Himax Technologies, Inc. (HIMX) Q4 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to Himax's Fourth Quarter and Full-Year 2018 Earnings Conference Call. At this time, all lines are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be provided at that time. [Operator Instructions] I'd now like to hand the call over to John Mattio, with Lamnia International. Please go ahead.

Thank you, operator. Welcome everyone to Himax’s first quarter and full-year 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 a question-and-answer session. If you have not yet received a copy of today’s results release, please email jmattio@lamniaintl.com or access the press release on financial portals or download a copy from Himax’s website at himax.com.tw. Before we begin the formal remarks, I would like to remind everyone that some of the statements in this conference call, including statements regarding expected future financial results and industry growth, are forward-looking statements that involve a number of 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 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 and demand for end-user application, also 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 the company 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, Chief Financial Officer for Himax Technologies. 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 Himax’s consolidated financial performance for the quarter and full year 2018 and to provide you with our outlook for the first quarter of 2019. 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 fourth quarter 2018 revenues and gross margins met our guidance, issued on November 8th, while EPS exceeded the guidance. For the fourth quarter we recorded net revenues of $191 million, an increase of 1.4% sequentially and an increase of 5.5% year-over-year. The revenues increase in the quarter was attributed to the production outputs of newly added foundries for both large display driver ICs and TDDI chips. Our WLO shipment volume to an anchor customer also increased sequentially. Gross margin was 24.3%, up 90 basis points sequentially, due to more favorable product mix. IFRS earnings per diluted ADS were 4.9 cents, better than the guidance range of 1.5 to 3.6 cents. The better than expected earnings were due to revaluation gain of 1.7 cents per diluted ADS from an AI startup investment made in November 2017. Non-IFRS earnings per diluted ADS were 5 cents, outperforming the guidance range of 1.7 to 3.8 cents. The better than expected earnings were again due to the reevaluation gain mentioned above. Revenue from large display drivers was $74.2 million, up 12% sequentially, and up 27.1% year-over-year, driven by Chinese panel customers’ continued ramping of new LCD fabs where we have solid design in penetration. Large panel driver ICs accounted for 38.9% of our total revenues for the fourth quarter, compared to 35.2% in the third quarter of 2018 and 32.3% a year ago. Revenue for small and medium-sized display drivers came in at $79.8 million, down 6% sequentially and down 1.8% year-over-year. The driver ICs for the segment accounted for 41.8% of total sales for the fourth quarter, as compared to 45.1% in the third quarter of 2018 and 44.9% a year ago. Sales into smartphones were up 20.1% sequentially, thanks to higher sales from TDDI, but offset by decreased shipment in traditional driver ICs for smartphones. Display drivers for tablets and other consumer products also declined over 30% sequentially. With the major addition of capacity we are optimistic about the TDDI business growth in 2019. Jordan will elaborate on this a bit later. Our driver IC revenue for automotive applications stayed strong for the fourth quarter reaching $32.9 million, down 3% sequentially but up 33% year-over-year, accounting for 21% of driver IC revenue. Revenues from our non-driver businesses were $37 million, down 0.5% sequentially and down 10.8% from last year. Non-driver products accounted for 19.3% of total revenues, as compared to 19.7% in the third quarter of 2018 and 22.8% a year ago. The fourth quarter saw continued growth of WLO shipments sequentially, but CIS and timing controller experienced some decline in revenue. The year-over-year decrease was due mainly to lower WLO and timing controller shipments. IFRS gross margin for the fourth quarter was 24.3%, up 90 basis points sequentially and down 30 basis points from the same period last year, both a result of product mix. Our IFRS operating expenses were $41 million in the fourth quarter, down 5.3% from the preceding quarter and up 1.8% from a year ago. The year-over-year increase was primarily a result of increased R&D expenses. The sequential expense decrease was mainly caused by the difference of the $3.9 million of RSU charge, offset by R&D and salary expenses increase of $1.6 million. As an annual practice, we grant annual RSUs to our staff at the end of September each year, which, given all other things equal, leads to higher third quarter IFRS operating expenses compared to the other quarters of the year. The fourth quarter RSU expense was $0.02 million while it was $3.9 million in the third quarter. Excluding the RSU expense, operating expenses increased 4% from the previous quarter and up 2% year-over-year. The quarter-over-quarter increase was mainly the result of higher R&D expenses during the fourth quarter. IFRS operating margin for the fourth quarter was 2.8%, up from 2.4% in the same period last year and up from 0.4% in the prior quarter. The IFRS operating income increased 575.8% sequentially and increased 24.8% year-over-year. The sequential increase was primarily a result of higher gross margin and lower RSU expense. The year-over-year increase was a result of higher sales offset by higher operating expenses. Fourth quarter non-IFRS operating income was $5.7 million, or 3.0% of sales, up from 2.6% for the same period last year and up from 2.9% a quarter ago. IFRS profit for the fourth quarter was $8.5 million, or 4.9 cents per diluted ADS, compared to $0.9 million, or 0.5 cents per diluted ADS, in the previous quarter and $23.5 million, or 13.6 cents per diluted ADS, a year ago. The sequential increase was a result of higher sales, lower RSU expense and the revaluation gain on investment that I have mentioned earlier. The year-over-year decrease was, however, mainly the result of an investment gain of $20.7 million booked in the fourth quarter 2017 as we disposed of a direct investment in Q3 2017 which accounted for 12 cents per diluted ADS. Excluding the investment gains, IFRS profit for Q4 2018 was $5.6 million or 3.2 cents per diluted ADS versus $2.8 million, or 1.6 cents per diluted ADS for the fourth quarter of 2017. Fourth quarter non-IFRS profit was $8.7 million, or 5.0 cents per diluted ADS, compared to $4.5 million, or 2.6 cents per diluted ADS last quarter and $23.8 million, or 13.8 cents per diluted ADS the same period last year. The sequential and year-over-year variance were from the same reasons stated above. Excluding the investment gains, non-IFRS profit for fourth quarter 2018 was $5.8 million or 3.3 cents per diluted ADS versus $3.1 million or 1.8 cents per diluted ADS for Q4 2017. Now let's have a quick overview of the 2018 full year financial performance. Revenues totaled $723.6 million in 2018, representing a 5.6% increase over 2017. Revenue from large panel display drivers totaled $260.5 million, an increase of 15.9% year-over-year, representing 36.0% of our total revenues, as compared to 32.8% in 2017. Small and medium-sized driver sales totaled $325.7 million, an increase of 6.8% year-over-year, representing 45% of our total revenues, as compared to 44.5% in 2017. Non-driver products sales totaled $137.4 million, a decrease of 11.6% year-over-year, representing 19% of our total sales, as compared to 22.7% a year ago. The year-over-year decrease was due mainly to certain one-off customer reimbursement totaling $13.3 million booked in third quarter 2017 in relation to the AR goggle business. Excluding the $13.3 million, the year-over-year decrease was 3.3%. Gross margin in 2018 was 23.3%, down from 24.4% in 2017. The year-over-year decrease was due primarily to the one-off customer reimbursement in 2017 mentioned above. IFRS operating expenses were $165.5 million, up $6.9 million or 4.3% compared to last year. The increase was primarily the result of increased R&D, salary and depreciation expenses offset by reduced RSU charge. 2018 IFRS operating income of $3.4 million represented a 59.5% decrease versus 2017 mainly for higher operating expenses. IFRS profit for the year was $8.6 million, or 5.0 cents per diluted ADS, versus $27.7 million or 16.1 cents per diluted ADS, a decline of 69% from last year. Excluding the investment gains that I have mentioned earlier, our IFRS EPS for the year was 3.8 cents versus 4.1 cents from the last year. Non-IFRS profit for 2018 was $12.9 million, or 7.5 cents per diluted ADS, down 61.9% year-over-year. Again, the year-over-year decline was due mainly to the investment gains mentioned above. Excluding the investment gains, Non-IFRS EPS for the year was 6.3 cents versus 7.7 cents from last year. Turning to our balance sheet, we had $117.7 million of cash, cash equivalents and other financial assets as of the end of December 2018, compared to $148.9 million at the same time last year and $102.9 million a quarter ago. On top of the cash position, restricted cash was $164.3 million at the end of the quarter, same to the preceding quarter and up from $147 million a year ago. The restricted cash is mainly used to guarantee the Company’s short-term borrowings for the same amount. Our year-end inventories were $162.6 million, up from $145.8 million a quarter ago and up from $135.2 million at the same time last year. Accounts receivable at the end of December 2018 were $189.3 million as compared to $188.8 million a year ago and $187.6 million last quarter. Days sales outstanding was 95 days, as compared to 101 days a year ago and 96 days at end of the last quarter. Net cash inflow from operating activities for the fourth quarter was $2.3 million as compared to the inflow of $8.3 million for the same period last year and an inflow of $2.2 million last quarter. Cash inflow from operations in 2018 was $4 million as compared to $29.4 million in 2017. 2018’s operating cash flow was lower mainly because, in response to capacity shortage of foundry and certain packaging material, we had to keep the inventory level higher than usual. The trend may continue into this year. Fourth quarter capital expenditures were $5.2 million, versus $15.5 million a year ago and $8.2 million last quarter. The fourth quarter CapEx consisted mainly of ongoing payments for the new building’s construction, WLO capacity expansion and installation of active alignment capacity to support our 3D sensing business. Total capital expenditure for the year was $49.7 million, versus $39.3 million a year ago of which $7.6 million was for the investment of design tools and R&D related equipment related to our traditional IC design business. Other capital expenditures mainly investment in land, a new office building and capacity expansion for 3D sensing business, was $42 million in 2018 versus $33 million in 2017. In 2019, we anticipate continued payments for the above CapEx items to be totaling around $39 million including a payment of $27.7 million for the land, which will conclude the current phase of capital expenditure. As of December 31, 2018, Himax had 172.1 million ADS outstanding, unchanged from last quarter. On a fully diluted basis, the total ADS outstanding are 172.6 million. The first quarter is traditionally the bottom of the year in terms of sales because it has fewer working days due to the Lunar New Year holidays. Customers’ inventory correction on smartphone drivers, reflecting their conservative views for the smartphone market, will also negatively impact our first quarter sales. We expect the first quarter revenue to decrease around 14% to 19% sequentially. Gross margin is expected to be around 23%. Gross margin is expected to be around 23% depending on the final product mix. IFRS loss attributable to shareholders are expected to be in the range of around 1.0 to 3.0 cents per diluted ADS based on 172.6 million outstanding ADS. Non-IFRS loss attributable to shareholders are expected to be in the range of 0.8 to 2.8 cents per diluted ADS based on 172.6 million outstanding ADS. I will now turn the call over to Jordan.

Thank you, Jackie. In the fourth quarter of 2018 we delivered solid growth in the areas of TDDI, WLO and large display driver IC despite weakness sentiment in the overall consumer electronics markets. Looking into 2019, on the backdrop of an uncertain global economy, the TV panel market is overshadowed by concerns of over-supply and the global smartphone sales are projected to suffer some decline. We are however, still targeting some top line growth with upside momentum coming from TV and automotive markets as well as significantly more TDDI shipments for smartphone application, where we only made a small amount of shipment last year when we suffered from foundry capacity shortage. We will continue to advance our technologies across key strategic areas. These include among others, next generation display driver technology for 8K TV and AMOLED, 3D sensing for both mobile phone and non-mobile phone applications and ultra-low power smart sensing where we are seeing rising momentum in new applications such as smart home. Fully aware that we are operating in an uncertain macro environment, we are also putting cost control at the top of our agenda list, targeting to continuing R&D activities across all our strategic areas without raising R&D expenses from the last year. The total OpEx is budgeted to be at around the same level as that of last year excluding the anticipated increase in depreciation arising primarily from the construction of the new fab described above. Now let me give you further insights behind our Q1 guidance and trends that we have seen developing in our businesses. Our large display driver IC business enjoyed strong growth in the second half of 2018 as 4K TV penetration continues to rise globally and China continues to ramp brand new advanced generation LCD effects. Looking into 2019, while the market is facing the challenge of potential oversupply we are seeing continuous strength in our business, backed by strong design wins with certain LCD makers who are leading the market in capacity and brand customer engagements. Equally important, after a lot of engineering efforts we are now better prepared than last year in terms of getting the necessary capacity support from our strategic vendors. Notably most of our panel customers have completed qualifications of our new foundry with our key customers and we have also successfully secured additional COF package capacity to meet our customer's TV and monitor demands. Nevertheless, for the first quarter our large display driver business is likely to decrease by high single digits sequentially due to seasonality and customers' inventory correction. The number of TV makers showcased their 8K TV technology at the recent CES. I'm pleased to as report that one of our industry leading customers will be launching a new 8K TV model with Himax technology inside in March. With its cost still high and true 8K content still scarce 8K TV is unlikely to generate much sales in 2019, but 8K TV is a strategic area for Himax because of its much higher display driver and timing controller contents and high technical barrier of entry. We are encouraged by the recent establishment of the 8K Association to help develop 8K TV ecosystem and accelerate its adoption. Besides TV, we are working with panel customers to deploy 8K technology to new areas such as high end gaming PC and professional purpose monitors. Now turning to the small and medium sized displays driver IC business, with the ramping of the newly added foundry, our capacity constrains for TDDI shipment has largely been alleviated. In Q4, 2018 we were able to fulfill more customer orders with improved supply, thereby greatly increased the TDDI revenue from the previous quarter. Another notable milestone for TDDI during Q4 was that we secured a marquee design win from a major Korean smartphone maker and are already making mass production shipments in the first quarter, although starting with a relatively modest volume. While we are positive on the trend of higher TDDI penetration in smartphone in 2019, and our much improved TDDI supply, continued TDDI business would nevertheless be challenged by the anticipated lackluster sales of global smartphone market and the expected decline of TDDI’s average sales price as competition intensifies. To gain market share in 2019 we are working to secure more design wins by offering new generation TDDI solutions. The new solutions can enable narrow bezel panel design without the usage of COF packaging, which not only is costly, but also suffers from serious supply constraint. Several leading panel makers are now sampling panels with our new TDDI solution. As expected, our traditional discrete driver IC sales into smartphone declined well over 25% sequentially in the fourth quarter as the market is being quickly replaced by TDDI and AMOLED. This segment accounted for less than 6% of our total sales in the fourth quarter and will further shrink in 2019. Combining TDDI and discrete smartphone driver our Q1 sales into the smartphone market is expected to decrease close to 30% sequentially due to seasonality and weak global smartphone market. However, we expect a strong second half rebound in 2019. On AMOLED product line, we have been collaborating closely with leading panel makers across China for product development. We believe that AMOLED driver ICs will be one of the long-term growth engines for small panel display driver IC business. During the fourth quarter, our automotive business delivered a solid 33% year-over-year growth. The demands for more sophisticated and higher performing displays are still rising with automakers. We are pleased to see our state-of-the-art technology for super large, end-to-end automotive displays showcased at CES. In addition, we launched the world’s first TDDI design for automotive displays and the technology is scheduled to start shipping within 2019. Our technological prowess will continue to separate us from the rest as, for the next generation display for automotive. We are the leader in all key technologies including TDDI, AMOLED and local dimming timing controller. Our first quarter revenue in this segment is, however, set to decrease close to 10% sequentially, impacted by panel customers’ inventory adjustments in response to the weak car sales momentum caused by the U.S.-China trade tension. Our tablet and consumer electronics businesses declined more than 30% sequentially in Q4 2018, driven by weak overall market sentiment. They accounted for less than 10% of our total sales in the fourth quarter. We expect businesses in both segments to further shrink in the first quarter by around high single digit sequentially. For first-quarter small and medium-sized driver IC business, we expect revenue to decrease by high-teens sequentially. The non-driver IC business segment has been our most exciting growth area and differentiator for Himax in the past few years. Now, let me share some of the progress we have made in the last quarter as well as our views of future growth opportunities. First on 3D sensing business update. 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 (ASC) and time-of-flight. Depending on the customers’ needs, we provide 3D sensing total solution or just the projector module or optics inside the module. We have highlighted in the last earnings call that the 3D sensing adoption for Android smartphone 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 with our platform partners aiming to leapfrog the market by providing high performance, easy to adopt and yet cost friendly total solutions, targeting the majority of Android smartphone players. We have a solid product roadmap and plan including new architecture, new algorithm to make it happen. The development progress is on track and the new solution is aiming for smartphone customers’ 2020 models. We believe that 3D sensing will be widely used by more Android smartphone makers when more killer applications become available and the ecosystem is able to substantially lower the cost of adoption while offering easy-to-use, fully-integrated total solutions, for which Himax is now playing a key part. In the meantime, we are working closely with a number of leading smartphone makers on multiple projects by providing projector module or critical optical components targeting their 2019 or 2020 models. I have mentioned previously that 3D sensing can have a wide range of applications beyond smartphone. We have started to explore business opportunities in various industries by leveraging our SLiMTM 3D sensing total solution. Such industries are typically less sensitive to cost and always require a total solution. We are collaborating with Kneron, an industry leader in edge-based artificial intelligence in which we have made an equity investment, to develop an AI-enabled 3D sensing solution targeting security and surveillance markets. We are also working with partners/customers on new applications covering home appliances and industrial manufacturing. We will update our progress in due course. As anticipated, the shipment volumes to our WLO anchor customer for the fourth quarter recorded a double-digit sequential growth as a result of the customer’s large-scale adoption in more models. The overall 2018 shipment increased considerably year-over-year. However, lower first quarter volume compared to the previous quarter is expected as per the customer’s demand forecast. The much-reduced shipment will negatively impact our Q1 gross margin as lower utilization will lead to higher equipment depreciation and factory overhead on a per unit basis. Nevertheless, the Q1 revenue will still record a significant increase from the same time last year. In addition, we are encouraged by the progress of the ongoing new development projects with the said customer for their next generation products centering around our exceptional design know-how and mass production expertise in WLO technology. On CMOS image sensor business updates, we continue to make great progress with our machine-vision sensor product lines. Combining Himax’s industry leading super low power CIS and ASIC designs with Emza’s unique AI-based, ultra-low power computer vision algorithm, we are uniquely positioned to provide ultra-low power, smart imaging sensing total solutions. We are pleased with the status of engagement with leading players in areas such as connected home, smart building and security, all of which are new frontiers for Himax. For traditional human vision segments, we are seeing strong demands in laptop and increasing shipments for multimedia applications such as car recorders, surveillance, drones, home appliances, and consumer electronics, among others. I will now give you an update on the LCOS business, where our main focus areas are AR goggle devices and head-up-displays (HUD) for automotives. In 2018 many AR goggle devices were launched targeting primarily the niche industrial business applications. 12 top of them are multinationals continue to invest heavily to develop the ecosystem applying applications, software, operating systems, system electronics and optics. While AR goggles will still take a few more years to full realize its market potential we believe LCOS remains the mainstream technology in this space. Our technology leadership and proven manufacturing expertise, are 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 automotives. One of our customers had demonstrated a state-of-the-art HUD product with Himax LCOS inside at the 2018 CES with extremely positive market reception. LCOS for both goggle device and HUD represents much higher ASP and gross margin for us and represents a long-term growth driver for us. In the meantime, we are working with various OEMs to bring LCOS micro displays to mini projectors with revenue contribution to start from 2019. For non-driver IC business, we expect revenues to decrease by over 30% sequentially in the first quarter, driven primarily by lower WLO shipment. That concludes my report for this quarter. Thank you for your interest in Himax. We appreciate your joining today's call. We are now ready to take questions.

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

Hey guys, thanks for taking my questions. Jordan, just wondering if you could comment on what's behind your confidence in the smartphone rebound in the second half? Is this just based on normal seasonal patterns, is this based on design wins you have in the pipeline? Any additional color would be helpful.

I think is primarily on the design pipeline we have with the customer and also the projects being discussed with the customer which hopefully many of them will soon become true real design wins. And certainly in the second half already on the year particularly I think our new technologies are for higher end full HD+ is primarily how we call [indiscernible] design, in which we are leading the charge in the industry, which basically enables further reduction on our own display bezel without the need to use COF package material, which as you know is both very expensive and also is heavy and lot of surprise, all these concerns. So we are trying to narrow the gap of bezel of narrow bezel design between ICs without COF package, so that is for the higher end full HD+ technology that we are focusing on at the moment. And on the low end HD+ the effort there is primarily to further reduce cost. So in our next generation design we have so called [indiscernible] design which again we are leading the charge in the industry. So we are already engaging customers. We are starting development projects with customers. We anticipate [indiscernible] new designs we're starting to make [indiscernible] contributions from second half of the year. So for all these various reasons I think we are committed for a strong rebound in the second half, not to mention the fact that we have been hopefully, successfully trying to convince the customer that the capacity shortage, [project] [ph] capacity shortage of last year which was very bad is already probably behind us. So I think we are ready to go with the customer.

Okay, that's helpful. And along the capacity constraint lines, just curious if you could quantify what sort of capacity on the TDDI side you expect to have in Q1 and then how that will ramp throughout the year?

In terms of firstly on our target for the year, we are targeting to reach on a monthly basis over 10 million per month in the second half which is going to represent about 25% of global TDDI market at a time. So as far as the capacity is the concerned, certainly our [prepared] [ph] capacity is well above that number meaning more than 10 million per month. So, we are ready to take more orders if we can so that is effecting how we are trying very hard on which is to try to be aggressive and to get out there and [indiscernible] design project with the customer right now. But our target I think is achievable, is reasonably achievable, more than 10 [KK] [ph] a month and get our capacity is well above that.

Okay, thank you.

Thank you, Jaeson.

Thank you. Our next question comes from the line of Tim Savageaux with Northland Capital Markets. Your line is now open.

Yes, thank you, good morning. A couple of questions, you mentioned that the – despite the sequential decline you expect year-over-year growth in wafer level optics I imagine through a greater number of devices at your large customer. I wonder if you could talk about your expectations in growth trends for WLO for the year, both as a result of increased number of devices at your large customer as well as any potential traction on the Android side at the WLO level as the year progresses?

We - actually we didn’t specifically say we expect WLO to growth this year against last year as the reason being what we did say is that our overall revenue, overall sales for this year we expect for a number of reasons we expect to see some growth despite the macro economy, and so that we did say, but we didn't specifically say that we are always going to register growth this year. That is primarily because admittedly our WLO business in terms of shipments, although we have good design pipelines and collaboration projects with multiple customers, but in terms of actual shipment we are highly dependent on one single customer, anchor customer, which provides very big volume and in all we have been very solid vendors to them. But it's certainly our first quarter compared to first quarter of last year because of more [modest] [ph] adoption, the volume did see some increase, but I think we are not providing full year visibility because we honestly we don't have and we are just building according to their demands. So that's [indiscernible] our WLO outlook. Now we do have Android customers in the pipeline, but the Android customers for 3D sensing the volume if they do happen they are small for this year compared to [indiscernible] expected volume. So I think the main driver of revenue for WLO within this year is going to be the anchor customer again for which we don't pretend to have good visibility. We have visibility for the whole year. Having said that, we are working with multiple projects with the anchor customer and also other Android customers. So hopefully, starting from next year, we will have a more diversified balanced sales portfolio as well as projects portfolio and even customer portfolio. So that is the aim for next year and beyond, but for this year it is highly dependent on that one anchor customer.

Understood and thanks. If I could follow up, despite the sequential decline forecast in large driver looks like you're growing pretty good pace on a year-over-year basis. I think to your point you've mentioned overall expectations for revenue growth which you say your large driver is the biggest part of that and it looks like you're growing more than - based on what you're guiding 20% in Q1, I know you had a stronger second half of 2018, but what sort of growth expectations or would you expect that type of year-over-year growth to continue in large driver?

First Tim, I appreciate the question. In addition to large driver perhaps I can give a quick overview on both on large driver and small-medium sized driver and a little bit on non-drivers. So you get a full picture, fuller picture of how we're thinking for the whole year. Again, we appreciate, fully appreciate the macro economic uncertainties. So that is going to impact the market demands and we also appreciate the fact that people are generally not so bullish of smartphone market which for Himax is the single biggest end market. So these all are factors are certainly negative and we have to bear that in mind in our projection and also by providing some colors for the projection, we are not providing solid guidance for the whole year numerically. Now for our large display driver, our target are hopefully double-digit growth year-over-year. Chinese panel makers, their ongoing capacity expansion certainly is going to help. And also I mentioned in my prepared remarks, we suffered last year a lot by capacity shortage, firstly on the foundry side and thereafter on the COF packaging material side and for both I think we are leading the industry in terms of resolving those issues, so we feel we are very well prepared and we are actually ready to restart preparation compared to our peers, ready to pitch aggressive to customers trying to win more design wins because of our strong capacity support for the second half. So, and also I think China for large panel has been our largest market and within China there are actually upper tier customers and lower tier customers and our focus has a lot more upper tier customers who typically enjoy better - are customer engagement or relationships, they enjoy better technology and they enjoy better market share in the high end and they enjoy more diversified product portfolio. So I think we will benefit by supporting all those efforts to those upper end customers. So the concern for the whole year for large display is capacity oversupply and I think it is the industry consensus that somehow somebody at some point has got to reduce their capacity. But I think our focus customers as it appears are the less likely ones to do that compared to those lower tier customers and also I think our Korean customers who are in large display driver, in large display [indiscernible] in our business is suffering from higher cost compared to Chinese. So our market share for Q4 is already more than 20% globally and we expect that market share certainly and that will decline. Our aim is to further grow that market share. So that's - I think that's the color for our large display and for our small display the biggest driver obviously is going to be TDDI which I just mentioned already in Jaeson's question, and so we expect TDDI to more than double from last year. However, for smartphone overall the growth certainly will be much smaller than that because we do expect the traditional discrete driver IC for smartphones to further decline. So overall, we think the year-over-year increase of more than 25% can be expected for smartphone. For Automotive, the growth will not be actually significant. It is more likely to be single digit because until quite a few years of strong growth for the automotive display market, the market has started to become mature and the growth rate is likely to be single digit this year and even further down next year, and also the fact is that the Himax market share is already very high in overall 30% globally. So we start high market share in the mature market I think after quite a few years obviously phenomenal growth for Himax in the automotive display driver business. I think we are going to remain in the market either with community market share position, but the growth for the year is only likely to be single digit. Other sectors in small and medium sized display driver will not look so excited or promising. I'm talking about tablets which is likely to be a little down, hopefully single digit are Electronic Paper EPD, also are likely to be down perhaps single digit and other consumer electronics I think will be probably even worse. So, all these smaller sectors in small and medium sized display drivers are likely to suffer some decline this year. So overall, we believe putting all this together probably single digit growth although it is still very early stage to say, but therefore for small and medium sized driver probably single digit growth for the whole year. Non-driver, three biggest segments for now, WLO which I have already mentioned, so we are not making comments or indications because of legal feasibility, and then CMOS image sensor strong growth expected because of better product portfolio into multimedia product and [indiscernible] market, more products hopefully more customer engagement. There are a lot of smaller engagements but they are, it is quite a diversified portfolio, but we are seeing strong growth momentum this year and more so next year. So CIS would definitely be double-digit growth for this year. And lastly is our timing control business for TV which I think you can pretty much follow my comments on large display driver because they typically go side by side. So I think that kind of covers all our major product areas our indication for growth prospects for the whole year. I hope that's more than answers your question Tim.

It sure does. Thank you very much.

Thank you.

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

Thanks for taking my question. Jordan I would like to ask you about the OLED progress because you made in your prepared remarks about the OLED driver IC especially with smartphone you have been working with customers. I remember several years ago you had been shipping some OLED driver ICs, I would like to know what's your latest progress and then the approximate timing for this to see revenue contribution?

I think many of our revenue contribution is going to be next year, a little within this year. This year we do have across major OLED customers in China we do have progressing projects, we do have engagement, but it really depends a lot on also the customer's progress. And in some cases, the specs or the target of market last year been changed. So for smartphone market, we certainly is the major target market. We have a lot of activities, but unfortunately in terms of actual sales or contribution I think it is more safe to say in your modeling it should should be next year’s story rather than this year. Now, we do have OLED projects include automotive as well, certainly in terms of production timing even later than in the smartphone but we do have engagement again with Chinese leading customers on that as well. Over there you speak a bit, so you talk about even higher end displays compared to our [indiscernible] and even with the benefits of we are talking about plastic OLED, so free form designs which will be very important for the market. So I think OLED there are lot of activities both in smartphone and automotives, but in terms of revenue contribution you would not see until next year.

Okay. Thank you. And then probably a followup question for Jackie, I think in the prepared remarks had mentioned OpEx are targeting for a flattish excluding the increasing depreciation, but for the - I think if you - could you let us know what is the amount of the depreciation increase in the OpEx line or more easily, can you just give us a rough idea about what's OpEx spending for this year? And also comment on the effective tax rate for this year? Thank you.

Yes. The total OpEx for 2019 is budgeted to be around $175 million IFRS basis of which we see $8 million more depreciation, incremental depreciation versus the last year, and of the $8 million incremental depreciation $2 million really come from the capitalized lease. So we basically were capitalizing our lease right? So I think that represents about 5.6% year-over-year increase. As far as the effective tax rate, right now we are projecting about 3% because if you put everything together, I think that right now because of the low visibility and the uncertainty of the macro economics right, we try to remain conservative. Therefore, our driver IC division may not be as profitable this year. So the effective tax rate will be lower because we'll be paying less taxes, at least that's in the current assumption right now.

Okay. About 3% is that?

Yes 3%, yes.

3% okay. Okay, got it. Thank you.

Thank you. Our next question comes from Donnie Teng with Nomura. Your line is now open.

Good evening CEO and CFO. My first question is related to TDDI. So it looks like the TDDI shipment will sequentially decline to first quarter from fourth quarter last year. And you mentioned about your change in the new design, so probably that's the main reason. But I'm not sure whether there is still some capacity constraint particularly in the back end. So that is another reason you cannot get enough capacity because it looks like Novatech's market share is still meaningfully pretty high in the first half. And also wondering when will we see the TDDI shipment to pick up this year, will it be in the second quarter or it will be more like backend loaded in the second half? Thank you.

Certainly very much second half back end loaded, but certainly you should expect further pickup second quarter from first quarter. First quarter would definitely be the bottom. And I think first quarter is low because of some serious capacity concerns we really had to last year fourth quarter in particular, we really have to escort a lot of customers in order to just focus to satisfy the demands of while major Chinese end customer and that is unavoidable and difficult decision to make because we simply didn't have the capacity to satisfy everybody. So we stuck to a major customer that we had we focused on in the last year. Everybody was pretty much in a panic mode, so because capacity was so short across the board. So I think the end result was that they ended up taking what they really needed from us in Q4 last year and therefore we are seeing some inventory correction from that major customer. And now we are actually diversifying into other customers, but this diversification process because admittedly we did have a high degree of dependency on one single customer. So the fluctuation, I think compared to our competitors, our leading competitor as you mentioned I think is certainly not in our favor, but hopefully when we have a more balanced customer portfolio and product portfolio starting from now actually the situation will improve. Now, I just mentioned about our new generation of design. We are not saying our sales will [indiscernible] those designs. I think we still this size, we hope to win more design win sockets. But I think with this current generation design we will continue the next shipments and again last year the concern was more primarily capacity. It took a little bit of time to really convince the customer that the concern is already gone and then it will be a design engagement stage and then lead to shipments. So it will be some lead time required for us to diversify our customers, but I think the fact that we were able to support our high end product for HD+ with an industry leading customer, I think that kind of demonstrated our capability. And we just have to start from there and try to win more projects with small customers.

Got it, got it and one more question…

And also, I think for TDDI I also want to talk about potentially other applications, not actually, not potentially, they are happening right now. TDDI is going to be more and beyond just smartphone. You talk about automotive, higher tablet, or larger display with active stylus and even two-in-one and notebooks, such products industries already adopted TDDI. And I think we are in the front tier in terms of exploring those opportunities and engaging with those customers. So with automotive, I think to give you a rough idea, automotive we expect shipment started - starting from second half of this year, starting small but the next year will be a lot more programs starting mass production, that is for automotive TDDI from higher target. Again, the development and verification by panel makers, we spent our revenue contribution from three quarters or from the third quarter of second half of this year and active stylus TDDI actually this is where we are leading the industry. Together with our key partner we made an announcement and then all at CES we got a pretty good response. So the engineering sample will be ready in the second quarter for OEM [indiscernible] design, so hopefully again, mass production by the end of this year. Two-in-one note book solution will be ready by the end of this year, but mass production is expected next year. So although any one of this single sequence in terms of volume has nothing to compare with mobile phone biting for long term, I think they also represent good growth areas for us.

Got it. So one followup question on the capacity constraints, so this year can we say that the foundry capacity now is no longer a constraint but probably more like in the back end, is that a fair comment?

For very high end TDDI, you talk about COF packaging, then COF certainly capacity is a constraint. I know for sure quite a number of even leading smartphone customers they are hesitant to go into such designs simply because of capacity concerns. And we also know of probably two or three medium smartphone customers, they had to go straight to the ecosystem and go secure COF capacity directly by themselves. So it’s very expensive and it's got a lot of capacity constraint. So in our projection for this year, although we do have such technology and we do have some shipment records for COF, but again we are suffering from the same set of capacity constraints, so in this year it is safe to say we are not really counting on that. So that is, if you probably mean, but again the COF packaging then, yes it's got a COF capacity constraint. But in terms of testing, indeed it requires higher testing and testing as always is a long term issue, but is an issue that has always been resolved. And it is always the issue, it has always been resolved. And it may represent some a little bit of shortage, but it is not a big scale shortage such as our - what we saw in terms of foundry capacity or what we are seeing right now in terms of COF. We are talking about very different story. So those are testing capacity constraints. I think it is only marginal now and they can be resolved.

Got it and my second question is pretty simple. I think we have some long term growth drivers like all display driver ICs and 3D sensing and LCOS, if you look at the coming one to two years, when what product line should we expect to see more meaningful sales contribution at the earliest, and if you're wondering if you can rank these three product lines, so when will we have better visibility on these product?

I think in terms shorter term visibility, certainly the best potential comes from 3D sensing where we provide critical optical components or particular modules to both Android and now Android smartphone markets covering COF and [indiscernible] and all these solutions. So there we are talking about a very small number of leading customers who have their in-house technology steps to provide their own total solution. So, we along with some of our peers will be called in to provide certain critical component of technologies to go with their total solution. So that if you like, is certainly the major revenue contributor, last year, this year, next year, that is the most short term. So I think in terms of 3D sensing, we talked about in my prepared remarks, admittedly the first generation arguably, the technology development was a reasonable success, but I think we probably didn't do well enough in terms of cost and also easiness for customers integration. So that is how we're working now at the moment together with our platform partners. So the talk is end of this year to early next year sampling for our new total solution and mass production is likely to be second half 2020. Okay, so and also we do have existing technology, existing solutions which we are using to explore opportunities primarily in non- smartphone sectors. Again they are less cost sensitive, but they don't total solutions, so only a very small handful of vendors around the world to supply that. But the difficulty here is the fact that you need to meet their requirements both technical and commercial requirements and you need to put together a truthful solution for them in order to start to generate the revenue. By saying that we are talking about not just our total solution, also our total solution needs to work with for example their central controlling SOC, their SOC platform or IP and so on and so forth. But I think so our target market for now in the short term is primarily security and surveillance because in terms of use case scenario they are quite similar to face unlock required for smartphone, meaning the hardware and spec revision required is the smallest in those segments because of in surveillance and security are high, but in most cases you basically, you also try to do facial recognition, with [indiscernible] writing and so on and so forth with is quite similar to smartphone. And we are also engaging manufacturing in our factory kind of customers, but I cannot elaborate more details. Hopefully, somewhere within this year we will probably make more information available to the market, but I have to respect confidentiality for now. But what I’m trying to say is that these are AI IoT applications. They are more fragmented, but they do represent a tremendous market potential for us. We are, if you like, still going through the learning process in the sense that we do it over here, we do have a total solution and there will be next year general solution you know developed for for smartphone will be also applied over here by how we are going through right now is really to learn from free design activities, hardware, software, and system integration, all these together. So it's necessary knowhow combination process to me. But again, for such application we are in the forefront of the industry's development. So I think we see 3D sensing as a new and tremendous market for the long term. So we are in a very real position where we have three critical technologies under the same roof being optics, CIS and algorithm and even there is a concern, but so very few people in the world can do that. So I think we are seeing 3D sensing as a very long term thing for Himax. So I think that is the first major area for non-driver. I think what you didn’t mention and we did mention in our prepared remarks, I think I will try to take a few minutes to explore another major AI IoT opportunity for us which is ultra-low power sensing. Similar to 3D sensing, the reason why we are into this big time is because we firstly need a new market, a tech new market. We see tremendous long term potential. And secondly, we have some very unique technology in the marketplace and certainly our technology and our position is already highly recognized in the industry evidenced by the fact that we already approached typically by their respective industry leaders for cooperation. So because of this unique position that we enjoy, we also seen ultra-low polar sensing for AI IoT as a very long term growth engine for Himax. You'll remember we acquired this Israeli software company called Emza. Emza specialized, even now provide the algorithm, AI based algorithm for ultra-low power imaging sensing, intelligent ultra-low power sensing. So together with CMOS image sensor and our ASIC design, we are probably the only one in the world which can put together such a solution with such amazing ultra-low power specification. Right now it is primarily for people detection, limited people recognition and people counting. I probably thought it will give you our focus area for the short term is primarily surveillance and security market where very often your will need to have better recharged solution which requires super low power and that is where we come in. I'll give you probably a rough example of security and surveillance markets or smart door bells, smart door lock or all these entering can show such markets. Eventually it's already happening right now. This will be upgrading to 3D face recognition for access control because of higher requirement for safety, right. You mentioned if you are tall, even if you are home, you want to come in electronically and you had it generally replaced for your traditional key. Actually the industry has now been upgraded from 2D facial recognition to 3D. Now the problem is when you are 3D sensing, you kind of have 3D sensing always long because it is simply too power consuming. In addition to 3D sensing, you also don't want to have your central SOC always locked. So what you need is a supplemental ultra-low power image, a smart image detection device sitting on the side to basically screen and recognize there are human beings approaching. And that's when you decide to work up the central SOC and 3D sensing which are again positive [indiscernible]. So we are seeing a lot of inquiries coming from our customers approaching us for such different programs. So I'm pretty sure we will have more news to report, better progress to report in the due course for ultra-low power and sensing as well. So in terms of revenue contribution I would say this will also start from next year. Primarily we have a lot of engagements and design activities together with our customers. And lastly on LCOS, we emphasize that for – we are talking about two major markets, AR goggle devices, and those were HUD for super high end automotive HUD application, both we're testing and will take a few years to fully materialize. So how we do in there across for now is, we really try to minimize our cost because we do have a technology already, we do have a lot of displays already developed for the customers want us to develop a new display which is still happening by the way from some [indiscernible]. The [indiscernible] a nice tool for new panels, we build specification requirements. So whether it is new panels or existing panels, but customers simply want us to support them in their development effort charge NRE [ph]. And so we've tried to minimize our cost, we try to utilize our existing technology and product portfolio and we try to charge NRE for whatever big effort or small effort services that we provide to customers, hoping to get to see the real commercialization of both these sectors, be it in AI cargo devices and HUD. By the way HUD we are really seeing, a lot of people are saying they have never seen this before. They had imagined, [indiscernible], but again it is automotive, it is going to take a few years to materialize. So that kind of covers our non-driver effort. So again, these are unique. We are already in the leading position, highly recognized by the industry and the market maybe it is small for now, but we feel they are new market and they are long term growth areas.

Got it. Thank you so much.

Thank you, Donnie.

Thank you. And with that I will now turn the conference back over to Mr. Wu for any closing remarks.

As a final note, Jackie our CFO will maintain our investor marketing activities and we'll continue to attend investor conferences and we'll announce the details as they come about. Thank you and have a nice day.

Thank you. Ladies and gentlemen, that does conclude today's conference. Thank you very much for your participation. You may all disconnect. Have a wonderful day.