Himax Technologies, Inc. (HIMX) Q3 2018 Earnings Report, Transcript and Summary

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 33.4% in the second quarter of 2018 and 27.9% a year ago. Revenue for small and medium-sized display drivers came in at $85 million, down 4.8% sequentially and down 2.6% year-over-year. The driver ICs for the segment accounted for 45.1% of total sales for the third quarter, as compared to 49.2% in the second quarter of 2018 and 44.2% a year ago. Sales into smartphones were down 30.5% sequentially, as opposed to 40% that we indicated in the last earnings call, due to better-than-expected TDDI production output in the early ramp of our foundry. With the major addition of TDDI capacity available to us, we’re very optimistic about the smartphone business growth in Q4 and next year. Jordan will elaborate on this a bit later. Our driver IC revenue for automotive applications recorded another historical quarter, up 18.3% sequentially and 55.4% year-over-year. The quarterly revenue reached $33.9 million, accounting for more than 22% of our driver IC revenue. We’re happy with the strong momentum and our leading market position in this space. Revenues from non-driver businesses were $37.1 million, up 18% sequentially but down 32.5% from last year. Non-driver products accounted for 19.7% of total revenues, as compared to 17.4% in the second quarter of 2018 and 27.9% a year ago. The sequential increase was mainly driven by the significantly higher WLO shipments to an anchor customer. The year-over-year decrease was due mainly to certain one-off customer reimbursement totaling $13.3 million booked in Q3 2017 in relation to the AR goggle business. We expect WLO shipments to continue to increase strongly in the fourth quarter and into 2019. Jordan will also elaborate on this a bit later. Our IFRS gross margin for the third quarter was 23.4%, up 40 basis points from 23% in the second quarter of 2018 but down 210 basis points from the same period last year. The sequential increase was due mainly to improved product mix. The year-over-year decrease was, again, due to the one-off customer reimbursement mentioned above. The reimbursement accounted for 120 basis points in Q3 2017. Our IFRS operating expenses were $43.4 million in the third quarter, up 5% from the preceding quarter and down 7.7% from a year ago. The sequential expense increase was caused by $3.8 million of RSU expense, offset by R&D and salary expenses reduction of $1.7 million. The year-over-year decrease was mainly a result of reduced RSU and R&D expenses. As an annual practice, we reward employees with an annual bonus at the end of September which always leads to a substantial increase in third quarter IFRS operating expenses compared to the other quarters of the year. This year, the RSU grant totaled $3.9 million, out of which $3.8 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. The non-IFRS operating expenses for the third quarter were $38.8 million, down 5.3% from the previous quarter and down 3.6% from the same quarter 2017. IFRS operating margin for the third quarter was 0.4%, down from 1.7% in the same period last year and little changed from 0.3% in the prior quarter. Third quarter non-IFRS operating income was $5.4 million, or 2.9% of sales, down from 5.2% for the same period last year and up from 0.5% a quarter ago. IFRS profit for the third quarter was $0.9 million, or $0.005 per diluted ADS, compared to $2 million, or 0.012 per diluted ADS, in the previous quarter and $3.6 million, or $0.021 per diluted ADS, a year ago. The year-over-year decrease was, again, due to the one-off customer reimbursement mentioned above. Third quarter non-IFRS profit was $4.5 million, or $0.026 per diluted ADS, compared to $2.3 million, or $0.013 per diluted ADS last quarter and $8.9 million, or $0.052 per diluted ADS the same period last year. Turning to our balance sheet. We had $102.9 million of cash, cash equivalents and other financial assets as of the end of September 2018, compared to $151.6 million at the same time last year and $126.7 million a quarter ago. The cash position dropped $23.8 million from last quarter due primarily to the dividend payout of $17.2 million and CapEx of $8.2 million. On top of the above cash position, restricted deposit was $164.3 million at the end of the quarter, as compared to $147 million in the preceding quarter and $147.2 million a year ago. The increase is due to additional restricted cash deposit made to guarantee the dividend payment withdrawn from the banking facility in the quarter. The restricted deposit is mainly used to guarantee the Company’s short-term borrowings for the same amount. As of September 30, 2018, our inventories were $145.8 million, up from $142.1 million a quarter ago and $130.1 million at the same time last year. Accounts receivable at the end of September 2018 were $187.6 million as compared to $183.2 million a year ago and $176.3 million last quarter. Day sales outstanding was 96 days at the end of September 2018, as compared to 99 days a year ago and 93 days at end of the last quarter. Net cash inflow from operating activities for the third quarter was $2.2 million as compared to an inflow of $16.9 million for the same period last year and an outflow of $2.8 million last quarter. The year-over-year variance is mainly due to inventory pre-build in reaction to foundry capacity shortage. We expect this will repeat in the fourth quarter. Capital expenditures were $8.2 million in the third quarter versus $10.1 million a year ago and $17.7 million last quarter. The third quarter CapEx consisted mainly of ongoing payments for the new building’s construction, WLO capacity expansion, and installation of active alignment equipment for our 3D sensing business. As of September 30, 2018, had 172.1 million ADS outstanding, unchanged from last quarter. On a fully diluted basis, the total ADS outstanding were 172.5 million. For the fourth of 2018, we expect revenues will be around flat to up 5% sequentially. Gross margin is expected to be around 24.2% to 25.2%, depending on our final product mix. IFRS earnings attributable to shareholders are expected to be in the range of around $0.015 to $0.036 per diluted ADS based on 172.6 million outstanding ADSs. Non-IFRS earnings attributable to shareholders are expected to be in the range of $0.017 to $0.038 per diluted ADS based on 172.6 million outstanding ADSs. I will now turn the call over to Jordan.

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 panel display driver and timing controller businesses. One of our industry leading customers will be launching a new 8K TV with Himax technology inside early next year, and we expect more to come from this and other customers in the future. Capitalizing on our 4K TV success, we are strongly positioned for this emerging high-end market opportunity. Now, turning to our small and medium-sized display driver IC business. I’m pleased to report that we were able to start the mass production of TDDI at the new foundry earlier than original schedule and achieved greater-than-expected output yield at the early stage of mass production. With the ramping of the new capacity, our constraint of TDDI shipment will be increasingly alleviated starting from the fourth quarter. We will be able to fulfill more customer orders from the design-wins it already achieved, thereby doubling the revenue of Q4 from the last quarter. With the new capacity’s continued ramping, we target to completely resolve our foundry capacity issue in the third quarter of next year. For the time being when our capacity remains a constraint, our resources are prioritized for higher end full HD projects as they yield higher revenue and better margin with less competition. TDDI penetration is expected to reach more than 30% in smartphone in 2019, representing a tremendous upside potential for Himax. Backed by the new foundry capacity and fast expanding design-win portfolio with tier 1 smartphone OEMs and leading panel makers, we are well positioned to win a major market share in this new space, repeating our historical success in the smartphone display driver IC business. We believe TDDI will be the biggest growth driver for our business in 2019. With higher ASP and better margin, TDDI chips will help improve our corporate sales and profit significantly in 2019. As expected, our traditional discrete driver IC sales into smartphone is set to decline by close to 50% sequentially in the fourth quarter as the market is being quickly replaced by TDDI and AMOLED. This segment will account for less than 5% of our total sales in the fourth quarter. Combining TDDI and discrete smartphone driver, our Q4 sales into the smartphone market is expected to grow more than 20% sequentially. During the third quarter, our automotive business continued to perform well and recorded another historical high, delivering a 44.4% growth year-over-year through nine months 2018. The demands for more sophisticated and higher performing displays are still rising with automakers. Our technological prowess will continue to separate us from the rest as, for the next generation display for automotive, we are the leader in key technologies such as TDDI, AMOLED and local dimming timing controller. Q4 revenue in this segment is set to grow around low single digit sequentially as we continue to benefit from our design wins which took place during the last few years. Our tablet and consumer electronics businesses are expected to decline by over 30% sequentially driven by weak overall market momentum. They account for less than 10% of our total sales in the fourth quarter. For fourth quarter small and medium-sized driver IC business, we expect revenue to decrease by low-single-digit sequentially. The non-driver IC business segment has been our most exciting growth area and a differentiator for Himax in the last few years. Now, let me share some of the progress we made in the last quarter as well as our views on future growth opportunities. First off, 3D sensing business update. As a leader in 3D sensing, we have participated in most of the smartphone OEMs’ ongoing 3D sensing projects covering all three types of technologies, namely structured light, active stereo camera or ASC and time-of-flight, where we provide 3D sensing total solution, or just the projector module or optics inside the module, depending on the customers’ needs. By offering either the projector module or critical optics, we have been collaborating with a small handful of smartphone names that have in-house capability to come up with their own customized 3D sensing solutions. We already have one such end customer using our technology for mass production with two more customers in the pipeline targeting 2019 product launch. For most Android smartphone makers who don’t have such in-house capability, however, we aim to provide total solution to enable their 3D sensing. At present, the 3D sensing adoption for this market remains low. The adoption is hindered primarily by the prevailing high hardware cost of 3D sensing and the long development lead time required to integrate it into the smartphone. Instead of 3D sensing, most of the Android phone makers have chosen the lower cost fingerprint technology which can achieve similar phone unlock and online payment functions with somewhat compromised user experience. Reacting to their lukewarm response, we are working on the next generation 3D sensing -- a total solution, with an aim to leapfrog the market by providing high performance, easy to adopt and yet cost friendly total solutions, targeting the majority of the Android smartphone players. In addition, we are providing 3D sensing developer kit which is being used to develop applications over both smartphone and non-smartphone platforms. We believe that 3D sensing will be widely used by more Android smartphone makers when the ecosystem is able to substantially lower cost of adoption while offering easy-to-use, fully-integrated total solutions, for which Himax is now playing a key part. I’ve mentioned previously that 3D sensing can have a wide range of applications beyond smartphone. While smartphone remains our top priority, we have started to explore business opportunities in various industries by leveraging our SLiM 3D sensing total solution. Such industries are typically less sensitive to cost and always require a total solution. Our recently announced collaboration with Kneron, an industry leader in edge-based artificial intelligence, to develop an AI-enabled 3D sensing security and surveillance solution is just an example of real world applications using our 3D sensing technology. As anticipated, the shipment volume to our WLO anchor customer for the third quarter was a lot higher than of the previous quarter, thereby improving our WLO capacity utilization substantially. The fourth quarter will see another very significant sequential growth, thanks to the customer’s large-scale adoption on more models. The overall 2018 shipment will increase considerably year-over-year. Meanwhile, we are encouraged by the progress of the ongoing R&D projects with the said customer for their next generation products centering around our exceptional design know-how and mass production expertise in WLO technology. Let me also talk about other WLO businesses. As we mentioned previously, we are already collaborating with a small handful of smartphone makers that have in-house capability to come up with their own customized 3D sensing solutions targeting 2019 product launch. For those customers, we provide full projectors or critical optics inside the 3D sensing module of which WLO optics is a major component. Now, some update on our capital expenditure. We announced the increase of the Phase 1 capital expenditure budget, which is on top of our regular CapEx for the IC design business, from $80 million to $105 million in early 2018. The majority of the Phase 1 investment goes to land and building, new equipment for the WLO anchor customer, and an initial capacity of 2 million units per month for 3D sensing. Of the Phase 1 CapEx of $105 million budget, $33 million has been paid out in 2017, followed by $38.6 million made in the first nine months of 2018. As we mentioned in previous earnings calls, the CapEx budget will be funded through our internal resources and banking facilities. We have more than sufficient banking facilities with favorable cost for such CapEx budget. On CMOS image sensor updates. 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 for both our structured light and ASC 3D sensing total solutions. Our Always-on-Sensor or AoS product line, the joint offering of Emza and Himax Technologies uniquely positions us to provide ultra-low power, smart imaging sensing total solutions, leveraging Himax’s industry leading super low power CIS and ASIC designs and Emza’s unique AI-based computer vision algorithm. We are pleased with the status of engagement with leading players in areas such as connected home, smart building and security, all of which new frontiers for Himax. For traditional human vision segments, we see strong demands in laptop and increasing shipment 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 automotive. While AR goggles will take a few years to fully realize its market potential, LCOS remains the technology of choice in this space. Our technology leadership and proven manufacturing expertise have little competition, evidenced by the growing list of AR goggle device customers and ongoing engineering projects. In addition, we continue to make great progress in developing high-end holographic head-up displays for high-end automotive. One of our customers will demo its state-of-the-art head-up-display product with Himax LCOS inside at the 2019 CES. LCOS for both goggle device and head-up-display represents much higher ASP and gross margin for us. In the meantime, we are working with various OEMs to bring LCOS microdisplays to mini projectors with revenue contribution to start from 2019. For non-driver business, we expect revenue to increase by low-single-digit sequentially in the fourth quarter, driven mainly by WLO shipment. That concludes our 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.

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 third quarter target was 5 million, actually which is about 5% -- 10% higher than that as actual results. And we said earlier in the fourth quarter our target 10 million for the whole quarter. I think we are on track to achieve to beat that number again, probably by another 10%, hope so, we’ll see. But, I think what’s important is even within the fourth quarter strong or probably November, December, the ramping month-after-month is quite significant. We expect somewhere in the second quarter our target on a single months basis will be 10 million. And in the second half, on a single month basis we will reach 20 million, and then will above 20 million every single months for the whole second half. I’m saying somewhere in second half we hope to achieve 20 million per month. So, if you put the numbers together, you do your own math, you can pretty much figure out our target market share and revenue and so on. Your second figure question is about backend supply. I mentioned earlier, there is a type of driver IC packaging called COF, i.e. Chip-on-Film, meaning you have a bare die, and you bind bare die on to a piece film. So, that’s why you call it Chip-on-Film. And the film has a connector pin, it’s connected on to the display. That’s how it works. And traditionally, that kind of packaging is only applied in large display driver IC because just by the nature of the technology. And historically, I would say since we founded Himax, the industry has more or less been in a rather serious oversupply situation. And as a result, we’re seeing industry is consolidating, people getting out of the market, merging with each other to try to survive. So, we have historically been in oversupply situation, until this year when there is a major change in the industry, which is cell phone, smartphone, starting from AMOLED and thereafter some TFT LCD as well. Some high-end smartphones in order to narrow its basal, [ph] he bottom end basal by a little bit, they are prepared to pay a lot more to buy the film and have their IC packaged by COF type. As we know, the volume of smartphones is very significant. And now we’re seeing the major adoption of the COF type being the top three home makers. So, there is a big trend of AMOLED adoption already in this type of packaging, and they are the emerging but significant move of TFT LCD into this space as well. So, now, we’re now talking about the top three smartphone players being the major users of this technology. So, as a result, the COF industry has turned from a serious oversupply situation to a shortage situation. And that directly impacted our large panel display driver IC business. So, I would say the whole of next year, for large panel display driver, we expect to see a continuous capacity issue, probably much less so foundry, but rather it is primarily for COF industry. And related to this its bundled [ph] equipment something with IoT. And certainly that has a lot to do with how much penetration of COF into a smartphone we’re going to see next year. It’s variable because it is apple to apple basis, it is about $1 more expensive. So to smartphone makers, really want to narrow its [indiscernible] by paying so much, yet to see. But, as the design partner we see far, I think next year we expect to see continuous shortage. But, I think being a large display driver player for all time, I think we enjoyed very solid relationship and strategic partnership with both Taiwanese and Korean COF makers. So, I think, hopefully our situation will be better than our peers. But they are working very hard to try to resolve this issue as we speak actually.

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 guidance for the whole year. But, I think next year, overall trend looks optimistic for Himax, starting from large panel display again. We do expect another robust growth for next year, actually for the same reason. As these two of our Chinese customers are ramping new fab Gen 8.6 and Gen 10.5 next year, in early next year actually. And with other customers quite not having new capacity, new fab into their family, but they are still ramping, there are newly ramped capacity carry out -- carry on from second half this year. So, we’re still seeing demand increase in terms of capacity. However -- and also because of the shortage, there is likely to be a continuous ASP hike and that in turn will also provide us good support for our margin as well for large penal display driver business. The big uncertainty is macro economy, which I don’t know, you guys are expert. And certainly, we’re already seeing witness in Chinese economy and that is going to have a major impact on the world I think. So, we are cautious in watching the change of momentum in the overall economy. But large side -- I think large panel, we’re looking good. Small panel, again, I already talked about our plan for TDDI next year which is going to remain in for next year. So, we’re set to enjoy a strong growth for TDDI and i.e. small and medium sized display. And on non-driver, I already talked about WLO and another major sector in our non-driver is timing controller, which is going along with large display driver. So, I think for our major sectors, it’s set to enjoy good growth. If you look at our major problem area in the growth for this year, which are display driver for smartphone, and we said earlier, in Q4 it’s already less than 5% of our total sales and certainly market I think expects continuous good momentum next year but that is also already quite small in our total revenue portfolio. So, that is kind of my outlook for next year.

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.