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Executives

John Mattio - IR, MZ Group

Jordan Wu - President & CEO

Jackie Chang - CFO

Analysts

Anthony Stoss - Craig-Hallum Capital

Kyna Wong - Bank of America

Jay Srivatsa - Chardan Capital

Jun Zhang - Wedge Partners

Jerry Su - Credit Suisse

Himax Technologies, Inc. (HIMX) Q1 2013 Earnings Call May 7, 2013 8:00 AM ET

Operator

Greetings. Welcome to the Himax Technologies Incorporated First Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, John Mattio, Senior Vice President of MZ, North America. Thank you Mr. Mattio, you may now begin.

John Mattio

Thank you, operator. Welcome everyone to Himax’s first quarter 2013 earnings call. Joining us from the company are Mr. Jordan Wu, President and Chief Executive Officer and Ms. Jackie Chang, Chief Financial Officer. After the company’s prepared comments, we have allocated time for questions in a Q&A session.

If you have not yet received a copy of today's results release, please call MZ Group at 212-301-7131 or access the press release on financial portals like Bloomberg, Yahoo! or Google or you could download a copy from Himax’s website at www.himax.com.tw.

Before we begin with the formal remarks, I would 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.

Factors that could cause actual results include, but are not limited to, general, business and economic conditions and the state of the semiconductor industry; market acceptance and competitiveness of the driver and non-driver products developed by the company, demand for end-user application products, reliance on a small group of principal customers, the uncertainty of continued success in technological innovations and other operational and market challenges; the capacity to maintain the full two-way fungibles between the company's ordinary shares and ADS, and other risks described from time to time in the company's SEC filings, including those risks identified in the section entitled Risk Factors in its Form 20-F for the year ended December 31, 2012 filed with the SEC as amended.

Except for the company’s full year 2012 financials, which were provided on the company’s 20-F filed with the SEC, the financial information in this conference call is unaudited and consolidated, and prepared in accordance with U.S. GAAP. Such financial information is generated internally and has not been subject to same review and scrutiny, including internal auditing procedures and audit by independent auditors to which the company subjects its annual consolidated financial statements, and may vary materially from the audited consolidated financial information for the same period.

Any evaluation of the financial information included in this conference call should also take into account the company’s published audited consolidated financial statements and the notes to those statements. In addition, the financial information included in this conference call is not necessarily indicative of its results for any future 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.

At this time, I would now like to turn the call over to Mr. Jordan Wu. Jordan, the floor is yours.

Jordan Wu

Thank you John and thank you everybody for being with us for today’s call. We have some exciting developments to report. As usual, I will provide some preliminary review on our first quarter of the year and then our outlook for the second quarter. I will also comment on a few of our product areas of focus for the year. Our CFO, Jackie Chang, will then provide further details on our financial performance for the period ended March 31, 2013. In addition, on April 30th, we filed a Form F-3 shelf registration statement with the SEC. We will give you some details on that.

I am pleased to report that our first quarter revenues, gross margin and GAAP and non-GAAP earnings per ADS all exceeded the guidance we provided on February 7th. For the first quarter, we reported net revenue of $175.7 million with gross margin of 24.6%. Our GAAP gross margin for the first quarter improved from the previous quarter by 130 basis points.

First quarter GAAP earnings per diluted ADS were 8.2 cents and non-GAAP earnings per ADS were 8.8 cents, which surpassed the top end of our guidance by 9.3% and 10%, respectively. These positive performances are a result of our diversification of customer base and expansion of product portfolio to more exciting and high growth areas of small and medium-sized driver and non-driver businesses.

Our first quarter revenues of $175.7 million represented a 5.4% increase from $166.7 million in the first quarter of 2012 and a 7.8% decrease from $190.6 million in the fourth quarter of last year. The sequential decline was expected due to the short quarter and seasonality in our business.

Revenues from large panel display drivers were $60.1 million, down 15.8% from a year ago and down 22.5% sequentially. While large panel driver IC will continue to remain a major part of our sales; it accounted for just 34.2% of our total revenues for the first quarter, compared to 42.8% a year ago and 40.7% in the fourth quarter of 2012. The significant sequential decrease was a result of slow monitor demand, high customer inventory, seasonal slowdowns and reduced sales to our related party customer.

Among all our large-sized panel market regions, China continued to show impressive growth year-over-year. Sales for small and medium-sized drivers came in at $91.3 million, up 26.1% from the same period last year and up 6.9% sequentially. As a segment, driver ICs for small and medium-sized applications accounted for 51.9% of total revenues for the first quarter as compared to 43.4% a year ago and 44.8% in the previous quarter.

Our small and medium-sized driver sales reached another record high in terms of both absolute value and percentage of total revenues, thanks mainly to the fast growing smartphone sector that has become our single largest revenue contributor. Small and medium-sized applications accounted for over half of total revenues for the first time in our history. Despite of fewer working days due to Chinese New Year, we managed to achieve a sequential growth mainly because of the strong sales to first tier international smartphone brands. The strong year-over-year growth is a result of the robust sales of smartphone, tablet and automotive display applications.

Revenues from the non-driver businesses were $24.3 million, up 6.2% from the same period last year and down 12% sequentially. Non-driver product revenues accounted for 13.9% of total revenues, as compared to 13.8% a year ago and 14.5% in the previous quarter. The sequential decline is mainly a result of weak sales of CMOS image sensor, which we predicted in the last earnings call. We will elaborate on this later.

Our first quarter non-driver businesses overall grew a mere 6.2% year-over-year. We believe the less than ideal growth of the Q1 non-driver products was a temporary setback. We are confident that our non-driver products will resume their strong growth momentum during Q2 and throughout the rest of the year. I will discuss more on some of these product areas a bit later after Jackie’s remarks on our financials.

While revenues from our related party continued to decline, we saw a strong growth from other customers. Related party sales were down 27.4% from the previous quarter and down 30.4% from the same period last year. In comparison, revenues from non-related parties went up 1.3% quarter-over-quarter and grew 27.3% year-over-year. Related party sales accounted for 25% of total sales in the first quarter, compared to 37.9% a year ago and 31.8% in the previous quarter. This related party customer remains our single largest customer with sales made to them mainly in large panel driver IC products. We will continue to provide them with the best service in an effort to win the most possible business from them.

Our GAAP gross margin for the first quarter 2013 was 24.6%, a 170 basis points expansion from 22.9% a year earlier and a 130 basis points improvement from 23.3% in the previous quarter. This is the sixth consecutive quarter of gross margin improvement and the highest gross margin level since the third quarter of 2008.

The trend in our margin expansion is a direct result of a richer mix of higher margin products like those in our non-driver categories and the fast-growing small and medium-sized panel drivers which are trending toward higher resolution. Gross margin improvement will continue to be one of our business goals going forward.

Our GAAP net income for the first quarter was $14 million, or $0.082 per diluted ADS, up from $11.3 million, or $0.066 per diluted ADS, for the same period last year, and slightly down from $14.8 million, or $0.086 per diluted ADS, in the previous quarter. GAAP EPS beats our guidance as a result of higher sales and better gross margin.

In summary, we are pleased with the top and bottom line performance of the first quarter of 2013 when, during a low season period, we achieved both margin expansion and profitability improvement. We will continue to execute our strategy and are excited about further growth opportunities ahead of us.

I will now ask Jackie Chang, our CFO, to provide more clarity and details on our financial results. After Jackie’s presentation, we will further discuss outlook for the remaining quarters of the year and our second quarter 2013 guidance. Jackie?

Jackie Chang

Thank you, Jordan. I will now provide additional details for our first quarter financial results. Our GAAP operating expenses were $26.4 million in Q1 2013, up 11.8% from $23.7 million a year ago and up 4.9% from $25.2 million in the previous quarter. The increase was mainly resulted from higher expenses related to salaries for R&D’s new hires and new product developments.

GAAP operating income for the first quarter of 2013 was $16.8 million, or 9.5% of sales, up $2.3 million compared to the same period last year and down $2.5 million from the previous quarter.

Non-GAAP net income in the first quarter was $15 million or $0.088 per diluted ADS, up from $12.1 million, or $0.071 per diluted ADS, for the same period last year, and down from $15.7 million, or $0.092 per diluted ADS in the previous quarter. Non-GAAP net income represents a growth of 23.6% year over year and a decrease of 4.4% as compared to the previous quarter.

Our cash, cash equivalents and marketable securities were $158.9 million at the end of March 2013, a significant increase from $102.1 million for the same time last year and $138.9 million a quarter ago due to the substantial net cash inflow from operations during the quarter. On top of the above cash position, restricted cash was $74.1 million at the end of the quarter, down from $84.2 million during the same period last year and no changes compared to the last quarter. The restricted cash is used to guarantee the company’s short-term loan for the same amount. We want to stress that Himax remains debt-free.

Inventories as of March 31, 2013 were $138.3 million, up from $118.5 million a year ago and up from $116.7 million a quarter ago. We raised the inventory level to accommodate for the expected increase of shipments during the second quarter. Accounts receivable at the end of March were $189.9 million as compared to $189 million a year ago and $209 million last quarter. Day sales outstanding was 97 days at end of March 2013, as compared to 103 days both a year ago and at end of the last quarter. The 97-day day sales outstanding signifies an improvement compared to the level between 103 and 109 days over the past 4 quarters.

Net cash inflow from operating activities for the first quarter was $29.4 million as compared to $3.6 million during the same period last year and $52.4 million in the previous quarter.

Capital expenditures were $4.7 million in the first quarter versus $1.6 million a year ago and $2.2 million last quarter. The capital expenditure was mainly for the purchase of some in-house driver IC testers to cope with higher demands anticipated due to strong smartphone and tablet driver sales. While we outsource the majority of our driver IC testing, we have always maintained a certain level of in-house testing facility for the purpose of both R&D and mass production.

We paid an annual dividend of $0.063 in July 2012, which equals to 100% of our net income for the year ended December 31, 2012. The board will decide on our 2013 dividend soon.

With regards to our $25 million share buyback program, we have purchased a total of $13.4 million, or approximately 9.5 million ADS through March 31, 2013. No ADS was purchased in first quarter 2013 because our share price appreciated significantly in the quarter. As of March 31, 2013 Himax had 169.6 million ADS equivalents outstanding. Out of the total share repurchase plan of $25 million announced in June 2011, $11.6 million remains unused. We will continue to execute the remaining share repurchase program in accordance with Rule 10b-18 and in compliance with any other applicable legal, regulatory and contractual restrictions.

I will now turn the floor back to Jordan to discuss update to our 2013 outlook and second quarter guidance.

Jordan Wu

Thank you, Jackie. As detailed on our last call, 2012 was a year of transition when we delivered robust revenue and earnings growth on the back of successful customer and product diversification. Throughout 2013, we are seeing strong fundamentals across many of our product lines and will continue to execute our strategy to focus on image processing related technologies while diversifying our customer base and product portfolio.

Large panel driver IC remains one of our major businesses and will continue to be part of our major revenue stream. As expected, first quarter large panel driver IC sales declined amid a seasonally weak market featuring reduced working days, slow monitor demand and high customer inventory.

The sales to our related party customer also declined. We are confident we have maintained a competitive position in the large panel segment and will continue to pursue new growth opportunities presented by China’s continued expansion of their overall panel production capacity and potential new business from Korea.

The prospect of our small and medium-sized panel driver business remains a focal point of our business in 2013. We are in a strong position in the smartphone sector with leading technologies, competitive products and good customer line-up. We will further expand our smartphone customer base which has already covered first-tier international and Chinese brands as well as the fast-growing China white-box market.

Smartphone application has been the largest revenue contributor among all panel applications since the third quarter of 2012. We expect the sales for smartphone application will continue its growth momentum throughout the rest of 2013. In addition to volume growth, we are also benefiting from the industry trend toward higher resolution as mentioned in our last call.

Higher resolution will not only benefit our revenue but also gross margin. Beyond smartphone, tablets and automotive displays are the other two major applications where our small and medium-sized driver ICs enjoyed the strongest growth. Although the first quarter is usually a low season, the sales for both applications still grew significantly during the quarter. In the tablet market, our penetration covers both international brands and the low-cost robust market, which surged in 2012 with growth continuing into the first quarter of 2013.

We also enjoy a leading market share in automotive display in both before and after markets with leading end user brand customers stretching across all continents. With further design-wins and shipments in the pipeline, we expect these two product lines will continue their growth momentum throughout 2013. Our non-driver products as a whole declined in the first quarter compared to the last quarter. However, we expect this is a short term setback and growth momentum will return starting Q2 and going forward. I will now highlight some of the non-driver product lines below.

We pointed out in our last earnings call that our CMOS image sensor business would suffer from a weak demand during the first quarter of 2013, as many of the customers adopting our new sensor products would still be finishing up product tuning and those using existing products were affected by China market’s correction and low season. However, we expect our CMOS image sensor product line to rebound strongly in Q2 with sales expected to triple from the previous quarter to become our single largest non-driver segment. Sales are to be boosted by shipments of our 1 mega-pixel sensor for tier-one laptop customers and growing demand for our 2 and 5 mega-pixel sensors from smartphone and tablet makers in China, Taiwan and internationally. With more complete product offerings covering newly-launched 8 mega-pixel and solid shipping records of our existing products, we expect to break into new and leading smartphone brands in the second half of 2013 and continue to penetrate the tablet, IP Cam, surveillance and automotive markets.

We also continued to make good progress in our ASIC service and video processing IP licensing businesses by winning new projects from top-tier customers. Our execution for the ASIC projects won last year was highly praised by our customers. We have therefore not only obtained additional projects from those existing customers but also leveraged on the track record to win new projects from new international brand customers in Q1, some of which involve projects of massive scale and complicated features. These accomplishments proved our strong R&D capabilities and competitiveness in this area. We are excited by this progress and expect this product line to generate more development fees which will contribute to better overall gross margin in 2013.

In several of our previous earnings calls, we updated on the progress of the LCOS technology for new application development. Specifically, we highlighted our collaboration with several top-tier customers on the new head-mounted display application. I would be remiss not to address the attention lately on our rumored work with certain customers on head-mounted display products. As a general disclosure on PR policy which the members of our team and our IR coordinators abide by, we do not disclose and comment on specific customer information unless it is required by the SEC reporting guidelines or the customer themselves publicly identifies us as a supplier. While the discussions about head-mounted display have reached a fevered pitch, our focus remains to continue to work with our customers to try to bring new head-mounted display products to the market as soon as we can. All such development projects are under strict non-disclosure agreements.

As we mentioned in earlier earnings calls, head-mounted display is a new and exciting product area with a great deal of potential and is an application where we believe our LCOS technology is superior to other competing technologies. We have worked on the application for a long time and we actually pointed out in our Q2 earnings call of 2012 that head-mounted display would be the new focus of our LCOS (inaudible) display business. In anticipation for potential product delivery ramping, we have recently embarked on certain capital expenditure to upgrade our in-house LCOS facilities. In addition to head-mounted display, our LCOS micro displays are applied by numerous partners to create other new application products such as pico-projector, head-up display for automotive application and projectors for toy application. We remain committed to the long-term development of LCOS micro display technology and its exciting new applications and market potential. We believe these developing applications will augment Himax’s long-term growth and further diversify our revenue stream.

With all these new developments and design wins of our non-driver products, we expect our non-driver businesses to grow strongly in Q2 2013 and beyond. We will continue to lift the non-drivers’ percentage of total sales to further diversify sales base and improve gross margin. Now I would like to spend a few minutes to talk about the shelf registration statement which we filed on April 30, 2013. The filing was mainly in response to the request of Innolux Corporation, one of our major shareholders, to register its entire shareholding in Himax in order for it to facilitate an SEC registered offering. We have been advised that Innolux intends to dispose of its entire holding of Himax's shares. The shelf registration will expire in three years regardless of whether the company and/or

Innolux will have taken down the entire registered number of shares. The shelf registration statement allows Himax and Innolux to offer and sell shares from time to time before the registration expires, in one or more public offerings, of up to 25,472,473 ADSs and 25,399,753 ADSs respectively.

For more details regarding our shelf registration statement, you may also refer to our press release on April 30. 15 Absent Innolux’s planned sale, we would not have filed the shelf registration statement at this point. We decided to file for our own primary shares because the shelf registration statement, once declared effective by the SEC, would remain in place for a period of three years, during which time we may offer and sell new shares at any time without going through the registration and SEC review process. Himax does not currently intend to issue any of the primary shares registered under the shelf registration statement. If we should do a primary offering in the future, we will decide on the timing and specifics of any such offering, including price and use of proceeds, on a case-by-case basis for each offering and these will be set out in a prospectus supplement filed with the SEC at the time of the future offering.

Innolux has publicly stated that the planned disposal of shares is part of its divestment strategy as it intends to focus on its core business of TFT-LCD manufacturing. We will continue to work hard to be a value-added supplier to Innolux so as to continue to keep Innolux a significant customer after the sale of shares. Since we are not issuing new shares, Innolux’s sale of shares will not result in dilution of our outstanding shares. We should also point out that Innolux’s sell down will significantly increase our public float, potentially boosting Himax’s share liquidity and broadening our shareholder base.

After this offering, in accordance with US GAAP ASC 850, we will no longer consider our transactions with Innolux as related party transactions. Our current director, Mr. Tien-Jen Lin, a special assistant to the General Manager of Innolux, will leave our Board of Directors after the completion of the sales. We intend to elect a new and independent director to fill the vacancy during the next general shareholders meeting in the third quarter.

Finally, for the second quarter, we expect a 17% to 20% growth in our revenues compared to the last quarter. Gross margin is expected to be around flat compared to the first quarter of 2013. GAAP earnings attributable to shareholders per diluted ADS are expected to be in the range of 10.5 to 11.5 cents per diluted ADS based on 171.9 million outstanding ADSs. Non-GAAP earnings attributable to shareholders are expected to be in the range of 11.1 cents to 12.1 cents per diluted ADS based on 171.9 million outstanding ADSs.

Thank you for your interest in Himax. We appreciate your joining today’s call and we look forward to a productive and profitable year in 2013. Operator, we will now open the floor for questions.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our firs question is from the line of Anthony Stoss of Craig-Hallum Capital. Please proceed with your question.

Anthony Stoss - Craig-Hallum Capital

Hi Jordan, hi Jackie, congrats on the strong results and guide. Two-part question, Jackie on the gross margin and OpEx front, how do you see that trending in the second half of the year on additional volume ramps? And then Jordon, on the LCOS side, I know you can't talk specifically about customers, but can you talk about your current capacity, if you are satisfied with what you've got right now heading into the second half of the year? Thanks.

Jordan Wu

First, for the first question, our gross margin and OpEx for the second half of the year, as you appreciate we don't really give guidance for this, but before we did, we believe (inaudible) for the first half because firstly I think the panel industry in general has frankly enabled us and you know we are seeing the trends also higher in smartphone and tablets and all these are trends to our benefit and also we do expect (inaudible) products as a percentage of total sales to increase compared to first half. So I think it would hopefully contribute to the gross margin. So again we have provided the guidance, but there is no reason why we should be pessimistic at this point.

For LCOS, it’s kind of profit advantage because we have benefited from the capacity which is primarily the requisite of process and the second capacity which is the module process. The module process is once more operative and now going into effect we managed relatively (inaudible), but so our first step of debottlenecking to liquidate those issues (inaudible) relatively low cost and we struggle to be (inaudible).

And in my prepared remarks, I talked briefly about our embarking on certain technology expenditure measure to basically in terms of facilities of our LCOS capacity lines which we're also to that extent leap on capability, but all I can say is that in the foreseeable future, I think, you know, considering (inaudible) slow debottlenecking and facility improvement and the recognition of operators with our full capacity (inaudible) in the immediate future.

So to give you a more kind of precise number again, it depends on how many measures we have taken to debottleneck (inaudible) and what not; I think we're confident between 1 million to 2 million panels per month, per (inaudible) with regards to measure CapEx.

Anthony Stoss - Craig-Hallum Capital

Okay. Thank you Jordan; appreciate it.

Jordan Wu

So what we are trying to do is to ramp it phase by phase according to (inaudible) and we are now ready for free measure CapEx, I mean that’s before the volume which is up a year ago, but before the volume which was 1 million or 2 million panels a month.

Operator

Thank you. Our next question is from the line of Kyna Wong of Bank of America. Please proceed with your question.

Kyna Wong - Bank of America

Hello Jordan, hello Jackie. Thanks for picking up my questions I got several questions I am going to ask probably in short. First is about (inaudible), during Labor Day, in China, this is good for large panel like TV drivers, as well as the small medium like smartphone drivers?

Jordan Wu

I am sorry you have to speak a little bit little loudly here.

Kyna Wong - Bank of America

Okay. Can you hear me clearly now?

Jordan Wu

Ask very loud.

Kyna Wong - Bank of America

Okay. I want to ask about as to in the beginning of May, during the Labor Day in China, so was it the TV sales or smartphone sale which will help in the large panel driver and smartphone drivers demand; and this is the first question? And second question is about the gross margin guidance in second quarter, is around that quarter-over-quarter, as I see the small and medium driver and as well as long driver business should need the revenue contribution, so what products will suffer in margin or gross margin pressure in the second quarter?

Jordan Wu

Well, your first quarter about sales through for the total hardware technology in China, I believe (inaudible) and I am sorry we don’t give the (inaudible) but we will provide our guidance but I think you see we are pretty competent about the Q2 buyers, I think that answer your first question.

As for the second question, I think into the amount of CapEx mic, it did changed, I think you are right, I mean we are seeing now driver potentially go up and we are seeing continued trends for small and some medium sized panels. But I think, I mean but we are not guiding for the (inaudible) we are guiding for (inaudible) quarters of sequential growth already and I think in some time actually for business channel which operate for month (inaudible) how ever it really depends product by product. So I think (inaudible) in certain high end large panel, as compared to last quarter and that may result in a (inaudible) our gross margins.

So I think you can just take a look by channel the contingency for our small and medium sized panel and also small driver, although I am sure in the long term there will be, you’ll be actually right and in some time I think that (inaudible) so at the moment I think (inaudible). And the only reason I can provide, the only information I can provide is not the result of some product mix.

Kyna Wong - Bank of America

Can I ask more about the ASP then, the operating margin, so the trend of the ASP in large driver IC and small and medium-sized IC in 2Q, could you give us some color?

Jordan Wu

(inaudible) we repeated in our previous call, (inaudible) our driver IC is priced primarily on number of channels from (inaudible) the customer may because of the requirement for the product quality, come back to more external cost for IC, (inaudible) balance sheet behind because actually we are trying to make some improvements to the product. And therefore (inaudible) you are shipping our small IC with higher channel cost and your rates will include the ones for -- although higher channel cost although it implies small number of IC. So you cannot simply compare it to that, but typically (inaudible) for price erosion quarter-over-quarter or year-over-year. And at this stage I think we are simply heading quarter was some price erosion because of customer request. So all we try to do is to try to make it up with our cost issues.

And secondly, our product mix will also have to our gross margin. That being said, look at our question as well (inaudible) then I will say over the past few quarters and this current quarter as well quarter-over-quarter we decreased some small price erosion every quarter but not through cyclical and (inaudible) give you a lot of specifics, but so I think we need to make sure those who has erosion which (inaudible) as to make up through our program issues.

Operator

Our next question is coming from the line of Jay Srivatsa of Chardan Capital.

Jay Srivatsa - Chardan Capital

Let me ask you a few questions in terms of mix as you look at Q2, it looks like the large panel business was down a little bit if you want to expect it to pick up in the next quarter and how do you see the small panel business growing next quarter?

Jordan Wu

I think the trend is expected to continue. I think our small and medium-sized panel combined will (inaudible) current focus where we are growing (inaudible) on the first quarter and then (inaudible) go far and we mentioned in Q and then probably coming for some 13.7% (inaudible) to go up by 14 in Q2.

Jay Srivatsa - Chardan Capital

Speaking on non-driver business, it looks like the image sensor business is a little weak. Can you speak specifically to the micro display side where you are seeing sequential growth in Q1 and do you expect that to continue to Q2?

Jordan Wu

Absolutely. We did enjoy the one potential sequential input for panel displays in Q1, sequentially increased. With different reviews total number (inaudible) small and medium size (inaudible) it could be kind of (inaudible) in our last quarter earnings call that we will -- we're going through our total production particularly with our customers and so for that it would be negative shipments. That best explained the sequential increase (inaudible). We’ve already seen some in Q2 and so again in Q3 and so again in Q4. In other words, we're expecting significant return quarterly growth throughout this year and hopefully next year as well. So that again is coming from a small place which is (inaudible) level.

Jay Srivatsa - Chardan Capital

Specifically on the micro display side, could you talk to us on how many customers you have lined up and how many are ramping currently?

Jordan Wu

We had actually a very good number of customer customers (inaudible) end user customer, the primary and it is also meet that additionally space of the product development, I am talking about panel display, detects the newly (inaudible) picks customers of (inaudible) to own and develop commercial product than to non-commercial product, it was very complicated combination of how to focus at the edge and (inaudible) financial needs. So we are very careful including our constant effort, I probably (inaudible) that we are in a very strong position in terms of our position in other states so we are kind of telling customer, competitive customers (inaudible) and the combinative results that we have we can always judge ourselves.

So we do have for a top new customers approach with the real competence (inaudible) but their projects are even (inaudible) and they are only small number of (inaudible) of delivery stage by the market that generates, I really told the (inaudible). So we are encouraged by the lot of customers, I think that is a fair statement.

Jay Srivatsa - Chardan Capital

Competitive in that space, Jordan, how do you see yourself relative to some of the other guys who have similar types of solutions, are you -- do you get the sense that the competition is going to pick up later part of this year or do you see feel pretty comfortable in terms of where your apps are relative to the overall marketplace?

Jordan Wu

I think there are two type of competition, the first one is (inaudible) provide and the other one is (inaudible) at least for the foreseeable future (inaudible) and so that there is hope (inaudible) we do enjoy there a lot of advantages which are very unique (inaudible) different type of appreciation (inaudible). Secondly, we have our (inaudible) for many of our competitors actually (inaudible). So overall, we believe (inaudible) so then it is the only thing (inaudible) you can survive and comfortable.

So that we will into that business (inaudible) and I think that so far we have proven that we are worth and on top of that we enjoy a lot of IT you know which are very fundamental and we have been working hard and we continued to (inaudible) our IT portfolio (inaudible) in an effort to try to raise our (inaudible) more. So far I think customer come to us it will be (inaudible) it is quite unsure and customer comes to us, come to people for quotation, for a given project and for (inaudible) and for mass production but here people come to us to really to discuss (inaudible) on the product costs or people’s reputation and technical area they showed us and so we are a very critical part in their development. You know how the (inaudible) I mean engineering wise you would be (inaudible) so not only (inaudible) through the whole analysis stage. So you know we are talking about product for (inaudible) dimension etcetera, etcetera. So I think being a leader at this stage (inaudible) advantage, so we usually don't see completion of a (inaudible) for the time being

Jay Srivatsa - Chardan Capital

All right, switching topics in terms of revenues from related parties obviously to your largest customer seems to be declining quarter-over-quarter at least from Q4 to Q1, could you give us some insight on what the dynamics there is with your largest customer and how do you expect that revenue to go as you see the rest of the year.

Jordan Wu

I think for (inaudible) I think we think we mentioned for market that our customer has made it quite clear that they are ready to diversify, and we you know have (inaudible) very high expenditure of their (inaudible) simply with (inaudible) because of the essential development and so now the question is whether they have finalized their government certification decision. (inaudible) it is not at right balance and for that I'm not sure I know the (inaudible) because (inaudible) dynamics and to they are my customer, they don’t necessarily share (inaudible). So I believe I think it is probably too (inaudible) I think that (inaudible) retail share has nothing to do with the business really, its part of their participation strategy. So I don't think one should (inaudible) indication (inaudible) one way or the other. So I think how we can perform in the long-term it’s really up to us and so the (inaudible) as well. But it's really fair (inaudible) stage. And for this year, it's so (inaudible). I think probably fair to say that it's our (inaudible) is probably slow compared to our third quarter probably because our (inaudible) realizes primarily on (inaudible) our small handle and (inaudible) growing faster and secondary we are hopeful that we look at that (inaudible) for the new bench of companies are hopefully, have been (inaudible) leases with reasons would also contribute to further because it's (inaudible) but it's very over probably to say, we have already (inaudible) in our design, engineering and shipping logistics within a lot. So it's very helpful I would say.

Jay Srivatsa - Chardan Capital

Alright, Jackie, in terms of inventories, it looks like it creped up quite a bit in the quarter. Can you give us some sense on what the composition of the inventories was in terms of increase?

Jackie Chang

Yes, I think that in the script, we earlier discussed that we prepared all the higher level inventory in anticipation of higher demand in the second quarter, and although we don’t give guidance for the third quarter, our third quarter (inaudible) is our highest [region] of quarter as well. So we really have to prepare for that. We're very confident that with the current inventory level can support our anticipated a higher shipment and revenue. So we are comfortable about it.

Jordan Wu

And yet any (inaudible) created composition of quarter end and first quarter inventory a very big chunk of it actually was work in progress of finished goods.

Jay Srivatsa - Chardan Capital

Okay. And then last question on the shelf itself, Jordan can you give us some sense on timing, when do you expect Innolux to plan on exiting the position and when do you expect yourself in terms of Himax looking to raise capital around the shelfs?

Jordan Wu

Well, I will take the second question first, we have said quite clearly in the remarks that we are on time for us to raise capital. So we are doing it because we are kind of piggy backing on the effort and money we already spent for (inaudible) for our major shareholder. So we are confident on Himax, we are (inaudible), we are convince through general (inaudible) we have small CapEx requirements, we have (inaudible) plan, choice you know I was concerned (inaudible) or not, even if I knew I would have told you anyway. So you had a [venture], so I don't know. When we want to be, we will announce it.

Operator

Thank you. Our next question is from the line of Jun Zhang of Wedge Partners. Please proceed with your question.

Jun Zhang - Wedge Partners

I have a couple of questions first of all, do you have better about how much you account will drive (inaudible) coming from China handsets and tablets market?

Jordan Wu

Sorry Jun you did a question of China.

Jun Zhang - Wedge Partners

China handsets and tablets market, how much of (inaudible) driver business is coming from the China tablets market?

Jackie Chang

You are talking about the first quarter right?

Jun Zhang - Wedge Partners

Yeah, first quarter, yes.

Jordan Wu

Yes, we are looking for the number.

Jackie Chang

Yeah, the smartphone for first quarter it was about close to 70%, 70% sold to the Chinese customers and tablets are over 45%.

Jun Zhang - Wedge Partners

Okay, 45% and 70% and second question could you comment on the overall large panel actually demand in the Q2 and when do you expect your Chinese clients the BOE China stock are going to ramp to that capacity so that you could offset the weakness from Innolux?

Jordan Wu

Well we mentioned earlier in addition to China we are looking to tending to new customers and new markets including Korea; and as far as BOE and transfer are concerned. I think we are simply one of the major suppliers to them and I think they especially BOE, I think they do have plan to (inaudible) potentially, so I think especially towards the greater part of the year and throughout next year, the year after I think we can expect to see further opportunity from the early we are seeing (inaudible) operating demand. So we are trying to seeing (inaudible) from our firsthand (inaudible), I think we are (inaudible) I think we are still very hopeful and I think the (inaudible) so I think we are possibly you know given the people that we are hopefully report some (inaudible) because again there are new competency, there are new markets and new customer potential to us.

Jun Zhang - Wedge Partners

Okay. So my next question is, you mentioned the CMOS sensor, that's a little bit weaker in Q1, so I think that you are planning to launch the matrix or the BSI CMOS sensor in Q2, the late Q2, is that still on the page and what do you expect the (inaudible) capacity ramp in the next few quarters?

Jordan Wu

Well, I think (inaudible) products one is (inaudible) which is even market for the value and the other one is (inaudible) lower in Q2 I think it is probably safe with Q3 for the launch. Now (inaudible) we mentioned in our previous quarter now we will have to pay that, we kind of suffered in Q1 because of our customer (inaudible) was to be able to design page so and but there shouldn't be much (inaudible), those customers are able to prepare to (inaudible) in Q2. But on top of that (inaudible) explains our optimism, but we think in our view – in terms of figure sale, I think it is a combination (inaudible). As far as 8-megapixel is concerned, what I am saying the next quarter (inaudible) small one in Q4.

Jun Zhang - Wedge Partners

Okay. So what's your current status of your touch panel business, is it still doing pretty well?

Jordan Wu

The touch panel business, at the moment we are suffering from functional scale down because we told earlier about (inaudible) focus firstly on our (inaudible) and we are hoping that we can pay (inaudible) and kind of copy that and you have seen (inaudible) and we have been (inaudible) and it turns out the market because the technology requirements over there are somewhat different from that required by the smartphone customer. (Inaudible). However, they are 45, they are system deprived are also light strong. So although a problem we're going to counter, it would be first tier type customers. (Inaudible) with the turnout of (inaudible) market and the public effect in China, you think that maybe talking about the fundamental customer as opposed to this (inaudible) really what. So very often, it tickles through these winning process but we're confident that some of the significant cost, it will pick up as we take out sufficient (inaudible) wipe out customers in China.

Jun Zhang - Wedge Partners

So, a switching to the question. So I think your competitor, probably your competitor claimed the independent panel (inaudible) suppliers, so do you think after next sort of all your shares, you would become more independent and you get the benefit from more orders from (inaudible) do you think that’s true?

Jordan Wu

That is the price. That is definitely the prices. So we certainly need to go on as we go and try to (inaudible), I mean everything I have to deal with is (inaudible). So (inaudible) because that they are situation 2012 but those (inaudible) community. So we absolutely drive that (inaudible) cost.

Operator

Our next question is from (inaudible). Please proceed with your question.

Unidentified Analyst

Thanks very much for taking my call. Congratulations on a great quarter. I see bought some driver IC testers to use in-house for some mass production, are you seeing a type capacity a ChipMOS and Chip-On?

Jordan Wu

Yeah, on the high-end in particular, (inaudible) they are apply for high end smartphone and package product.

Unidentified Analyst

So you are seeing a tight supply, is that -- do you intend on buying more testers as the quarters go on?

Jordan Wu

Yes. I mean total (inaudible) percentage wise I have already facilities of (inaudible) more percentage more proportion compared to the quarter, but you are right top of the (inaudible) because now we have seen type of and our customers, the 15,000 (inaudible) and then we confirm the equipments with our (inaudible). So we have big and tight supply both from the (inaudible) I think we are seeing a tight supply.

Unidentified Analyst

Are you seeing tight supply also in goal bumping?

Jordan Wu

No, I think so. I think (inaudible) a lower capacity (inaudible) I mean, you go through many visitors around talk to with all (inaudible) on the combined basis (inaudible) I think we for the market right now.

Operator

Thank you. Our next question is from the line of Jerry Su of Credit Suisse. Please proceed with your question.

Jerry Su - Credit Suisse

Just one follow up on test of capacity you have got. Could you clarify how much capacity comes from the total demand you need and also what is the impact to your margin or the financial state of P&L going forward. My second question is regarding (inaudible) could you give us your thought on what do you think about penetration rate this year and also next year, thank you?

Jordan Wu

I am sorry, I tell you on the first question the capacity is related to all products.

Jerry Su - Credit Suisse

It’s the (inaudible) capacity you are trying to install this year, what percentage will that come for a total (inaudible) in demand (inaudible) and how does that impact your P&L?

Jordan Wu

I don’t think it’s (inaudible) P&L and we have fix to some (inaudible) on apples-to-apples too, but I think you come forward for 10% of our total usage, so it’s not going have a major impact on our P&L.

Jerry Su - Credit Suisse

And for (inaudible).

Jordan Wu

I think (inaudible) a lot of variety (inaudible). Our view is that if we become the mainstream or kind of enjoys some gross margin (inaudible) simply alternative, because we are talking about four times the (inaudible) i.e. that it’s three to four times the (inaudible). So it is definitely good news for both of us. How much demonstration (inaudible) other question; I think this year if we get both year for (inaudible) and also people talking about other TV so (inaudible) all one P3 and even notebooks. I think that in the industry is still going through a lot of (inaudible). Of course its (inaudible) and secondly as you all know there's not much hunger for PAYTV yet and if we can authorize the goal (inaudible) then you know for someone if you are trying to get (inaudible) then lot of (inaudible) are capable of (inaudible) trouble viewing because you know we don't suffer the petition of (inaudible) you are going to you are just going to (inaudible) higher resolution probably on the contrary we are probably (inaudible) from all (inaudible) quality experience. So I think we are, the industry is quite connecting (inaudible) is you know fine with PAYTV or (inaudible) but how to use that (inaudible) but how do you make your (inaudible) TV set its built in (inaudible) a product for the consumer to be able to bring in to productivity and I think the industry as a whole is here has a long way to go. So I think this year we are thinking, we are looking as to probably 3 million or 5 million (inaudible) and probably the whole lot compared to the whole TV market.

Secondly if you look at the amount of other products certainly the number would be even a much smaller. So I think while we are very excited about the potential I don't even (inaudible) by saying okay (inaudible) is going to contribute tremendously to our business this year (inaudible) and you said we feel them all (inaudible) business people (inaudible) some of our major occupants who are end user customers are you have probably (inaudible) and you don't have focus in the content and you are absolutely (inaudible) can now really hand it over the what do you do you want this up to begin (inaudible) solution so that you can scale it up, you can reduce the volume, you can reduce the noise, you can enhance the color, you can do a lot of things to basically fully (inaudible) volumes of highly (inaudible) or higher provide (inaudible) TV and we don't trust them. We do probably efficiently (inaudible) that we are (inaudible) not only to be great and therefore consumer would be reluctant to who buy it.

Operator

Our final question for today is from Jay Srivatsa of Chardan Capital.

Jay Srivatsa - Chardan Capital

Just a question on the dividend, when do you expect to be able to announce it and what are you thinking in terms of the payouts.

Jordan Wu

I really can’t make a statement here regarding our (inaudible). So certainly you shouldn’t expect (inaudible) payout in the line with last year. Last year, the profit earning was lower so probably got (inaudible) strong, so we decided to (inaudible) as pay out. But I believe hopefully compared to our (inaudible) I believe we are clearly a (inaudible) way out and I believe the last.

Jackie Chang

We usually announce a dividend program mid June and then the actual distribution end of July.

Jordan Wu

Yeah. So, we (inaudible) by the end of the quarter, before the quarter earnings.

Jackie Chang

We would be facing (inaudible) maintenance.

Jordan Wu

Certainly in 2013 prospect.

Operator

Thank you. At this time I will turn the floor back to management for closing comments.

Jordan Wu

Thank you everyone for taking the time and for the questions. We look forward to talking with you again at our upcoming earnings calls in early August. As a final note. Jackie Chang our CFO would be on (inaudible) here in the US in the first week of May and we also have time to attend investors’ conferences hosted by various banks. So please (inaudible) John (inaudible) before already proceeding with (inaudible) further and thank you and have a nice day.

Operator

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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