Good day, ladies and gentlemen and welcome to the Himax Technologies Third 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 call maybe recorded. I would now like to introduce your host of today's conference, Greg Falesnik, Managing Director with MZ North America. Sir, you may begin.

Thank you, operator. Welcome everyone to Himax’s third 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 email greg.falesnik@mzgroup.us 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 that involve a number of risk and uncertainties that could cause actual results to events to differ materially from those described in the conference call. 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, as well as other operational 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, 2015 filed with the SEC in April 2016. Except for the company’s full year of 2015 financials, which were provided in the company’s 20-F and 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 we subjects 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. I will now turn the call over to Mr. Wu. Jordan, the floor is yours.

Thank you, Greg. And thank you, everybody for being with us for our earnings call on which we will detail results from the third quarter 2016 and provide our fourth 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 inline with our reiteration of guidance on September 29. For the quarter, we reported net revenues of $218.1 million, at high end of our guidance with a gross margin of 25.6%. Third quarter GAAP revenues per diluted ADS came in at $0.079 and non-GAAP earnings per diluted ADS were $0.0124 also meeting the higher end or exceeding our guidance. The third quarter revenues of $218.1 million represented an 8.5% sequential increase and 31.7% increase year-over-year. Both the sequential and year-over-year growth was due mostly continue growth momentum across all major product lines, driven by large panel driver IC sales, benefited from our leading market share in China and in 4K TV. Our better than expected smartphone driver IC sales and accelerated AR/VR related business from our leading US customer. Revenues from large panel display drivers was $72 million, up .6.8% sequentially and up 42.6% from a year ago. Large penalty spread drive IC accounted for 33% of our total revenues for the third quarter, compared to 33.6% in last quarter and 30.5% a year ago. As opposed to original guidance of double-digit sequential growth, our large panel driver business grew just mid-single-digit due to a certain customer’s short-noticed shipment adjustment of its monitor products. Without the last minute change, we could have achieved double-digit sequential growth that we guided. Despite the lower than expected sales mentioned above, our large panel products actually…

Thank you, Jordan. I will now provide additional details of our third quarter financial results. GAAP operating expenses were $40.4 million in the third quarter of 2016, up 32.2% from the preceding quarter and up 4.9% from a year ago. The significant sequential increase was caused by the $9.2 million 2016 RSU grant we have traditionally expensed in the third quarter, which was considered in our guidance. As an annual practice, we reward employees with an annual bonus at the end of September each year which always leads to a substantial increase in the third quarter GAAP operating expenses compared to the other quarters of the year. This year, the annual bonus compensation including Restricted Share Units, or RSUs, and cash payouts totaled $12 million, out of which $9.2 million was vested immediately and expensed in the third quarter. The remainder will be vested equally at the first, second and third anniversaries of the grant date. Excluding the RSU charge, our third quarter operating expenses were $31.2 million, up 2% from the previous quarter and down 8.2% from the same quarter 2015 GAAP operating margin for the third quarter of 2016 was 7%, up from negative 1.5% for the same period last year and down from 10.9% a quarter ago. The GAAP operating income decreased 30.2% sequentially, but increased 721.5% year-over-year. The sequential decline was mainly a result of the higher RSU expense to compensate the team for with a much improved profitability of the year. Third quarter non-GAAP operating income, which excludes share-based compensation and acquisition-related charges was $25.1 million, or 11.5% of sales, up from 1.6% from the same period last year and up from 11.1% a quarter ago. The non-GAAP operating income increased 12.1% sequentially and 835.7% from the same quarter 2015. Our GAAP net income for…

Thank you, Jackie. We delivered solid results to achieve both top and bottom line growth during the first three quarters of the year, as our driver and non-driver business segments both performed strongly. We have increased market share in our core driver IC business this year and continue to solidify its leading position through technology advancement and customer engagement. With the most comprehensive product portfolio in the industry, we were further capitalize on our strong position in display drivers to lead the market in major new technology trends, including higher display resolution, AMOLED and in-cell TDDI. Equally important, Himax has many unique technologies and solutions for AR, VR and IoT applications with exciting long-term growth potential. For our LCOS micro display and WLO products, which are integral parts of the eco-system for the booming AR sector, we continue to increase new project engagements with many heavyweight customers worldwide. We remain committed to our long-term strategy to diversify our product and customer base with innovative technologies. With that, I will now provide our fourth guidance, followed by a more detailed outlook. The fourth is typically a low season for the semiconductor. For the fourth quarter 2016 we expect revenue to be down 4% to 9% sequentially.\ Gross margin is expected to be slightly down sequentially, depending on our final product mix. GAAP earnings attributable to shareholders are expected to be in the range of 8.5 to $0.11 per diluted ADS based on 172.4 million outstanding ADS. Now GAAP earnings attributable to shareholders are expected to be in the range of 8.7 to $0.0112 per diluted ADS based on the same number of ADS. In providing the above earnings guidance, we have a 14% income tax rate of 2016 calculated based on exchange rate of NTD 31.5 against the US, which is…

[Operator Instructions] Our first question comes from the line of Tom Sepenzis with Northland. Your line is open.

Hi. Thank you for taking my question. The first question I just would like to get a further update [ph] and when do you think that’s going to [indiscernible] company. One of your competitors are seeing [ph] growth already. So I know that you were one of the first to offer [ph], but it sounds like maybe you haven’t seen significant wins yet, so that’s what led to actual revenue and EPS growth and that something that comes next year?

Tom, you were a little bit on and off, and I am guessing you were referring to TDDI product, am I right?

Yes, sorry. I was just asking, it seems like TDDI is going to start for you, whereas one of your biggest competitors here in the US is seeing an incredibly strong ramp right now in TDDI, so I am just wondering if you feel like you've gotten behind there and you could catch up?

Yes. It’s a good question. And thank you for raising the question. We have mentioned in our prepared remarks that while we have made some shipments already, but they are not really less significant compared to the US competitor that you mentioned right now, and as we mentioned, starting from Q1 next year, we expect to see volume [ph] shipments, and I believe our ramping for our TDDI products will be very fast quarter after quarter next year, and in a few quarters’ time, it will be a major contributor to our revenue and profit. Now, as far as why we are so-called behind compared to that US competitor of ours, I think that company comes with primarily touch panel controller background. Historically, when touch panel is discreet from display, it is the end device maker such as a smartphone maker, people like Huawei or Xiaomi choosing the touch panel controller who are sourcing panels from panel makers, which in turn particularly are driver IC provider, guys such ourselves. So, we have sufficiently been serving our panel makers via our US competitor because of our nature of being a touch panel controller provider. They are serving the end device makers. Now, the touch panel and display panel are now being merged into one to form in-cell. An in-cell will be provided by our traditional customer base, which is TFT-LCD makers. However, it is only in the very beginning stage right now. Take as example – I mean for example, one of our biggest Chinese customers, they are now using their Gen 6 to produce in-cell panels. They do have a plan to move into Gen 8.5, which is in design phase, but it’s not in mass production yet. We are – meaning what I am trying to say is that…

Great. Thank you very much. I will get back in queue.

Thank you, Tom.

Thank you. Our next question comes from the line of Tristan Gerra with Robert W. Baird. Your line is open. Q – Tristan Gerra: Hi, there. It looks like on the basis of your commentary that you expect continued shortages in small panel that you see continued the strong demand in the China smartphone supply chain. Any color that could provide in terms of how that ramp is shaping up relative to real and demand and what type of seasonality and/or potential inventory correction we could sometime in the first of half of next year?

Thank you, Justin. As you know, our end device customer base are primarily Chinese or let me put it the other way, way, not Apple right. Not Apple, every non-Apple player is our customer. And I think Chinese players in particular are now really leading the pack when it come to growth in smartphones. I think, throughout the entirety of this year and certainly the momentum is expected to continue through next year as well. So we really benefit from this, and our –certainly, we enjoy very leading market share with end brands such as Vivo, Oppo, Huawei, and Xiaomi, and La TV, and so on and so forth. So we really benefit from their very strong shipments. And as I mentioned, we are still in shortage unfortunately, it’s been that way for about two quarters now, and that certainly is -- the good side of it is evidence of a very compressive design phase. We are seeing the sell through to be healthy for driver ICs, and we are even hearing from customers that -- some optimistic customers are telling me at least first half of next year, no worries; more conservative ones, first quarter, no worries. That is not to say second half will have a problem, but certainly we don’t have visibility that long. But that is – this is what literally all of my customers are telling me, I mean, right now it’s in shortage right, so people are fighting to get new allocation. But I think for the industry, supply/demand situation remains healthy. It’s certainly towards the end of next year when Apple may have another major launch, then it certainly will be a major variable that we cannot predict. But as far as we can see, the leading Chinese brand in particular are enjoing the very strong momentum, and we benefit as a result. Q – Tristan Gerra: Okay. That’s very useful. And a quick second question, there is some industry forecast that predicts a fairly nice ramp in 3D scanning and smartphones starting next year notably as smartphone OEM try to bring new features, could you – you’ve spoken about that technology on the call, could you elaborate a little bit on how us seal your position in that segment for the competition and are your engagements limited to just one leading smartphone makers or do you have additional engagement in smartphone for 3D scanning and what's the potential timing of one? Thank you.

Thank you. Interesting, I haven’t seen the report myself, certainly very please to hear that, so thank you for sharing. We -- actually we’ve got the whole bunch of customers waiting for our 3D scanning solution to materialize, and our partner right now is the heavy weight TV chipset maker, right now. So it’s a joint development partnership under which the heavy weight TV smartphone chipset maker together with us will co promote a total solution including AP and a total 3D scanning solution to the customer with the 3D scanning solution and the AP, the connection already being take care of by the two of us, the partnership. So in short, we are now really targeting specific individual smartphone customer as such. We are working together with the platform maker. The beauty of this is that once the solution is ready, it can be adopted by many. And in fact, through our still rather limited joint promotion efforts, we are seeing overwhelming interest from smartphone makers, so we are not really so much – not much worried about the end customer interest, so it is really us, the change is on us, our sales and partner. Now the way we split the work, right, they provide the AP and we provide the entire what we call 3D scanning or a structural [ph] projector module, by which what I am saying is as we mentioned, a projector with a laser, beaming laser light, emittable light through optics – with a pattern, emittable pattern which hits surroundings and bounce back and captured by a CMOS image sensor which is the focus on higher bandwidth. So that you compare the out coming pattern of the laser light and the incoming pattern being captured, and you kind of compared the change of the…

And our next question comes from the line of Mike Burton with Brean Capital. Your line is open.

Hi, and thanks for letting me ask the question. I just had a question on the gross margin guidance, guiding down sequentially year over year. Sorry if I missed this, but can you talk through some of that? The revenues are definitely up. Is it mostly just mix? Am I to assume then AR/VR is actually down sequentially or just kind of walk through some of the puts or takes on the gross margin line.

I think you have answered the question already yourself. It is the mix plus AR/VR down, and the mix I would say excluding the AR/VR is similar. The level is similar, the gross margin number will be similar.

Yes, but we do see gross margin for smartphone actually improving QoQ because of a high end resolution requirement for the DDIC. That’s where we are under the capacity constraints, but as we continue to ship more, we shall continue to improve gross margin.

But too bad as I mentioned in my prepared remarks, we are limited by capacity, and that happens to involve some of our high resolution products, otherwise the margin would have been better, but that’s just the capacity constraint.

Okay and then looking at the OpEx, that was down year over year in September. Are we expecting kind of similar going forward into December and just how we should think about it going into next year?

I think you should not expect dramatic up or down of OpEx next year versus this year, and this year’s OpEx is slightly down so far I mean excluding share based compensation, right. Excluding RSU – I mean including RSU certainly this is up compared to last year because RSU we paid out a lot more this year than last. So, excluding that on a non-GAAP basis, I think it is a combination – I mean it is not planned that way, let me just put it that way, right it happened that way. But the efficiency in [indiscernible] depreciation in tools and stuff, right. So, actually we continue to add [indiscernible] our headcount and we certainly continued to add salary this year. So if you look at the salary expense per se, and the headcount actually both increased year over year. However, I think our market in 2D expense has been down compared to the last year, not that we are trying to reduce our R&D rather it is just against a combination of better efficiency, and it just happened that way here. So, you shouldn’t expect next year’s OpEx to be down from this year, nor should we expect next year’s OpEx to be up meaningfully from this year either.

Okay Thanks.

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

Thanks for taking my questions. Just a really quick one. How much in NRE fees did you recognize in Q3 and kind of how should we think about that revenue stream going forward?

Jaeson, we actually didn’t really disclose it, but it is probably in the neighborhood of $15 million to $20 million this year in 2016, and as we continue to add customer in the joint development of AR project and also WLO projects for consumer electronics and chipset platform for smartphone, etc., We would expect NRE to actually increase in 2017.

I think I will elaborate on that Jaeson. NRE for us is a lot more significant in terms of -- for our long-term business compared to what is showed in the P&L for that particular year. If you look at our traditional driver IC or timing controller power management IC, all such business, we do just from time to time some NREs, but they are very rare to be very honest, because this is a more commoditized market, and we do offer our standard path to many customers, so no customer would want to pay NRE for anything. So, when we say NRE, our NRE revenues started to increase probably starting from about last year, and this year certainly rather significantly, and you can expect to have – to see good NRE income in the next few years, because of those very unique products, unique technology areas that I mentioned, you know WLO, LCOS, AR/VR are going for 3D scanning and stuff like this, right. NRE is not going to make you reach, but it is very important in the sense that firstly, it potentially reduces our burden rate while we are cultivating a new technology and secondly, it shows the customer’s commitment, i.e., I don’t like to see a engineers, our team being engaged by a customer because they are engineers, I also fancy about their technology and then two crucial engineers working – very happy and together and try to do something fancy. No, I want to make sure my customers’ engineering team are fully authorized in there to pay – fully authorized by their management and they have to pay rather – a meaningful amount to engage us for a product. That shows a lot of other customers’ commitment. So, and then typically NRE would be in…

Okay, that is helpful. Thank you.

Thank you and our next question comes from the line of Suji Desilva with Roth Capital. Your line is open. Q – Suji Desilva: Hi Jordan. Hi Jackie. So, on the large panel segment you had some good year over year growth. I am wondering you said in the prepared remarks that you expect similar growth in the 2017 timeframe. I am wondering, is there sufficient customer share gain opportunity or share gain opportunity for you to continue the grow at these rates in the large panel market?

Certainly, we can continue to grow whether at the same rate that I cannot comment one or the other. We can continue to grow at least over the next few years because quite simply our customers are still building fabs, big time. And with such new customers typically in China, they are number one when there is – that is not tangent, right. So, for example, you are talking about BOE, another Gen 8.5 by Q1 next year. SKC also in China due to next year and BOE, I believe, later next year or early the year after the [change pad] will be coming on stream as well. And there is another new fab Generation 8.5 from Innolux and the CSOT, I can’t recall the detailed timing but somewhere next year. I think if there will be another 8.5 and Pender as well, another 8.5. yes, there we go Pender is what they call Gen 8.6 mass production commencement 3Q 2018. CSOT Gen 11 mid 2019, Innolux Gen 8.6 Q1 to Q2 next year. SKC I mentioned Gen 8.6 Q3 next year and finally BOE Gen 8.5 Q2 next year and Gen 10 Q1 the year after Q1 2018. So, whole bunch of new fabs and all these are our customers. With many of them we are either number one or number two IC vendor. So, we continue to be quite confident and then because of these new fabs coming on-stream our design activity with such customers are very very busy right now. One last thing I want to mention. Last but not least, I mentioned in my prepared remarks, one of our really major advantage is the fact that we can offer driver IC, or timing controller or power management IC, OP and a whole bunch of other things that we can answer all their IC – all kind of – IC issues. So, they are probably just one other player in the industry that can offer the same thing. So that is really a major advantage. Q – Suji Desilva: Very helpful color. Thank you.

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

Hi, Jordan. Hi, Jackie. And I feel sorry that your customer delayed the project, but I believe that your position will pay out. So my first question is really on your MO led driver IC business because you mentioned that contribution will start from 2017 and they seem to be from Chinese customers. So can I confirm that your opportunity with Korean customer already gone? May I confirm that?

I think – I cannot say it’s gone, because we do have approaching engagement with them and we actually passed qualification. So initially out of business issues but we did then really take that project into our real volume production. And later in the day I think I suspect – I think the top management strategy from that Korean customer is that they are seeing competition, of course the completion from Chinese they are new aligns. So I think the Korean wants to outsource it little as possible to outsiders to keep the entry barrier areas as high as possible and forward selling as possible. I think that’s what they are thinking. So we are seeing much as we saw, we are probably one of the better ones, but with all non-group company, non-group IC vendors their attitude has turned very, very conservative of late. So I wouldn’t say it’s terminated, it’s gone, I mean anything is possible in business. But I will be honest that is far we seeing right now.

Okay. Understood. Okay and my follow up question is that you mentioned that your LCOS and WLO revenue would be small in coming quarters and so your big customer give you any commitments or will pay you some compensation? Because I remember that in a previous quarter you had spent some CapEx and hired some labors for the new capacity so how would you compensate all those, can I assume margin would decline coming quarters?

Thank you, Charlie for asking the question. Number one yes, will be compensated for the loss of volume. Although, obviously I cannot comment on details and I will say I really appreciate the customers being very responsible and very fair in the risk. And also I think the customer has been generous and fair primarily because we are seen as a long-term strategic partner to their long-term effort of AR. So this is really just a very, very, very beginning. So I want people to know that they and a whole bunch of my other customers some of them biggest names take work, they are more committed than ever, they are spending more R&D money into this and we are seeing more VCs, put in more money into such AR efforts. So don’t be put down by this short headwind, that what I want to really highlight. So I mentioned in my prepared remarks that we not worried and we very honest about this, we are not worried. Now having said that though, I just want again clarify of all the movers that would decline in Q4 which we have mentioned and which has been built into our guidance and we've also said the next few quarters the volume will be minimum. Now I just mentioned this is their first generation, very first generation product, the idea has always been to test the market and I also I mentioned the customer is not stopping the door. On the contrary, they are building up their investment and development efforts, leveraging on the experience and lessons we have all learned from this first generation product. Equally important, is of course you have not seen, players who are not already out of the service, players who are developing it under the water, obviously…

Yes. So fair enough, I look forward to your future success. Thanks.

Thank you.

Thank you and our next question comes from the line of Donnie Teng with Nomura. Your line is open.

Hi CEO, CFO. Thank you for taking my question. Thank you for taking my question. My first question is regarding to your large driver IC business. Recently the foundry companies such as UMC and Vanguard all see better sales momentum on large driver in the fourth quarter, while you and Novatech are all seeing weaker large driver sales. So I just wonder if you have seen that large driver demand will rebound in the first quarter next year, or you just preview the inventory when you have a relatively low inventory level by end of last quarter?

Donnie, I am not sure I will agree with you on the volume of whether it is TSMC or Vanguard on driver IC per se on Q4. I mean fair enough, they are very full and they are doing okay in Q4, but I don’t believe that comes from driver IC. TSMC driver IC exposure is already…

Sorry, I mean UMC.

…but even in UMC – you just mentioned Novatech and us right. These two happened to be major customers of UMC. So, I just don’t see – I haven’t seen their detail when they call or something, but as far as I know, UMC is a very important strategic partner of ours. I don’t think they will be like increasing their driver shipment in Q4. In Vanguard, I think their booming business right now comes from things like power management IC, the finger print and so on, not necessarily driver. And I think we also have power chips which is really the source of the capacity constraint. So power chip is totally full. And we are overall large panel and small panel combined we are – I think we are their biggest customer and unfortunately we are in shortage. So, I am also not sure I would agree Q1 traditionally is always a low season. You have Chinese New Year and all of that. So, we expect Q1 to be a low season. This year should not be an exception. Although, we are not providing Q1 guidance.

So can we say that this due to a tight capacity, so maybe we need to book some capacity in that sense, is that correct?

And that is -- in last panel driver IC in particular it is an area of very unique competitive advantage. We are not fighting over capacity which many others over such players as UMC or Vanguard. They are not and that – panel driver IC, it is for us -- it is primarily power chip. By the way power chip where we say they have a shortage is referred to higher end smartphone is not the large panel. The large panel is okay. We are their only customer in large panel and their capacity and our demand we are all very well planned. We are in advance. So, large panel and also our customer’s transparency, you know visibility is also better for large panel as well for us. So, from our customer to us to people like power chip, I think large panels is where our IC capacity normally is much better planned. We have another large panel foundry vendor Macronix, or MXIC. Again we are now in the 8 inch. We are their sole customer for large panel driver IC. We actually co-developed that process for them, so they really can’t work with other people. So, this tool if you like forms our core of the supply for large panel and with these two we are sole customer, we have a constructional relationship to assure as such and as a result, that is actually one of the reasons why our customers love us for large panel driver IC vendor because they are seeing our supply to be very reliable and steady.

Thank you, and my last question regarding to a quick follow-up on TDDI. So may I ask what kind of a resolution of TDDI you can provide initially in 2017? Is that more like a WQHD or 4HD or HD720?

It is more – is currently primarily 4HD and also a bit low in HD720. We can do higher end as well, but we don’t believe when you move too high end right now panel makers here already is going to be a serious challenge. So, if a panel maker is not going to make good profit, what is the point? So eventually this will move up to quadruple HD and so on, very high resolution. But right now our major competitor they are shipping is primarily HD720. We believe next year you will be primarily 4HD because HD720 will then be start to consider like mid to lower end with in sale, which is still a bit more expensive. You want very thin design, very good form factor, so 4HD is the right product category to be in.

Okay, got it. Thank you so much.

Thank you. And I am showing no further question at this time. I'd like to turn the call back to management for closing remarks. Thank you. And as a final note, Jackie Chang, our CFO will again maintain investment marketing activities and attend to future investor conferences. We were [indiscernible] as they come about. So please contact our IR department and/or Greg Falesnik if you are interested in speaking with the management. Thank you. And have a nice day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. And you may all disconnect. Everyone have a wonderful day.