Good day, ladies and gentlemen and welcome to Himax Technologies, Inc. Third Quarter 2018 Earnings Conference Call. [Operator Instructions] It is now my pleasure to introduce John Mattio, Investor Relations with Lamnia International. You may begin.

Thank you, operator. Welcome everyone to Himax’s Third 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, you can 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 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 of 2017 financials, which were provided in the Company’s 20-F and filed with the SEC on March 28, 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 yet been subjected to the same review and scrutiny, including internal auditing procedures and external audits by an independent auditor, to which we subjects its 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. Now, I’d like to turn the call over to Ms. Jackie Chang. Jackie, the floor is yours.

Thank you, John, and thank you, everybody for joining us. Our outline for today’s call is first to review the Himax’s consolidated financial performance for the quarter, and to provide you with our outlook for the fourth quarter of 2018. Jordan will then give an update on the status of our business, after which we will take questions. We will review our financials on both IFRS and non-IFRS basis. The non-IFRS financials exclude share-based compensation and acquisition-related charges. Our third quarter 2018 revenues, gross margin and EPS all exceeded our guidance, issued on August 9th, and were in line with our October 5th, preannounced key financial results. For the third quarter, we recorded net revenues of $188.4 million, an increase of 3.9% sequentially and a decrease of 4.4% year-over-year. Revenues were better than our guidance of flat quarter-over-quarter. The revenues increase in the quarter was attributed to greater than expected production outputs of the new foundries for both large display driver ICs and TDDI chips that allowed us to fulfill more customer orders. As anticipated, our WLO shipment volume to an anchor customer also increased significantly against that of Q2 2018. Gross margin was 23.4%, up 40 basis points sequentially, outperforming the guidance by 90 basis points. A more favorable product mix and stronger-than-expected engineering fees from project engagements enhanced the gross margin. IFRS earnings per diluted ADS were $0.005, better than the guidance of around a loss of $0.01. Non-IFRS earnings per diluted ADS were $0.026, outperforming the guidance of around $0.015. Revenue from large display drivers was $66.3 million, up 9.4% sequentially, and up 20.6% year-over-year, driven by increasing 4K TV penetration and Chinese panel customers’ ramping of new LCD fabs. Large panel driver ICs accounted for 35.2% of our total revenues for the third quarter, compared to…

Thank you, Jackie. Our Q3 results outperformed the original guidance. As indicated in the last earnings call, we’re confident that we’re moving out of the trough and will deliver better performance in the fourth quarter and next year. We are seeing solid growth momentum in areas of TDDI, WLO and large display driver IC in the fourth quarter, despite the prevailing weak sentiment in the overall consumer electronics and in particular the smartphone market. Traditional discrete display driver for smartphone, however, will continue to decline in Q4 as it is being quickly replaced by TDDI and AMOLED as we mentioned reputedly. The other area of decline in Q4 will be the display driver for tablet, a sector which is experiencing weak market demand. Now, let me give you some insight behind our Q4 guidance and trends that we see developing in our businesses. Our large display driver IC business recorded high-single-digit growth in the third quarter due mainly to a few factors, namely, improved supply from the newly added foundry capacity, our Chinese panel customers’ ongoing capacity expansion, and shipment to a new panel customer who only started ramping up their first fab lately. The ramping of our new foundry was in good progress as more of our panel customers completed qualification with their customers for the new capacity. Looking into Q4, we are seeing continued strength in customer demands and we are able to improve the order fulfillment from last quarter, despite the new emergence of an industry-wide capacity constraint in relation to the packaging of the large panel display driver IC. With that, we expect large display driver business to increase by high-single-digit sequentially. Looking into the future, many TV manufacturers are planning on introducing consumer-grade super high-end products with 8K resolution, which will benefit both our large…

Thank you. [Operator Instructions] Our first question comes from Tristan Gerra with Baird. Your line is now open.

Given that your TDDI production is improving, what type of market share you think you can get in TDDI, exiting next year in smartphones? And also, by next year what type of price premium you think TDDI is going to generate relative to your traditional driver IC business?

Our target -- bear in mind, this is our market share in TDDI rather than market share for the entire smartphone industry because as you know, smartphone now, another very big trend for display is AMOLED and certainly there will be still discrete driver IC type of displays. So, on TDDI, our target towards the latter half of the year, next year, because -- I say that because I mentioned in my prepared remarks that we expect our capacity constraint will be removed starting from Q3, right. So, our target by that time is about 30% global market share in TDDI. The premium is harder to say, because obviously it depends on resolution and also it largely depends on whether the driver includes memory or not. And in addition to that, to make things even more complicated, there is a new trend, newly emerging trend with display driver for TDDI, for smartphone having COF as the packaging material as opposed to non-COF type, which is POIC, [ph] which we call COG or Chip-on-Glass type. So, I don’t have a good answer in terms of average number of price premium in front of me. I would say -- just a ballpark, I would say, about 80% to double the premium, give and take a discreet driver IC with a unit price of $0.70 to $0.80 as supposed to $1.50 for TDDI. And that is for non-COF and non-memory type.

Okay. And then, just a quick follow-up, if you could talk about your positioning in OLED driver ICs, now that another BOE is going to be ramping capacity next year?

We are -- without naming the specific customers, we are working with a few Chinese customers right now for their new capacity. Right now, our focus is on TDDI for the time being but AMOLED is certainly very important to us longer term. So, it’s in design stage. We don’t expect significant volume for next year but we are very hopeful that the year after we start to see -- we will start to see significant ramp.

[Operator Instructions] Our next question comes from the line of Jaeson Schmidt with Lake Street Capital. Your line is now open.

Just wondering if you could comment on -- given this new development of looking to develop lower cost 3D sensing solutions for the Android market. Does that at all impact your current relationship with Qualcomm that was previously announced?

No. On the contrary, we are working together with them. We are still shooting for high-end market, but we definitely need to bring the cost down, I would say substantially as well. But, we do have a pretty solid roadmap and the plan including architecture -- new architecture, new algorithm and so on and so forth. For the obvious reason, I cannot elaborate too much. It’s very confidential. But, I think we learn a lot of lessons through this round of -- this I would say first generation of 3D sensing total solution. And so, we realize that the cost needs to be much lower. And also through this learning, through this experience, we also figure out a lot of ways to effectively bring down the cost. I’m not talking about marginal improvement because with marginal improvement, it doesn’t really help. So, as I said earlier, right, we have revamp starting from architecture and algorithm and so on. So, it’s a work in progress. But, thank you for asking. Indeed, we are still working with telecom providers, key telecom providers to make it work.

And the last one for me, just to clarify your CapEx outlook. Has that been changed as far as Phase 2, given that the android OEM situation seems to be pushed?

No. Before I answer the question, let me just provide the important background. Our CapEx is only to cover the optics WLO and what call active alignment, AA. Both are critical for the particular end. As far as our so called total solution is concerned, Jaeson that was earlier question, right, the sensor, the ASIC and [Indiscernible]. So, those have nothing to do with our CapEx. So, so our first Phase 1 CapEx is primarily for our customer, which is among obviously the very small, handful of smartphone OEMs with in-house capability for their own design. So, for the vast majority of our Phase 1 capacity, we are not targeting our so called total solutions market. So, it’s primarily for the anchor customer. And then, we did prepare, we said earlier repeatedly about 2kk, 2 million per month of capacity for other customers. They could be the first type being the -- in-house capability for total solution or a second type who require total solution. As it turned out, I think it’s more likely than not, looking into next year, our 2kk per month of capacity will be occupied by additional type 1 customers, i.e. with in-house capabilities. As I mentioned, we’re still working with a few -- a couple of other names for project shooting for 2019 launch. As it turns out, actually our 2 million per [unit] of capacity is probably not sufficient. And for that reason we probably have to outsource some of our manufacturing to others as well. Now -- so, in order words, to get back to your question, we’ll try to limit our CapEx for next year, unless there are, as expected major volume demands that we haven’t seen so far. And in which case, we’ll certainly report the progress and will probably embark on further CapEx addition. Other than that, I think our CapEx, there is marginal increase here and there but there won’t be major increase from the existing capacity. Because, I think CapEx, typically you need a certain scale to make it work. Unless there is major addition of customers, big projects, I think our current capacity with the flexibility of putting some into outsource vendors will be sufficient. Now, if you talk about 2020, then there is a very, very high likelihood. There will be a major CapEx investment but that is something we have to update much later on.

Thank you. [Operator Instructions] Our next question comes from the Jerry Su with Credit Suisse. Your line is now open.

Regarding TDDI, I would like to follow up on this. Can you tell us about the -- what is your expectation for the total addressable market this year, and also, how will it grow into 2019? And then, I think you also mentioned about some of the backend supply tightness. Can you give us a little bit color on this and how Himax has done to secure more capacity to meet the demand for TDDI and also for the large driver IC in 2019. Thank you.

The first question is about TDDI. In 2018, I mean it’s no secret that the major smartphones are using TDDI for their smartphone. The expected penetration for TDDI for ‘18 is somewhere around 25% and next year, it’s expected to be 35%, so, from 25% to 35%. So, it’s a growth of about 35% each. So, that’s pretty significant. And certainly, our situation in 2018, we repeated many times that we are rather limited in capacity this year. So, our share is rather limited this year. But, getting to earlier question of Tristan, we expect to get a major market share in 2019. A different approach is of expanding in 2 million new [technical difficulty] demand problem. In the case of Himax, we are taking a hard and by long-term solid approach, which is to go beyond -- long-term solid approach, which is to go beyond the like [Indiscernible] where the capacity is always crowded, the integration. So, we have worked with a new -- a foundry partner, which historically had a relatively unified [ph] such experience but show a lot of Himax support and input, and actually a lot of it -- our own recipe and fine tuning. We have managed to ramp-up pretty quickly the new foundry partners’ capacity, as I indicated in my prepared remarks. So, things are moving on track, better than on track right now. So, we -- again, we expect Q1 to see a major increase again. So, actually to recap, for this year, we indicated in all this Q&A, second quarter, our target was 6 million for the whole quarter of shipment. Third quarter came down slightly from 6 to 5 because second quarter we have some more inventory to sell; we didn’t have it in the third quarter. So, we say our…

And then, on this topic, I think your backend vendor is also talking about TDDI testing is also under severe constraint. Could you also elaborate on this?

Yes. The tester is supplied primarily -- TDDI requires higher tester because it requires high bandwidth high speed. It’s in shortage situation because there’s only one major vendor of such equipment in the entire industry; there are minor ones but they are far away in terms of capability and capacity from the dominant vendor. And the industry is running so fast, so quickly. So, it’s no surprise that we are going to see some tightness over here. But, I think it’s something that has been anticipated long time ago. And the vendor, the equipment vendor never [indiscernible] of delivering X number of sales per month. And as they go along the supply and demand, will kind of adjust itself. And Himax for example will try to leave the very high end to such ICs while leaving the next notch of testers into other testers by rewriting our program and so on and so forth. So, it’s something that is in type of tight supply situation. But I think it’s something that the industry can somehow manage because it is expected a long-time ago and it isn’t coming so rush and so such a big surprise.

[Operator Instructions] Our next question comes from the line of Charlie Chan with Morgan Stanley. Your line is now open.

So, my first question is regarding your next generation 3D sensing. And you’ve said that you aim leapfrog. So, can I get some more color on this leapfrog technology? Is that more for the front side 3D sensing or for the real side, so called, the world-facing 3D sensing? And which type of technology you will most advanced, meaning structuralized TOF or active stereo from this technology improvement?

The choice is for front-side, i.e. for recognition still for facial recognition; it’s going to be structured light. We are working on sales with other partners on other things. But when we talk about the next generation 3D sensing, the so called front [ph] technology, we are talking about structured light and front side. Front side, because there is a solid demand and the customers do want this. They compare about [indiscernible] and they compare about the cost. But they also said actually fingerprint is to be a temporary solution because guess what, finger printing only do one thing and one thing only which is fingerprint, meaning to unlock, and you cannot do anything else. But with 3D sensing, you do have potential for other applications. So, people are saying if there is so much you can deliver, a much cost right solution, then we’re jumping to it. And why structured light because with ASC, there are two camera modules with the projector. With structured light, there is one camera module with one projector. So, you remove that cost of one camera. So, if you want to -- there is so much, you get your architecture right. I cannot get into much detail, sorry, for confidential reasons. But, if you look at your architecture right, removing that one piece of camera module away from the material is very important to get your cost under control. So, we certainly believe that structured light is the right solution for low cost. Although today structured light is offered at higher cost compared to ASC, but I think that is because of the whole industry’s old generation. It’s not something that cannot be improved. In fact, we’re improving it. As far as the world-facing camera is concerned, I know people are talking about it, and indeed we’re working a few customers on such project. I think in general, people seem to feel that in terms of world-facing camera, TOF is always the strong contender as opposed to ASC or structured light. However, TOF continues to suffer the low resolution of big pixel size toward sensing, the major problem. And people complain about it because if you want to do some serious application, you do need a resolution. So, it is something that the industry is still working on. As far as TOF is concerned, so it’s something that the industry is still working now. As far as TOF is concerned, I want to make one thing -- clarify it. Himax is going to play a major role in projector and optics but we are -- in the foreseeable future, we don’t have sensor, we don’t have algorithm in-house. So, we are now offering total solution, we are only offering total solution right now for ASC type and structured type in our next generation.

Thank you. That’s very, very helpful. And my follow-up is regarding your WLO business. I think, this year I think, potentially one big customer contributes most of the revenue. And for next year, you’re saying there are more projects going on. But, we’re also seeing more completion. So, for next year, do you think WLO business will grow year-on-year versus this year?

I think, the answer is yes, because the customers do have more models into production or adopting this technology compared to last year or this year. And also, we -- as I’ve said earlier, right, we do have other customers who have their in-house capability of providing their own in-house solution. There will be some revenue coming from those other customers as well. So, yes, in our likelihood, I think we will see some growth, although we may not see a very significant growth like this year. Actually, the ongoing R&D projects that we are working on with anchor customer, I think the revenue is more likely to be year 2020 story rather than next year. But for the existing program in our own space, we do enjoy the sole source status. So, I think next year, we will see some growth from this year.

Lastly, if I may, I think it will be very helpful if the company can also share some of your observation on MVNA [ph] because we know that makeover is a little bit tough now but company is growing in fourth quarter, U.S. smartphone business is growing 20% sequentially. And the large panel driver IC business tends to be okay, right. So, Jordan, how should we reconcile the kind of weak demand, inventory issue to your kind of good performance into fourth quarter, and do you see kind of the more downside risk into next quarter?

I think you are actually right, Charlie, in saying that the Q4 award [ph] is weak. We managed to give a guidance of flat to 5% growth. I think because of all special situation in the large display driver space, yes, we are also like others, we are also suffering from the capacity shortage somewhat. But some of our customers are running -- they are fixed, and that is additional market for us and in particularly in China where we have a major market share, so I think we enjoy the benefit of the loss rampage. [Ph] And also, in other markets such as Taiwan, there are customers, I mean, we are -- our design wins with those customers are, if you like, they are more important projects, revenue generating or profit generating projects. So in the tight supply situation, they are refrained of their manufacturing plan, and some of our projects enjoy the benefit of priority. I think that also partially is plan. In the smartphones, I think we have to admit, yes, we are enjoying a major growth because we did come in from a lower -- relatively low base. So, I think I can’t say I’m very happy with the performance of this quarter because I’m still not -- because we are still suffering from capacity shortage, although we enjoy a pretty decent growth. I think, you asked about Q1. Q1 is Chinese New Year. So, we’re not providing guidance for Q1 yet but we have shorter working days. So, I don’t expect another major growth for Q1. However, I think more importantly, for 2019 outlook, I’m sure somebody is going to ask this, so I am going to comment on this right now. Again, we’re not providing, as a principle, we’re not providing a so called…

Okay. Thanks. Since you’re well prepared for this kind of mid to long-term outlook question, much appreciate it. Thanks.

Thank you, Charlie.

Thank you. And that concludes today’s question-and-answer session. So with that, I would like to turn conference back over to Himax for further remarks.

As a final note, Jackie Chang, our CFO, will maintain investor and marketing activities and continue to attend investor conferences. We’ll announce the details as they come about. 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.