Himax Technologies Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 10, 2023

There are 7 speakers on the call.

Operator

Ladies and gentlemen, welcome to the Himax Technologies Inc. 2nd 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 is being recorded.

Operator

I would now like to turn the conference over to your host, Mr. Mark Schwalenberg from MZ Group. You may begin.

Speaker 1

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.

Speaker 1

Eric Li, Chief IR, Peer Officer. After the company's prepared comments, we have allocated time for questions and a Q and A session. If you have not yet received a copy of today's results release, please email himxmzgroup.us Access the press release on financial portals or download a copy from Himax's website at www.hymax.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.

Speaker 1

A list of 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 would now like to turn the call over to Mr.

Speaker 1

Eric Li. Eric, the floor is yours.

Speaker 2

Thank you, Mark. Thank you, everyone, for joining us. My name is Eric Li, Chief IRP Officer at Himax. On today's call, I'll first review Himax's consolidated financial performance for the Q2 2023, followed by our Q3 outlook. Jordan will then give an update on the status of our business, after which we will take questions.

Speaker 2

We will review our financials on an IFRS basis. Challenging business conditions Due to ongoing macro headwinds persisted during the Q2, Yet we continued to execute successfully with gross margin surpassing the guidance range, while both revenues and EPS landed at the upper end of guidance range issued on May 11, 2023. 2nd quarter revenues registered $235,000,000 a decrease of 3.8% sequentially, yet at the upper end of our guidance range. This was attributable to improve the 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.

Speaker 2

As we 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 destocking. Q2 profit per diluted ADS was 0.05¢ at the upper end of the guidance range of minus 0.29¢ to 0.06¢. Revenue from large display drivers came in at $45,400,000 a decrease of 14.3% sequentially, yet above our PIE guidance. Monitor IC sales surpassed our pie guidance up single digit sequentially driven by our clients' proactive pull forward In preparation for the Q2 sales festival and the recovery of gaming display, Notebook sales notably outperformed our guidance, thanks to a strong shipment to key customers. TVIC sales declined as expected as customers suspended pull ins Having already replenished their inventory over prior 2 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.

Speaker 2

Moving on to our small and the medium sized display driver segment. Revenue was $150,300,000 a slight decline of 2.9% sequentially. Smartphone and tablet driver sales Increased mid teens and the single digit respectively in 2nd quarter as we saw a recovery in business momentum, Particularly in TDDI products, Q2 automotive driver sales decreased single digit sequentially, But outperformed our guidance of low teens decline as clients resumed order replenishment for both traditional DDIC and TDDI. Automotive driver business was still our largest revenue contributor With around 30% of total sales in the Q2, we are particularly confident in our automotive TDDI growth potential, Backed by hundreds of design wins already secured, significantly ahead of our peers and among these design wins, Only a small portion has commenced the mass production. With the design win projects under our belt, we believe We can continue to grow our market share in automotive TDDI.

Speaker 2

In addition to our already dominant position in traditional DDICs, where we have a 40% global market share. Small and the media size driver IC segment accounted for 63.9 percent of total sales for the quarter compared to 63.3 percent in previous quarter and 64.5 percent a year ago. 2nd quarter non driver sales also exceeded guidance with revenue of $39,300,000 up 7.9% from a quarter ago. The better than expected sales performance was a result of higher shipment for TCAM and the CMOS image sensor. Despite the slight sequential decline in TCAM sales In Q2, we surpassed guidance of a low teens decline, bolstered by a better than expected shipment of Monitor and Automotive TCAM.

Speaker 2

TCAM Business represented over 9% of our total sales Lastly, for WLO, notably during the quarter, We commenced volume production to 1 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 13.5 percent a year ago. Our operating expenses for the 2nd quarter were $53,200,000 an increase The sequential increase was mainly a result of increased R and D expenses. Yet Amidst the prevailing macroeconomic headwinds, we remain focused on strict cost controls. Our Q2 operating expenses include the amortized expenses for annual bonus rent made the entire year of $6,400,000 as compared to $6,500,000 in previous quarter and $7,400,000 from a year ago.

Speaker 2

As a reminder, we grant annual bonuses to employees at the end of September each year, including ISU and the cash award. A portion of those bonuses It's immediately vested and recognized in the 3rd quarter with the remainder equally vested In 3 tranches on the 1st, 2nd and the 3rd anniversary of the grand date and recognized on a straight line basis over the vesting period of each tranche. 2nd quarter after tax profit was $900,000 or $0.05 per diluted ADS compared to $14,900,000 or $0.085 per diluted ADS last quarter. Turning to the balance sheet. We had $219,500,000 of cash, cash equivalents and other financial assets as of June 30, 2023, compared to $461,600,000 at the same time last year and $223,800,000

Speaker 3

a quarter

Speaker 2

ago. 2nd quarter operating cash inflow was approximately $1,700,000 as compared to an inflow of 66 $400,000 in Q1, primarily due to $51,000,000 income tax paid during Q2. An illustration of our continuous effort to deplete inventory for the past few quarters. We had $43,500,000 of long term unsecured loans as of the end of second quarter, of which $6,000,000 was the current portion. During the Q3, We have made a payment of $83,700,000 for annual dividend to shareholders.

Speaker 2

Further, We expect to pay out a total of around $30,000,000 for employee bonus awards, comprised of around $9,300,000 for the immediately vast portion of this year's award and $21,000,000 for vested awards granted over the last 3 years. Despite the substantial employee bonus payout, we still expect to guarantee positive To generate I'm sorry, 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 $297,300,000 markedly lower than $335,200,000 last quarter. Accounts receivable at the end of June 2023 was $239,000,000 down from $252,200,000 last quarter and down from $371,000,000

Speaker 4

a year

Speaker 2

ago. DSO was 90 days at the quarter end as compared to 93 days last quarter and a year ago. 2nd quarter capital expenditures were $2,900,000 versus $2,800,000 last quarter and $2,500,000 a year ago. The Q2 CapEx was mainly for our IC Design business. As of June 30, 2023, Himax has 174,400,000 ADS outstanding, Unchanged from last quarter, on a fully diluted basis, total number of ADS outstanding for the Q2 was RMB 174,700,000.

Speaker 2

Now turning to our Q3 2022 Guidance. I'm sorry, 2023 guidance. We expect 3rd 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 3rd quarter profit attributable to shareholders is estimated to be in the range of $0.015 to 0 point 0 $0.06 per fully diluted ADS. As we have done historically, we will grant employees annual bonus, including our ICUs and the cash awards on or around September 30 this year.

Speaker 2

The 3rd 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 $10,500,000 out of which $9,300,000 or $0.042 per diluted ADS will be vested and expensed immediately on the Grand Day. As a reminder, The total annual bonus amount and the immediately vast portion are our current best estimate only, And the actual amount could vary materially depends on, among other things, Our Q4 profit and the final Board decision for the total bonus amount and its vesting scheme. As is the case for 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 2021 were $39,600,000 $74,700,000 respectively, of which $18,500,000 $24,800,000 vested immediately. I will now turn the call over to Jordan to discuss our Q3 outlook.

Speaker 2

Jordan, the floor is yours.

Speaker 3

Thank you, Eric. The prevailing sentiment in the consumer electronics market for semiconductor remains sluggish. Customers continue to exercise caution towards panel procurements, 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, we implemented strict cost control measures due to intensified EV price competition, adversely impacting our first half sales.

Speaker 3

Now looking ahead with renewed momentum in the automotive market, we believe the stage is set for sales rebound as we approach the end of the year. Supported by more favorable product mix, In terms of gross margin, for the Q3, 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 minimal fuel requirements and high wafer costs set during the severe foundry capacity shortage period. Furthermore, we can now leverage diverse foundry sources For optimal operational efficiency, a much improved cost structure, thereby maintaining our product competitiveness. Variable product mix shift is also a key factor contributed to our expected Q3 gross margin expansion.

Speaker 3

This is predominantly driven by increased automotive sales As discussed earlier, thanks to a robust recovery in the Chinese Automotive market leading to other It's related to order reduction from customers. Notably, Our automotive sales for traditional DDIC, TDDI and TCAN are all set to enjoy decent double digit sequential growth In the Q3 and collectively are expected to represent almost 45% of our total sales. As a reminder, all these automotive products have better have a better than corporate average Moving on to inventory destocking. Our inventory depletion is progressing nicely with Q3 inventory level on track for meaningful reduction. At this point, we are comfortable in our overall inventory level.

Speaker 3

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. While 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 for 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.

Speaker 3

Our Q3 2023 large display driver IC revenue is projected to be down single digit Sequentially, we expect TVIC business to be down high teens quarter over quarter due to leading anchor brands' Non BIC sales are expected to increase by a decent double digit sequentially, predominantly from rush orders from 1 leading brand. Meanwhile, monetizing sales are set to increase single digits sequentially, continuing The customers are restocking momentum we saw last quarter. Turning to the small and medium sized display driver IC business. Despite continuing uncertainty in consumer electronics, we improved with improved visibility and And 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 a decent double digit sequentially on a strong uptick in both TDDI and traditional DDIC.

Speaker 3

However, Smartphone and tablet sales are both projected to decline double digit. The sequential growth of automotive DDIC business is fueled by resumption of customer orders across the board following several quarters of inventory correction. Automotive TDDI Business also resumed its growth trajectory in the 3rd quarter, driven by increasing production of customers' new vehicles after an unexpected second quarter disruption. The automotive's recovery has been further bolstered by supportive governmental policies, especially in China and the U. S.

Speaker 3

To incentivize new vehicle purchases. Given the rapid adoption of TDDI in new generation vehicles where we have already secured well over 300 design wins The number of new design in projects is still increasing as we speak. We remain confident that we'll continue to enjoy strong growth as our DD market share position remains unchallenged. It is worth noting that automotive TDDI sales We account for over 30% of total automotive sales in the 3rd quarter and are poised to continue to increase. Let's move on to LT DI, A technology where Himax has been a pioneer in the market.

Speaker 3

Given the growing global demand for large, panoramic, Interactive and intuitive in car display experiences, we anticipate accelerating adoption of LT DI in the coming years. The OTDEI is gaining popularity particularly among high end car models With fancy and or larger than 30 inches automotive displays, our integrated solution of has been adopted by many customers as their standard platform for higher 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 Slide before mass production starting 2024. As we have mentioned repeatedly, Himax is at the front runner position in 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, LTTI and AMOLED.

Speaker 3

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 well as deep engagement with Tier 1s and OEMs who deeply trust and rely on Himax 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 offloading inventory, Offering aggressive pricing, while enduring losses to deplete the excess inventory.

Speaker 3

As we near the end of our discussion process, our strategy is to not engage in pricing competition, even at the expense of forfeiting revenues by turning away our profitable projects. Having said that, We have placed wafer starts for select products starting Q2. Next for an update on AMOLED. Himax offers both DDIC and TCAM for OLED displays and has commenced production for tablet and automotive applications jointly with global leading panel makers. For automotive OLED display, design activities are going smoothly with both conventional carmakers and NEV vendors across different continents.

Speaker 3

Concurrently, we continue to gear up For AMOLED driver IC Development by strategically partnering with major Korean and Chinese panel makers on 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 timing controller, we anticipate Q3 TCON sales to decrease Single digit sequentially hampered by reduced shipment for monitors and OLED displays for tablet. For OLED Tablets business, our customers are still in the midst of inventory offloading due to muted end market demand.

Speaker 3

Despite the soft demand environment, we are actively working on the next generation IC for OLED tablet, I mean to broaden our offering and better position us for when demand returns. Next on our automotive TCAM business, we continue to solidify our leadership position, particularly in local dimming T Con, which can improve display contrast We're 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 Tecom business is poised to experience explosive growth with notable sales contribution starting 2024. We expect it to be one of our major growth engines in coming years.

Speaker 3

Switching gears to the Wiseye Smart Image Sensitive Total Solution, which incorporates Himet's proprietary ultra low power AI Processor, always on CMOS image sensor and CNN based AI algorithm. We continue to support the Mass production of Stell's notebook along with other endpoint AI applications, including video conference device, We are also focused on strengthening our IntelliSenseing module business in an effort to further broaden Our customer base and application, the module offering incorporating YSight technology provides 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 are well suited for markets featuring high variety and small quantity. Throughout recent quarters, we have received Excellent feedback from customers. We are seeing large increases in projects for various applications.

Speaker 3

Building on this momentum, we plan to roll out a series of modules that will expand our product offerings to cover Over the past few quarters, we have witnessed steady growth in the adoption of our Wi Fi products, particularly in home surveillance applications, specifically door lock, doorbell and battery camera. Notably, we are pleased to report a successful collaboration with a leading door lock vendor in China, the largest market globally. The project is steady for mass production starting in the second half this year with anticipated growth extending to 2024. Our YSIGHT solution is also being implemented for automotive applications where it can intelligently detect the presence, movement or posture of driver or passenger, 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 application for car owner recognition and key lease access, with other new use cases also under development.

Speaker 3

Next for an update on our WE2 AI Processor, We have engaged global network 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 notebook surveillance and a host of other endpoint AI applications. The WE2 Processor offers further advancements in inference speed and ultra low power, maintaining superior power efficiency compared to our already industry leading 1st generation AI Processor, Furthermore, in context of Wear AI, WE2 enables More detailed computer vision object analysis such as real time facial landmark, hand landmark and human pose and skeleton among others at extremely low power consumption. This enables sophisticated human expression detection for smart notebook and broader AI applications. Having established a leading position in ultra low power AI processing and image sensing for endpoint AI applications, We are firmly committed to the YSI product line's ongoing development and growth.

Speaker 3

By leveraging broad At Ecosystem Partners and Customers, we aim to maximize market reach and explore potential applications. We believe that our WiseDAR AI business will serve as a multiyear structure 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, 3 d 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.

Speaker 3

As our technologies are vital for facilitating immersive content evidenced by the growing list of ARVR goggle device engineering projects with leading customers Across the board, first on WLO update. We recently commenced for the production of our WLO technology to a leading North American customer Starting in the Q2 for their new generation VR devices to enable 3 d gesture control. We expect a decent shipment for this customer in the second half in preparation for the upcoming seasonal shopping sales. Our LCOS high mix state of the art color sequential from the LCOS micro display technology was one of the most high profile demos at the Display Week 2023 in May and successfully captured the attention of numerous tech giants. Through years of strenuous development, our color sequential front end of the year has achieved exceptional and industry leading illumination in full RGB color, along with the groundbreaking tiny form factor, ultra lightweight at a wide degree field of view.

Speaker 3

These features make our LCOS micro display particularly well suited for next generation AR goggles outperforming other competing technologies, mainly microLED, The growing number of engineering engagements are preceded nicely with leading tech names. We are confident our color sequential front video calls can be one of the most promising technologies that meets the rigorous requirements To enable AR goggles, the introduction of the latest mixed reality device Our leading tech giant exhibited the significant advancement for the whole metaverse ecosystem. It illustrates how the metaverse in immersive technologies continue to evolve, are increasingly accessible and may gradually become a more integral part of our everyday life in the future. We believe given our expertise in optical related technologies, including hundreds of patents In AR, VR and 3 d, 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.

Speaker 3

For non driver IC business, we expect revenue to decline double digit sequentially in the Q3. 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.

Operator

Certainly. One moment for our first question. Our first question will be coming from Jerry Hsu of Credit Suisse. Your line is open.

Speaker 5

Thanks for taking my question. Jordan, I just want to ask you on the you have previously noted that the It's likely to improve from first half. So judging from the guidance you provided already for the quarter, The slide implies that the 4th quarter revenue should recover from the Q3 of 2012. And then what are the drivers behind that? That's the first question.

Speaker 5

And then in terms of the automotive, I think you have mentioned about the 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 IC or timing controllers and how does that compare with the other product line? And then maybe on the wafer pricing side, as you have already terminated your Long term agreement with foundry products in 2nd quarter. How should we think about the wafer cost interest that you have? Can you benefit from All the renegotiation or the wafer foundry price reduction to help your margin.

Speaker 5

That those are my three questions. Thank you.

Speaker 3

Thank you, Jerry. Yes, I think there's a good likelihood The Q4 will see a further recovery from the shroud in Q3. However, as a disclaimer, we are very confident on the continuous growth of the omni sector In Q4, however, in the consumer sector, the Q4 visibility The year remains quite low. So it really depends on the outcome Of the of how the market is going to develop for the consumer products. But In our current projection, yes, indeed, second half is likely to be better than first half And Q4 is hopefully going to recover from the trial in Q3.

Speaker 3

That's the first question. The second question, Really, there are quite a few questions surrounding Automotive sector. I think you mentioned pricing trend and specifically pricing trend for automotive sector compared to those of other I think, I mean, Himax does enjoy a very nice leading position. We're still maintaining market share in automotive sector and inevitably we are seeing competition both internationally and coming from China. And certainly, for competitors, one of the approach they will take For this relatively new market for them is to undercut our price.

Speaker 3

But I think 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's not favorable to us, our long term competitiveness. So yes, we will certainly be prepared to compete on pricing by improving Improving our cost structure vigorously. Having said that, I think automotive sector compared to consumer Market has a much higher entry barrier for newcomers because of its Very different ecosystem or supply Here we talk about not just panel makers and end customers also OEM. Auto TOIs play a very, very important role.

Speaker 3

And also, we have geographical diversity, which is certainly very, very different from any of the consumer markets. Here you have the U. S. Market, Japanese market, Korean, European and certainly China market, which are really quite different, and they are dominated by very different players. And also, these very different names, which dominate different markets, they partner with Sometimes rather different PON players too.

Speaker 3

So you're talking about a much more complex and diverse Ecosystem players for IC vendors to cover and I think we do have a very clear advantage Being the early mover and also in joining the leading market share. And also, you are aware, automotive market replacement of any parts is a lot harder Compared to consumer products, right. So we feel, yes, there are price competition and Customers do try to undercut our price, but that doesn't mean we always have to meet their price to meet the competitiveness. We do enjoy a better position and very, very often customer We're still working with Himax even having very aggressive Prices on hand from our competitors. But I think so we are taking competition lightly, But we are still confident across different product segments, the multi market, Namely DDIC, TDDI, timing controller, OLED and LTDI.

Speaker 3

We are going to be the market, and this is evidenced by the fact that Our customer engagement and design win projects under our bills are far larger compared to any of our peers. So yes, there are price competition, but we remain quite confident In any foreseeable future for our leading position to be unchallenged. And we will price in cost and NANDI cost We are for strategic reasons. We did and still do have a slightly larger inventory level The normal, particularly for DDIC products. But we're not worried about that because Again, we are secured by a lot of design wins and with those projects All products expected to enjoy a very long lifetime.

Speaker 3

But we are approaching the end of our Inventory destocking process even for DDIC And with our new weather starts, certainly we will certainly negotiate typically spot deals Volume for price kind of arrangement with our foundry vendors. And so I think you can expect at least the latest starting from about End of Q1 or Q2 of next year, you will see our DDIC cost structure will see a major improvement. Because of new wave of starts, that is likely to see better prices. And certainly, foundry diversification, I mentioned earlier, It's a key area that we are exploring. And we are not just diversifying our foundry in Taiwan, we're also diversifying into China, where China, as we know, is the biggest market in the world for automotive And the country does favor in overproduction.

Speaker 3

And for that reason, we are Diversifying into China as well. And our moving to China for foundry Service has been most welcome by Chinese foundry players Because they all know Himax is the leading player in this market. So there are various measures that we take we are taking to hopefully lower our cost and also to strengthen Our supply chain for automotive market. I hope that answers your question, Jerry.

Speaker 5

Yes, very clear. Thank you.

Speaker 1

Thank

Operator

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

Speaker 4

Thank you, management, for taking my question. I have only two questions. The first one is regarding to the automotive driver IC. So 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, like some of the leading Auto, IDM companies or IC design companies mentioned about some slowdown in terms of Some kind of automotive ICs demand into the second half.

Speaker 4

So I'm just wondering if you could give us some color In terms of the end market, do we have like a majority of the market in China? Or we still have Some exposure to the overseas market. So that's the first question. And second one is that I think you have Mentioned about the cost structure will be improved into the first half next year. I think we have a very good Progress in terms of the gross margin recovery already in the Q3.

Speaker 4

But in terms of a normalized gross margin, considering the cost structure improvement, Could you kind of give us some idea, it's like for example, where is The normalized gross margin is compared with like the COVID period in 2021, 2021 and 2022. Thank you.

Speaker 3

Thank you, Donnie. The first question, The simple answer is given our market share, you should not be surprised that our customer base In terms of end 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 is relatively new market, so market statistics are not particularly mature.

Speaker 3

So we are not Talking about that number out loud, but we believe based on our internal count, our market share should be higher than that. And then lower payment timing controller, our market share is even higher than The TDDI, again based on internal count, we believe it is probably 60% or higher. So At OTDEI, we are likely to be the pioneer with mass production the first mass production Of the whole world expected to start from this quarter. So we do enjoy the leading market share In literally every single technology area for automotive market. So Our end customer base does cover the whole world, All major continents and all major markets.

Speaker 3

Now You talk about other IT vendors, their view of the second half. I think There could be a difference between us and those where there is a panel maker market in between for us, In between our sales and the Tier one product, in that case, they may not be the same. Now, so our first half, so I believe our first half, the first quarter and second quarter, Our automotive revenue probably were more hampered compared to those. And our customers are just coming back and trying to restock and catch up for The for our supply, which otherwise should have been made in the first half. And more specifically, I'll give you some color.

Speaker 3

TDDI and TCON are well positioned to enjoy Very strong growth, high very decent double digit growth, not just quarter over quarter, But also first half over second half and also this year over last year, okay. I repeat, for Automotive area in TDDI and TCOM both are relatively New markets where we have a leading position and they are in very strong growing stage. So we expect to enjoy the decent double digit growth, not just quarter over quarter, But also second half over first half and the year over year for this year. And also, I can Pretty much stay the same for next year too. I think we have good confidence in that because they are relatively new markets.

Speaker 3

However, For DDIC, while the second half while we reported 3rd quarter is likely to See a strong rebound from the 2nd quarter. With second half also expected to enjoy a double digit growth for First half, however, for DDIC, year over year, we are likely to see a decline. We are going to see a decline, DDIC. And given that DDIC is still the biggest component of our overall Automotive business. So fiscal year 2023 for overall Automotive Business, We are still likely to see some decline over last year.

Speaker 3

I don't know if I'm confusing you guys, but I believe I made it quite clear. So because DDIC is being replaced by TDDI. And also I talk about governmental policies to incentivize new purchase from China and the U. S, right. And those incentives are provided primarily to EVs, Which are predominantly new design models and given that they are new, they tend to use PVDI and in many cases Double team in TECON as well.

Speaker 3

So The replacement of TDDI over traditional DDIC Honestly, it's probably quicker than we anticipated last year. The replacement the pace of replacement is faster. But that is not bad news for us because that means on a panel per panel basis, our content is higher. And as I mentioned earlier, We do enjoy even stronger market share compared to DDIC. So I think So because of this reason TDDI and TCOM, I think we feel quite confident that Next year, our Automotive business will start to see It grows a decent growth from this year again.

Speaker 3

Although this year, our overall Automotive business is likely to see some decline From last year, not a severe decline, but some decline. Your second question is about our cost and margin profile I believe. I think I can say In the long term, we I mean, as a reminder, we are not The intention is not to provide our long term gross margin guidance, right. And just 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, I think it is probably difficult for us to see the same level of very high gross margin during COVID At its peak, we're talking about we're over 50%. Honestly, it is probably difficult to see in the coming years.

Speaker 3

However, whether our gross margin will return to the pre COVID period when we typically Had some 24%, 25% kind of gross margin. I don't think so. I'm not that Pessimistic, Aiza. And I think there could be a lot of reasons to explain that, but I will emphasize on Himax specifically in our situation. I think we feel good about our going through A structure change in terms of our product mix and overall company profile.

Speaker 3

We said earlier in my prepared remarks that our automotive market It's likely to account for almost 45% of our total sales this quarter. This was unheard of whether it's during COVID or pre COVID. Our automotive market at the time was at best 10 plus percent of our total sales. Now this high percentage certainly comes from 2 factors. 1, automotive has been growing very fast, and the automotive market for display is likely to outgrow Other markets in the coming years.

Speaker 3

So that is very good news for us. Certainly, that 45% high number is also The result of the very sluggish consumer market, right, which pushed down other product contributions. So but in any case, in the long term, our automotive market contribution is likely to be much, much higher than previously. So that is, what I say, fundamental change. And the automotive market does enjoy not just higher, but also more stable and more predictable gross margin compared to So again, being having a much higher exposure to the automotive market The next few years, I think, is a very good news for Himax.

Speaker 3

And we are also investing Chris, in a few new areas, my auto market covers not just driver IC but auto timing So as I mentioned and also our YSIGHT products is in Still very early stage, but we expect to double our revenue for the coming years. And that enjoys The best gross margin among all our product lines. And for example, I'll give you another example, e paper It's turning into color version and with a fast growing market potential and We have a good and major exposure over there as well. So these new markets are likely to drive our gross margin up in the long term. What I cannot tell with similar degree of certainty is consumer market Well, really, there's a poor visibility, not just for the rest of the year, But also into next year.

Speaker 3

Having said, it's poor visibility, it doesn't mean it's necessarily That's forever, right. So at some point, we certainly hope you will recover. And But for now, I think at least for Himax, visibility for automotive market is quite good and For YSai, it's quite good as well. So I believe that will improve our long term margin profile significantly. I hope that answers your question, Donnie.

Speaker 4

Thank you so much, Jordan.

Speaker 5

Thank you.

Operator

And one moment for our next question. And our next question will be coming from Tiffany Hsieh of Morgan Stanley. Your line is open Tiffany.

Speaker 6

Thank you. Thanks management for taking my questions. I have three questions. My first question is relating to the pricing side. As the management mentioned earlier in the prepared remarks and in the Q and A section that the smartphone and tablets market are seeing some Pricing erosion and what's I'm just wondering what's the current pricing environment for like non auto T cons and Largest play driver ICs like TV.

Speaker 6

Are we seeing like severe pricing competition now in the market? This is my first question.

Speaker 3

Okay. Quick answer. I think we have seen the worst and now this market is actually stabilizing. The worst Being at a time when everybody suffers from overstock and as we are Nearing, I would say, nearing the end of destocking process throughout the whole industry. I think Pricing has now become healthier pricing environment.

Speaker 3

Certainly that is my general comment. Specifically I think TV is certainly stabilizing. IT, the notebook and monitor are also stabilizing. Automotive market also is holding up. Even tablet, I think, is stabilizing quite nicely.

Speaker 3

I think I mean, from our point of view, the weak spot for now remains to be smartphone, We mentioned in our prepared remarks that there are certain there are still A small group of our peers, which they are going through aggressive stocking price process, But hopefully towards the end of the year or the next year that will also Come to an end. But I think so I think I say we have Going through the worst because inventory position is healthier. But certainly, we are still suffering from Low visibility throughout the whole industry. So what is going to detect Our margin profile for non automotive markets, I think that's just for Himax, but throughout the whole industry. The end market demand It's still sluggish.

Speaker 3

So the end customers are definitely going to demand aggressive pricing from us, While our foundry partners, because of low utilization, they are not Really enjoying with profitability either. Some of our foundry partners are actually suffering from some losses already. Can we get more aggressive pricing from our foundries or can we And to help us substantially lower our cost, continue to lower our cost to support our end customers or Can the end customers support a more healthy environment because their market May have started to turn around. That is yet to be seen. We don't know yet.

Speaker 3

But as a fabless IC design company, Our current strategy certainly is not to just for the sake of enlarging our revenue size To Megawave Stars, while knowing the new wave starts May not be loss making business or not profit unprofitable business. We our strategy is not to do that And not to compete too aggressively on those markets where some of our peers are still going through destocking process.

Speaker 6

My second question is, I want to ask about the foundry's node side. Are we seeing any specific foundry note that is still in shortage right now?

Speaker 3

No.

Speaker 6

No. Okay. Thank you.

Speaker 3

I don't think there is any node that is a shortage right now. I'm not too familiar with the very, very advanced nodes like 3 nanometer, 4 nanometer, 5 nanometer, but for the space, we are aware of the answer is no.

Speaker 6

Okay. 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 auto in the next few years. Could you also share the current penetration rate of the

Speaker 3

Well, Keelung, the rate driver IC has been A very old thing that's been going around for, I don't know, maybe more than 10 years, way over 10 years. So it's not exactly the theme of the day, so to speak, because customers who can adopt GoA Technology has already done so. I'm talking about across different panels, different applications. So, Kedong was very big ages ago. Can you even recall when Once upon a time, a hit to guys like Timex because all of a sudden our gate driver market It was disappearing, but now Get Driver accounted for very, very negligible portion of our business It's already because of the GOA technology, Which has been put in place for many years.

Speaker 3

So it is not really a thing that we discuss about anymore.

Speaker 6

Okay, got it. Thank you for the color. Thanks again for taking my questions.

Speaker 3

Thank you, Tiffany.

Operator

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

Speaker 3

As a final note, Eric Li, our Chief IR PR Officer will maintain investor marketing activity and continue to attend investor conferences. We'll announce the details as they come about. Thank you and have a nice day.

Operator

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Himax Technologies Q2 2023
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