Himax Technologies, Inc. Q2 FY2023 Earnings Call

Hello, ladies and gentlemen. Welcome to the Himax Technologies, Inc. Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to hand the conference over to your host, Mr. Mark Schwalenberg from MZ Group.

Thank you. Welcome everyone to the Himax second quarter 2023 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 email [email protected], 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. A list of risk factors can be found in the Company's SEC filings, form 20-F for the year ended December 31, 2022 in the section entitled 'Risk Factors', as may be amended. Except for the Company’s full year of 2022 financials, which were provided in the Company’s 20-F and filed with the SEC on April 6, 2023, 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'll now like to turn the call over to Mr. Eric Li. Eric, the floor is yours.

Thank you, Mark. Thank you, everyone, for joining us. My name is Eric Li, Chief IRP Officer at Himax. On today's call, I first review Himax consolidated financial performance for the second quarter 2023, followed by our third quarter outlook. Jordan will then give an update on the status of our business, after which we will take questions. We will review our financials on an IFRS basis. Challenging business conditions due to ongoing macro headwinds persisted during the second quarter. Yet we continued to execute successfully with gross margin surpassing the guidance range while both revenues and the EPS landed at the upper end of the guidance range issued on May 11, 2023. Second quarter revenues registered $235 million, a decrease of 3.5% to 3.8% sequentially, yet at the upper end of our guidance range. This was attributable to improved order momentum, particularly in the automotive DDIC large display driver IC and the non-driver business. Gross margin came in at 21.7%, a decrease from 28.1% of last quarter, but above our guidance range of 20% to 21% due to a favorable product mix. A previously reported Q2 gross margin was impacted significantly by a one-time expense related to the strategic termination of certain high-cost foundry capacity agreements. In addition to price erosion related to the stocking. Q2 profit per diluted ADS was 0.5 cents at the upper end of the guidance range of minus 2.9 cents to 0.6 cents. Revenue from large display drivers came in at $45.4 million, a decrease of $14.3 sequentially yet above our prior guidance. Monitor IC sales surpassed our prior guidance up single-digit sequentially driven by our client's proactive pull forward in preparation for the Q2 sales festivals and the recovery of gaming display. Noble sales notably outperformed our guidance. Thanks to a strong shipment to key customers. DDIC sales declined as expected, as customers suspended pooling having already replenished their inventory over the prior two consecutive quarters. Large panel driver IC sales accounted for 19.3% of total revenues for the quarter, compared to 21.7% last quarter and 22% a year ago. Moving on to our small and medium size display driver segment. Revenue was $150.3 million, a slight decline of 2.9% sequentially. Smartphone and tablet driver sales increased in the mid and single digits respectively in the second quarter. As we saw a recovery in business momentum, particularly in TDDI products. Q2 automotive driver sales decreased single digits sequentially, but outperformed our guidelines. Guidance of low teens decline as clients resumed order replenishment for both traditional DDIC and the TDDI. Automotive driver business was still our largest revenue contributor with around 30% of total sales in the second quarter. We are particularly confident in our automotive TDDI growth potential backed by hundreds of design wins already secured, significantly ahead of all our peers and among these design wins only a small portion has commenced mass production. With the design win projects under our belt, we believe we can continue to grow our market share in automotive TDDI. In addition to our already dominant position in traditional DDIC, where we have a 40% global market share. Small and medium size driver IC segment accounted for 63.9% of total sales for the quarter compared to 63.3% in the previous quarter and 64.5% a year ago. Second quarter non-driver sales also exceeded guidance with revenue of $39.3 million up 7.9% from a quarter ago. The better than expected sales performance was a result of higher shipments for Tcon and the CMOS image sensor. Despite the slight sequential decline in Tcon sales in the second quarter, it surpassed guidance of a low-teens decline bolstered by better than expected shipment of monitor and automotive Tcon. Tcon business represented over 9% of our total sales in the second quarter. Lastly, for WLO, notably, during the quarter, we commenced the volume production for one leading North American customer for their new generation VR devices to enable gesture control. Non-driver products accounted for 16.8% of total revenues as compared to 15% in the previous quarter and 13.5% a year ago. Our operating expenses for the second quarter were $53.2 million, an increase of 4.3% from the previous quarter and 1.2% from a year ago. The sequential increase was mainly a result of increased R&D expenses, yet amidst the prevailing macroeconomic headwinds, we remain focused on strict cost controls. Our second quarter operating expenses include the amortized expenses for annual bonuses made in five years of $6.4 million, but compared to $6.5 million in the previous quarter and $7.4 million from a year ago. As a reminder, we grant annual bonuses to employees at the end of September each year, including RSUs and cash awards. A portion of those bonuses is immediately vested and recognized in the third quarter with the remainder equally vested in three tranches on the first, second, and third anniversary of the grant date, and recognized on a straight-line basis over the vesting period of each tranche. Second quarter after tax profit was $0.9 million or 0.5 cents per diluted ADS compared to $14.9 million or 8.5 cents per diluted ADS last quarter. Turning to the balance sheet, we have $219.5 million of cash, cash equivalent, and other financial assets as of June 30, 2023 compared to $461.6 million at the same time last year and $223.8 million a quarter ago. Second quarter operating cash inflow was approximately $1.7 million as compared to an inflow of $66.4 million in Q1, primarily due to $51 million income tax paid during Q2. An illustration of our continuous effort to deplete inventory for the past few quarters. We had $43.5 million of long-term unsecured loans. As of the end of the second quarter, of which $6 million was the current portion. During the third quarter, we have made a payment of $83.7 million for annual dividends to shareholders. Further, we expect to pay out a total of around $30 million for employee bonus awards, comprised of around $9.3 million for the immediately vested portion of this year's award and $21 million for vested awards granted over the last three years. Despite the substantial employee bonus payout, we still expect to generate positive operating cash flow in Q3 again, due to the ongoing destocking process across major product lines. Our quarter-end inventories as of June 30, 2023 were $297.3 million, markedly lower than $335.2 million last quarter. Accounts receivable at the end of June, 2023 was $239 million down from $252.2 million last quarter and down from $371 million a year ago. DSO was 90 days at the quarter-end as compared to 93 days last quarter and a year ago. Second quarter capital expenditures were $2.9 million versus $2.8 million last quarter and $2.5 million a year ago. The second quarter CapEx was mainly for our IC design business. As of June 30, 2023, Himax has 174.4 million ADS outstanding, unchanged from last quarter. On a fully diluted basis, the total number of ADS outstanding for the second quarter was 174.7 million. Now turning to our third quarter 2023 guidance, we expect third quarter revenues to be flat to decline 7% sequentially, gross margin is expected to be around 30.5% to 32% depending on the final product mix. The third quarter profit attributable to shareholders is estimated to be in the range of 1.5 cents to 6.0 cents per fully diluted ADS. As we have done historically, we will grant employees an annual bonus, including RSUs and cash awards on or around September 30th this year. The third quarter guidance for profit per diluted ADS has taken into account the expected 2023 annual bonuses, which subject to board approval is now assumed to be around $10.5 million out of which $9.3 million or 4.2 cents per diluted ADS will be vested and expensed immediately on the grant date. As a reminder, the total annual bonus amount and the immediately vested portion are our current best estimate only, and the actual amounts could vary materially, depending on among other things, our Q4 profit and the final board decision for the total bonus amount and its lasting scheme. As is the case for the previous year, we expect the annual bonus grant in 2023 to lead to higher third quarter operating expenses compared to other quarters of the year. In comparison, the annual bonus for 2022 and the 2021 were $39.6 million and $74.7 million respectively, of which $18.5 million and $24.8 million vested immediately. I will now turn the call over to Jordan to discuss our Q3 outlook. Jordan, the floor is yours.

Thank you, Eric. The prevailing sentiment in the consumer electronics market for semiconductors remains sluggish. Customers continue to exercise caution towards panel procurement, limiting our visibility into the second half for consumer products. However, we see improving business momentum in the automotive sector, our largest sales contributor, where a healthy rebound for the first-half weakness appears to be underway. As a reminder, the global automotive market experienced a severe downturn throughout the first half of the year as major Chinese automakers cut back production when implementing strict cost control measures due to intensified EV price competition, first impacting our first half sales. Now, looking ahead with renewed momentum in the automotive market, we believe the stage is set for a sales rebound as we approach the end of the year supported by a more favorable product mix, improved cost structure, and normalized inventory levels, which should also lead to improved gross margin. In terms of gross margin for the third quarter, we expect substantial improvement from the Q2 trial, which was primarily related to the one-time early termination expense to foundry partners as we reported last quarter. I would like to stress again how this early termination decision was part of a crucial operating strategy for us. By sacrificing margin last quarter, we now have added flexibility where new wafer starts are no longer bound by minimum fuel requirements and high weather costs set during the severe boundary capacity shortage period. Furthermore, we can now leverage diverse found resources for optimal operational efficiency, a much-improved cost structure, thereby maintaining our product competitiveness. Variable product mix shift is also a key factor contributing to our expected Q3 gross margin expansion. This is predominantly driven by increased automotive sales as discussed earlier. Thanks to a robust recovery in the Chinese automotive market, leading to reductions from customers. Notably, our automotive sales for traditional DDIC, TDDI, and Tcon are all set to enjoy decent double-digit sequential growth in the third quarter and collectively are expected to represent almost 45% of our total sales. As a reminder, all these automotive products have a better than corporate average margin profile. Moving on to inventory destocking, our inventory depletion is progressing nicely with Q3 inventory levels on track for meaningful reduction. At this point, we are comfortable with our overall inventory levels. Thanks to our continuous effort to destock for several quarters. In addition, the remaining stocks are comprised of IC products, which have a solid customer design base and long expected lifetimes. We now expect that our inventory will normalize near historical average levels by the end of the year. The macroeconomic environment still presents some headwinds for us. Given the expected strength in automotive sales, improved operating flexibility, and cost structure, in addition to our commitment to expand our presence in high value-added areas such as Tcon, OLED, and AI, we expect second-half sales and gross margin to improve from the first half and believe we are well positioned for long-term sustainable revenue growth. With that, I will now begin with an update on the large panel driver IC business. Our third quarter 2023 large display driver IC revenue is projected to be down single digit sequentially. We expect TV IC business to be down high quarter-over-quarter due to leading end brands, stringent production control measures amid a soft market. Monitor IC sales are expected to increase by a decent double-digit sequentially, predominantly from rush orders, from one leading brand. Meanwhile, monitor IC sales are set to increase single digits sequentially, continuing the customers' restocking momentum we saw last quarter. Turning to the small and medium-sized display driver IC business, despite continuing uncertainty in consumer electronics, we see improved visibility and demand in the automotive market. Q3 revenue is expected to be flat or slightly up sequentially. Our automotive driver IC business is poised to increase by decent double-digit sequentially on a strong uptick in both TDDI and traditional DDIC. However, smartphone and tablet sales are both projected to decline double-digit. The sequential growth of the automotive DDIC business is fueled by the resumption of customer orders across the board following several quarters of inventory correction. Automotive TDDI business also resumed its growth trajectory in the third quarter, driven by increasing production of customers' new vehicles after an unexpected second quarter disruption. The automotive recovery has been further bolstered by supportive governmental policies, especially in China and the U.S. to incentivize new vehicle purchases. Given the rapid adoption of TDDI in new generation vehicles where we have already secured over 300 design wins and the number of new design projects is still increasing as we speak, we remain confident that we'll continue to enjoy strong growth as our leading market share position remains unchallenged. It is worth noting that automotive TDDI sales will account for over 30% of total automotive sales in the third quarter and are poised to continue to increase. Let's move on to LTDI technology where Himax has been a pioneer in the market. Given the growing global demand for large panoramic, interactive, and intuitive in-car display experiences, we anticipate accelerating adoption of LTDI in the coming years. The LTDI is gaining popularity, particularly among high-end car models with larger than 30-inch automotive displays. Our integrated solution of LTDI and local dimming Tcon has been adopted by many customers as their standard platform for high-end displays from which a variety of large automotive displays will be developed. This further solidifies our position among customers in the high-end automotive display market. We expect an influx of collaborations leading to a growing number of projects slated for mass production start in 2024. As we have mentioned repeatedly, Himax is in a frontrunner position in the automotive display IC market, offering a comprehensive product portfolio covering the entire spectrum of specifications and technologies to address varying design needs, including traditional DDIC, TDDI, local dimming Tcon, LTDI, and AMOLED. Having the broadest one-stop-shop offering also drives customer loyalty, as evidenced by years of extensive collaboration with panel makers across the globe. As far as deep engagement with Tier 1s and OEMs who deeply trust and rely on our high expertise for their product roadmap, we are confident that our automotive business will continue to be our primary sales growth engine moving forward. Next on smartphone and tablet product lines, we continue to see lackluster demand in the market. Currently, a small group of peers are still in the midst of loading inventory, offering aggressive pricing, or enduring losses to deplete the excess inventory. As we near the end of this stocking process, our strategy is to not engage in pricing competition, even at the expense of fulfilling revenues by turning away non-profitable projects. Having said that, we have placed orders for the next products to start in Q2. Next, for an update on AMOLED. Himax offers both DDIC and Tcon for all displays and has commenced production for tablet and automotive applications jointly with global leading panel makers. For automotive, all displaying design activities are going smoothly with both conventional car makers and NEV vendors across different continents. Concurrently, we continue to gear up for a driver development by strategically partnering with major Korean and Chinese panel makers for various applications covering smartphone, tablet, notebook, and TV. For smartphone AMOLED display driver, amidst a muted smartphone market, we still target to commence production towards the end of 2023. Now let me share some of the progress we made on the non-driver IC businesses. Starting with an update on the timing controller, we anticipate Q3 Tcon sales to decrease single-digit sequentially hampered by reduced shipment for monitors and automotive displays for templates. For the OLED tablet business, our customers are still in the midst of inventory loading due to muted market demand. Despite the soft demand environment, we are actively working on the next generation IC for all tablet, to broaden our offering and better position ourselves for when demand returns. Next on our automotive Tcon business, we continue to solidify our leadership position, particularly in local dimming Tcon, which can improve display quality while also lowering power consumption. We are encouraged by the growing validation and widespread deployment in both premium and mainstream car models across the globe. Our automotive Tcon business is poised to experience explosive growth with notable sales contributions starting 2024. Switching gears to the WiseEye Smart Image Sensing total solution, which incorporates the company’s proprietary ultralow power AI processor, always-on CMOS image sensor, and CNN-based AI algorithm. We continue to support mass production and sales for notebooks, along with other endpoint AI applications including video conference devices, shared bike parking, door locks, and smart agriculture models. We also focus on strengthening our intelligence module business in an effort to further broaden our customer base and application. The module offering incorporates WiseEye technology providing clients with a series of highly integrated plug-and-play module boards, which are user programmable, but also loaded with our pre-trained AI models for simple system integration. This can effectively shorten customers' time to market and reduce development costs, making it particularly well suited for markets featuring high variety and small quantity. Throughout recent quarters, we have received excellent feedback from customers who have seen large increases in projects for various applications. Building on this momentum, we plan to roll out a series of modules that will expand our product offerings to cover more diverse markets and seize upon the vast opportunities presented in endpoint AI. Over the past few quarters, we have witnessed steady growth in the adoption of our WiseEye products, particularly in home surveillance applications, specifically door locks, doorbells, and battery cameras. Notably, we are pleased to report a successful collaboration with a leading door lock vendor in China, the largest market globally. The project is slated for mass production starting in the second half of this year, with anticipated growth extending to 2024. Our WiseEye solution is also being implemented for automotive applications where it can intelligently detect the presence, movement, or posture of drivers or passengers, delivering a broad array of AI use cases inside a vehicle. Such demand is expanding rapidly with global leading car brands for new car models, primarily in applications for car owner recognition and keyless access, with new use cases also under development. Next, for an update on our WE2 AI processor, we have engaged global names for their next-generation product development. We have made significant progress in enriching AI features and use cases through collaborations with major CPU and AP SOC players for next-generation smart notebooks and a host of other endpoint AI applications. The WE2 processor offers further advancements in inference speed and ultralow power, maintaining superior power efficiency compared to our already industry-leading first-generation AI processor WE1. Furthermore, in context-aware AI, WE2 enables more detailed computer vision object analysis, such as real-time facial landmark, hand landmark, and human pose, as well as skeleton detection, among others, at extremely low power consumption. This enables sophisticated human expression detection for smart notebooks and broader AI applications. Having established a leading position in ultralow-power AI processing and image sensing for endpoint AI applications, we are firmly committed to the WiseEye product line's ongoing development and growth. By leveraging broad ecosystem partners and customers, we aim to maximize market reach and exploit potential applications. We believe that our WiseEye AI business will serve as a multi-year structural growth driver for Himax. Lastly, for an update on our optical-related product lines, Himax is one of the few companies in the world that can offer a diverse range of optical products, including WLO, 3D sensing, and LCoS for the development of immersive technologies and the realization of the Metaverse. Himax is well-positioned to capitalize on the growth of this nascent industry. As our technologies are vital for facilitating immersive content, evidenced by the growing list of AR/VR goggle device engineering projects with leading customers across the board. First on the WLO update, we recently commenced production of our WLO technology for a leading North American customer starting in the second quarter for their new generation VR devices. To enable 3D gesture control, we expect decent shipments for this customer in the second half in preparation for the upcoming seasonal shopping sales. On LCoS, Himax's state-of-the-art Color Sequential Front-lit LCoS microdisplay technology was one of the most high-profile demos at Display Week 2023 in May and successfully captured the attention of numerous tech giants. Through years of strenuous development, our Color Sequential Front-lit LCoS has achieved exceptional and industry-leading illumination in full RGB color, along with a groundbreaking tiny form factor, ultra-lightweight, and a wide degree of field-of-view. These features make Himax’s LCoS microdisplay particularly well-suited for next-generation AR goggles, outperforming other competing technologies, mainly MicroLED. A growing number of engineering engagements are proceeding nicely with leading tech names. We are confident our Color Sequential Front-lit LCoS can be one of the most promising technologies that meet the rigorous requirements to enable AR goggles. The introduction of the latest mixed reality device from a leading tech giant exhibited a significant advancement for the whole metaverse ecosystem. It illustrates how the metaverse and immersive technologies continue to evolve, are increasingly accessible, and may gradually become a more integral part of everyday life in the future. We believe given its expertise in optical-related technologies, including hundreds of patents in AR/VR and 3D, customers can leverage our product suite to develop immersive experiences for a variety of futuristic and mainstream products in their metaverse applications. We continue to strengthen our optical-related technology suite while forging partnerships with global technology leaders to strategically secure a distinct position in the space and create an additional diverse long-term revenue stream. For the non-driver IC business, we expect revenue to decline double-digit sequentially in the third quarter. That concludes my report for this quarter. Thank you for your interest in Himax. We appreciate your joining today's call, and we are now ready to take questions.

Our first question will be from Jerry Su of Credit Suisse. Your line is open.

Thanks for taking my question. Jordan, I just want to ask you on the, you have previously noted that the second half revenue is likely to improve from the first half. So, judging from the guidance you provided already for the third quarter, this implies that the fourth quarter revenue should not recover from the third quarter. And then what are the drivers behind that? That's the first question. And then, in terms of the automotive, I think you have mentioned a lot of the new products in this area. But I want to ask about what is the pricing trend you are seeing for the automotive driver ICs, or timing controllers, and then how does that compare with the other product lines? And then maybe on the wafer pricing side, as you have already terminated your long-term agreement with your foundry partner in the second quarter. How should we think about the wafer cost interest? Can you benefit from some of the renegotiation or the wafer foundry price reduction to help your margin? Those are my three questions. Thank you.

Thank you, Jerry. Yes, I think there's a good likelihood that in Q4, we'll see a further recovery from the trial in Q3. However, as a disclaimer, we are very confident on the continuous growth of the automotive sector in Q4. However, in the consumer sector, the Q4 visibility remains quite low. So, it really depends on the outcome of how the markets are going to develop for consumer products. But in our current projection, yes, indeed, second-half is likely to be better than the first half. And Q4 is hopefully going to recover from the trial in Q3. That's the first question. The second question really has quite a few surrounding inquiries about the automotive sector. I think you mentioned the pricing trend, specifically regarding the automotive sector compared to low prices in other markets. I think, I mean, Himax does enjoy a very nice leading position. We dominate the market share in the automotive sector, and inevitably we are seeing competition both internationally and coming from China. Certainly, for competitors, all of their approaches for this relatively new market for them is to undercut our price. But I think, and certainly, I mean, in that end, you mentioned, you also asked a question about cost structure. I think certainly I'll elaborate a little bit on that in a few minutes. But certainly, we are committed to continue to improve our cost through various means, including diversifying our foundry base as we reported earlier by terminating certain long-term agreements that are not viable to our long-term competitiveness. So yes, we will certainly be prepared to compete on pricing by improving our cost structure vigorously. Having said that, I think the automotive sector compared to consumer markets has a much higher entry barrier for newcomers because of the very different ecosystem or supply chain. Here we talk about not just panel makers and customers but also OEMs, which play a very important role. And also, we have geographical diversity, which is very different from any of the consumer markets. Here you have the U.S. market, Japanese market, Korean, European, and certainly Chinese market which are all really quite different and are dominated by varied players. Those varied names dominate different markets and sometimes partner with different components too. So, you're looking at a much more complex and diverse ecosystem for IC vendors to cover. And I think we do have a distinct advantage being the early mover and also enjoying leading market share. Additionally, as you are aware, the automotive market replacement of any components is much harder compared to consumer products. So, we feel yes, there is price competition and customers do try to cut our prices, but that doesn't mean we always have to meet their price to maintain competitiveness. We do enjoy better positioning, and often customers will still choose to work with Himax even when faced with aggressive pricing from our competitors. But I think, so we are taking competition lightly but we still feel confident across different product segments, the automotive market, namely DDIC, TDDI, timing controller, OLED, and LTDI. We are going to lead the market and this evident from the engagement of our customers and design win projects under our belts, far larger than any of our peers. So yes, there is price competition, but we remain confident in our foreseeable future for our leading position to be unchallenged. Regarding cost structure, we did and still do have a slightly larger inventory level than normal, particularly for DDIC products. But we are not worried about that because we are backed by a lot of design wins, and with those products expected to enjoy long lifetimes. However, we are approaching the end of our inventory stocking process, even for DDIC. Our new wafer starts certainly will result in typical spot deals, volume for price arrangements with our public vendors. I expect that at least by the end of Q1 or Q2 of next year, you will see our DDIC cost structure undergo a significant improvement due to new wafer starts that are likely to offer better prices. Furthermore, diversifying our foundries, as I mentioned earlier, is a crucial area we are exploring. We are not just diversifying in Taiwan, but we are also expanding into China where the country is the biggest automotive market globally. The local production is favored by Chinese companies, and for that reason, our move into China has been welcomed by Chinese manufacturers because they know Himax is a leading player in this space. So, there are various measures we are taking to hopefully lower our costs while strengthening our supply chain for the automotive market. I hope that answers your question, Jerry.

Yes, very clear. Thank you.

Thank you.

Our next question will come from Donnie Teng of Nomura. Your line is open.

Well, thank you. Mention for taking my question. I have only two questions. The first one is regarding the automotive driver IC. I think you have made a very clear comment on the EV market recovery in China in the second half, and likely customers start to review some of the automotive driver IC inventory. But recently it seems that some of the leading auto IDM companies or IC design companies mentioned a slowdown in terms of automotive IC demand into the second half. So, I'm just wondering if you could provide me some clarity on the end market. Do we have a majority of the market in China or do we still have some exposure to overseas markets? So, that's the first question. And the second one is that I think you have mentioned about the cost structure will improve into the first half of next year. I think we have made satisfactory progress in terms of the gross margin recovery already in the third quarter. But in terms of normalized gross margin, considering the cost structure improvement, could you kind of provide us some ideas? It is, like, for example, where does the normalized gross margin stand compared with the COVID period in 2021 and 2022? Thank you.

Thank you, Donnie. The simple answer to your first question is, given our market share, you should not be surprised that our customer base, in terms of OEMs covers the whole world, not just China. We have mentioned in DDIC, our market share is about 40%. In TDDI, we believe our market share is even higher than that. Just that it's a relatively new market. So, market statistics are not particularly mature. So, we are not communicating that number openly, but we believe based on our internal counting, our market share should be higher than that. In terms of timing controller, our market share is likely even higher than TDDI. Again, based on the internal counting, we believe it is probably 60% or higher. In LTDI, we are likely the pioneer, with mass production for the whole world expected to start from this quarter. Hence, we enjoy leading market share in Italy across every single technology area for the automotive market. Therefore, our end customer base covers the entire globe, all major continents, and all major markets. Now, regarding other IT vendors and their views on the second half, I think there could be some differences between us and those where there are panel maker markets in between for us, in between our sales and the prior. In their case, they may not see the same results. So, for the first half, I believe our first quarter and second quarter automotive revenue was more hampered compared to theirs, and our customers are just returning and trying to restock and catch up for our supply, which otherwise should have been produced in the first half. More specifically, I'll provide some detail. TDDI and Tcon are well positioned to enjoy very strong growth, displaying decent double-digit growth not just quarter-over-quarter, but also first half over second half, and also this year compared to last year. I repeat, for the automotive area in TDDI and Tcon, both are relatively new markets where we hold a leading position, and they are in a very strong growth phase. We expect to enjoy decent double-digit growth, not only quarter-over-quarter but also from the second half compared to the first half and year-over-year for this year. I can also say the same for next year. We are confident, not merely due to their relative newness, but we have good confidence based on the strong growth we've been seeing. However, for DDIC, we indicate that the second half, we reported the third quarter is likely to see a strong rebound from the second quarter. The second half will also likely enjoy double-digit growth for the first half. However, for DDIC year-over-year, we expect to see a decline. We will see a decline in DDIC. Since DDIC is still the biggest component of our overall automotive business, our fiscal year ’23 overall automotive business will likely experience some decline compared to last year. The decline isn't severe, but it will exist. I don't know if I'm convincing you guys, but I believe I made myself quite clear. The replacement of DDIC is occurring quicker than we had anticipated last year, as the government incentivizes new purchases from both China and the U.S. These incentives are provided primarily to EVs, predominantly involving new design models that tend to use TDDI and many cases local dimming Tcon as well. I think so, because of this reason, you TDDI and Tcon, we feel quite confident that next year, our automotive business will start to experience decent growth from this year again. Although for this year, our overall automotive business is likely to see some decline from the previous year. Not a severe decline, but some decline. Regarding your second question on our cost and margin profile, I believe I can share this: Our intention is not to provide our long-term gross margin guidance. But just to give you a “flavor” of how we believe our gross margin trend is going to evolve over the long-term horizon. It is probably difficult for us to see the same level of very high growth market during COVID at its peak, which was over 50%. Honestly, it is likely to be challenging to reach that in the coming years. However, whether our gross margin returns to pre-COVID levels where we typically achieved 24-25%, I wouldn’t think so; I’m not that pessimistic either. There are numerous factors that explain that. But I would emphasize that in our case, we are going through a structural change in terms of our product mix and overall company profile. Our automotive market is expected to account for almost 45% of our total sales this quarter, which was unheard of during COVID or pre-COVID when our automotive market was at best 10% of total sales. This high percentage is both due to rapid automotive growth and sluggish consumer market conditions that have reduced contributions from other products. But, in any case, our automotive market contribution is likely to be much higher in the future. Our automotive market enjoys not only higher but also significantly more stable and predictable gross margins compared to other markets. Thus, a higher exposure to the automotive market in the next few years is good news for Himax. Additionally, we are investing aggressively in new areas. Our automotive market covers not just driver IC but also controllers, as I mentioned, and our WiseEye products are at a very early stage but we aim to double our revenue in the coming years given it enjoys the best growth margins among all product lines. For example, I’d like to highlight another example: E-paper is transitioning to color versions with considerable market potential and we have notable exposure there. These new markets likely will drive long-term improvement in our gross margin. However, I can’t predict the same degree of certainty for the consumer market, where visibility remains poor, not just for the rest of this year but also moving into next year. Increasing visibility doesn’t necessarily imply it’s bad forever; we hope for recovery. But for now, we maintain good visibility in the automotive market, as well as for the WiseEye segment, so we believe this will improve our long-term margin profile significantly. I hope I answered your question, Donnie.

Your second question is about our cost and margin profile, I believe. I think I can say in the long term, I mean, as a reminder, the intention is not to provide our long-term gross margin guidance. And just give a flavor of how we believe our gross margin trend is going to be like, as we take a longer term, look at the longer-term horizon.

As I mentioned earlier, it's probably difficult for us to return to the same level of very high growth market that we experienced during COVID at its peak, where gross margins exceeded 50%. Honestly, it’s likely we won’t reach that level in the coming years. However, I’m not overly pessimistic that our gross margins will return to pre-COVID periods when we typically achieved some 24%-25% gross margin. There are several reasons for this. But I want to emphasize that in Himax specifically, we feel optimistic as we are undergoing a structural change in our product mix and overall company profile. Our automotive market is likely to account for almost 45% of our total sales this quarter compared to only a small percentage during peak COVID. This high percentage results from both rapid automotive market growth and sluggish consumer demand. So, in any case, we expect much higher contributions from our automotive sector in the future. The automotive market is not just higher but also more stable and predictable in terms of gross margins compared to other markets. Thus, being principally involved in the automotive sector will be beneficial for Himax moving forward. We are also investing heavily in new area developments as I mentioned, in driver ICs but also controllers. Our WiseEye products, while at a nascent stage, are anticipated to double in revenue over the coming years and have the highest margins in our product lines. Additionally, areas like E-paper are transitioning to color, representing a burgeoning market where we have significant exposure. These new markets are expected to further enhance our gross margins in the long term. However, I cannot predict the same level of certainty in relation to consumer market demand, where visibility is still poor for the rest of the year and operationalizing into the next. That being said, we remain optimistic regarding the automotive and WiseEye segments, which we believe will significantly benefit our long-term gross margin outlook. Thank you for your understanding.

Thank you so much, Jordan.

Thank you.

Our next question will come from Tiffany Yeh of Morgan Stanley. Your line is open.

Thanks, management for taking my questions. I have three questions. My first question relates to the pricing side. As management mentioned earlier in the prepared remark and in the Q&A section that the smartphone and tablet market are seeing some pricing erosion. I am wondering what the current pricing environment for non-auto Tcon and large display driver ICs like TVs looks like. Are we seeing severe pricing competition now in the market? This is my first question.

Okay. Quick answer: I think we've seen the worst and now the market is actually stabilizing. We experienced the worst situation when everyone suffered from overstock. As we are nearing the end of the stocking process across the entire industry, I think pricing has become healthier overall. Certainly, that is my general comment. Specifically, I think TV prices are stabilizing, as are ICs being used for notebooks and monitors. The automotive market is also holding firm, even tablets are stabilizing nicely. From our perspective, the weak point for now remains the smartphone market, where we mentioned in our prepared remarks that a small group of peers are still going through aggressive pricing competition due to inventory issues. However, towards the end of the year or by next year, this should also come to an end. So, we believe that we have gone through the worst, as our inventory position is healthier now, but we still suffer from low visibility in the industry. Therefore, the end market demand remains sluggish, implying that end customers will still demand aggressive pricing from us. At the same time, our foundry partners, also burdened by low utilization, are not enjoying good profitability either, with some facing losses. Whether we can obtain better prices from our foundries to help us significantly lower costs and if the end customers can support healthier pricing patterns is still to be determined; we are unsure at this moment. Our current strategy, however, is not to sacrifice revenue size for the sake of production with regards to contracts that may result in loss-making businesses or unprofitable engagement, which some peers still pursue.

My second question is regarding the foundries notes side. Are we seeing any specific foundry node that is still in shortage right now?

No. I don't think there is any node that is currently in shortage. I'm not too familiar with the very, very advanced nodes like three, four, or five nanometers, but for the space we are aware of, the answer is no.

Thank you. And my last question is regarding the technology side. Could you kindly provide us your view on the development of Gate on Array driver IC on Alto, in the next few years? Could you also share the current penetration rate of the GOA driver IC on Alto? Thank you.

Driver IC technology has been around for over ten years, so it’s not exactly the theme of the day, so to speak, because customers who can adopt GOA technology have already done so across different panels and applications. The GOA driver IC became less relevant quite some time ago; I don't even recall when our previous GOA driver market faded away. As a result, go-driver currently accounts for a negligible portion of our business because of the GOA technology's widespread deployment, which has been implemented for many years. Therefore, it is not really a discussion theme for us anymore.

Okay. Got it. Thank you for the color and thank you for taking my question.

Thank you, Tiffany.

And I’m showing no further questions. I would like to hand the call over to Jordan for closing remarks.

As a final note, Eric Li, our Chief IR, and PR Officer, will maintain investor 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, this concludes today's conference. Thank you for your participation. You may now disconnect.