Himax Technologies Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2024

There are 4 speakers on the call.

Operator

Hello, ladies and gentlemen. Welcome to the Himax Technologies Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. And later, we will conduct a Q and A session and instructions will follow at that time. As a reminder, this conference call is being recorded.

Operator

I would now like to turn the conference over to Eric Li, Chief IR PR Officer at Himax. Eric, please proceed.

Speaker 1

Welcome everyone to the Himax. My name is Eric Li, Chief IR PR Office at Himax. Joining me today are Jordan Wu, President and Chief Executive Officer Jessica Ping, Chief Financial Officer. After the company's prepared comments, we have allocated time for questions in the Q and A session. If you have not yet received a copy of today's results release, please e mail atmcgroup.usorhxirhimax.com.tw.

Speaker 1

Access the press release on financial portals or download a copy from Himax's website at www.hymax dotcom.tw. Before we begin the formal remarks, I'd like to remind everyone that some of the statements in the conference call, including statements regarding expected future financial results and industrial 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 filing from 20 F for the year ended December 31, 2023 in the session entitled Risk Factors as may be amended. Except for the company's full year 2023 financials, which were provided in company's 20 F and filed with the SEC on April 2, 2024. The financial information included in this conference call is unaudited and consolidated and prepared in accordance with IFI's accounting.

Speaker 1

Such financial information is generated internally and has not been subjected to the same review and scrutiny, including internal auditing procedure 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. On today's call, I will first review the Himax consolidated financial performance for the Q2 2024, followed by our Q3 outlook. Jordan will then give an update on the status of our business, after which we will take questions. You can submit your question online through the webcast or by phone.

Speaker 1

We will review our financials on an IFRS basis. We are delighted to announce that Q2 revenue surpassed the guidance, while gross margin and the profits were in line with the guidance range issued on May 9, 2024, despite the prevailing economic headwinds. The better than effective financial results primarily stemmed from resumed order momentum across most of our product lines. 2nd quarter revenues registered $239,600,000 an increase of 15.5% sequentially, exceeding our guidance range of an 8% to 13% increase. Gross margin came in at 32%, in line with our guidance range of 31.5% to 33.5%, up from 29.3% of the previous quarter and 21.7% same period last year.

Speaker 1

The sequential growth was driven by cost improvements and the favorable product mix along with increased sales in the automotive IC and the key comp product lines, both of which have higher than corporate average gross margins. The substantial improvement in gross margin from the same period last year was primarily due to one time early termination expense paid to foundry partners, which elevated minimum fulfillment requirement constraints and high wafer costs set during the severe industrial capacity shortage. Consequently, our new wafer starts are no longer bound by these restrictive terms. Additionally, we can now leverage diverse foundry source for optimal operational efficiency and a significant improved cost structure, thereby maintaining our product competitiveness. Q2 profit per diluted ADS was $0.169 at the top end of the guidance range of $0.13 to $0.17 Revenue from large display driver came in at $39,000,000 reflecting a sequential increase of 24.7%.

Speaker 1

The increase was predominantly driven by customers restocking in TV and the monitor IC after several quarters of muted demand, as well as increased order in preparation for shopping festivals. Both TV and monitor IC sales posted sequential double digit increases quarter over quarter. In contrast, Q2 notebook IC sales declined slightly following a strong reduction in the previous quarter. Sales of large panel driver IC accounted for 16.3% of total revenues of the quarter, compared to 15.1% last quarter and 19.3% a year ago. Small and media size of the space driver segment revenue reached $158,800,000 marking a sequential increase of 10.1% and surpassing our guidance due to stronger than anticipated sales in the TDDI products for automotive, smartphone and tablet.

Speaker 1

In Q2, automotive driver sales encompassing both traditional DDIC and TDDI increased by a decent high teens sequentially and more than 50% year over year. Despite expectations of weakening electric vehicle demand, both automotive DDIC and the TDDI sales experienced sequential growth in Q2. Thanks to our robust design wins pipeline in TDDI and the customers' continuous restocking momentum in DDIC since end of Q1. Our automotive business comprising driver, TCOM and OLED sales remained the largest revenue contributor in the Q2, representing over 47% of total sales. Meanwhile, Q2 Teplit IC sales slightly increased sequentially, surpassing guidance of a decline, fueled by leading customers' new model ramp ups.

Speaker 1

Conversely, smartphone driver sales declined as expected during a subdued susceptible season characterized by sluggish demand. The small and the medium sized driver IC segment accounted for 66.3% of total sales for the quarter, compared to 69.5% in the previous quarter and 63.9% a year ago. 2nd quarter non driver sales reached $41,800,000 up 30.6% from the previous quarter due to a resurgence in orders for our TCOM product for TV, monitor, automotive, as well as OLED tablet. Our automotive local dimming TCOM, where we dominate the market, has been swiftly adopted by major panel makers, Tier 1 suppliers and the car manufacturers worldwide, Those things were over 100 design win projects with only a small number of design awards have commenced mass production. This momentum is further fueled by the rapid expansion of project awards across continents, positioning us for strong growth, mirroring the success we have achieved in automotive TDDI.

Speaker 1

TCOM Business represented over 10% of our total sales in the 2nd quarter. Non driver products accounted for 17.4 percent of total revenues as compared to 15.4% in the previous quarter and 16.8% a year ago. 2nd quarter operating expenses were $47,300,000 a decrease of 6.7% from the previous quarter and a decline of 11.1% from a year ago. The sequential decrease was primarily driven by decreases in textile expenses. The year over year decreases was primarily due to reduced textile expenses and a decline in the annual bonuses for the amortized tranches of the previous year's bonuses.

Speaker 1

Amid ongoing macroeconomic challenges, we are strictly enforcing budget and expense controls to manage these conditions. 2nd quarter operating income was $29,300,000 or 12.2% of sales compared to -0.9 percent of sales for the same period last year and 4.8% of sales last quarter. Both the sequential and year over year increases were primarily due to higher sales and an improved gross margin. 2nd quarter after tax profit was $29,600,000 or $0.169 per diluted ADS compared to $12,500,000 or $0.071 per diluted ADS last quarter and $900,000 or $0.05 in the same period last year. The asset tax profit for the first half was $42,100,000 or $0.241 per diluted ADS, a significant increase from $15,800,000 or $0.091 for the same period last year.

Speaker 1

Turning to the balance sheet, we had $253,800,000 of cash, cash equivalents and other financial assets at the end of June 2024, compared to 277 point $4,000,000 a quarter ago and $219,500,000 at the same time last year. The sequential decrease in cash balance was primarily due to customers' refund for their deposits made during the industry wide capacity shortage, along with strategic investment of approximately $16,000,000 in FOCI through private placement. The cash balance reduction was partially offset by an operating cash inflow of $26,900,000 during the quarter. Compared to the operating cash inflow of $6,700,000 in Q1, the sequential decrease was mainly attributable to reduce the sales over the preceding 2 quarters, leading to lower receivables. Additionally, the increase in accounts payable in Q2 was a result of higher Q1 wafer starts as we anticipated larger shipment volumes in Q2.

Speaker 1

Other significant operating cash outflows in Q2 included annual income tax payments. Looking ahead to Q3, we anticipate a decline in cash, cash equivalents and other financial assets, primarily due to a payment of $50,700,000 for annual dividend to shareholders. We also expect to distribute a total of approximately $30,700,000 for employee bonus awards at the end of this quarter, which include around $11,300,000 for the immediately vested portion of this year's award with the actual amount subject to the final Board decision and the $19,400,000 for vested awards granted over the past 3 years. Our quarter end inventories as of June 30, 2024 were $203,700,000 similar to $201,900,000 last quarter indicating a well managed and balanced inventory level. Accounts receivable at the end of June 2024 was $242,400,000 up from $212,300,000 last quarter and $239,000,000 a year ago.

Speaker 1

DSO was 99 days at the quarter end as compared to 93 days last quarter 90 days a year ago. 2nd quarter capital expenditures were $4,600,000 versus $2,700,000 last quarter $2,900,000 a year ago. The 2nd quarter CapEx was mainly for R and D related equipment and in house tester for our IC design business. As of June 30, 2024, Himax had 174,700,000 ADS outstanding, unchanged from last quarter. On a fully diluted basis, the total number of ADS outstanding for the 2nd quarter was 175,100,000.

Speaker 1

Dollars Now turning to our Q3 2024 guidance, we expect 3rd quarter revenue to decrease 12% to 17% sequentially. Gross margin is expected to be around 30% depending on program mix. The 3rd quarter profit attributable to shareholders is estimated to be in the range of $0.015 to $0.045 per fully diluted ADF. As we've done historically, we will grant employees annual bonus, including our ICUs and the cash awards on or around September 30 this year. The 3rd quarter guidance for profit per diluted ADS has taken into account the expected 2024 annual bonus, which subject to Board approval is now assumed to be around $12,500,000 out of which $11,300,000 will be exhausted and expensed immediately on the grand day.

Speaker 1

As a reminder, the total annual bonus amount and the immediately exhausted portion are our current best estimates only. And the actual amount could vary materially depending 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 2024 to lead to higher Q3 operating expenses compared to other quarters of the year. In comparison, the annual bonus for 20232022 were $10,400,000 $39,600,000 respectively, of which $9,700,000 $18,500,000 lasted immediately. In providing our Q3 financial guidance, the Q3 expense related to employee bonus is estimated to be $14,200,000 compared of $11,300,000 the immediately adopted portion of this year's bonus as stated above and the $2,900,000 the amortized portion of the previous year's unboxed bonuses.

Speaker 1

For the sake of completeness, employee bonus expense in each of the last three quarters were was also around $2,900,000 I will now turn the call over to Jordan to discuss our Q3 outlook. Jordan, the floor is yours.

Speaker 2

Thank you, Eric. Given the prevailing macroeconomic uncertainty and customers remain conservative, causing panel makers to take a cautious stance and strictly control production to maintain low inventory levels. This is adversely impacting RC demand leading to our conservative third quarter forecast. During the Q2, the automotive market, carmakers initially anticipated a sales boost due to promotional activities and government subsidies, especially in China. Consequently, we saw a major uptick in the 2nd quarter IC sales along with the aggressive discount campaigns of carmakers.

Speaker 2

However, these intense campaigns did not generate the anticipated sales growth and may have even triggered consumers to hesitate in purchasing new cars, leading to disappointing car sales in China for the Q2 and resulting in excessive inventories throughout the supply chain. As a result, our panel customers have begun to scale back their IP procurement in Q3 to manage inventory levels. In comparison, the automotive makers in Europe and the U. S. Have remained relatively stable since last year without experiencing the traumatic fluctuations seen in China.

Speaker 2

As a leader of the automotive display ICs, we serve a diverse range of brands worldwide with sales evenly distributed across all major markets. However, since China is the world's largest automotive market, commanding over 30% of the global sales, fluctuations in China do have a substantial impact on our business. Moving forward, we will navigate the current challenging business environment through close collaborations with panel makers and Tier 1 suppliers, meticulously managing our wafer spots and close the monitoring customer demands. The automotive IT business is Himax's largest revenue contributor, accounting for over 47% of total sales in Q2, significantly higher than our peers. Despite the recent challenges, we remain optimistic about our automotive IC business and are committed to the long term innovation and development of our automotive products.

Speaker 2

The automotive display market remains on solid footing with a positive growth trajectory driven by versatile innovations and technology advancements. Advanced and fancier displays are increasingly becoming a major selling point for carmakers, driving the automotive display market towards a megatrend of expanding quantities, sizes and sophistication. As the leading player in the automotive IC market, Himax is well positioned to be the key beneficiary of the trend. We commend a 40% global market share in traditional automotive DDIC and hold an even larger share in both the automotive TDDI and novel dimming TCOM markets. In addition to offering the most comprehensive range of automotive IC products for LCD panels, we are actively expanding into the automotive OLED panel market, forming strategic partnerships with major panel major TV leading panel makers in Korea, China and Japan to develop comprehensive solutions encompassing DDIC, TCAM and touch control ICs.

Speaker 2

This proactive approach positions us to navigate industry shifts and capitalize on the anticipated widespread adoption of OLED displays in the high end vehicles, further solidifying our market leadership. During the quarter, we announced 2 substantial sufficient investments. 1st, in an effort to strengthen the long term partnership with SpawSee, we, as a strategic investor, acquired a 5.3 percent equity stake through private placement. The partnership integrates Himax's wearable optics or WLO expertise and 4 C's optical fiber to create innovative world leading linear drive product for optics or LPL and co packaged optics or CPL solutions. For advanced mother ship modules required for the fast growing cloud AI and high speed computing markets.

Speaker 2

This collaboration not only highlights the application, versatility of the WLO technology and Himax's market leadership, but also underscores the significant potential of our WLO in advancing LPOCPO technology, which is vital for the advancements of cloud AI and high speed computing. Separately, we invested in the U. S.-based obsidian sensors, whose revolutionary high resolution thermal imaging sensors meet the growing demand of thermal imaging across various industries, including automotive, security, surveillance, drones and military. This investment broadens our portfolio of imaging sensors, which when meshed with our ultra low power Wi Fi AI enable enhanced sensor fusion possibilities for endpoint AI applications. The Obsidian investment positions us at the forefront of machine vision AI applications, delivering high effectiveness, particularly in harsh environments and completely dark scenarios.

Speaker 2

As we look ahead, our focus remains on enhancing profitability, strengthening operational resilience and improving adaptability to the evolving market. We continue to optimize our cost structure and reinforce our supplier diversification strategies for foundries as well as packaging and testing. At the same time, we remain committed to stringent expense control set to further reduce operating expenses compared to last year. For reference, we achieved a 4% year over year reduction in operating expenses in 2023. With that, I will now begin with an update on the large panel driver IC business.

Speaker 2

In Q3, we anticipate a double digit sequential revenue decrease for large display driver ICs, primarily due to subdued monitor and TV IC sales, set to decline double digit and single digit, respectively, following substantial order replenishment in preparation for shopping festivals in the previous quarter. Procurements from our leading panel customers have become more conservative due to sluggish market conditions, driven by worse than expected shopping festival sales. However, local IT sales are poised for a decent increase, bolstered by robust order replenishment from our leading panel customers. Looking ahead in the novel sector, we have made a strategic effort to position ourselves to capitalize on the anticipated rising demand for 2 new market areas, namely LCD displays equipped with touch features and OLED displays, both expected to enjoy decent penetration in premium notebook and the upcoming AI PC markets, Leveraging our industry leadership in TDDI solutions for tablet market, we are working closely with LCD panel customers in the development of inCell TDDI and new generation TCON solutions for LCD displays. Concurrently, we have made significant strides in OLED technology for notebooks in strategic partnerships with leading panel makers in Korea and China, developing state of the art touch controllers, DDICs and TCON solutions.

Speaker 2

Some of the projects above, including in cell TDDI for mainstream LCD notebooks and PUB and TCAR and DDIC for OLED notebooks are slated for mass production in the second half of this year with the impairment first. We are optimistic that the notebook segment will act as a strong growth catalyst for Himax as we move into 2025. Turning to the small and medium sized display driver IC business. We anticipate 3rd quarter revenue to decline low teens sequentially, Impacted by our customers' disruptive measures, especially for the Chinese market, as I just mentioned, Automotive revenue in Q3 is expected to decrease high teens sequentially, following high teens growth of both DDIC and TDDI in Q2. That being said, through the 1st 9 months of the year, our automotive driver ID sales are still set to grow mid teens year over year, driven by continued expansion of TDDI adoption across all major end customers.

Speaker 2

We have secured over 450 TDDI design win projects with only approximately 30% currently in mass production, indicating significant growth potential going forward. Meanwhile, a trend is emerging where more customers are opting for Himax's TDDI or LTTI along with our lower team in DCOM as their standard development platform for creating new automotive displays of various sizes. This growing adoption of more of our automotive IC offerings also signifies an increase in company value for Himax on a per panel basis. Himax is widely recognized as the leader in the automotive display IC market, offering the industry's broadest range of products from traditional DDIC and TDDI to advanced technologies such as global dimming TCAM, LTDI and OLED. We are committed to continuously enhancing our product portfolio to meet customers' diverse and evolving needs.

Speaker 2

Our newly introduced TPDI incorporating local dimming TCAM in 1 chip exemplifies this commitment to providing customers with more options as the new solutions is ideal for smaller panels that usually require only 1 to 2 ICs for cost considerations, while still equipped with advanced touch and lower demand features. Turning to smartphone IG sales, we expect a decent double digit increase sequentially, thanks to new product launches by key customers during the quarter. In contrast to the positive outlook in smartphone business, Q3 tablet sales are projected to decline sequentially as end customers prolong their replacement cycles in response to challenging economic conditions. Next, for an update on our OLED business. For the automotive OLED market, we have formed strategic alliances with leading panel manufacturers in Korea, China and Japan, leveraging our leadership in automotive LCD technology and OLED design expertise.

Speaker 2

These partnerships further strengthen our presence in the market. We offer a comprehensive suite of OLED solutions for automotive, including DDIC, TCAM and on sale touch controllers, ensuring complete coverage of customer requirements. Notably, our meticulously engineered OLED on sale touch controllers, set a new standard boasting an industry leading touch signal to noise ratio of over 45 dB, greatly enhancing sensitivity. This allows automotive displays to maintain proper functionality under challenging conditions such as glass wearing and working the operations. We are pleased to share that our OLED on the touch controller for automotive has entered mass production this quarter.

Speaker 2

With additional projects set for mass production soon, we anticipate sales of our OLED on sale touch controller to further bolster our revenues starting 2025. Beyond the automotive sector, we have met notable advances in the tablet and notebook sectors with top OLED panel manufacturers in Korea and China. Our comprehensive OLED product offerings encompassing DDIC, TCAM and touch controllers has led to several panel of led to several new projects that are on track to end the mass production later in the year. Regarding smartphone OLED, the current market drawdown of our customers has prompted us to revise our production timeline to next year. Despite these challenges, we are actively collaborating with customers in Korea and China and have several verification and partnership projects currently in progress.

Speaker 2

I would like to now turn to our non driver IC business update. First, for an update on our TCAM business. We anticipate a double digit sequential decline in Q3 TCAM sales as customers pull forward their inventory purchases during the prior quarter, particularly for monetization. However, our Automotive TCOM business is expected to achieve a decent double digit growth in Q3. Despite the current headwinds in the automotive market fueled by the shipment of new projects from previously secured design wins.

Speaker 2

Since only a small portion of the secured design wins are currently in mass production, we anticipate significant growth potential for our automotive T Con business in the coming years. While ongoing weak macroeconomic conditions continue to subdue demand in consumer electronics, Some of our newly developed TCAM ICs for OLED tablet and e paper displays are starting to show promising results. In the Tablets segment, we are expanding our product lineup and strengthening our position in the high value asset OLED market, building on our early success in the Taply OLED market. For the rapidly growing e paper market, we recently made a joint announcement with E Ink, the global leader in e paper market to unveil T2000, a state of the art next generation color ePaper T Con. EPaper stands out for its energy efficiency, consuming power only during screen updates, leveraging Himax's decades of expertise in image display processing and T Con design.

Speaker 2

The T2000 T Con accelerates screen updates for better viewing experience, while greatly reducing power consumption of the e paper display. Additionally, the T2000 features an exclusive handwriting processing accelerator enabling seamless nearly lag free handwriting while boosting prompt display responsiveness on e vapor displays without requiring an SoC. It also enables richer and more vibrant colors, enhancing the display's visual appeal across a broad spectrum of eInks, our color ePaper platform. The collaboration opens new possibilities for color ePaper applications in e readers, e paper digital signage and more. Switching gears to the Wi Fi Archi Lo Power AI sensing solution, a cutting edge endpoint AI integration featuring industry leading ultra low power AI processor, always on CMOS image sensor and advanced CNN based ARP AI algorithm.

Speaker 2

In the fast changing AI landscape, WiSight AI Technology stands out for its expertise in own device tiny MRO microcontroller solutions, categorized by remarkably low power consumption, operating at just single digit mini watts, making it possible to add AI functionalities to battery powered endpoint devices. Our WebSci technology is creating new opportunities for companies such as Desmond, China's leading high end smart door lock vendor, who introduced the world's 1st smart ball locks with 20 47 century monitoring and real time events recorded with the fancy AI features achieved while still maintaining over 6 months of power of battery operation. Our collaboration with Desmond has sparked increased interest from other borrower vendors across various continents to develop innovative value added AI features such as parcel recognition, smart anti pinch protection and biometric access. Notably, some of our customers are currently evaluating our newly introduced Wi Fi Palm RAN solution, which offers effortless KIDS and highly secure biometric access for entry control. WiSai PolymerM is part of our WiSai AI module business, integrating Himax WiSai to AI processor, CMOS image sensor and our proprietary PowerLAN authentication algorithm.

Speaker 2

We see growing traction and extensive engineering activities for this contactless biometric authentication solution that can authenticate an individual's identity in under 100 milliseconds. While the consumer gets a few milliwatts of power. This represents a significant breakthrough in security technology by enabling biometric authentication in battery powered devices. With outstanding accuracy and robust loudness check capabilities, PARLAN authentication significantly reduces the risk of duplication or spoofing compared to conventional fingerprint or face recognition, making it an ideal choice for indoor security, login authentication and other access control applications. WiFi Palm WAN upholds robust security standards while offering best in class power efficiency, making it the only solution suitable for battery powered devices.

Speaker 2

We are collaborating with vendors across various sectors globally, including door lock, access control, notebook and automotive. While just launched at the beginning of the year, Wi Fi Power RAN has already been successfully adopted by a U. S. Customer for smart security and is set to commence mass production starting the end of this year. We believe Wi Fi Palm RAN will profoundly impact the security industry and unlock new opportunities for battery powered devices across various use cases.

Speaker 2

To broaden why the AI's market reach a short term customer development cycles. We also provide seamlessly integrated plug and play Wi Fi modules and no code, low code AI development platforms, featuring diverse context aware AI algorithms that customers can reprogram or fine tune with minimal effort for real world use cases. Our recent announcement with NVIDIA Pao exemplifies this approach, whereby our Wi Fi module customers targeted AI deployment or resource constrained endpoint devices can easily optimize and quantize our deep learning models with pre trained enterprise ready AI models and tours offered by NVIDIA. This facilitates rapid democratization of endpoint AI applications using cost effective production ready AI modules for various use cases. Additionally, in response to growing AI driven demand towards machine vision across various environments.

Speaker 2

We recently made a strategic investment in Obsidian Sensors as a Diego based company renowned for its revolutionary high resolution low cost thermal sensors offering unmatched versatility by detecting heat differences even in complete darkness, measuring temperature and identifying distant objects. This investment extends our image sensor portfolio beyond optical sensors to include thermal sensors, a valuable complement to our product suite, which is now widened to cover harsh sensing conditions such as heavy fog or complete darkness. Moreover, this strategic investment promises synergy of the 2 companies with our WiSA AI aggregating data from both optical and thermal imaging sensors for a truly holistic view of the environment beyond human vision. In addition, we are engaged in ongoing engineering collaborations that leverage Himax's IT design resources and know how. We believe by integrating the strength of Himax and Obsidian, we can seize new opportunities in the expanding sensor and AI markets across industrial, defense, security, consumer electronics and automotive sectors.

Speaker 2

As an illustration, the U. S. National Highway Traffic Safety Administration issued a new rule in April 2024, mandating that automatic emergency braking or AED, including pedestrian AED or PAED be implemented starting in 2029. This regulation aims to significantly reduce rail and and pedestrian crashes. Similar rules are increasingly being mandated by regulatory authorities worldwide.

Speaker 2

The novel ADAS and AED systems integrated with Obsidian's thermal sensors provides clear vision in low light and adverse weather conditions such as fog, smoke, rain and snow. This ensures better driving safety and security, underscoring the trend and significant potential demand for thermal imaging sensors. Last on WLO, During the Q2, we made a strategic investment in 4sea, a tower based global leader for silicon photonics connector through a $16,000,000 target placement, resulting in a 5.3% equity stake. This collaboration highlights the immense potential of our WLO technology for AOPOCPO, which are crucial for further advancing high speed AI and HPC technologies. Our partnership integrates 4Seas proprietary LPOCPO connector technology with Himax's nanoscale wearable level optics know how to create industry leading optical transmission solution catered for the most advanced modern chip modules, which demand enhanced bandwidth, improved data rate, minimized signal loss, reduced latency and lower energy consumption, all for accommodating future generation needs of generative AI and HPC.

Speaker 2

Currently in close collaboration with 4 leading AI semiconductor players and foundry partner, We are working closely with SORC on AOPOCTO development for products that meet customers' near term production goals. AOPO, CPO technology is crucial for furthering generative AI and SPC and will continue to evolve rapidly to meet the explosive demand in these areas. We are committed to advancing the technology with Falsy, ensuring our solutions stay at the cutting edge and align with the multi year roadmaps of our AI chip and foundry partnerscustomers. We believe this will generate new loss, lasting revenue stream for Himax. We will provide further updates as they become available.

Speaker 2

As Fosse is a company listed on the Type A Exchange, The stock price and resulting, call it, fair value reflected our books change each day. These fluctuations have been and will continue to be recognized by way of changes in auto equity as a balance sheet item, not affecting our profit and loss. As an illustration, based on the close of Allstate stock price as of the end of June 2024, we met a gain of $9,600,000 on our $16,000,000 for the investment. However, the set gain was not recorded as an investment profit in our Q2 financial statements and instead was booked as an increase in owner's equity. Likewise, upon disposal, the resulting investment gain out loss will also be recognized as a change of equity through retained earnings, thus not affecting our profit loss at the time of the disposal either.

Speaker 2

The accounting method we chose reflects our long term commitment to the 4th investment. With over a decade of experience CWO, Himax has developed diverse designs across a broad spectrum, including 3 d sensors, ARVR devices, biomedical inspection and optical communication, just to never feel. These technologies have been widely adopted by some of the world's most prominent tech companies with cumulative shipments reaching more than 600,000,000 units. We anticipate WLO playing an even more decisive role in the next generation optical technology landscape. Thanks to its versatile, high precision, lightweight and small form factor characteristics that are now feasible with alternative technologies.

Speaker 2

In addition to the progress made in LPO, CTO, we are seeing an increase in enduring projects with globally recognized leaders who are leveraging our WLO expertise for the upcoming ARVR devices, underscoring the widespread recognition of our technology. For non driver IC businesses, we expect revenue to decline high teens sequentially in the Q3. That concludes my report for this quarter. Thank you for your interest in time. We appreciate your joining today's call and are now ready to take questions.

Operator

Thanks very much, Jordan. And ladies and gentlemen, we are now in Q and A session. The first one to ask question Donnie Teng, Nomura. Go ahead please.

Speaker 3

Thank you, Jordan for taking my question. My first question is regarding to the automotive business. So I think we have started to see some positive signs back in April. And I remember we were pretty positive back in June and even entering into July. But guidance looks like to be a little bit disappointed and you just mentioned about customers digesting the inventories quickly.

Speaker 3

Just wondering when exactly you are seeing this kind of weakness from the customers? And also because in mid of July, there has been a news in China that Chinese government asking EV companies to check their localization rate in terms of the component in IC procurement. So, wondering if there's any issue there, whether we will be like retired by the Chinese EV makers or it's not the case? Thank you.

Speaker 2

Thank you, Donnie. You are right in that we more positive last quarter when we had our conference call than the present moment. And I think the reason behind it, I've already explained in a lot of detail in my prepared remarks, I. E, the fluctuation in Chinese market is the main factor causing the difference in our view. And as it turns out, our customers were obviously optimistic for their second half outlook entering the Q2 and they were apparently sold too many too much ICE inventory.

Speaker 2

And now they are going through the disruptive process. And also we also mentioned in our prepared remarks that the U. S. And European markets are relatively stable compared to China. Now if you look at the Q3 prospect and also if we look further into Q4, so the over procurement in Q2 and the starting in Q3 kind of explains our changing position in our outlook.

Speaker 2

Now the real question is how is this going to go going forward. And I think, I mean, certainly for the longer term, like next year, we remain still pretty positive about the outlook, which I will probably cover in a few minutes. Now more importantly, what is the near term in Q4? And I'll tell you the truth, our internal forecast, which were the result of collective forecast coming from various customers globally, including panel makers in Tier 1s. Q4, as of today, the projection remains pretty positive with actually a decent double digit growth compared to Q3.

Speaker 2

However, we are toning down Q4 automotive prospect right now, given the very recent, I'm talking about last week also, the global turmoil in financial markets, which might impact consumer confidence in their major big ticket spending such as buying new cars. So but we are uncertain and we are given the short period of time, because the major financial turmoil across the global financial market really occurred only last week. So there's no time for us to get feedback from our customers that I suspect there's no time for our customers to get good feedback either from the market. So we are taking a with a C attitude. But in fact, as of today, our outlook for Q4 based on our forecast book is still pretty positive.

Speaker 2

And when did the sentiment turn? I would say probably beginning of this quarter, only very recently, but we did see steady kind of slight pullback of customers for forecast, almost week by week, slightly or steadily and that is certainly another very promising side. Now on your concern of China localization, yes, indeed, they've met the announcements and set targets to further mobilize their IG supply for China's automotive sectors. But as far as we are concerned, in our IC, which is our automotive IC, which is display ICs. We are I wouldn't say that would not be a threat because any competition is a threat.

Speaker 2

But I think our leading edge is now so significant that I can't see any impact of Chinese competition in the near term or in the foreseeable future. And compared to consumer electronics, as we all are very aware of, automotive ICs are much harder to replace and you have to go through a much lengthier ecosystem and let alone the various requirements, higher standards of safety and other requirements. So Chinese localization certainly does not play any role in our more conservative outlook for Q3 or going forward into Q4. In fact, next year, if anything, we believe our market share, especially for those new technologies such as TDDI, double TIM and TCAM or OLED actually starting next year, we are likely to see some early ramping. I think if anything, we believe quite confidently our market share of automotive display ICs will further rise from this year's level.

Speaker 2

And there's no reason for us to believe next year's automotive market will continue to be very bearish. I mean, I think it's too early for us to form a very solid view for next year, but there's no indication of signs that people's costs are spending on cars will necessarily decrease given the fact that the economy is going through some troubles, but I think all governments with authorities, the feds of different countries will likely to take measures to encourage consumption and boost their GDPs and spending happens to be a major item if the government wants to boost their GDP. So I think, again, I'm not providing a solid outlook for next year, but I just want to say there's no reason for us to believe next year will be a bad year for automotive market. I hope that addresses your question.

Speaker 3

Great. Thank you, Geraldine. And my second question is regarding to CPO. So could you maybe elaborate more on what's the timeline of the CPO product?

Speaker 2

When should we expect to see

Speaker 3

some more volume contribution? And how confidence you are is like to ramp up this business in the mid to long term? Thank you.

Speaker 2

Present timeline, I'm proud by NDA of my partners and customers. So I'm afraid I cannot give you very, very specific date or timetable. But I can tell you, what we are working on right now, the design is targeted for mass production. It is not it is certainly not a R and D concept. An R and D project is not actually, we are way past that stage.

Speaker 2

I mean, certainly, we did that before, years before, but we are way past that stage. And we are now pushed towards mass production ASAP. That's what I can tell you is, in fact, we expect to see some small, but very early result hopefully by the end of this year, but that's minimal. But next year, if everything goes as planned, there will be steady there will be steady, steady ramping. And the confidence they will mid- to long term, I would say, is very confident.

Speaker 2

I think we all know about this hunger for more positive power because of generative AI, right? And we are all very aware of the issues there. The challenge is to further increase your bandwidth, your processing power, your processing speed and but there are all kind of issues, including power consumption, heat dissipation and all that, right. And I would say CPO is relatively low cost and relatively easy. I'm not saying it's easy, but it's relatively easy to fix to all these issues and also cost wise as well, because right now, if you analyze the most advanced HPC ICs or GPU ICs.

Speaker 2

They are very big process in power, but their bottleneck right now is actually the transmission with the outside, the transmission of the IC. The IC can process a lot of power data, high bandwidth, super high bandwidth, very fast. The bandwidth is expanding is expected to expand exponentially over the next few years. Now with advanced packaging, it's going to the expansion is going to be faster and faster. However, the real bottleneck right now is their transmission capability, their transmission bandwidth, which is limited because now they are relying on metal wire to do the transmission.

Speaker 2

And we all know there's no secret to really improve that. You just need to replace your metal wire with fiber optics. And that's exactly what we're trying to achieve, right, that we're trying to help to resolve. And so if you can successfully replace your metal wire with fiber optics right away, you boost your bandwidth by hugely. Thereby also as a major side benefit, you also reduce your power consumption because the thermal loss will become much less and you increase your data accuracy, etcetera, etcetera, right?

Speaker 2

So I would say it's everybody in the ecosystem is very keen to making sure that this happens ASAP and when it happens because as I mentioned, right, it's a relatively cheap and easy fix to their solutions. So I don't see any reason why this should not be adopted across the board to cover as many of the ICs as possible. Now I'm only talking about ICs, which demand very high bandwidth, right, which demand very high bandwidth. And our goal, our role is to building on the foundation of today to continue to help expand the transmission bandwidth, right? And we have a role line together with partners, our customers to really pretty dramatically expand the transmission bandwidth very substantially.

Speaker 2

I'm talking about by many by multiple times over the next few years. And some of these projects are already in experimental stage, in earlier experimental stage or more mature experimental stage. But what I'm trying to tell you is that the 1st generation upon loss production will greatly expand the transmission bandwidth of those ICs already with further solutions expected to be available in rather short time span with multiple times improvement in our transmission bandwidth. So I think this is really an exciting opportunity for us for WLO. I mean, it was a surprise when we realized a long time ago that our revenue can actually be utilized to tackle this issue.

Speaker 2

But as we dig further and further, we realize this is actually a very, very perfect solution, a very perfect fix for the data transmission bandwidth issue that is now faced by this AI technology advancement. Any further questions from Tony or others?

Speaker 3

No, thank you, Julien. Very helpful.

Speaker 2

Thank you.

Operator

Ladies and gentlemen, we are still in Q and A session.

Speaker 2

As a final note, Eric B, our Chief IRP Officer will maintain investor marketing activities and continue to attend investor conferences. We will announce the details as they come above. Thank you and have a nice day.

Remove Ads
Powered by Quartr
Earnings Conference Call
Himax Technologies Q2 2024
00:00 / 00:00
Remove Ads