out in early August. Our dividend is determined primarily by the prior year’s profitability. Our decision to pay out 89% of last year’s net profit demonstrates our continued support for our shareholder base and strong confidence in the outlook for our revenues and earnings growth in 2016 as well as in our long-term growth prospect. As of June 30, 2016, Himax had 171.9 million ADS outstanding, unchanged from last quarter. On a fully diluted basis, the total ADS outstanding are 172.4 million. I will now turn the floor back to Jordan.

Thank you, Jackie. The increasing momentum of our large panel driver IC sales will continue to come from China and the world’s accelerating 4K TV adoption. Our smartphone driver IC business has rebounded well this year, reflecting our leading position in Chinese smartphone market where our end brand customers are performing strongly, and better demand are stimulated by rising 4G adoption. Leveraging on our technology leader and early mover advantage in AMOLED driver and pure in-cell TDDI technology, we are well positioned to benefit from increasing adoption of AMOLED and pure in-cell displays. For non-driver products, the true highlight of the year will be LCOS microdisplay and WLO products, which are integral parts of the ecosystem for the booming AR sector. During the first three quarters of the year, LCOS and WLO combined will grow more than ten times through accelerating shipment to our existing AR customers. We are also making good progress in new territories such as IoT and machine vision with our CIS and WLO products, evidenced by more design-ins and engagements with leading consumer electronic brands and a leading international smartphone chipset maker. Overall, we are seeing strong momentum across all our major product lines and feel very good about the growth prospects of 2016 and beyond. With that, I will now provide our third quarter guidance, followed by a more detailed outlook. For the third quarter of 2016, we expect revenues to be up 5% to 10% sequentially. Gross margin is expected to be flat to slightly down sequentially, depending on our final product mix. GAAP earnings attributable to shareholders are expected to be in the range of 6 to 8 cents per diluted ADS based on $172.4 million outstanding ADSs. Non-GAAP earnings attributable to shareholders are expected to be in the range of 10 to 12 cents per diluted ADS based on the same number of outstanding ADSs. As we have done in the past, our third quarter GAAP earnings per diluted ADS guidance has taken into account our expected 2016 grant of restricted share units, or RSUs, to our team at the end of September. The 2016 RSUs, subject to our Board approval, is now assumed to be around $11.5 million, of which around $8.1 million or 4 cents per diluted ADS, will be vested and expensed immediately on September 30th, the grant date. In comparison, the 2015 RSUs totaled $5 million, out of which $4.5 million or 2 cents per diluted ADS, was vested immediately. The grant of RSUs would lead to higher third quarter GAAP operating expenses compared to the other quarters of the year. In providing the above earnings guidance, we have assumed a 13.5% income tax rate for 2016, calculated based on exchange rate of NTD 31.4 against the USD, the exchange rate as of the beginning of August. Now, let me provide some details behind our guidance and trends that we see developing in our businesses. For reasons mentioned earlier, our large panel driver IC sales and market share have further increased this year. We expect our large panel IC revenue to grow by double digit sequentially and more than 50% year-over-year. In addition to benefiting from our leading market share in China and in 4K TV, we are also leading the charge in new technology areas such as 8K TV by working with our Chinese and Korean panel customers. The other segment in our driver business is ICs used in small and medium-sized panels for applications including smartphones, tablets and automotive. Demand for driver ICs for smartphone has remained strong, but our sales in this area will likely just stay flat sequentially in Q3, as we can hardly make enough delivery for the surging rush orders of late from Chinese and Korean end customers. However, it will still grow around 20% year-over-year. We also continue to see resolution upgrade in the second half of the year, which should help mitigate some gross margin pressure for the product segment. On AMOLED, demand has taken off as smartphone brand customers increasingly adopt AMOLED panels in their premium models. This trend has prompted more panel makers to ramp up their investments in AMOLED manufacturing and accelerate their timetable for the mass production of AMOLED panels. We have been collaborating closely with multiple panel customers across China, Korea and Japan for AMOLED product development and are seeing more design-ins especially with key Chinese and Japanese panel customers and smartphone makers. Such progress reaffirms our technology leadership. We believe that AMOLED driver IC will kick off a new growth cycle for our small panel driver IC business starting 2017. Automotive has been the best-performing category among driver ICs used in small and medium-sized panels in recent years. We expects the category’s Q3 revenue to grow double digit sequentially and more than 30% year-over-year. The strong growth will likely continue into the next few years. Our confidence comes from the fact that higher resolution and larger panel sizes are becoming mainstream for automotive. With numerous top automobile brands having been our indirect end customers, we are well positioned to take advantage of this fast growing market. Further, our driver ICs used in tablets resumed growth in the first half and will continue to produce noteworthy growth in the second half of the year, driven by the strength of high-resolution displays of 10-inch and above. Overall, we expect small and medium-sized driver IC segment in the third quarter to be up by high-single-digit sequentially. For the past few years, the non-driver business segment has been our most exciting growth area and a differentiator for Himax. New product developments continue to evolve and gain traction, and we remain positive on the long-term growth prospect of our non-driver businesses. We expect high-single-digit growth in our non-driver products for the third quarter. Sales of timing controller, touch panel controller, ASIC chip, wafer level optics and LCOS microdisplay will deliver strong growth this year, partially offset by lower sales of the CMOS image sensors. I will now highlight some of the non-driver product lines. Numerous on-cell design wins from leading Chinese smartphone names have led to growing sales of our touch panel controller in Q2 and we expect the growth to further accelerate throughout the rest of 2016. We are also one of the pioneers in offering TDDI solutions and are in partnerships with essentially all of the display makers in the state-of-the-art pure in-cell touch panel for joint technological development. The volume shipment record from a leading Chinese smartphone customer validates our leading position as a pioneer. We are adding more design wins and will start shipping in mass production of our TDDI solutions to additional Chinese and Korean smartphone customers and panel makers in the second half of 2016. Along with AMOLED driver ICs, TDDI is another major growth engine for our small panel business starting from 2017. I will now turn to the LCOS and WLO product lines and AR/VR, their key applications. The recent staggering success of Pokémon Go has provided a looking glass into the future trajectory of the AR technology and given one early answer for why and how you’d want it to. Since its launch just over a month ago, the AR game has taken the digital world by storm with already more than 100 million app downloads and 20 million active users. Thanks to the viral popularity of Pokémon Go, AR is now getting the attention and consumer validation that we, at Himax, has always known to be possible. While we must give credit where it is due, the AR technology used by Pokémon Go today is actually still quite primitive. Compared to the AR/MR technologies being developed by our customers and partners, Pokémon Go pales in comparison in terms of how AR can bring alive the consumer experience to interact directly with the physical environment with more sophisticated holographic imagery, 3D sensing and real-time surroundings detection. If you have not seen demonstrations of AR devices already, its holographic imagery will actually appear on your desk, your chair or walking next to you on the street. Moreover, the world of AR is much more than just gaming. It represents a next generation computing platform. Future versions of the technology will cover both commercial and consumer uses and will be much more sophisticated and produce an endless stream of uses. These could include daily computing in a virtual office, social networking, teleconferencing, et cetera. Due to the eye-opening effect of Pokémon Go, those who thought AR required several more years to gain traction are now changing their models as the game, almost overnight, elevated AR to mass-market and added 10s of billions of dollars to its market potential in the next few years. A new and lucrative marketing tool on top of AR software and applications are being created that will catapult AR device development and intensify further investment in the sector. We believe the path Pokémon Go started will prompt an AR industry that most didn’t think possible before. Having invested in related technologies for over 15 years, we are uniquely positioned as the provider of choice for microdisplay and related optics, both critical enablers to the AR device. With little competition, we continue to work with 30 plus new and existing customers for various AR devices, many of which you have seen news from lately. Our design engagements now cover leading companies in a wide variety of industries such as software, gaming, search, mobile, social media, military, automotive, wearable, and toy. Many of our customers have committed huge amounts of R&D and capital to capture the rapidly expanding future of this game changing product category. We expect revenues and shipments of our LCOS and WLO to continue to accelerate during the second half of this year. Further new launches of AR products from more customers, as well as increasing shipment of existing customers, could greatly lift our sales further of these two product areas during 2017. With little new capital investment, we will be able to substantially enlarge our output to meet additional demands through de-bottlenecking and continuous yield improvement. Looking beyond 2017, however, we will need further capacity for our LCOS and WLO products to address the strong demand anticipated out of the very busy design-in activities that we’re having right now. We are pleased to report that we have just kick-started our expansion plan for next generation LCOS and WLO production lines. Backed upon our customers' demands and feedbacks, the expansion plan includes a major increase of new capacity based upon state-of-the-art processes largely developed from within. The new production lines will not only offer far better cost and product quality for mass production, it is also a major technology advancement for very high end products of the future. The total investment is now budgeted to be $80 million to $100 million for monthly capacities of 3,000 12-inch wafer input for LCOS and 6,000 8-inch equivalent mother glass input for WLO. The actually output volume can vary widely, depending on the size of the chips. For LCOS, a 12-inch wafer can yield between 80 to 1,500 chips on our existing product designs, while for WLO, an 8-inch mother glass can produce as many as thousands of chips or as few as less than ten. The scheduled mass production is end of 2017 to early 2018. The new capacity will be located at a newly acquired land, adjacent to our in Tainan, which is 5 hectares in size, some 1.6 times the size of our current headquarters. The investment will be financed through our internal resources and existing bank facilities. The current plan only uses around 20% of the land. We will therefore still have plenty of room for future expansion. We have also reserved sufficient space in the building for customers’ future consignment needs. Part of our existing WLO equipment was purchased by our customer and consigned to us. To sum up, the next generation expansion will substantially enlarge our existing capacity and lift our technology to another level, thereby further strengthening our leadership position in the AR sector worldwide. We believes this is just the beginning of a very long term growth story. Of note about LCOS and WLO, they enjoy better margin compared to our corporate average. The margin will be further lifted with new designs from a more diversified customer base and, in particular, the commencement of the new fabs’ mass production. We expect the expansion project will enjoy a phenomenal return on investment in the years to come. Now, for AR applications. We have been developing customized driver chips for next generation OLED panels with two top-notch VR players. We expects mass production to start in late 2016 to early 2017. Additionally, we have started to engage with certain VR customers to develop their AR devices. Last but not least, we continue to make good progress in two new smart sensor areas, which we announced earlier by collaborating with certain heavyweight partners, including leading consumer electronics brands and a leading international smartphone chipset maker. By pairing a DOE integrated WLO laser diode collimator with a near infrared CIS, we are offering the most effective total solution for 3D sensing and detection in the smallest form factor, which can be easily integrated into next generation smartphones, AR/VR devices and consumer electronics. Similarly, the ultra-low-power QVGA CMOS image sensor can also be bundled with our WLO module to support super low power computer vision to enable new applications across mobile devices, consumer electronics, surveillance, drones, IoT and artificial intelligence. We will report the business developments in these new territories in due course. Regarding other CIS products, we maintain a leading position in laptop application and will increase shipments for multimedia applications. And that will conclude our non-driver business discussion. Thank you for interest in Himax. We are now ready to take questions.

Thank you. [Operator Instructions] Our first question comes from Anthony Stoss with Craig-Hallum. Your line is open.

Hi, Jordan and Jackie. On the $80 million to $100 million capacity expansion, what gives you the confidence in adding that additional capacity in lieu of the AR, it looks like it came up a little short in June. And then secondly, phenomenal growth on the smartphone side, what can you do to expand capacity in Q3 and beyond. Thanks.

The first question, we have been actually pushed by our customers, many customers, about the issue of capacity, regarding the LCOS and WLO. This certainly includes glasses for AR device and also the 3D scanning device that I just mentioned, the DOE collimator with infrared sensing. So both these areas -- actually major areas will require additional capacity. Now, we are having so many design-ins, design-wins. We saw many customers expected mass production timetable to be next year and the year after. So, I mean, if we don’t start now, I think it -- our reach is tremendous in terms of having spent so much time and money on R&D and having calculated so many top tier high quality customers and yet, don’t have the capacity ready for them. Without capacity, our design efforts and R&D really means nothing. So we actually have gone through very detailed plans and this plan has actually been with us for a very long time and now, we believe it is really handful for us to get started, because as I mentioned earlier, even if we start the planning now, and start to do the construction soon, the commencement of mass production of the new facility will only start about a year-and-a-half later. So we are actually, our concern is more on the situation where the capacity does not come along early enough rather than having been able to find sufficient demand to free up the capacity. And also another point I want to highlight is that for the LCOS and WLO, certain parts of the capacity can be added incrementally. So if you look at our investment plan I discussed earlier, we are pleased that we acquired a very large piece of land, which actually accounts for pretty significant portion of the $80 million to $100 million on investment, because we are through at this stage and that is also again a demand from our customers and so we anticipate future growth. So right now, the capacity I mentioned only occupied 100% of the land, meaning we have plenty of room for official expansion. And then, we -- on the 30% of land, we build a building. The building will be -- will certainly I think be partially empty in the very beginning stage and then after we start to get more orders coming along, we start to debottleneck our investment and also I mentioned earlier the building also has reserve room for future possible consignment needs for our customers. So all this has taken into consideration very detailed discussion and calculation feedback from a lot of our customers. The second question about the smart phone, we were caught by surprise in fact a few months ago, the surge in demand mainly from Chinese [indiscernible]. Initially was just a matter of not being able to deliver in time and over time the demand continues to increase, if we can a matter of capacity issue. We are still working very hard to resolve the issue, I can say you is that we are very confident that Q4 shipment or capacity available to us will be significantly larger that of Q3. Now, and how long the surge in demand will continue that is something I don't know but our ICs which is suffering from capacity right now has such widespread design wins across literally every single Chinese brands in the major cell phone models. But we feel we should gear up at full speed and produce as many as possible because even if the markets started to turn, I think we are confident given the widespread design wins that the ICs will be consumed very quickly. So exactly how many - how much growth income of capacity we can produce next quarter is still a work in progress issue but certainly we will be able to produce more and we are not worried about inventory at the end.

And then it’s my follow-up Jackie, can you give us the dollar amount, the revenue and AR in the quarter? Thanks.

We’re actually not disclosing that but I think is now over close to about 10% for the quarter and certainly the business will accelerate throughout 2016 and beyond.

I just want to add, bear in mind, the real high quality AR classes are a separate area in the marketplace without very much shipments but even with such space and small volume, the AR revenue is already close to 10% of sales as Jackie just mentioned. This shows the potential, that is because our portion in the total bill of materials is rather significant and this further evidence the fact that this industry offers tremendous growth for Himax.

Our next question comes from Tristan Gerra with Baird. Your line is open.

Just a quick follow-up question on your non-driver business, would you be able to provide a – what your outlook from your revenue standpoint is for the non-driver business for the whole year?

For this year?

Correct, just for us to get a sense as to what we should expect in terms of year-over-year growth and whether there was any changes relative to prior guidances in that business?

We actually – we’re not really giving the full-year guidance, but I think the non-driver business overall for this year should grow probably over 30%, 35% to 40% year over year.

We expect growth to be much higher next year.

And then as a follow-up, if you could provide what the unit growth was your small, medium and also large panel business in Q2?

The volume growth...

One second place.

For the second quarter, large driver IC - shipments actually grew about close to 50%. While the small medium shipment grew about low single digit year-over-year.

Our next question comes from Tom Sepenzis with Northland Capital. Your line is open.

Jackie, I think for September you guided 13.5% tax rate what should we be expecting is that the rate going forward or does it bump back up next year?

Well, actually we said assuming change rate remain about the same, the tax ratio will be actually lower for next year because our LCOS and WLO division, are making little profit, they will probably contributing to a lot higher profit and that will sure offset the tax liability for the whole company as the subsidiary does have very high credit - tax credit, parent company was not able to utilize in the past years when the subsidiary was actually losing money and now that returns profitable this year and 2017 certainly is going to improve quite a lot more, I would expect the income tax rate to actually be lot lower next year.

And then, could you just talk a little bit Jordan may be about what the CMOS issues are?

CMOS image sensor?

Yes.

We haven't performed well this year in the first half I mean certainly and that was a manufacture why non-driver sector overall has not grown even more strongly. And I think one of the issues we face right now and in the past was the very intense competition in the smartphone sector. We did offer, we do, we sell to five megapixel, eight megapixel and 13 megapixel sensors into the smartphone market but then again we are a latecomer and as big as the market size is, the competition is very tense. So starting from a few quarters ago we made a strategic decision to turn our distant focus for smartphone to overall non-smartphone that includes primarily smart sensor, multimedia sensors and very importantly but for longer-term automotive sensors. We have actually very exciting progress in terms of interaction in our projects of automotive sensors but as you guys would appreciate. Automotive takes a very long time from development to mass production. So that is more of a long-term focus. Shorter term, multimedia is now a very strong segment for us. Devices such as drone, surveillance, home appliances and others, actually gaining very good traction each quarter. And also a very, very important decision we made is to define new products spec for potentially niche markets in IOT and other things. So two of the very significant examples we mentioned we actually announced sometime ago and we reiterated just now in my prepared remarks what is what we call our ultra-low power always on sensor. This sensor consumes a fraction of power consumption compared to ordinary ultra censors and then therefore can be lid up always and all the time that is why we call the always on sensor. We have good design activities already in into TV, refrigerator and drone and other things. Mass production is expected to be next year. And here we're talking about some of these of end customers. Another thing very unique is 3D scanning and environmental detection technology so this involves a infrared CMOS image sensor which is coupled with a laser and optical collimator and DOE. The whole thing and also - what happen is, you have been [indiscernible] and the DOE. You’ve basically been a invisible pattern if you like to your surroundings which is the option, but bounce back the signal received by the infrared CMOS image sensor and then you compare the outcome pattern and with the incoming pattern back and we have a algorithm chip to process it to calculated it and that is when you can actually detect your 3D surrounding. We are making very exciting progress and we expect our mass production to start next year. And in this type of solution, Himax alone develop many or multiple chips from a module, so the whole module can sell at a pretty price. We are working with a leading international smartphone chipset maker with our partner in this technology and now we're talking to various exciting customers for which the detail I cannot disclose, I hope to report progress in due course but these are of course various examples of our major shift of our strategy in our CMOS image sensor, we kind of admit that we are too late in the smartphone world but if we feel utilize this technology and we trend it around to other niche market indications which can be very profitable business for us in particular for IoT and machine region territories.

Our next question comes from Jaeson Schmidt with Lake Street Capital. Your line is open.

First one just wondering on gross margin with a stepped down in Q3, I assume that’s driven by mix, is there anything else that’s contributing to that and how should we look at gross margin than going forward beyond Q3?

You are absolutely right driven by mix and really there is not much I can add further. Beyond Q3, if you talk about the short-term like Q4 then it certainly is again always an issue the product mix. And admittedly our price pressure on driver IC remains quite high. Our panel marker customers are working hard try to turn profitable right now. So, although the panel price or the overall display environment has been much improved from first half when they are actually making losses now they are all geared up trying to make a profit. So the pricing pressure remains high on our side. If the more favorable environment persists into Q4 and beyond which many observers believe will be the case, then believe in Q4 or going forward the next quarters our pricing pressure will probably be less but that’s certainly is not something I can be very, very certain about. Now if you look at longer term, like if I take just on top of my head say second half next year or even longer term then I will feel a lot more upbeat about our gross margin potential, which I think will be lifted by the margin sales of non-driver businesses in particular AR, VR and the niche market CIs I just described, all these issues related to AR, VR, LCOS and WLO, niche market CIs, all these areas I think will produce much better gross margin and certainly don’t forget on-sale touch and in sale touch for these new territories will offer much better gross margin.

And then turning to the LCOS WLO expansion plans, obviously this has been driven by what you’re seeing in your pipeline but just any LCOS WLO customers have exclusivity on a certain percentage of this expected expand?

No, other than the equipment they can sign, for obvious reason there were exclusive right for those equipments but other than that no. I mentioned earlier in my prepared remarks we have 30 plus customers probably [indiscernible] already but, we have very comprehensive design base across the players that you read every day from means just that for obvious confidential reasons which - but we are very comprehensive in the sectors customer coverage for the obvious reason we can offer exclusivity to anybody.

Our next question comes from Charlie Chan with Morgan Stanley. Your line is open.

So my first question is regarding your large panel driver ICPCs, it has been growing strongly over the past few quarters. So from your observation, have your customer can have inventory for large panel driver IC and do you think that this can continue to grow into next quarter?

Our customers in this area, large panel in particular, we operate with our customer on a hub basis, I mean we ship our ICs to their hubs and they withdraw the ICs just-in-time basis. So, really if there is so called “inventory” as such it’s reflected in our balance sheet rather than our customers. So that’s one point and then if you look at our balance sheet, our inventory level has remained healthy I would say nothing out of the extraordinary and if you look at, now I think another question so in the driver IC inventory, on the customer side, another issue is our customer’s panel inventory, I think the industry has been pretty healthy right now, the inventory, the growth of supply chain is quite lean and with other reported reduction of Korean panel makers in their panel they try to [indiscernible] which for them is more profitable. So, it has created a supply kind of tension across the industry, so that's why I think on the last panel inventory label I think the industry has remained pretty healthy right now.

And my next question is on your AR smartphone business because your customers are exciting, they have a strong commitment for your next technology investment but at the same time since some of product launch at the beginning of the year, so far we haven't seen a concrete demand over the sellthrough data. So what is the discount mentioned between customers plan and the real customer demand, so if you can share with us for example if you get some sellthrough data on your customer and why your customer can be so aggressive for future capacity, it will be very helpful.

Many of our customers which engage us design activities haven't even started shipment yet, I would say vast majority of customers haven't even started shipment yet. As far as the so-called connected concern, I think we have to appreciate that the AL device as of today is actually very difficult to manage with the display certainty in the very normal area in which I think as you all know we play a major role. So unlike a smartphone there are so many references, the industry is not so mature, AR device because of the issue, the reason you mentioned there are simply aren't that many products around in the marketplace and nobody can claim this product will be perfect or close to mature. There is really no reference, no good reference of which to design your device. So every single customers, big customers in particular have to move the device almost from scratch, right. So the designs likely actually take a long time and what we're seeing is also they are investing a lot which is still admittedly to the outside world and to creating software platform for us encouraging as developers or industrial corporation or media players or movie entertainment players to come along. So they are actually tremendous amount of activity going on under the water right now and our customers are seeing requests and demand from their customers and they will in turn come to us and say hey where's my capacity, I have been paying you the development fees and this is my effective timetable and where is my capacity, do we have sufficient capacity, we are getting so many of such enquiries these days like we still obliged to commit our capital into a major expansion.

Do you foresee any demand come comes from consumer markets or most of those demands are come from enterprise users or applications? Thanks.

Certainly the more viable players now focus on enterprise market first which I think is healthy and positive for the industry long-term because in the price market tends to grow slower and has smaller sized compared to consumer market. It does demonstrate the fact that AR device is much more than just gaming, it can be used for many, many applications. And also with enterprise kind of wholesale sales, right wholesale customers or customers are in better position to depart the device to improve the device to get direct feedbacks and to do co-development on applications with AR customers and get very useful feedbacks for the product category to continue to improve. So we actually are in total agreement with our customers that we should not try to attack the product too early to much prematurely to the consumer market, having said that though we do have quite a few customers having again obviously I cannot mention names and not let alone they are details. They are very seriously trying to get into consumer market, some of them are our existing AR customers, they are developing AR devices internally.

Our next question comes from Jerry Su with Credit Suisse. Your line is open.

The first question, I would like to ask about on the capacity expansion plan you mentioned, you have laid out on equivalent basis for LCOS and also for wafer level optics. Could you let us know what is the existing capacity now for LCOS based on 12-inch wafer equivalent and now so that [indiscernible]?

I think on average, our standard design because as we’ve indicated the capacity expansion is facing on 12-inch wafer and the 8-inch – 12-inch for LCOS and 8-inch for WLO but will cover different level of design, right but based on the standard design, our current capacity for LCOS is above anywhere from 200,000 to 300,000 ICs per month.

Let me do this way, our current equipment firstly on LCOS, the new capacity were in rough 12-inch wafer, the current capacity is 8-inch wafer, right. So the pro area is about 2.25 times difference. In our current LCOS capacity, our main equipment can accommodate the same 3,000 wafers, but again, it’s on age basis. However, for us to reach the full capacity of 3,000 average wafers we will need to debottleneck certain backend facilities plus how I describe the potential increase of capacity to cover demands for next year when our new capacity has not come online, but I made some remarks earlier about that. And I also mentioned that such increase capacity will not take up too much of additional capital expenditure because the main equipment has already been invested. Right now without debottlenecking our 8-inch wafer input capacity is only about half of the total capacity of 3,000. Forgive me for the complicated answer because the issue is rather complicated. So, right now is about $1.05 an inch, now with little investment debottlenecking, we will be able to do 3000 8-inch and the new capacity will be 3000 12-inch which implies one and two times the capacity even after the debottlenecking of these capacity. Okay, I hope that it is all clear on LCOS. Now on WLO, now the 8-inch class I mentioned in my prepared remarks we are talking about - we talked about - we talk about 6000 8-inch equivalent mother glass input, the reason we had the equivalent in our old days because in our - I cannot disclose too much detail because that involves proprietary technology but our current process involves 8-inch mother glass. In the future we should be able to cut from much bigger mother class and with the ability for our production life. So that's why we say the new capacity we say its’ 6000 8-inch equivalent. Now in our existing capacity, they are two portions, one is our investment and the other portion is customers consignment. I cannot comment too much on customer consignment on confidential reason but existing one, our own investment has less than half of this capacity right now.

So which it’s less than 3000 8-inch equivalent?

Wafers.

Next question in the guidance is provided by segment it seems like that large sizes going double-digit and the other two segments high single digit? I think based on revenue mix, this should suggest your Q3 revenue should be at very high end of your guidance or even should be higher, so I don't - could you help us understand why you guided 5% to 10% growth, I think you should be ending up like 9% or 10% QonQ?

I think we mentioned earlier in Q3 the smartphone which is our number one sector is going to be only flat and that is the main reason. And also we certainly always like to be in a bit of a conservative side. So I think as of today, when we look at our forecast, certainly you are right, we are - our forecast focused looks to be probably on a more towards the higher level guided range but again platform opportunity because of capacity constraints will grow this quarter.

And then last question for Jackie, what is the guidance for OpEx for Q3 and also for full-year?

For the full-year, I think what we expect around probably $138 million including our view of a lot higher levels than last year of probably around $8.1 million that will be charged this year. So actually if you take our non-GAAP operating expenses actually only increased around 1% year over year so we are continuing to monitor our operating expenses very, very closely.

[Operating Instructions] Our next question comes from Donnie Teng with Nomura Securities. Your line is open.

My first question is about your strong growth on large driver IC business, may I ask set for potential market share again, do you think it is related to Samsung shutdown it’s LCD panel production line, so that is why your China panel makers are also gaining market share?

Not directly, I mean, not directly, our China customers have a large capacity this year compared to last year, if fact the next two years they will continue to grow their capacity and I think that is the main reason. And also for 4K TV, 4K TV needs more drivers and 4K TV this year is expected to reach almost a quarter of the total core demand so that is very helpful for us. So I think that should be the main reason. And certainly because of Samsung's decision we are indeed seeing some Samsung sourcing more panels from China and that certainly benefit us as well.

And my second question is a follow-up on gross margin. So, as you mentioned above, it is mainly due to product mix as large driver IC carries a lower gross margin, but you also mentioned above the SP pricing pressure. So, if we compare larger driver IC with small driver IC which one will have a relatively larger pricing pressure on third quarter or in the coming quarters?

Large panel.

And my third question is related to your 80 million to 100 million investment for the LCOS and WLO. So since we already had a 20 million CapEx last year, so I'm wondering what is our CapEx planned this year and next year, so is the 20 million CapEx last year already included in 80 to 100 million investment you announced?

No. It was mainly for WLO and some cost equipment, and certainly they are our usual CapEx including our design tools and so on and so forth. But the answer is no, all this 80 to 100 million CapEx is new.

Could you tell us what kind of CapEx number for this year or next year, so we can see this total 80 to 100 million in the next one or two years.

It will not be very much in this year. This year we are primarily on planning and ordering and preparation. A big chunk of it will be in next year, next year will be the peak. We announced further details in due course and as of today, while we are still talking to our various construction vendors and equivalent vendors, I mean we feel it’s still a bit too premature to give a specific in terms of timetable for the CapEx. I can say for more certain that the bulk of it will be next year.

Got it.

I mentioned earlier we feel confident that this can be financed from our resources and bank facilities.

So could you tell us the CapEx number this year, so because…

The actual CapEx for 2016 was actually low over $10 million and then we spent a lot higher than that may be around $11 to $12 million this year. And as Jordan said most of the new capacity expansion CapEx will happen next year.

And I'm showing no further questions, I will now turn the call back over to Jordan Wu for closing remarks.

As a final note, Jackie Chang our CFO, she will maintain investor marketing activities and attend as usual investor conference in US and Asia, and we will announce the details as they come about, please contact our IR department and/or John Mattio if you're interested in speaking with the management. Thank you and have a nice day.

Thank you ladies and gentlemen, it does conclude today’s conference, you may all disconnect and everyone have a great day.