Himax Technologies, Inc. Q3 FY2023 Earnings Call

Hello ladies and gentlemen and welcome to Himax Technologies Inc. third quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. To ask a question during this session, you will need to press star-one-one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star-one-one again. As a reminder, this call is being recorded. I would now like to hand the conference over to your host, Mr. Mark Schwalenberg from MZ Group. Sir, you may begin.

Thank you. Welcome everyone to the Himax Third 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 question and answer 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 will now turn the call over to Mr. Eric Li. Eric, the floor is yours.

Thank you Mark, and thank you everyone for joining us. My name is Eric Li, Chief IR/PR Officer at Himax. On today’s call, I will first review the Himax consolidated financial performance for the third quarter of 2023, followed by our fourth 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. We are pleased to report that Himax third quarter revenues and profit both exceeded our guidance, while gross margin came in at the upper end of the guidance range issued on August 10, 2023. The better-than-expected results are attributable to the resilience of our core business in the face of macroeconomic challenges. Third quarter revenues registered $238.5 million, an increase of 1.5% sequentially and up 11.6% on a year-over-year basis, exceeding the guidance range of a 7% decline to flat sequentially. This can be credited to positive order momentum across all business segments. Gross margin came in at 31.4%, a substantial increase from 21.7% last quarter and at the upper end of our guidance range of 30.5% to 32%. The Q3 gross margin improvement reflected the absence of the one-time expense incurred in the second quarter related to the strategic termination of certain high-cost foundry capacity agreements, in addition to a favorable product mix primarily driven by the remarkable performance of our automotive product line, which maintains a higher margin profile than corporate average. Q3 profit per diluted ADS was $0.064, exceeding the guidance range of $0.015 to $0.06. Revenue from large display drivers came in at $43.7 million, a decrease of 3.7% sequentially but up 5.9% year-over-year. DDIC sales declined as expected as customers already replenished their inventory in previous quarters and suspended further pull-ins. Monitor and notebook IC sales were up single digits and nice double digits respectively in the third quarter, predominantly driven by rush orders from key customers. Large panel driver IC sales accounted for 18.3% of total revenues for this quarter compared to 19.3% last quarter and a year ago. Moving onto our small and medium-sized display driver segment, revenue was $151.1 million, an increase of 7.2% sequentially and up 13.9% compared to the same period last year, surpassing the guidance range due to better-than-expected sales performance, particularly in the automotive sector and the TDDI products. Q3 automotive driver sales saw a decent double-digit sequential increase thanks to a strong uptick in both TDDI and the traditional DDIC as clients worldwide resumed order replenishment. Smartphone and tablet driver sales, on the other hand, decreased double digits and mid-teens sequentially, reflecting continued soft market demand. In the third quarter, the automotive business remained our largest revenue contributor, accounting for nearly 45% of total sales. One notable highlight during the quarter was our commencement of the world’s first mass production of LTDI. This further demonstrates our leadership position in the lucrative automotive display battlefield. Jordan will elaborate in a few minutes. Small and medium-sized driver IC segment accounted for 67.6% of total sales for this quarter compared to 63.9% in previous quarter and 66.2% a year ago. Third quarter non-driver sales also exceeded guidance with revenue of $33.7 million, down 14.4% from a quarter ago but up 9% compared to the same period last year. The better-than-expected performance was a result of higher shipments of WLO and CMOS image sensors. Tcon business represented over 8% of our total sales in the third quarter, yet experienced a low teens sequential decline hampered by decreased demand for both large display panels and AMOLED displays for tablets. On a positive note, we continue to solidify our leadership in automotive Tcon markets with local dimming technology adoption rising rapidly by leading panel makers, Tier 1s and car makers across the board. With numerous project awards already in hand, we expect a strong growth trajectory for automotive Tcon in the next few years. Non-driver products accounted for 14.1% of total revenues as compared to 16.8% in the previous quarter and 14.5% a year ago. Third quarter operating expenses were $63.7 million, an increase of 19.8% from the previous quarter but down 12.5% from a year ago. As a reminder, we grant annual bonuses to employees at the end of September each year, including RSU and cash awards. Our 2023 annual bonus compensation of $10.4 million was in line with guidance, out of which $9.7 million or $0.044 per diluted ADS was immediately vested and expensed in the third quarter. In comparison, bonuses for 2022 and 2021 were $39.6 million and $74.7 million respectively, of which $18.5 million and $24.8 million were vested and expensed immediately. The changes in Q3 operating expenses were mainly associated with the way we expense the employee annual bonus grants based on IFRS accounting. To clarify, the Q3 bonus expense includes two portions. First, as mentioned above, $9.7 million for the immediately vested and recognized portion of the current year bonus grant, that is based on the expected profit for the full year. Second, $6.2 million for the amortized tranches of the prior year’s bonuses. As a reference, the amortized expense of the prior year employee bonuses for the full year 2023 would be as high as $21.8 million due to substantially high profits in 2021 and 2022, leading to a significantly increased bonus carryover amortization expense. This has caused volatility in our IFRS figures for 2023. For the annual bonus grant, Himax has always followed a consistent compensation policy and rules for employees. Amidst the prevailing macroeconomic headwinds, we are currently exercising strict budget and expense control with full year 2023 OPEX poised to decline compared to last year. Third quarter operating income was $11.1 million or 4.6% of sales, compared to 1.8% of sales for the same period last year and minus-0.9% last quarter. The sequential increase was primarily a result of increased sales and gross margin, partially offset by higher operating expenses in the third quarter. The year-over-year increase was primarily a result of lower operating expenses brought by lower annual bonus compensation, partially offset by lower gross margin compared to the same period last year. Third quarter after-tax profit was $11.2 million or $0.064 per diluted ADS compared to $0.9 million or $0.05 per diluted ADS last quarter and $8.3 million or $0.048 in the same period last year. Turning to the balance sheet, we had $155.4 million of cash, cash equivalents and other financial assets as of September 30, 2023 compared to $227.9 million at the same time last year and $219.5 million a quarter ago. Third quarter cash flows were impacted primarily by two cash payouts: $83.7 million for annual dividends and $29.5 million for employee bonus. The employee bonus is comprised of $9.3 million for the immediately vested portion of this year’s award and $20.2 million for vested awards granted over the last three years. Despite the substantial payout in Q3, we delivered strong positive operating cash flow of $16 million, again due to the ongoing destocking process across major product lines with inventory rates experiencing a meaningful reduction compared to past quarters. We had $42 million of long-term unsecured loans as of the end of the third quarter, of which $6 million was the current portion. Our quarter-end inventory as of September 30, 2023 was $259.6 million, markedly lower than $297.3 million last quarter. Accounts receivable at the end of September 2023 was $248.5 million, up from $239 million last quarter and down from $253.3 million a year ago. DSO was 95 days at quarter-end as compared to 90 days last quarter and 74 days a year ago. Third quarter capital expenditures were $2.6 million versus $2.9 million last quarter and $3.4 million a year ago. The third quarter capex was mainly for our IC design business. As of September 30, 2023, Himax has 174.7 million ADS outstanding, little changed from last quarter. On a fully diluted basis, the total number of ADS outstanding for the third quarter was 174.8 million. Now turning to our fourth quarter 2023 guidance, we expect fourth quarter revenues to decline 5% to 11% sequentially. Gross margin is expected to be around 30%, depending on the final product mix. The fourth quarter profit attributable to shareholders is estimated to be in the range of $0.09 to $0.13 per fully diluted ADS. I will now turn the call over to Jordan to discuss our Q4 outlook. Jordan, the floor is yours.

Thank you, Eric. We anticipate that our fourth quarter sales growth will be relatively modest compared to typical seasonal patterns, mainly due to weak demand from end markets, cautious inventory management, and tight procurement processes from our customers. Additionally, persistent macroeconomic challenges are affecting our visibility as panel customers remain hesitant about demand forecasts, resulting in a focus on short-term needs and more last-minute orders. Nonetheless, our midterm outlook for the automotive segment, which is our largest revenue contributor, remains optimistic as we hold a strong position in that market. Most of our design wins in TDDI and local dimming Tcon, both new technologies for the automotive sector, are expected to begin mass production in the next two years, further strengthening our market leadership amid rising competition. Coupled with the trend of higher quality, size, and complexity of displays in vehicles, Himax is set for sustainable growth in the automotive market for years ahead, despite other industry challenges or economic pressures. In light of the current economic difficulties, we are implementing several measures to cut costs, including improving manufacturing and operational efficiencies and leveraging various partners for foundry and backend support. Our recently announced partnership with Nexchip in automotive showcases Himax’s strategy to diversify foundry supply. This collaboration expands our foundry capacity while optimizing costs in the burgeoning automotive market, especially in China. Regarding inventory, we are seeing positive progress in the destocking phase, with a significant reduction noted in Q3. We are approaching historical average levels after several quarters of aggressive inventory control. Thanks to the rising growth of our automotive business, a refined cost structure, normalized inventory levels, a varied product mix, and a focus on higher margin, high-value segments like Tcon, OLED, and AI, we are well-positioned for sustainable long-term revenue growth and profitability. Now, I will provide an update on the large panel driver IC business. For the fourth quarter, our revenue from large display driver ICs is expected to experience a significant sequential decline, driven by the absence of holiday shopping this year and heightened local competition in China. In the TV IC market, leading brands are continuing to apply strict production control measures amidst soft demand, while we maintain low inventory levels, resulting in a forecasted double-digit decline in Q4 TV IC sales. Sales for both notebook and monitor ICs are also expected to drop significantly sequentially due to challenging market conditions. In the small and medium-sized display driver IC segment, fourth quarter revenue is forecasted to see a single-digit decline, given the subdued festival season and sluggish demand for consumer electronics. Smartphone sales are projected to drop by double digits, while tablet sales are anticipated to rise slightly in Q4. Automotive revenue is expected to remain flat or dip slightly sequentially, following a surge in orders for both traditional DDIC and TDDI in the previous quarter. Automotive TDDI sales are anticipated to continue growing in the low teens sequentially due to strong customer orders and supportive government policies in China and the U.S. that incentivize new vehicle purchases. Our design wins for automotive TDDI continue to grow and now total nearly 400, significantly outpacing our competitors. Notably, automotive TDDI sales are expected to constitute nearly 40% of total automotive driver sales in Q4. As mentioned earlier, automotive driver sales are now our largest revenue source, and when combined with automotive Tcon, they are projected to represent almost half of our total sales in Q4. Regarding our industry-leading LTDI, we recently announced that Himax is the first globally to begin mass production of LTDI for specific customers and EVs, starting in Q3 this year. We expect LTDI adoption to increase as it gains popularity in car models featuring larger displays, as manufacturers aim to set their products apart. We are also observing more customers opting for our integrated LTDI and local dimming Tcon solution as the standard for developing ultra-large automotive displays. These new automotive displays, typically over 30 inches, provide a highly detailed visual experience and require multiple LTDI chips alongside at least one local dimming Tcon, significantly increasing our content value on a per-panel basis. This development not only creates a new revenue stream but also strengthens our leadership in the automotive display market as we head into 2024. Himax is leading the automotive display IT market with a comprehensive product range that includes DDIC, TDDI, local dimming Tcon, LDTI, and AMOLED technologies. These complete offerings satisfy diverse customer needs, cultivating strong loyalty and partnerships with global panel manufacturers, Tier 1 suppliers, and automakers. We foresee our automotive segment continuing to be a crucial growth driver for the company. In our smartphone and tablet product lines, we are still experiencing weak market demand. On a brighter note, our inventory has been substantially balanced to an acceptable level after consecutive depleting quarters. With the destocking nearly finished, we initiated wafer starts for select products beginning in Q2 this year and are continuously looking to enhance our cost structure in preparation for when demand rebounds. For our AMOLED business, by collaborating with top panel makers in Korea and China, we are making strides in developing AMOLED driver ICs for various applications, including automotive, tablets, smartphones, notebooks, and TVs. In the automotive AMOLED sector, our design wins are steadily increasing from traditional car manufacturers and NEV companies worldwide. In smartphone AMOLED display drivers, weak demand in that sector has caused slight delays from our original timelines, but we are continuing to work with customers in Korea and China on ongoing verification and partnership projects. Next, I will provide an update on our non-driver IC business, where we are making consistent progress. Starting with our Tcon business, we expect Q4 Tcon sales to drop double digits sequentially, impacted by reduced shipments for large displays and OLED tablets as customers continue to offload inventory amid subdued market demand. Although market sentiment remains weak, we are actively developing the next generation Tcon IC for OLED tablets, notebooks, and automotive applications, aiming to diversify our product lineup and strategically position ourselves for a demand resurgence. In our automotive Tcon business for LCD panels, our position is unmatched in local dimming Tcon, as demonstrated by growing validation and widespread deployment in both premium and mainstream new car models. We plan to launch a series of Tcon products for automotive to cater to the varying requirements of global customers. Global dimming technology is increasingly applied in automotive displays, initially for high-end models and gradually expanding into more mainstream vehicles. One notable application is in heads-up displays, where our Tcon's unique ability to deliver high contrast effectively mitigates the backlight leakage effect common in TFT LCD panels, which usually manifests as a square-shaped image projection on the windshield. Our automotive Tcon business is primed for significant growth, with strong momentum expected in 2024 and beyond, serving as one of our key growth engines. Transitioning to our Wi-Fi smart image sensing total solution, which incorporates Himax's proprietary ultra-low power AI processor, always-on CMOS image sensor, and CNN-based AI algorithm. For notebooks, we continue to support mass production for Dell’s notebook. Given the rising use of human presence detection features in notebooks, our collaborations with global notebook brands are advancing positively. Moreover, our WiseEye solution is in production across several endpoint AI applications, including video conferencing, automotive, access control, shared bike parking, door locks, and smart agriculture, among others. Notably, we are advancing in door lock applications, partnering with leading players in China, with mass production expected to begin at the end of this year. This latest smart door lock design enhances the existing human presence detection functionality by supporting an additional camera set for dual functionality. The secondary camera can monitor ground-level activities like parcel deliveries or improve indoor security. We are also developing more innovative features alongside key customers in this sector for their next-generation smart door lock products. We anticipate significant adoption of WiseEye in surveillance applications starting in 2024. Next, regarding our WE2 AI processor, it offers improved inference speed and ultra-low power compared to its predecessor, WE1. In context-aware AI, WE2 facilitates detailed real-time computer vision object analysis, such as facial and hand landmarks, and human pose recognition, while consuming minimal power. This enables sophisticated human expression detection for smart notebooks and broader AI applications. We are making notable progress in partnerships with major CPU and AP SOC manufacturers preparing for their target markets in next-generation smart notebooks, surveillance, and other endpoint AI applications. We will share more details as they develop. Additionally, we are focusing on expanding our Intelli-Sensing Module business to target users less familiar with AI or those wanting to incorporate AI capabilities into their products without extensive development. This applies particularly to small volume or early market applications. Our modules integrate WiseEye technology, offering clients compact, user-programmable boards preloaded with AI models for easy system integration, which can significantly shorten time to market and reduce development costs. To widen our market outreach, we will launch Intelli-Sensing Modules targeting various AI needs, available through online resellers and other partners. Our Intelli-Sensing Module has received excellent feedback in recent quarters, with successful deployments in parking systems across different regions of Asia, offering precise real-time motion and occupancy detection to streamline vehicle billing processes. Our modules operate efficiently at ultra-low power, making them suitable for battery-powered parking systems, simplifying installation and lowering maintenance costs. Additionally, our AI functionality includes vehicle recognition, optimizing parking space utilization. Beyond parking solutions, there is growing interest in our Intelli-Sensing Module applications for retail shelf management and human flow monitoring. We are excited about the growth prospects for this product. Our strong position in ultra-low power AI processing and image sensing in endpoint AI applications reflects our commitment to developing and expanding the WiseEye AI business. Through collaboration with a wide range of ecosystem partners and customers, we aim to maximize our market reach and explore more potential uses for endpoint AI applications. While adoption is in early stages, we believe our WiseEye AI business will act as a multi-year structural growth driver for Himax. Lastly, regarding our optical-related product lines, with our decade-long expertise in optoelectronics, Himax is offering various technologies, including WLO, 3D sensing, and LCoS, fueling continuous advancements related to emerging metaverse applications. We also have innovative solutions underway to expand our technological portfolio. The recent launch of Liqxtal Graph display technology by our subsidiary, Liqxtal Technology, exemplifies Himax's capability to provide diverse products. This liquid crystal-based optical technology offers unique display capabilities, showcasing personalized colored content on the exterior lenses of glasses for external viewers while ensuring unobstructed visibility for the wearer. We believe Liqxtal Graph display technology will create numerous application possibilities for wearable devices in the future. Following our introduction of a cutting-edge color sequential front-lit LCoS microdisplay at the Display Week in May, we have seen several industry giants shift their focus from micro OLED to our front-lit LCoS for their AR goggles, reflecting our success in performance and functionality, including superior luminance in full RGB color, enhanced optical efficiency, compact form factor, and lightweight design. These advancements are critical in meeting stringent requirements for the next-generation see-through goggles. Regarding WLO, we began volume production for a leading North American customer in Q2, integrating our solution into their new generation VR goggles for 3D gesture control. We made substantial shipments in Q3 in anticipation of the upcoming seasonal shopping period. For our non-driver IC business, we expect revenues to decline in the mid-teens sequentially in the fourth quarter. That concludes my report for this quarter. Thank you for your interest in Himax. We appreciate your participation in today's call and are now open to questions.

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

Hi Jordan and Eric, can you hear me?

Yes, loud and clear.

Thank you Jordan for taking my question. My first question is regarding your guidance. If I look at your guidance across different product lines or by application, I feel it’s a little bit opposite to the current market conditions, for example smartphone and PC looks like to be recovery while automotive, if you look at the IDM companies’ present guidance, it seems like the auto demand in non-China markets has been weakening, but your guidance shows that PC, notebook and monitor has been slowing down into the fourth quarter, as well as smartphone, while automotive looks like still quite resilient. Could you kindly explain why there are differences between the current market dynamics versus your guidance? Thank you.

Thank you, Donnie. To be honest, I'm not sure I have a very good explanation for that. I agree with your perspective that our guidance suggests a different direction. Overall, the consensus seems pessimistic for the auto sector, while the smartphone and PC markets appear to be in the early stages of recovery. One possible explanation is that we have a dominant position in the automotive display market. As you may recall, there was a sudden drop in demand for automotive display ICs in Q1 when China implemented strict COVID control measures, resulting in factory shutdowns. In Q2, widespread price competition in the EV sector led many customers to suspend their orders with us. However, in Q3, we experienced a strong rebound, which I believe is more about our customers needing to restock after being behind in the first two quarters rather than just market sentiment. I anticipate that this momentum will continue into this quarter, although the rebound may not be as significant, so we are guiding our automotive business for this quarter to be flat to slightly down. This reflects our leading market position with comprehensive coverage, allowing us to be the first point of call for customers needing to restock for production. In contrast, our position in the smartphone and PC markets is not as strong. For example, while our market share in monitors is relatively robust, we are also seeing strong demand in Q4. This should not deviate significantly from PC demand, but from our order book perspective, we see a different picture, which I attribute to our varying positions in these different markets.

Understood. Sorry Jordan, so you mean the monitor momentum from your side is better than notebook?

Slightly, yes.

Understood. My second question is regarding the ASP trend across the different product lines. Are you seeing ASPs stabilizing, or by different product there could be still some different kinds of ASP erosion trends in the coming months? Another thing is that you previously announced that you have more cooperation with Nexchip, and I feel recently that driver IC companies are more aggressively shifting their foundry capacity away from the foundries with higher price to the lower price, so if that would be helpful to your gross margin improvement going forward, if the ASPs do not further decline that much, while the foundry costs can be further reduced?

First on the trend of average selling prices, they are stabilizing across the board compared to the past few quarters due to improved industry inventory levels. Our customers, particularly e-panel makers, are either starting to turn a profit or are still facing losses. We acknowledge that the macroeconomic climate hasn't been favorable. There will likely be continued price pressure due to low demand and customers struggling with profitability, although it shouldn't be as severe as what we saw in previous quarters. This sentiment generally applies across various sectors, and while conditions may change as we head into next year, we currently don't see significant disparities among sectors. Regarding our collaboration with Nexchip in China, we recently announced our strategic alliance focused on automotive display technologies. We've initiated joint efforts on both DDIC and TDDI, with mass production expected around Q4 of next year. Aside from price considerations, having a strong partner in China will enhance our ability to engage with Chinese customers and tackle the important automotive market, especially in electric vehicles. We believe our Chinese customers will appreciate this collaboration with Nexchip. Furthermore, we will explore diversifying our supplier base, particularly in foundry and backend operations, to expand our presence in China. In the long run, this should help us manage costs and mitigate pricing pressures.

Understood. Maybe just one last follow-up from me. If we look at your fourth quarter guidance, your EPS is in between $0.09 to $0.13. But surprisingly, I feel the upper range of $0.13 looks like to be higher than my previous expectation if considering your sales is going to decline, like 8% quarter-on-quarter in the midrange. Do you have a lower tax rate in the fourth quarter or do you have lower OPEX in the fourth quarter?

Yes, thank you for this question. I appreciate you’re being very diligent in looking at our financials and building your model. Yes, there will be some tax benefits that we will enjoy because of certain tax planning that we made earlier in Q4. I wouldn’t elaborate on details right now, obviously, but yes, tax is one of the reasons, and basically we also run our financial projection model, right, so the EPS range certainly is directly the outcome from those models based on our revenue and gross margin guidance, among other things, and yes, you picked up this fine detail, and indeed there will be some tax benefits that we expect to enjoy in Q4, and that is due to earlier tax planning that we did.

Understood. Thank you Jordan, I’ll go back to the queue.

Appreciate that, Donnie.

Thank you. At this time, I would now like to turn the call back over to Jordan Wu for closing remarks.

As a final note, Eric Li, our Chief IR/PR Officer, will maintain his 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 call. Thank you for your participation. You may now disconnect.