Hello, ladies and gentlemen. Welcome to the Himax Technologies, Inc. Third Quarter 2021 Earnings Conference Call. At this [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Mark Schwalenberg from MZ Group.

Thank you, Renz. Welcome, everyone, to Himax's Third Quarter 2021 Earnings Call. Joining us from the Company are Mr. Jordan Wu, President and Chief Executive Officer; Ms. Jessica Pan, Chief Financial Officer; and Mr. Eric Li, Chief IR/PR Officer. After the Company's prepared comments, we have allocated time for questions in a Q&A session. If you have not yet received a copy of today's results release, please e-mail himx@mzgroup.us. Access the press release on financial portals or download a copy from Himax's website at www.himax.com.tw. Unless otherwise specified, we will discuss our financials based on non-IFRS measures. You can find the related reconciliation to IFRS on our website. 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. The factors include, but are not limited to, the effect of the COVID-19 pandemic on the Company's business, general business and economic conditions and the state of the semiconductor industry, market acceptance and competitiveness of the driver and nondriver products developed by the Company, demand for end-use applications products, reliance on a small group of principal customers, the uncertainty of continued success in technological innovations; our ability to develop and protect our intellectual property, pricing pressures, including declines in average selling prices; changes in customer order patterns; changes in estimated full year effective tax rate; shortage in supply of key components; changes in environmental laws and regulations; changes in export license regulated by Export Administration Regulations (EAR); exchange rate fluctuations, regulatory approvals for further investment in our subsidiaries; our ability to collect our accounts receivable and manage inventory 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, 2020, filed with the SEC as may be amended. Except for the Company's full year of 2020 financials, which were provided in the Company's 20-F and filed with the SEC on March 31, 2021, the financial information included in this conference call is unaudited and consolidated and prepared in accordance with IFRS accounting. Such financial information is generated internally and has not been subjected to the same review and scrutiny, including internal auditing procedures and external audits by an independent auditor to which we subject our annual consolidated financial statements and may vary materially from the audited consolidated financial information for the same period. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. I will now turn the call over to Mr. Eric Li. Eric, the floor is yours.

Thank you, Mark, and thank you everybody for joining us. My name is Eric Li, and I am the Chief IR/PR Officer. Joining me are Jordan Wu, our CEO; and Jessica Pan, our CFO. On today's call, I will first review Himax's consolidated financial performance for the third quarter of 2021, followed by the fourth quarter 2021 outlook. Jordan will then give an update on the status of our business, after which we will take questions. Our third quarter revenue met guidance issued on August 5th, while gross margin and EPS were both at the upper range of the guidance. Revenue, gross margin and EPS, again, all reached all-time highs in the third quarter of 2021. For the third quarter, we recorded net revenues of $420.9 million, an increase of 15.2% sequentially and an increase of 75.4% compared to the same period of last year. The sequential increase was at the middle range of the guidance of an increase of around 13% to 17% quarter-over-quarter. The 51.7% gross margin, at the upper range of the guidance of 50.5% to 52% was an increase from the already high level of 47.5% for the second quarter 2021. Non-IFRS profit per diluted ADS was 79.5 cents, at the upper end of the estimate of 75.0 cents to 81.0 cents. IFRS profit per diluted ADS was 68.0 cents towards the upper range of the guidance of 63.0 cents to 69.0 cents. Revenue from large display drivers was $117.6 million in Q3, up 37.6% sequentially and more than doubled year-over-year, with sales growing through all 3 major product areas, namely TV, monitor and notebook. Both monitor and notebook IC revenues delivered impressive growth of around 60% sequentially as a result of persisting IT demand derived from remote working and the distance schooling. TV revenue was…

Thank you, Eric. At this moment, we still feel the pressure amid stringent wafer capacity shortage in the mature process nodes where we are mainly anchored. While the semiconductor industry continues to push towards advanced process nodes for applications such as 5G and HPC that demand high processing power, the system implementations of these applications also boost the demand for various companion chips such as PMIC, CIS and display driver that all share similar mature process pools. In addition, major increases of wafer consumption also come from a few fast-growing new areas such as AIoT and EV which also require mature process nodes. As we have highlighted many times, the industry has lacked major mature process capacity investment in years and the explosive demand from the above applications has led to significant capacity shortage. The display driver industry has been among the most impacted by the severe foundry shortage since the beginning of last year, and its supply-demand imbalance was exacerbated by the surging demands of some applications triggered by the pandemic. We believe the supply-demand imbalance will continue well into 2022. As such, we have made a long-term strategic decision to enter into multi-year contractual supply agreements with our foundry partners covering a wide range of product lines, including large display drivers, tablet and smartphone TDDIs, automotive and even OLED drivers to safeguard the capacity needed for our short-term and long-term business. Naturally, in entering into supply agreements, our strategies toward some applications, notably automotive and OLED, are more aggressive than others. Backed by solid supply agreements, the automotive segment is on track to become our single largest revenue contributor starting 2022 and we will be able to solidify our leading position by further widening the gap with our competitors. Meanwhile, we also seek out similar contractual arrangements with…

[Operator Instructions] Our first question comes from the line of Tristan Gerra from Baird.

So my question is that given the weakness in notebooks and TVs that's driving you to project your Tcon business to be down mid-single digit in the quarter, is that something, particularly if the weakness in notebooks is sustainable throughout the year unlike TVs where the business seems to be stabilizing, is the ongoing weakness in notebook at some point accelerating the point where you get back to supply-demand imbalance or balance? I know you've mentioned on the call that you're putting supply agreements in place and expect '22 to remain supply constrained. But again, if we see sustained weakness, notably in notebooks, does that mean supply-demand balance comes earlier than you previously expected? Any feedback would be useful here.

So particularly on notebook. So you want me to comment primarily on notebook rather than the overall market situation or supply-demand balance on driver IC. Is that right?

Supply demand actually overall. So in other words, if you have one of your end market that continues to be weak, does that mean that your overall business gets back in supply-demand balance earlier than you previously expected?

Okay. Got it. Actually, we are actually rather bullish on our overall large display driver IC business for next year, and that includes both driver IC and Tcon. And now I'm sure that everybody understands nowadays as we speak, the market is going through some softness, particularly in low end and small-sized TV segments. But in general, TV market remains soft. However, on the higher end, the demand is more persistent while we are seeing pretty solid demand coming from IT sectors, both monitor and notebook. But most importantly, if you look at our projection for next year, we are actually, as I said, we are very upbeat about the prospect of large display sectors, including all the 3 areas, notebook, monitor and TV. While we are not particularly certain about the prospect of the market's overall demand, our forecast is only as good as anyone's. But I think our optimism and our strengths going into next year has a lot of things that are particular to Himax. And also, there are also factors that are particular to display driver IC. Again, the large display market may go soft or maybe it will stay strong, I don't know, for the next year. But one very important factor for display driver IC that many people neglect is the fact that overall, the market is shifting towards higher-end feature and higher resolutions. And that is going to change the dynamics of the high-V process, i.e., display driver IC, wafer consumption substantially. So let me just repeat. So larger size, higher frame rate, higher end in general whether its notebook TV or monitor, while the number of units of panels shipment may remain the same or actually, it's only indirect relationship with the panel area or the glass area consumed. But when you…

Great. Thanks for the detailed answer. That's actually very useful. Just my follow-up question will be, do you expect your capacity, which you said is going to be up double digits next year to increase higher than the competition, which means that you will be able to gain market share as a result? And then the second part of the question is, is the discrepancy between your Tcon business and the driver IC business really driven by the higher screen resolution and higher frame rate that you just described? Is that really the key reason for you predicting Tcon will be down in Q4, but driver ICs would be up? And then finally, any comment about the China power shortages and the impact on the LCD panel production.

Okay. First, our capacity, I think based on our analysis, the answer is yes. We believe we are going to have some increase of capacity next year compared to this year, while the industry may actually suffer from some decrease of overall output. So the 2 factors together, certainly, I think we are likely to outpace our competitors in market share, hopefully, next year. And the second question is Tcon. I think the fact that we have one quarter of some dip in Tcon and increasing driver IC shipments, I think it may only be a reflection of timing controller certain customers having inventory adjustment. Bear in mind, timing controller typically are not purchased directly from panel makers rather they are from their both manufacturers, both OEM, ODM manufacturers. So there could be timing wise, some mismatch. But in the long term, I think we believe our Tcon market share will rise next year faster than display driver because historically our display driver IC market share is slightly higher than Tcon. Now with the tightness. We actually are, we and our customers I think we are both better off having our solutions shipped to customers on a bundled basis, meaning when much of them are bundled, our Tcon market share will get close to be more like driver IC. And again, historically drive IC market share is higher than that of Tcon. Your last question is about China power shortage. We haven't really seen a direct impact on us, not yet anyway. So touch wood. And I mean the reason is very simple. Panel industry is considered strategically important for the Chinese government. So they actually take measures to ensure that there's no power disconnection with the panel makers. And they also, in turn, are asking customers to look after their key suppliers. So again, so far, we haven't seen any impact, whether there will be long-term repercussions coming all the way to us, I don't know yet. But we haven't really seen or heard customers talking about this yet.

[Operator Instructions] We have our next question from the line of Jerry Su with Credit Suisse.

First question, I just want to get some more color about your gross margin outlook in the fourth quarter and perhaps into 2022, especially your gross margin guidance of around 50%. It seems like it's down 1 to 2 percentage points from the third quarter. So can you comment a little bit on that, the reason behind it? And how should we think about the gross margin into first quarter next year or perhaps 2022?

Thank you, Jerry. Yes, we guided for a slight dip in gross margin Q4 against Q3. Bear in mind, we have been going through a foundry capacity tightness. And therefore, we are taking up a lot of the foundry companies price hikes over the quarters. And so the way we keep or maintain or sustain or even improve our gross margin is to transfer the additional cost to our customers, right? So your question is really about whether we will be able to continue to transfer such additional cost to our customers. And in Q4, if you look at the numbers, it's simple mathematics, we are still able to transfer the cost. We are just not adding further markup to the increase on top of the cost increase to our customers. That's all. So because it's quite simple, right? You both -- our revenue will increase a bit, right? And if we transfer our cost because there is a gap, because there's a gross profit, right, so if you transfer 100% effectively the cost into your customers, then actually by definition, your gross margin will come down slightly, right? So that's what exactly happened. So if you look at the numbers we indicated for Q4, it basically shows that we are transferring just about all of our cost increases to our customers who can still take the cost increase, right, apparently. That's why we are giving the guidance. Now for next year, next is too long and too early for us to comment right now, given the nature of the industry. However, I think there's no reason for us to be pessimistic about the prospect. I'm talking about whether we can continue to stay at such similar or such or similar high levels of gross margin. Again, our comment would…

Okay. And just one follow-up question. I think in the prepared remarks, you also mentioned only a little bit about the WLO and also the LCoS. But I was just wondering for I think for a lot of companies that have been talking about metaverse. I'm just wondering from Himax historical track record on out the AR/VR goggles, especially one of the tech giants invested in your LCoS subsidiary. How should we think about metaverse -- how is Himax positioned in the metaverse world like in the next couple of years?

Honestly, I think quite well. But I think overall, metaverse, I guess these days, people are focusing primarily on VR goggles and then certainly AR goggles as well. And our position is quite well, primarily WLO and also LCoS. Now admittedly, our exposure to VR is less than that to AR. And AR, I mean, it's more challenging as a product, although it's a lot more exciting, even successful, right? So I think the whole industry is still fighting through the battles of conquering the engineering variance, trying to deliver something that consumers will go like, wow, right? So I think we are still going through that. In fact, our WLO in particular, we have projects covering 3D sensing for VR devices, and waveguide and 3D sensing for AR devices. And I mean, obviously, I cannot disclose the details and specific end customer names, but if you're talking about some, if not all of the biggest names in the tech world. They are working very closely with us. However, I don't think much will materialize in next year. I will be very honest about this. And that is why we decided, given the limited time and space, we decided not to mention much about it in our prepared remarks. And likewise for our LCoS, bear in mind, it's only applicable for AR. And of course, we are focusing on a lot of other things because we are working very hard with a few big names for AR goggles. So we also understand the technical challenges. And so that's why we actually put a lot of our LCoS effort into other areas such as HUD for automotive which are making good progress. However, given the nature of automotive, the real mass production with real volume will be few years away. And telecommunication, WSS, so switch device, areas such as this. But yes, AR goggles, we remain active player, but we feel it is we -- also understand there's a lot of hype, short-form hype recently, but we feel there may be some time to go before they really materialize.

Okay. So this is something that we should still continue to monitor in the next couple of years' time?

Yes, yes.

Our next question is from the line of Jon Lopez with Vertical.

Can you guys hear me, right?

Yes.

Fantastic. I have 2 questions. I guess the first one, just thinking about the near-term dynamics. I guess maybe I want to ask it this way. If we look at several of your panel customers, they're guiding their panel shipments and/or area shipments to decline in Q4 versus Q3. If we look at your largest display driver peer, they seem to be guiding their revenues to decline in Q4 versus Q3. And there's kind of a whole bunch of weakness happening in the smartphone segment, again, sort of materializing in Q3 and extending into Q4. You're guiding your sales to increase in Q4, and you're guiding your smartphone sales to increase more than your total sales. I'm wondering if you can just help us tease apart maybe what some of the differences are in your outlook versus that data set?

Well, again, twofold. One is, compared to the panel industry and the other one is compared to our peers, right? Compared to the panel industry, I think I've pretty much covered that in my response to the first question where our display driver demand do not necessarily go in proportion to the panel output for the glass area consumption, for the reason I've just mentioned, right, your feature upgrades, resolution upgrades, they tend to increase, in some cases, materially for the display driver wafer consumption while the glass area consumption may actually stay the same or even decline. So I think that is the comparison to the customer side. Now as for the competition, it's harder for me to comment. I think what I can say is that, as I said, we are giving up a lot on the lower-end business because of 2 reasons, really, China local competition, they are subsidized, but they can only focus on low end, right? They don't get really well recognized by leading international end customers. So they are very price aggressive, right, and they are subsidized. So throughout the foundry capacity tightness, we actually, before that, we have started to shift. We have started in customers' new project design, our bidding will be very conservative in those lower-end product areas while we focus only primarily on high end. That is one thing. So there's a major product mix shift for us this year, compared to last year, or the year after and then next year will be more so. So we are very much on for example, for TV, typically a very easy definition for high end against low end will be miniLVDS interface for low end and point-to-point interface for high end. And if you look at our product mix right now compared to just a couple of years ago, there's a major, major shift towards P2P interface. And now with P2P interface, we are shifting a lot more towards what we call USIT interface, which is the most high end. So that product mix, I think is a major difference. And now the high-end market demand is a lot more resilient compared to the low end. But I think that is one thing. And the second thing is that across TV and monitor and notebook, we have elected carefully and partnered closely, tightly with typically the #1 end customers. And so we enter into direct agreements with them. We have a lot of not just technical but business collaboration. And that also put our demand to be a lot more defensive to industry downturn. So I can only talk about our sales, and we have proven again and again and again that our guidance has been very robust and reliable, and I certainly hope and no reason to believe it will be different this quarter. So our guidance comes from directly from our board.

Our next question comes from the line of Donnie Teng with Nomura Securities.

Okay. Just 2 simple questions. The first one is your large display driver IC guidance looks like to be a little bit better than our peers. So just wondering that if you originally have bigger sales exposure to IT panels, right, the TV panels or you temporarily gain market share in the fourth quarter? That's my first question. And second question is regarding to our WiseEye total solution. So previously, we seemed like more positive from our progress with PC OEM customers by end of this year. So just wondering if you could give us some idea if we have entered into like volume production for our PC OEM customers in this quarter.

The first question, whether we have higher exposure for IT and notebook compared to TV, I don't have the answer right in front of me right now. We know we have a very solid notebook, no sorry, monitor, especially high-end monitor like gaming monitor market share. And our notebook market share has been rising. And then again, I emphasize, we are collaborating directly with end customers, leading end customers. I think all these factors helped. For TV, again, we are really moving away from miniLVDS products, i.e., low-end products and focusing not just on high-end products, but really focusing a lot on some of the leading end customers' products. So whether and how that compare with our peers and which peer, it's hard for me to comment and whether we are particularly more exposure on this sector than the other, I'm not sure about that. And for WiseEye, we have said in a few quarters already that we have had a major design win with a leading end customer for a mainstream application. We never really said it's PC or whether it's OEM or otherwise. But yes, we are on track to start mass production in Q4, and that's what we have always indicated. And certainly, Q4, it will not be throughout the whole quarter. So Q4 will be the commencement of mass production, but we have got pretty solid forecast for throughout for the whole next year. And I think given that it's really a new thing for the whole world and it's a brand-new product for us, we only started the first sampling only about a year ago. I think we are extremely pleased with the progress. And in addition to that, we also have with smaller volume, quite a number of different applications with some customers also on track for mass production also starting this quarter as well. So next year, you will see some revenue contribution from WiseEye, but it will still be low single-digit revenue contribution. But hopefully, we will outgrow our overall business for a very long time and certainly, we are confident this will be high-margin business.

Thank you. There are no further questions at this time. I will turn the call back over to Mr. Jordan Wu.

I apologize for the hiccup, but luckily, we managed to finish just at the market open. So as a final note, Eric will maintain investor marketing activities and continue to attend investor conferences. So we'll announce the details as they come about. Thank you, and have a nice day.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.