Himax Technologies, Inc. (HIMX) Q1 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Himax Technologies, Inc. First Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the call over to Greg Falesnik. You may begin.

Thank you, operator. Welcome everyone to Himax's First Quarter 2018 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 results release, please e-mail greg.falesnik@mzgroup.us or access the press release on financial portals or 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 the 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 events or results to differ materially from those described in this conference call 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 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 2017, filed with the SEC in March 2018. Except for the company's full year 2017 financials, which were provided in the company's 20-F and filed with the SEC on March 20, 2018, the financial information included in this conference call is unaudited and consolidated and prepared in accordance with IFRS 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 subject our annual consolidated financial statements and may vary materially from those 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 Ms. Jackie Chang. The floor is yours.

Thank you, Greg and thank you, everybody for joining us. Our outline for today's call is first, review of the Himax's consolidated financial performance for the quarter, followed by the second quarter 2018 outlook. Jordan will then provide an update on the status of our business, after which we will take questions. We will review our financial on both IFRS and non-IFRS basis. The non-IFRS financials exclude share-based compensation and acquisition related charges. We mentioned in the last earnings call that beginning in January 1, 2018 we will adopt international financial reporting standards, IFRS, to prepare our consolidated financial statements. We don’t expect the transition from US GAAP to IFRS to have any significant impact on our financial results. To illustrate the difference, we prepare the comparison table under both US GAAP and IFRS using 2017 numbers. The comparison table is included in our first quarter 2018 earnings press release. Our first quarter 2018 revenues came in at the high end of our guidance while gross margin and IFRS loss per diluted ADS were both better than guidance. For the first quarter, we reported net revenues of 162.9 million, a decrease of 10.1% sequentially and an increase of 4.9% year over year. Gross margin was 22.5%, 50 basis points higher than guidance. IFRS loss per diluted ADS was 1.6 cents, better than the guidance range of 2 to 3 cents. Revenue from large display drivers was 59.3 million, up 1.6% sequentially and up 0.1% year-over-year. Large panel driver ICs accounted for 36.4% of our total revenues for the first quarter, compared to 32.3% in the fourth quarter of 2017 and 38.2% a year ago. The first quarter is traditionally the bottom of the year because it has fewer working days due to Chinese New Year. Against seasonality, our large panel driver business grew low-single-digits sequentially, driven by increasing 4K TV penetration and Chinese panel customers' ramping of new LCD fabs. Revenue for small and medium-sized display drivers came in at 71.7 million, down 11.8% sequentially and up 7.6% year-over-year, due to seasonality and the overall weak smartphone market. The product segment accounted for 44% of total sales for the first quarter, as compared to 44.9% in the fourth quarter of 2017 and 42.9% a year ago. Sales into smartphones were down 23% sequentially and declined 5.4% year-over-year. Our TDDI shipment in Q1 was still hindered by customers' high inventory despite our numerous design-wins for HD+ and Full HD+ projects with top tier customers. However, we expect the shipment of our TDDI chips to accelerate starting the second quarter, but the volume would be somewhat offset by foundry capacity constraint that the industry is facing right now. Jordan will elaborate on this a bit later. Our small and medium-sized driver IC sales for automotive application recorded another historical quarter. Revenue, against seasonality, went up 1% sequentially and close to 40% year-over-year. The quarterly revenue is now close to 25 million, reaching almost 20% of the total driver IC revenues. Driver IC sales for tablets were down 9.2% sequentially, but up 2.4% year-over-year due to weak overall market demand in the product segment. Revenues from our non-driver businesses were $31.9 million, down 22.3% [ph] sequentially but up 8.5% versus last year. Non-driver products accounted for 19.6% of total revenues, as compared to 22.8% in the last quarter and 18.9% a year ago. The sequential decline was mainly due to lower than expected WLO shipment, offset by higher NRE income. The year-over-year increase was driven mainly by the WLO product shipment to a leading customer and, to a lesser extent, rising sales of timing controllers, CMOS image sensors and NRE income. We expect WLO shipment to increase in the second quarter and rebound strongly in the second half. Jordan will elaborate on this a bit later. Our IFRS gross margin for the first quarter was 22.5%, down 210 basis points from the last quarter and down 60 basis points from the same period last year. The sequential margin decline was due mainly to reduced order from our WLO anchor customer, resulting in higher depreciation and overhead charges on a per unit basis. Our IFRS operating expenses were 39.8 million in the first quarter, down 1.1% from the preceding quarter but up 16.1% from a year ago. The significant year-over-year increase was primarily the result of rising R&D expenses in the areas of 3D sensing, WLO, TDDI, and high-end TV as well as annual merit increase. In addition, NT dollar appreciation against the US dollar caused our salary expense to increase around $1.2 million as we pay the bulk of our employee salaries in NT dollars. IFRS operating margin for the first quarter was minus 2%, down from 1% for the same period last year and 2.4% in the previous quarter. The sequential decline was a result of lower sales and lower gross margin. The year-over-year decrease was caused by lower gross margin and higher expenses. First quarter non-IFRS operating loss was 2.9 million or minus 1.8% of sales, down from 1.3% for the same period last year and down from 2.6% a quarter ago. Again, the sequential decline was a result of lower sales and lower gross margin. The year-over-year decrease was caused by lower gross margin and higher expenses. IFRS loss for the first quarter was 2.8 million, or 1.6 cents per diluted ADS, compared to profit of 23.5 million, or 13.6 cents per diluted ADS, in the previous quarter and profit of 1.2 million, or 0.7 cents per diluted ADS, a year ago. The sequential decline was a result of lower sales and lower gross margin. An investment gain of 20.7 million in the last quarter for disposal of a direct investment in September 2017 also caused the first quarter profit to decline. The year-over-year decrease was caused by higher expenses. First quarter non-IFRS loss was 2.6 million, or 1.5 cents per diluted ADS, compared to non-IFRS profit of $23.8 million, or 13.8 cents per diluted ADS last quarter and non-IFRS profit of $1.6 million, or 1 cent in the same period last year. Turning to our balance sheet. We had 151.9 million of cash, cash equivalents and other financial assets as of the end of March 2018, compared to 199.5 million at the same time last year and 148.9 million a quarter ago. On top of the above cash position, restricted cash was 147 million at the end of the quarter, unchanged from 147 million in the preceding quarter and up from 107.4 million a year ago. The restricted cash is mainly used to guarantee the company's short-term borrowings for the same amount. We continue to maintain a very strong balance sheet and remain a debt-free company. Our inventories as of March 31, 2018 were 148 million, down from 148.3 million a year ago and up from 135.2 million a quarter ago. Accounts receivable at the end of March 2018 were 166.6 million as compared to 169.1 million a year ago and 188.8 million last quarter. Days sales outstanding was 92 days at the end of March 2018, as compared to 98 days a year ago and 101 days at end of the last quarter. Net cash inflow from operating activities for the first quarter was 2.3 million as compared to an inflow of 5.5 million for the same period last year and an inflow of 8.3 million for the last quarter. The decrease in operating cash flow is mainly due to lower net profit. Capital expenditures were 18.6 million in the first quarter of 2018 versus 2 million a year ago and 15.5 million in the last quarter. The first quarter's capital expenditure consisted mainly of ongoing payments for the new building's construction, WLO capacity expansion and installation of active alignment equipment to support our 3D sensing business. Other CapEx, primarily for the investment of design tools and R&D related equipment for our traditional IC design business, is around 1 million during the quarter. At the end of March 31, 2018, Himax had 172.1 million ADS outstanding, unchanged from last quarter. On a fully diluted basis, the total ADS outstanding are 172.5 million. For the second quarter of 2018, we expect revenue to increase around 9% to 14% sequentially, representing a double digit year-over-year growth. Gross margin is expected to be around 23%, depending on our final product mix. IFRS earnings attributable to shareholders are expected to be in the range of 0 to 1 cent per diluted ADS, based on 172.5 million outstanding ADSs. I will now turn the call over to Jordan.

Thank you, Jackie. We expect the solid rebound in the second quarter overall and sequential growth across all three major product categories. With that, let me now give you some insights behind our guidance and trends that we see developing in our businesses. Our large display driver IC business recorded low-single-digit growth in the first quarter against seasonality due mainly to our Chinese panel customers' capacity expansion and the market's increasing 4K TV demands. As many of our panel customers continue to ramp new fabs and run the existing capacity at high utilization, we would likely see continued growth in the second quarter, on the back of the first quarter's strong performance. We remain the market leader in the large panel driver IC business in China and will be a major beneficiary from China's ongoing capacity expansion. In the last earnings call, I highlighted that the whole industry is going through a capacity shortage of 8-inch foundry where the vast majority of large panel driver ICs are fabricated. We were not able to fulfill some orders due to tight foundry capacity during the first quarter. While the capacity shortage continued into the second quarter when we still cannot fulfill all the orders, we have successfully added a 12-inch fab into the pool of our foundry capacity to ease the shortage issue. We expect to make small volume shipment for TV related driver IC products from this fab starting the second quarter. However, the ultimate ramping schedule will depend on how fast our panel customers can go through their customer qualification, something all our major customers are working very hard on. With the 2020 Tokyo Olympics approaching, TV makers are rushing to develop super high end products with 8K resolution. I am pleased to report that our team has recently secured another 8K TV design win for a major panel maker and expect more to come in the next few quarters. We expect a low-single-digit sequential revenue growth for large display driver ICs, a double-digit growth year-over-year. Turning to the small and medium display driver IC business. Despite the first quarter decline in smartphone display driver IC sales due to soft market demand and seasonality, we do see smartphone makers starting to replenish inventory in the second quarter in preparation for the launch of new phones, which will benefit our second quarter business. Overall, we are expecting a strong sequential growth for our smartphone business and our HD+ and Full HD+ TDDI shipment are set to ramp up in Q2 as we indicated. TDDI represents a new source of revenue for Himax with higher ASP and better margin than the traditional driver IC, hence we expect the acceleration of TDDI shipment will lead to improvement of our small and medium panel driver IC product mix and contribute to our overall sales growth in 2018. Moreover, our new generation Full HD+ TDDI with chip on film or COF package have secured design wins from leading Chinese smartphone brands with mass production expected in the latter half of this year. TDDI with COF package for LCD displays can enable super-slim bezel design for premium smartphone models at a much lower cost than having similar form factor using OLED displays. Similar to the situation in the large display driver IC, the TDDI market is also facing a foundry capacity shortage issue. While trying to get as much capacity as we can from the existing foundries, we are working very hard to source and qualify additional foundry capacity for our TDDI ICs. As to automotive segment, we continues to have new projects going into mass production which were design-wins of the prior years. In the first quarter, sales into automotive sector have accounted for more than 15% of our total revenues and we achieved a very significant milestone to gain the world's first TDDI design-win for automotive application with mass production target of late 2019 to 2020. Q2 revenue in this segment is set to grow around 20% sequentially and around 50% year-over-year. We have engaged all of the major automotive panel manufacturers worldwide for long-term partnerships and secured many of their key projects pipelined for the next few years. Going into the second quarter, due to customers' new launches of smartphones, increasing TDDI shipment and the fast growing automotive display driver sales, we expect small and medium-sized driver IC revenue to be up around 20% both sequentially and year-over-year. The non-driver IC business segment has been our most exciting growth area and a differentiator for Himax in the past few years. Now, let me share some of the progress we’ve made in the last quarter as well as our views on future growth opportunities. As I reported previously, our 3D sensing total solution is primarily targeting the Android based smartphone at present. Nowadays, new smartphone designs feature edge-to-edge displays, removing home button and minimizing border area to provide better viewing experience. Along with the new design, three new approaches of biometric authentication for phone unlock and online payments are emerging to replace the traditional home button with capacitive fingerprint technology. These three new solutions for the Android smartphones are structured light 3D sensing and active stereoscopic camera or ASC 3D sensing, both for facial recognition, as well as under-display optical sensor for fingerprint authentication. Naturally, all of these three solutions have advantages and challenges. We think all three can fulfill different demands and can therefore co-exist in the market place. Structured light 3D sensing offers outstanding depth precision but the cost is the highest for its complex projector design and manufacturing. ASC is a lower cost alternative to structured light 3D for its relatively simple projector and the fact that it is built on the existing dual camera ecosystem. It is, however, constrained by more limited depth precision. Under-display fingerprint, with a similar cost to the ASC solution, is the closest alternative to the prevailing capacitive type fingerprint which is already familiar to the consumer. However, under-display fingerprint is limited to a single function of authentication without the possibility for other applications such as gesture sensing, photo enhancement or AR as can be achieved by the two 3D sensing approaches. Himax enjoys a unique position in that we offer critical technologies in all of the three solutions and are already a key player by forming different collaboration partnerships for each of the three alternatives. They represent immense revenue opportunities with much higher ASP and gross margin versus our mainstream display driver IC business. Now, let me give you updates for each of the three solutions. Firstly, on structured light 3D sensing. SLiM, our structured light based 3D sensing total solution, which we announced jointly with Qualcomm last August, brings together Qualcomm's industry leading 3D algorithm with Himax's cutting-edge design and manufacturing capabilities in optics and NIR sensors as well as our unique know-how in 3D sensing system integration. The majority of the key technologies inside the SLiM solution is developed and supplied by Himax ourselves. These critical technologies include, on the projector end, DOE and collimator utilizing our world leading WLO technology, a tailor-made laser driver IC, and high precision active alignment for the projector assembly; and on the receiver end, a high efficiency near-infrared CMOS image sensor. Last but not least, Himax has developed an ASIC by incorporating Qualcomm's algorithm for 3D depth decoding. The fact that all of these critical elements are developed in-house puts us in a unique leading position. It represents a very high barrier of entry for any potential competition and a much higher ASP and better profit margin for us. The Qualcomm/Himax solution is by far the highest quality 3D sensing total solution available for the Android market right now. It has the industry's best performance in all of 3D depth accuracy, indoor/outdoor sensitivity, power consumption and dimensions. It has passed the toughest eye safety standards with a proprietary glass broken detection mechanism to safeguard the user from any potential harm. We are pleased to report that the Himax SLiM solution is now ready for mass production. We have delivered production ready samples to select smartphone makers as well as their preferred facial recognition and secure online payment ecosystem partners for their development into end products, typically flagship or premium models. As each smartphone maker's design and requirements are somewhat different, such developments are taking longer than we anticipated. We are now targeting the end of the year for shipment to customers for their smartphones' sales in the first quarter of next year. Right now, Himax SLiM solution is only available on Qualcomm Snapdragon premium mobile platforms. Equipped with the ASIC for 3D depth decoding that Himax has developed, we can extend the solution to more mid- to high-end platforms. This initiative will make the SLiM solution more affordable for smartphone makers as the price differential among different application processor platforms can be very significant. With 3D depth decoding handled by the ASIC, the smartphone's AP can be freed up for other applications and lower end platforms with less computing power can be adopted for structured light 3D sensing. In the last earnings call, we unveiled our plan for a lower cost 3D sensing solution with ASC technology, targeting more mass market smartphone models for facial recognition. We are pleased to report that the joint development with an industry leading AP platform player is well under way. The collaboration leverages our WLO and DOE expertise, as well as active alignment manufacturing know-how and high sensitivity NIR sensors. Our target is to have ASC 3D sensing solution ready for mass production by the end of this year. Given the cost benefit, it has attracted a lot of interest from potential smartphone customers. While lower cost compared to structure light 3D, ASC will still represent a much higher ASP and better gross margin potential for us. We believe the 3D sensing adoption on Android smartphone in 2018 would be limited but foresee the market demands will increase substantially starting 2019. With our leading technologies, proven manufacturing expertise, new solution roadmap and alliance with leading AP providers, we believes we are well positioned to be the partner of choice for Android smartphone makers in their 3D sensing projects. Now, I would like to talk about optical fingerprint, an emerging opportunity for Himax. We have been working with an industry leading fingerprint solution provider to develop an under-display optical fingerprint product in the last two years, targeting smartphones using OLED displays. A number of design-in projects are already ongoing and we expect more to come. Combining the leading fingerprint solution design of our partner and a low-power CMOS image sensor with superior sensitivity, which we fully customized for this purpose, this optical fingerprint solution is able to deliver outstanding performance even under extreme conditions such as ultra-low light or direct bright sunlight, or when the finger is very cold or dry. Similar to 3D sensing, optical fingerprint is new and complex with a high barrier of entry. Again, the CMOS image sensor used in the solution will have a much higher ASP and better margin than our traditional display driver IC products. Now, some update on WLO. In the last earnings call, we reported that our WLO anchor customer had lowered its volume for the first quarter. After the earnings call, the customer made a further order reduction. The much reduced shipment negatively impacted our Q1 gross margin as lower utilization of our WLO fab led to much higher equipment depreciation and factory overhead on a per unit basis. Judging by the customer's forecast, we are optimistic that the shipment for the second quarter will rise from that of the first quarter and expect the volume to be significantly higher in the second half. Meanwhile, we are very encouraged by the progress of our new R&D projects with the said customer for their future generation products centering around our exceptional design know-how and mass production expertise in WLO technology. Next, on our capital expenditure. We announced the increase of the Phase I capital expenditure budget from $80 million to $105 million in the last earnings call. The Phase I is being executed as scheduled. Since February, we have been moving in equipment and some manufacturing related staff to the new building and started tuning the manufacturing process and conducting production trial run for our 3D sensing solutions. We have already achieved pretty satisfactory production yields in the internal pilot production. Of the 105 million budget, 33 million has been paid out in 2017 and another 17.5 million in the first quarter of 2018. The payment for the remaining 54.5 million is to be made throughout the rest of 2018. As we mentioned in the previous earnings calls, the CapEx budget for Phase I will be funded through our internal resources and banking facilities, if so needed. Now, onto our CMOS image sensor business update. We continue to make great progress with our two machine vision sensor product lines, namely, near infrared or NIR sensor and Always-on-Sensor. NIR sensor is a critical part of our SLiM and ASC 3D sensing solutions. Our NIR sensors' overall performance, measured primarily by way of quantum efficiency, is far ahead of those of our peers for 3D sensing. On the AoS product line, we announced the full acquisition of Emza in March. With the acquisition, Himax is now uniquely positioned to provide ultralow power imaging sensing solutions, complete with Himax's industry leading super low power CIS design and Emza's unique AI-based computer vision algorithm. This will also help Himax enter into markets beyond consumer electronics, such as connected homes, smart buildings and security. For the traditional human vision segments, we see strong demands in laptops and increasing shipments for multimedia applications such as car recorders, surveillance, drones, home appliances, and consumer electronics, among others. I will now give an update on the LCOS business where our main focus areas are AR goggle devices and head-up-displays for automotives. While AR will take a few years to fully realize its market potential, we have seen many companies, be the top name multinationals or new start-ups, invest heavily to develop the ecosystem, applications, software, operating system, system electronics, and optics. We continue to have active engineering activities with several tier-1 tech names with ambition to bring next generation smart glasses to the market. In addition, we continue to make great progress in developing high-end head-up display for automotives. We and our partners together have secured a few design wins. Timing for such revenue contribution would be 2019 the earliest. We believes LCOS represents a significant long term growth opportunity for us. For non-driver IC business, we expect a low-single-digit revenue growth sequentially in the second quarter, and around 10% growth year-over-year. That concludes my report for this quarter. Thank you for your interest in Himax. We appreciate you joining today’s call and we are now ready to take questions.

[Operator Instructions] Our first question comes from Gus Richard of Northland.

Yes. Thanks for taking my question. I was just wondering if you could provide a little more color on the revenue from the structured light product in the fourth quarter. Is that multiple OEMs, preproduction, just any color you can provide would be helpful? Thank you.

In the fourth quarter? You mean this year.

This year. Correct. I believe you said in your prepared remarks that that you would start to see revenue in the fourth quarter and I was just wondering if you could provide a little more color around that.

I am afraid it’s obviously too early to provide the so guidance on the revenue potential for the fourth quarter or even next year. I think we have said that there will be limited adoption in 2018. The thing is that development, especially on the software side, to finalize everything, including the most important online payment, secure online payment, is, I said earlier, is more challenging than we anticipated. But I think, I mean, our job, Himax’s job is primary to provide the total solution hardware, which we said earlier, we believe is mass production rate in, I think the thing is, we need to get the hardware ready before our ecosystem partners and our customers get to the next steps, including among others, ported to the various platforms and facial recognition and finally secure online payment to get a certification. So, we said earlier that we expect from the existing, deciding customers, their mass production timetable be Q1 next year, given the lead time required, there is good potential that we will start to make shipments to such customers towards the end of the year. I think it is fair to say that projection is a bit difficult to make right now, because I mentioned earlier, there are three approaches of next generation biometric authentication to replace the existing capacity fingerprint. The thing is, the customers right now are invariably in all three, many leading customers that we are seeing, so we actually took into certain customers on all three approaches and they are, where they are, some of them are having real projects for all the three technologies right now. They are, in the meantime, evaluating the pros and cons of each approach and trying to determine, which technology should be placed with which model at which time. And that makes our so called projection, early projection a bit more difficult than usual. But I think, so I’m afraid to say that we are reluctant to give indication for the revenue potential for Q4, but if everything goes as planned, we do expect explosive growth for next year. As far as the relative waging of the three technologies, and three approaches and which customer and which model will adopt which technology, I think it’s all being developed right now and so while we have very strong confidence that all the three will have tremendous growth and certainly mass production in next year, but and also we are confident that we will be at least production ready towards the end of this year, but as far as the short term Q4 revenue potential is concerned, I think we are reluctant to make indication at this stage.

And then just in terms of your capacity constraints, could you sort of give a little bit more color on the qualification process and when your customers will or the bulk of your customers will be able to or enough of your customers will be able to qualify the new 12-inch fabs to alleviate your constraints?

Yeah. We mentioned two areas of capacity constraint very much, namely large display driver IC and TDDI solutions. Firstly, on large display driver IC, traditionally, because of technology reasons, large display driver IC has been fabricated in 8 inch fab, not just for Himax. I think it’s a common phenomenon across the whole industry, because 8 inch fabs give you the right cost and technology combination. Now, unfortunately, 8-inch fab in terms of capacity always is extremely tight. So – and that is why we have successfully developed – actually, we started the development well over a year ago for seeing the capacity shortage. So we have started making small shipments for large display driver IC in the new China based foundry, which is 12-inch. We have fully qualified ourselves and I think all our major customers have also qualified our processes. However, the key is now for us and now even for our customers to qualify the process, the key is for the customers’ end customers, i.e., TV makers to qualify for the change of foundries. And that can take time. However, I said in my prepared remarks, that all customers are working extremely hard to try to make that happen, because everybody realizes the capacity for 8-inch is very tight and there is no -- we are not seeing – nobody is seeing the end of the tunnel, right. And I think the end customer has also realized that. So. I think, I certainly hope it will go as mostly as I am indicating right now and I have no reason to believe why it will not, but in my official answer, I fear to say the end customers’ configuration is the key, although in terms of 12-inch or large display driver IC, the good news is, we and our direct customers have all the confidence, actually, the year is very good and consistency is very good. We are seeing no issue at all, however, in terms of our technology and the ramping for the 12-inch new fab. As far as TDDI is concerned, TDDI for us and the rest of the industry is fabricated primarily in 12-inch. However, it just happens that in the more mature technology of 12-inch in this particular case, 80-nanometer, every key player of TDDI in the marketplace is fighting to get capacity from the same one single foundry provider, which makes the situation very tough. And for us, we are fast developing our choice, supporting our products into another foundry, which has offered plenty of 80 to 90-nanometer capacity for us. So we are doing the porting, we are trying to get the product, in fact, we’re porting the process to a new foundry. That is the first approach we’re doing. And the second approach we are working on is to mix new designs in 55-nanometer process in a couple of project partners. The first approach will take – certainly take shorter time to achieve and we believe in Q3, we should be able to strat mass production. Again, like large panel, probably more so in this case, end customers, meaning the smartphone makers are eager to see our success in such porting. So we got the few top tier customers already lined up, getting our, even early samples and giving us high priority in terms of qualification and transition into their – into replacing our existing new products. 55-nanometer new design will take slightly longer. I will say it will be the story of first half of next year. So TDDI, we – assuming our porting goes smoothly, then in Q3, particularly in Q4, Q3 will be the beginning of the commencement of mass production. Q4, we should see good growth, meaning to a certain extent, to a more limited extent, constraint of the existing foundry capacities, foundry partner’s capacity.

[Operator Instructions] Our next question comes from Tristan Gerra of Baird.

Just extending a little bit on the foundry capacity shortage issue, are you able to quantify the magnitude of the revenue impact for Q1, Q2 and the rest of the year. And also does that provide a mix improvement opportunity as maybe you can emphasize some higher margin products in the past, that's why you're being constrained.

Firstly, on foundry constraint, we have outstanding shortage, meaning let’s take the end of this quarter as example, right, the customers wishing us to make delivery and we are unable to, meaning, we have to postpone the delivery schedule. I think if you look at the total volume, it could be in a range of 10 million to 20 million ICs easily which compares to 100 million plus product shipment is something quite significant. I’m sorry, Tristan, what is your second question again?

And so thanks for quantifying the impact in Q1. Is the impact expected to remain in the same range as what you just mentioned for Q2 and for the second half and is there any opportunity for mix improvement as you are unable to ship some products?

I think in our guidance for Q2, the assumption behind the guidance is also around the same amount of shortage that we are assuming. I said earlier I am hoping that large panel, given that we are more than ready to switch to a new 12-inch foundry, in fact because 12-inch is brand new fab, the yield is even higher than our 8-inch foundries. And the customers realize that, but the thing is again, they have to go through the end customers’ qualification. So, again, I’m optimistic in the sense that end customers are also realizing the issue, however, to my response is that, TV market and the large panel display market overall is not the – the demand is not growing strongly. In fact, the demand is relatively soft. So that is certainly an active factor in terms of end customers’ qualification -- urgency for qualification. However, I think people understand, this is a long term issue is, it’s something the industry overall has to deal with. So whether you deal with this later or earlier, one way or the other, you have to sort it out. So I think again, I am optimistic and I’m seeing customers being very serious about getting the qualification completed and but on our end, we are fully ready. So, it's probably harder for me to predict the second half, but I have no reason to be pessimistic because customers are, I think, we just have to go through the procedure customer by customer.

Okay. That's very useful. And then just a quick follow-up. If you could provide an update on the OLED capacity ramp at BOE, the timing of when you expect that to become meaningful and also are you seeing any cannibalization in this recovering phase of the China smartphone market from OLED screens supplied by Samsung?

Our next question comes from –

Sorry, operator. I haven’t responded to the question. On OLED, we are still making designs with, you mentioned BOE, right. BOE has started some early production. I don’t want to comment too much on the customers’ activity, including their volume and ER rates. But BOE has repeatedly indicated to us that Himax overall is their strategic partner and they do want us to, again to this sector, which is very important for them long term, although in the short term, certainly, there will be quite a bit of learning curve to go through for our customer. And BOE is certainly among, if not the most greatest OLED player in China. And BOE has all the commitment, all the government support to develop OLED. So if you look at their plan and if even, if even their plan is only partially executed, I think the impact to Samsung and or LGT for that matter will be rather significant I would say. But certainly, it’s early to say, right, because they’re only ramping the first fab, but they do have, they have multiple fabs in progress or being planned, which are approved by the government or supported by the government or even has the foundry security. But I think as far as the final timing is concerned for them to really ramp those fabs about in some other cases, start consulting those fabs, I think they will still have to look at the market, certainly the first fab success will be important for them. Does that answer your question?

Our next question comes from Jaeson Schmidt of Lake Street Capital.

Thanks for taking my questions. Jordan, wondering if you could comment on how we should be thinking about the mix in 2019 between structured light 3D and stereoscopic 3D? And relatedly, if you've seen any change from your customer standpoint on which solution that you guys are more interested in?

If you ask me the -- this is a qualified question, Jaeson. I’m sorry for that, but I’m trying to give the best highlight, the best insight I have right now, but my answer can change next quarter as the market develops. The way I look at it right now, I mean, we started by talking to customers about structured light, because that was the -- from Himax’s point of view, was the first to get ready and also that was the technology offered by Apple. Initially, customers were starting to take it, because Apple was launching the phone and all that. But as time goes by, firstly, Apple’s phone sales probably was not as exciting as most people expected in the first place and the reality is that the structured light is quite expensive. And overtime, because of all these reasons, we are promoting additional tool, technologies to our customers, because we have to serve their interest and bear in mind, Apple is the only one in the world who can offer phones of such high price and with such high profit margin. So many of our customers, other than probably their premium models, they really cannot afford structured light to be honest and we actually said that from the outset, from the very beginning. So when we started promoting ST or stereotype 3D, we got a lot of excitement from the customer because of the cost issue. Now the readiness of -- on the hardware side, the readiness of stereo 3D is slightly behind that of structured light, we did realize actually they are the major advantage to this timetable, in the sense that the dual camera for RBG for picture taking, dual camera is already quite mature after probably three years of smartphone adoption. So the whole ecosystem, manufacturing, the algorithm, everything else is already pretty mature and like structured light, which we have to build from scratch. So actually while we are slightly behind our sales in terms of hardware readiness for our both stereotype 3D compared to structured light, our ecosystem partners are actually more ready for stereotype 3D compared to structured light. So net-net, the end result is that we are seeing roughly the same time we are indicating for both Q4 mass production or mass production ready. So given that I would say that we hope, I mean, or the way we see it right now, the mass production will take place probably at around the same time or probably one quarter, one from the other. As far as volume is concerned, in terms of number of units, I would certainly put my bet today on stereotype 3D, because it has the cost advantage and Android smartphone market cost is everything. However, our revenue potential per unit between the two is about 1 to 2 to 1 to 3. So that makes the answer slightly difficult for me. So I think we just have to giving you updates, it is really still a bit too early, but I tried to give you as much as highlights I can already.

No. That makes sense. And then as a follow-up, wondering how we should be thinking about your ASP at your largest WLO customer for future generation platforms. Do you expect to be able to maintain your ASP as is.

I really cannot comment on specific ASPs, but it’s – I can give you a broad idea of which is existing product is way below $1. Our future – in certain of our future R&D projects, we are working on together. I mean obviously I cannot give more specifics other than that. The ASP have been many, many times higher, because the design is a lot more complex and the build material equipment requirements are a lot higher. So I think if you line, we are moving up the ladder quickly and by great deal and our bigger customer has demonstrated they are confident and trust on us, while really allocating some of their most important, most critical and yet most challenging projects to us. So again I cannot give you specific numbers, but future products upon commencement or mass production, the ASP could be many, many times higher. You will certainly by way of, by unit of 100s running.

Our next question comes from Suji Desilva of Roth Capital.

On 3D sensing, the three different alternatives there. Can you talk more specifically about the content opportunity portfolio and ASP for each of the differential, just to understand how they stack up cost wise and content wise for you.

Ballpark. I'm going to give total solution, total solution, hardware, total hardware dilution, excluding the application. Total hardware dilution ballpark structured light is more than 20,000. As far as stereo 3D is concerned, it’s 10000 plus, ten plus thousands, likewise for fingerprint, for under display fingerprint, probably slightly lower by about the same. The content is different however for Himax. Our content proportion is the highest in structured light, because of the fact that we are the top solution and we actually produce from in-house quite a bit of the content inside. We only outsourcing stuff like laser, filter, lens and certainly the whole margin. And so for stereotype 3D, we have essentially of the whole module is relatively simple compared to structured light and that is why I think it is too of interest that we try to outsource as much as we can to specialize our camera module vendors. So and also the projector is a lot more simplified compared to structured light, however rather than having one sensor for structured light approach, here, you have two sensors. So in the sensor on faces, we have doubled the revenue potential for stereotype compared to structured light, however, all the rest is the smaller. So I would say for structured light, our content percentage in solution is probably 60% plus for stereo 3D. For stereo 3D, probably with a low ASP and therefore in the fingerprint, slightly less than half. Whereby we provide basically a sensor, which is quite a large sensor, because your finger has really big area, right, your thumb has a pretty big area and the fingerprint sensor and in the sensor for optical fingerprint has very, very large pixel size. And it has too, the total size has to be big enough to cover your finger. So the size is quite big. So the ASP is quite significant, a few dollars. I can’t recall the detail, but our content percentage is close to half of the whole thing.

And then specifically on the underglass fingerprint, how many customers do you expect might be adopting that technology in late ’18, early ’19 timeframe, just to understand how many customers you’re working with on that?

Quite a number of customers are talking to us or actually working with us, however, they are, I mean, for example, one is still, two, they’re still trying to decide whether it’s one of the three, which approach or which product. So I think we are talking to all top tier Android customers. As far as -- and that we are not just talking to them, we are actually working with them, with real engineering stuff. As far as exactly how many, and how many of them with how many projects will go into mass production this year or early next year is too early to say, but I can tell you that the collaboration or design in activities are very good. But clearly, there is actual design win activity, I really can’t say, I think it’s slightly early, probably by next quarter update, I can probably give you better insights.

Our next question comes from Charlie Chan of Morgan Stanley.

So my first question is regarding your engineering packaging, we’ve seen like the key bottleneck is customers’ qualification on the mobile payment. But do you think the 3D sensing can also happen in a rear side 3D sensing, because, for rear side maybe it’s not for mobile panel, but for AR gaming or ecommerce? Do you plan to go ahead to develop rear side 3D sensing. That is number one. And also besides the smartphone, do you see any adoption for your 3D sensing using other consumer electronics. This is my first question. Thanks.

On the rear side camera side, actually, we worked together with QUALCOMM for more than five years and that was actually our initial target and we did have a fairly prototype product for that. However, we put that aside because for the obvious reason, everybody is switching focus into front side and we saw specific applications of look and online payment. I do believe eventually, the main camera side with 3D sensing capability will be popular, because of potential in very small applications such as AR. However, I think the trouble is, everybody has got that idea, but what do you want to put that idea into execution and into real products, except what is the application, what is the key application, that we’re convincing consumers to pay. I think you will see it pick sometime for the market to develop, to think about development. So I see almost all my customers asking the same question and they are all working very hard and the obvious question they had, quad sensing is going to be the central application for the main camera because it’s same formation, it’s obvious, but I feel we see that becoming concrete and ideas are being put into real projects. I think we can’t say for sure, but as far as hard word is concerned, which is, we just have to, I mean certainly there are engineering work to be done, but we think it is the major thing to do, eventually. As far as non-smartphone is concerned, I think also it is quite obvious we are already in discussion and in some cases, still in discussion with other customers for IoT application, home or business applications, home applications and certainly cargo applications, although the market size is quite small right now and most interestingly to me is automotive applications. People are bringing extremely interesting ideas to us right now, however we are quite limited by our resources and smartphone being smartphone, the size is just so big and effective. So we feel it is the right thing to do that this for now, we develop our resources to smartphone and make it happen and make it a success before we start to get into other applications, because I mean interior, we can get our solutions to customer’s needs, however it will take some engineering work, right. So we have to be careful in terms of our recent allocation. What is your second question, Charlie?

Okay. Thanks. So my second question is regarding your gross margin trend, the [indiscernible] because your foundry customers now are, they are raising their wafer price to pass through the cost. So what does it mean to your gross margin trend in the coming quarters?

I think for now, we believe we can fully pass on the additional cost to our customers and that is the ongoing discussion we have with our customers to a lesser extent, starting from Q2, but certainly more generally from Q3. So I am seeing no issue, because the whole industry is suffering from shortage. So our customer realize that it is only reasonable that we pass the additional cost on to them.

Our next question comes from Jerry Su of Credit Suisse.

First question is on the active stereoscopic 3D camera. I think you mentioned you’re working with some partner. Can you quantify, is only platform or you have opportunities to go into multiple platforms for this solution.

We are working more closely with a partner who intends to offer multiple platforms of theirs, AP platform of theirs for our ASC. And we are – and I believe we are their exclusive partner, they are only using our solution for that purpose. And we are actually, we don’t exclude talking to other customers and they are also stereo camera algorithm, who has good software capability from algorithm to applications. And they are -- such house is coming to us asking for collaboration for us to provide a total solution for hardware as well. So there could be such opportunity as well. But certainly, right now, the priority is given to a world leading AP platform provider, but there will be multiple platforms. Yeah.

And then the second question on the, I think you have partnership in some components, starting from last year, so one of the major smartphone maker. Just wondering on the Android side, do you have any opportunities or what are you seeing right now for shipping, level of uptakes, DOE or other components into a platform apart from the total solution you have already mentioned?

Yes. We mentioned in our earlier earnings calls that for our structured light total solution, our intention is to provide total solution, however, when it comes to a very select leading smartphone majors who have their in-house capabilities for total system or module integration, then we certainly don’t rule out providing individual components to them, most typically projector. And there are indeed such projects going on at the moment, both for structured light and also for ASC. And actually, these are very active projects going on at the moment. But again such customers are very selective.

[Operator Instructions] Our next question comes from Andrew Uerkwitz of Oppenheimer and Company.

I just got two quick ones. I don't -- in the comments to begin, you didn't mention a phase 2 CapEx plan and on the previous two calls, you talked about having more detail, I believe right around this time. So I was just curious what the plan there was.

We have decided to put that on hold well for the time being, because I said earlier, the development in particular software into end product is taking longer than we anticipated. So it is only natural that we defer our phase 2. In our earlier announcement, we focused primarily on structured light. But the way we are seeing it right now although, again I want to emphasize, we'll get a lot better clarity one quarter or two quarters from now. A lot of capacity for us in WO is shared and active alignment as well in shared in between ASC type and structured light type, right, and I also indicated earlier that the way I see it right now, in terms of volume potential, ASC can be even bigger than structured light. So when this happens, there is certainly a very, very high likelihood, we have to rush our phase 2 probably, but before that clarity is clear is better for us. We are deferring our phase 2.

And then on the second question, when you think about the TDDI ramp, how do you think your share will shape up throughout the end of the year and then how cannibalistic is it with your traditional small town TDIC business?

We all know smartphone, the whole market in terms of number of units maturing. So it is actually not growing anymore. So one additional demand for TDDI means a diminishing of demand for traditional driver IC. That’s the hard fact. Our TDDI, we mentioned, volume wise, we mentioned our effort to try to eliminate the capacity constraint and by adding new foundry capacity and hopefully starting from Q3 and Q4 mass production, if that goes smoothly, then there is no reason to believe that we will not be able to hit our target of about 10 million units per quarter in either Q4 this year or early next year. Certainly, the ASP for 3D is much higher, a few times higher compared to traditional driver IC.

There are no further questions. I would like to turn the call back over to Jordan Wu for any closing remarks.

As a final note, Jackie, our CFO, will maintain investor marketing activities and she will continue to attend these conference. We will announce the details as they come about. Thank you and have a nice day.

Ladies and gentlemen, that does conclude our presentation and you may now disconnect. Everyone, have a great day.