Himax Technologies' CEO Discusses Q2 2013 Results - Earnings Call Transcript

| About: Himax Technologies, (HIMX)

Himax Technologies, Inc. (NASDAQ:HIMX)

Q2 2013 Earnings Conference Call

August 15, 2013 08:00 AM ET


John Mattio - SVP, MZ Group

Jordan Wu - President and CEO

Jackie Chang - CFO


Jay Srivatsa - Chardan Capital Markets

Anthony Stoss - Craig-Hallum

Kyna Wong - Bank of America

Jun Zhang - Wedge Partners


Greetings, and welcome to the Himax Technologies Inc. Second 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, Mr. 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 second 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 following the Company’s prepared remarks. If you have not yet received a copy of today's results, please call MZ Group at 212-301-7130 or access the press release on financial portals like Bloomberg, Yahoo!, Google or you could download a copy from Himax’s website at www.himax.com.tw.

Before we begin with the formal comments, 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 the 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-use 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 of 2012 financials, which were provided on the Company’s 20-F filed with the SEC, the financial information included 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 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 very exciting developments to report today. As usual, I will provide some preliminary review on our second quarter and then discuss our outlook for the third quarter 2013. I will also comment on a few product areas of focus. Our CFO, Jackie Chang, will then provide further details on our financial performance and the sale of Himax stock by Innolux Corporation.

I am pleased to report that our second quarter revenues, gross margin, GAAP and non-GAAP earnings per diluted ADS all met our guidance. For the second quarter, we reported net revenues of $207 million with gross margin of 24.6%. Second quarter GAAP earnings per diluted ADS were $0.112 and non-GAAP earnings per diluted ADS were $0.117, both coming in at the upper end of our earnings guidance. These positive performances are a result of our diversification of customer base and expansion of product portfolio through more exciting and high growth areas of small and medium size driver and non-driver businesses.

Our second quarter revenues of $207 million represented a 9.2% increase from $189.5 million in the second quarter of 2012 and a 17.8% increase from $175.7 million in the previous quarter of this year. Our second quarter revenues were the highest since the first quarter of 2008. Revenues from large panel display drivers were $64.3 million, down 19.3% from a year ago and up 7% sequentially.

Large panel display drivers accounted for 31.1% of total revenues for second quarter, compared to 42.1% a year ago and 34.2% in the last quarter. The sequential increase was mainly a result of seasonal demand for TV panels.

The year‐over‐year decrease was caused by reduced sales to Innolux, a formerly related party. Among our large market regions, China continued to show impressive growth both sequentially and year over year.

Sales for small and medium‐sized drivers came in $10.9 million, up 32.3% from the same period last year and up 21.5% sequentially. As segment total fees for small and medium‐sized applications accounted for 53.6% of total revenues for the second quarter as compared to 44.2% a year ago and 51.9% in the previous quarter.

Our small and medium‐sized driver sales reached another record high in terms of both absolute value and percentage of our total sales. That’s mainly to the fast‐growing smartphone sector that has become our single largest source of revenue.

This is a second category quarter for our small and medium sized driver sales to account for over a half of our revenues in our history. The sales increase was a result of the robust sales from the smartphone sector as mentioned but also tablet and automotive display applications, which will improve potentially during the second quarter post sequentially and year over year.

Revenues from the non‐driver business, was $31.8 million, up 22.3% from the same period last year and up 30.4% sequentially. Non‐driver product revenues accounted for 15.3% of our total revenues, also a record high, as compared to 13.0% a year ago and 13.9% in the previous quarter.

CMOS image sensors, wafer level optics, LCOS microdisplays, ASIC services and power management ICs were among the non‐driver products which delivered outstanding growth, I will discuss on several of these product areas later.

Innolux disposed of its entire equity holding in Himax on June 19, 2013, thereby ending its status as a related party. We therefore give you two sets of figures for the second quarter related party sales. By counting the sales to Innolux only up to June 19th, the related party sales accounted for 23.6% of total sales in the second quarter. However, on a comparable basis, the sales to Innolux in the second quarter accounted for 25% of total sales, compared to 33.4% a year ago and 2*% in the previous quarter. Going forward, Innolux is no longer a related party. Jackie will provide more details of the transaction a bit later.

Our GAAP gross margins for the second quarter of 2013 was 24.6%, a 150 basis points improvement from 23.1% a year earlier and a slight increase from the previous quarter. This is the seventh consecutive quarter for 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 better product mix. Gross margin improvement will continue to be one of our major business goals going forward.

Our GAAP net income for the first quarter was $19.4 million, or $0.112 per diluted ADS, up from $15.1 million, or $0.089 diluted ADS, for the same period in the past year, and up from $14 million, or $0.082 per diluted ADS, in the previous quarter. GAAP net income grew 28.1% year over year and 37.9% from the previous quarter. GAAP EPS per diluted ADS grew 27% from the same period last year and 37.1% over the previous quarter.

In summary, we are pleased with our second quarter performance where we achieved significant top-end bottom line growth. We will continue to execute our strategy and are excited about further growth opportunities going forward.

Jackie Chang, our CFO, will now provide more details on our financial results. After Jackie’s presentation, we will further discuss outlook for the third quarter of the year and our third quarter guidance. Jackie?

Jackie Chang

Thank you, Jordan. I will now provide additional details for our second quarter financial results. Our GAAP operating expenses were $27.1 million in Q2 2013, up 15.6% from a year ago and up 2.8% from the previous quarter. The increase was mainly resulted from expenses related to salaries for R&D new hires and new product developments. GAAP operating income for second quarter of 2013 was $23.7 million, or 11.5% of sales, up 17.5% compared to the same period last year and up 41.7% from the previous quarter.

Non-GAAP net income in the second quarter was $20.1 million or $0.117 per diluted ADS, up from $15.9 million, or $0.093 per diluted ADS, for the same period last year, and up from $15 million or $0.088 per diluted ADS in the previous quarter.

Non-GAAP net income represents a growth of 26.1% year over year and growth of 33.8%, as compared to the previous quarter. Non-GAAP EPS per diluted ADS grew 25.6% from the same period last year and 33.4% over the previous quarter.

Our cash, cash equivalents, and marketable securities were $147.1 million at the end of June 2013, a significant increase from $103.2 million at same time last year and slightly down from $158.9 million a quarter ago. The decrease is related to a free cash flow of which I will provide more details shortly.

On top of the above cash position, restricted cash was $74.1 million at the end of the quarter, up from $63 million during the same period last year and no change compared to the last quarter. The restricted cash is mainly used to guarantee the Company’s short-term loan for the same amount. We continue to maintain a very strong balance sheet with no debt

Inventories as of June 30, 2013 were $142.9 million, up from $139.2 million a year ago and up from $138.3 million a quarter ago. Accounts receivable at end of June were $219.2 million, as compared to $212.9 million a year ago and $189.9 million last quarter.

Day-sales outstanding were 104 days at end of June 2013, as compared to 109 days a year ago and 97 days at the end of last quarter. The DSO increase was attributed to increased sales quarter-over-quarter from large panel customers who are extended the payment terms.

Net cash outflow from operating activities for the second quarter was $2.74 million. The net outflow is mainly due to difference in AR and AP returns. We raised the inventory level at the end of the first quarter in prepare for expected increase of shipment during the second quarter. While we have to pay for those goods in second quarter, we will not get paid for our sales until the third quarter. We expect to generate a substantial net cash inflow from operations in 2013.

Net cash used in investment activities in the second quarter include capital expenditures of $6 million and the guarantee of $2.9 million provided by our LCOS subsidiaries for R&D grant from the government. In comparison capital expenditures were $1 million a year ago and $4.7 million last quarter.

The guarantee for the government will be returned to us upon the completion of the R&D project. The capital expenditure in the second quarter consisted mainly of purchase of in‐house testers for driver ICs, R&D design tools and LCOS manufacturing equipment. While we outsource the majority of our driver IC testing, we have always maintained a certain level of in‐house testing facilities for the purpose of both R&D and mass production.

During the second quarter, we declared our annual cash dividend of $0.25 per ADS, totaling $42.4 million. The dividends were already paid out in July. Our dividend is determined primarily by the prior year’s profitability. Our decision to payout 83.3% of last year’s net profit signifies our confidence in the business outlook of 2013. As of June 30, 2013; Himax had $169.6 million ADSs equivalents outstanding, unchanged from the last quarter.

On June 10, 2013, Innolux Corporation, then a 14.98% equity shareholder, announced its plan to dispose of its entire stake in Himax through a marketed offering. The transaction was successfully priced at $5.25 per ADS on June 13 and the syndicate exercised its 15% greenshoe option on June 19th. Innolux raised a total of $133 (ph) million gross proceeds.

Following the completion of the transaction, Mr. Tien‐Jen Lin, Innolux’s appointed representative, resigned from Himax’s board of directors. This was effective on June 28, 2013. The transaction only involved selling of existing shares and therefore did not result in any dilution in our outstanding shares. We shall also point out that our public float was significantly increased to 68.3% from 53.3% previously. The shares were placed mainly to broad based high quality institutional investors.

Before I turn the floor back to Jordan, let me quickly summarize our financial results for the six months ended June 30, 2013. Revenues were $382.7 million and gross profit was $94.1 million, representing growth of 7.4% and 15% over the first half of 2012 respectively.

Our gross margin increased to 24.6%, 160 basis point improvement from the same period last year. Our GAAP operating expenses were $53.6 million for the first six months of 2013, up 13.7% for the same period in 2012. The increase was mainly resulted from higher expenses related to salaries for R&D, new hires and product development.

Operating income of $40.5 million represented a 16.8% increase from the first half of 2012. The improvement in operating income was mainly the result of higher sales and both margin expansion, which was however somewhat offset by higher R&D expenses. GAAP net income for the first half of 2013 was $33.4 million or $0.194 per diluted ADS. Up from $26.4 million or $0.154 per diluted ADS for the same period last year.

GAAP net income for the first half of 2013 grew 26.4% over the same period last year. GAAP EPS per diluted ADS for the first half of 2013 grew 25.9% from the same period last year. Non‐GAAP net income for the first half of 2013 was $35.1 million, or $0.204 per diluted ADS, up from $28.1 million, or $0.164 per diluted ADS, for the same period last year.

Non‐GAAP net income for the first half of 2013 grew 25% over the same period last year. Non‐GAAP EPS per diluted ADS for the first half of 2013 grew 24.6% from the same period last year. Net cash inflow from operating activities for the first half of 2013 was $26.7 million, as compared to $6.8 million for the same period of 2012.

I will now turn the floor back to Jordan.

Jordan Wu

Thank you Jackie. We are pleased with our second quarter results where we achieved recognized sales in terms of both absolute value, and percentage of sales in two of our focused growth areas, small and medium panel driver IC and non-driver products. However we're seeing a short term slowdown ahead of us in the third quarter which I will elaborate further shortly.

In addition to the Innolux equity sale in Q2 which Jackie just covered, another major event was Google's investment in Himax display, our LCOS microdisplays subsidiary, which took place in July. I will also talk about that a bit later.

(Inaudible) driver is Q3 prospect was sluggish due to the global weakening demand of TV and laptop. This was worsened by the termination of China government’s TV subsidy program effective at the end of May. However we believe that this is temporary setback and we are confident about the long term growth prospect of driver IC in TV applications, which presents one of our major business focuses.

We have maintained a competitive position in the segments and will continue to pursue growth opportunities presented by China's continued expansion of their panel production capacity with potential new businesses from other major panel makers in Korea and Taiwan.

The short term prospect of our small and medium size panel driver business in terms of softening. China market slowdown in June and July due to smartphone makers model transitioning and the overall market inventory correction. However smartphone panel resolution continues to rise, which is a trend that has benefited our gross margin as we are among the leading players at the higher end of the market.

In comparison we are seeing intense price competition and margin pressure in the lower end smartphone and feature phone markets areas where we have lost the market share. Despite this market condition in smartphone, our small and medium size driver ICs for tablet and automotive displays are yet quite strong so far this year.

Our non-driver business enjoyed a 13.4% growth on a sequential basis in the second quarter. It remains our most promising product category in 2013 and beyond. As we predicted in the last earnings call, CMOS image sensors product line rebounded strongly in Q2. It has become our single largest non-driver segment starting from Q2. The second quarter sales were boosted by shipments of our 1 megapixel sensor for top tier laptop customers and growing demand for our 2 and 5 mega‐pixel sensors for smartphone and tablet makers in China and internationally.

With a more complete product line including the newly‐launched 8 megapixel sensor, we expect to break into new smartphone names in the second half of 2013 and continue to penetrate the tablet, IP Cam, surveillance and automotive markets. We’re confident that CMOS image sensor will be a fast growing area for us going forward.

Our execution in the ASIC projects over the last year was highly praised by our customers. Leveraging the track records, we had new projects from both the 15 and new customers during Q2, both then are leading initial brands. These accomplishments validate our capabilities and competitiveness in this area. We are excited by this progress and expect this product line to generate more development fees which will improve our overall gross margin in 2013. Our ASIC service business line will enjoy a more stable revenue stream once the project progress to mass production stage.

On power management IC and LED drivers, our sales has more than doubled in the first half of 2013, thanks to the shipment of a few new products of TV and monitor applications. We continue to expand our customer base, especially in China and Japan. We also see rapid growth in China for our power management ICs used in the tablet market. We have also expanded our product coverage to the LED lighting market.

On July 22nd, we announced the signing of an agreement under which Google will invest in Himax Display, Inc. or HDI, our LCOS subsidiary. The purpose of the investment is to fund production upgrades, capacity expansion and further enhancement of production capabilities at our in-house LCOS staff. Such products are used in applications including head‐mounted displays such as Google Glass, head‐up display and pico-projector.

Upon closing, Google will hold a 6.3% interest in HDI. Google also has an option to make additional investment at the same price within one year from closing. If the option is exercised in full, Google will own a total of up to 14.8% in HDI. We hold 81.5% of HDI at present and will remain the major shareholder of HDI after the transaction. Google’s investment in HDI will not have a diluted effect on our NASDAQ traded share.

This investment signifies a strategic partnership that we formed with Google, a preeminent global technology leader. Beginning in the second quarter of this year, we have already begun expanding and upgrading our LCOS capacity, with the investment from Google further validate our commitment to developing breakthrough technologies and state‐of‐the‐art production facilities for LCOS microdisplay. We look forward to leveraging this investment and our collective expertise with Google to create unique and transformation our LCOS technology for many years ahead. We believe that Google’s investment will further solidify our long term gross prospects in microdisplay business.

We mentioned in our earlier conference calls that our LCOS microdisplays are applied by numerous customers and partners to create products targeting a wide range of applications. In addition to head-mounted displays such applications also include pico-projector, head-up display for automotives and projector portfolio application. Our strategy is to maintain global leadership in microdisplay technology by working with multiple customers for multiple applications. We believe our LCOS microdisplay business will be one of the most important areas for Himax’s long‐term growth. We follow this new development as a steady stream of design wins for our non-driver products. We expect our non-driver businesses to grow sharply in Q3 2013 and beyond.

As a result of all that I mentioned above, we expect our non-drivers percentage of total sales will continue to increase as we further diversify our customer base, improve our gross margin and contribute to our profitability.

Last, but not least, some color now on our Q3 guidance. The current market environment showed relatively poor visibility. We therefore give a wide range in our guidance for the quarter. For the third quarter, we expect 5% to 12% decline in our revenues compared to last quarter. Gross margin is expected to go slightly up from the previous quarter. GAAP earnings attributable to shareholders per diluted ADS are expected to be in the range of $0.065 to $0.08 per diluted ADS based on 171.6 million after ADS, 6.6% to 31.1% increase compared to the same period last year.

As we have said in the past, our third quarter GAAP earnings per diluted ADS guidance has begun to curb (ph) our expected 2013 grant of restricted share units, or RSUs 2013 (ph) at the end of September. The 2013 RSUs, subject to our Board approval is now assumed to be valued in the range of $13 to $14million, of which approximately 55% will be vested and expensed immediately on September 30th, the grant date.

Excluding this share‐based compensation and acquisition‐related charges, our third quarter 2013 non-GAAP earnings attributable to shareholders are expected to be between $0.102 to $0.11 per diluted ADS based again $171.6 million of ADSs, up 5.2% to 20.6% increase compared to the same period last year.

Our cumulative debt net income for diluted ADS through the nine months of 2013 is projected to be in the range of $0.259 to $0.274, a 19.9% to 26.9% increase year over year. Our non-GAAP net income per diluted ADS is expected to be in the range of $0.307 to $0.322, a 17.6% to 23.1% increase year-over-year.

Operator, we are now open the floor for questions.

Question-and-Answer Session


Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (Operator Instructions) Thank you, our first question is coming from the line of Jay Srivatsa with Chardan Capital Markets. Please proceed with your question.

Jay Srivatsa - Chardan Capital Markets

Jordan, in terms of your guidance, it looks like June and July months have been little soft on the large panel and small panel. There seems to be a sense that with the holidays coming up in October in China, that the second half of Q3 could potentially see some ramp up towards that holidays. Can you set the stage for what you see in terms of demand patterns as you look at the rest of the quarter?

Jordan Wu

As you have said, well in China, we all know, in China (inaudible) represents a very difficult (ph) shopping season in big demand in theory for the end of Q3. But this year on the whole what we are seeing is the visibility seems to be a bit slow compared to last three years. We are now ruling out that there could be a demand pick up in the later part of the quarter but we are now sitting well in the middle of the quarter, but as I just said we feel the visibility is slow. So we are not really that certain about it, although we don’t rule out that possibility.

And before I actually highlighted in my remarks that we intentionally try to widen our range for the guidance because, I also said earlier the inventory level across the industry right now appears to be slightly on the high side and also customers end therefore our direct directors demand or forecast for the rest of the quarter so far has been conservative. So again, I mean we don’t rule out the possibility of that being picked up later in the quarter.

Jay Srivatsa - Chardan Capital Markets

In terms of the non-driver products, it looks like it grew pretty nicely at about almost $7.5 million sequentially in Q2 versus Q1. Do you expect further growth in Q3 on your non-driver products and if so, what segment of the non-driver products do you expect the growth to come from?

Jordan Wu

Absolutely. We do expect in Q3, the non-driver product to continue to grow sequentially and obviously year-over-year quite strongly. And so both in terms of, it's absolutely the amount and also, in terms of the consultation for (inaudible) driver in Q3, I think we are hopeful that it will be another record high. In terms of the strong areas of growth, certainly the CMOS image sensor product, the LCOS module and in particular also our power management ICs with reach our (inaudible) plans, the strongest growth for Q3.

Jay Srivatsa - Chardan Capital Markets

Okay and just last question. In terms of the investment from Google, can you give us some clarity on what do you expect in terms of utilization of the cash? Do you expect to invest and if you’re investing in the fab capacity, could you give us some timelines on when you hope ramp up capacity, and ultimately what level of capacity do you expect to be able to get to with the investments coupled with your existing capacity?

Jordan Wu

We actually mentioned in quite a few times in the past, in the conference call that we are working with certain top tier customers, some of which have started parallel production. Now what is not so clear to us is how long that parallel production is going to take before actual ramping.

Bear in mind, we are really talking about very new sort of concept. One which has been referenced before and one which involves a high degree of technical difficulties. So together with our customers we are working diligently and yet patiently to make sure everything is in order before we stop mass production and ultimately the timing for mass production is a decision of our customers, not of our sales person.

So, what we can do is to get repair and the moment I can tell you the effect, which is in-house is still relatively empty and so the first bottleneck will be our operator because when the demand is still slow, there is no reason for us to hire too many operators. And assuming demand start to come in, we will certainly higher more operators and therefore put our throughput and then thereafter there similar pages of the bottlenecking in capacity, and also along the line we are also upgrading our facility in the sense that we are trying to improve the quality of our product and also improve year rate. So both the bottlenecking and the improvement in our facilities are two measures of process for Google’s investment.

So at the moment, considering the low base of operators, our current capacity is actually less than 200,000 a month. But upon more hiring of operators and further increase of capacity or the bottlenecking of our facility, with certain investment we can actually using our existing facility, we can actually upgrade the capacity all the way up to 2 million panels per month. And after that if we see more orders, which we certainly hope will be the pace, there will be need for us (inaudible) and we have detailed plans for how we do that, how we go about in the all these different steps, step by step in very details. So we have tough plans for all that. So we know effectively how to achieve that.

We actually also got very nice pico plant (ph), which is right next to our next headquarters (inaudible) looking for the affinity to expansion to come. As far as exactly when this 2 million capacity will be achieved or even when we’ll start to see the building of the second step (inaudible), it is too early to tell. It is something we have to wait for more clarity for demand but finally I think it is important that I should highlight, we are very honored to be associated with Google Glass and I must be one of the earliest guys to have witnessed this development of that very unique, interesting, exciting product and I feel very excited about the potential and not just about Google Glass, but overall the head mounted displays have come and we also mentioned in my prepared remarks that we are actually working with multiple customers. So, we feel this is very exciting in terms of opportunity for Himax.


Thank you. Our next question is coming from the line of Anthony Stoss with Craig-Hallum. Please proceed with your question.

Anthony Stoss - Craig-Hallum

Three-part question. Jordon, if you wouldn’t mind talking about what you’re seeing on the out coast side in terms of competing solutions. Also Jackie if you wouldn’t mind take us on the display driver side as resolutions are increasing, kind of just your average ASPs if you can help with any kind of color on how they’re increasing; and lastly on the 8 megapixel CMOS image sensor side, just a sense of smartphone traction via designs?

Jordan Wu

I would stick by commenting on the competitive solutions for head-mounted display. Well, I think I should talk about the two potential areas of competition. One is other cost providers and the other one is competing technologies. I think for HD I would start by talking about competing technologies. I see you consider the cost, the simplicity of (inaudible) the performance including resolution, the image quality and also very importantly power consumption. Not just power consumption on the panel but power consumption on the entire optical system. If you put all this together, it of course actually represents a very, very key spot when it comes to head-mounted display.

Now, head-mounted display arguably is another type of pico-projection and certainly we are aware of the whole pico-projector market, which we have tried very hard and we have worked with various top tier plans for the end products and unfortunately they didn’t really become entering product. But out of those experiences, we have got to pick up a lot of lessons and therefore improve our product competitiveness along the way. We eventually follow for those long head-mounted display applications, which are primarily pico-projector applications, with shipping total well over 2 million panels already. So we did pick up quite a bit of experience.

In another line we realized, when you need to well place a very tiny metal display very close to your head or your eyes or even your brain, it of course actually sitting on a very nice sweet spot. So today what we are seeing, in the minds of customers where we are off of whether they are optical engineers (ph) or importantly end product makers. If you ask that about pico-projector they are (inaudible) competing technologies but when it comes to head-mounted display, I think LCOS almost the choice of everyone so far. So, I think possibly out of luck and possibly out of diligence I think LCOS is the right technology to use for head-mounted display, which is the most exciting market.

And in terms of other LCOS makers I think it’s fair to say that Himax arguably is the only one with a potential shipping chart rate (ph), as I mentioned earlier. We also enjoy the panel result for heavy accounts flat, have the experience of engaging top tier men internal sector (ph) market and therefore we are able to deliver a very competitive (inaudible) compared to our peers, which by the way is very, very few by number.

So, I think the thing obviously in the three sectors, this is all new. And yet to create such a product from scratch is a major task for any company. I am talking about our end user product, the final product. So our strategy is to pick and choose the ones which we believe are the helpful and bear in mind, this is very new. So the ones which we deliver are hopeful, those potential, financial and technology means to when these happen.

So, we are very careful not to always stretch our efforts to cover too many less promising as smaller customers by focusing primarily on those very sizable and promising companies and I think we are in a very good position right now booking with as I have said multiple customers. It is recurrent. And your last question about our 8 megapixel CMOS image sensor is that right?

Anthony Stoss - Craig-Hallum

Yes that and also just your average ASP on the driver side, if Jackie has got those handy. That would be helpful?

Jordan Wu

The internal ASP.

Jackie Chang

Well, Tony I think that what we are seeing now is the higher resolution driver IC for smartphone is the trend and we continue to see the trend going up. Especially Himax has been benefited from that higher gross margin resulted from a higher ASP. I think depending on the resolution between the true HD and HD720 and FHD in the future, every sale price can range anywhere of a 25% higher than the average WVGA to all the way to double the price. So you can see the gross margin is quite different. So as this trend continues, we should continue to be benefitting from that.


Our next question is coming from the line of Daniel Heyler with Bank of America. Please proceed with your question.

Kyna Wong - Bank of America

This is Kyna. I am asking on behalf of Daniel. And my question is about the visibility actually regarding your guidance. Because I remember somewhat on the June income, you see like 10% growth in the quarter and then later in late July and maybe in August we will see maybe a 5% to 10%, but now you see another 5% to 12% decline in the quarter revenue growth. So I would like to get more color from the actual market situation, and then what scenario that you would probably expect?

Jordan Wu

Right, well actually both large panel and small panel (inaudible), I think probably with the exception of tablets and automotive goes down at the moment, and I think the fact is that our visibility is low for just about everybody across the supply chain, and certainly I mentioned earlier, the demand for the October Shopping Season for China hasn’t really picked up yet.

Another thing about the poor visibility comes from the fact that customers tend to give us rush orders. They are probably less able to see the picture of their demand two or three months or even one month ahead. And therefore sometimes, more often, right now, then before that they have come to us for short-term revision of their focus of this. Unfortunately that sometimes represents lots of regular opportunity in a short term for us. For example if the customer push you to put A product in the forecast and all of a sudden they say oh we don’t need A for the short-term, now we are switching our demand to B-product. But because of their previous focus for A, we are to make preparations for manufacturing for A. And we may not necessarily have inventory available for them for B.

So unfortunately that is happening right now for us. Somehow we’re seeing to a certain extent, because of this low visibility inventory on the certain product essentially writing (ph) slightly, we are also facing shortage because of our supply because of our customer’s shook motives.

So I think all these are indications that people already seen a good visibility in the marketplace. This is not just China’s whereabouts. We are even talking about (inaudible) as well. So and again low visibility means if the visibility is low, we you can actually go for the (inaudible) or for the up. There could be a surprise upside in short-term as well but the answer is we really don’t know at this stage, even though we already sit in at the middle of the quarter.

Kyna Wong - Bank of America

Another question is about the interest income. This quarter I saw around $250 million gain from the interest income. Is this sustainable? How can I model, maybe for the future stable operating income for that?

Jackie Chang

The interest income for this quarter $256,000. I think that’s probably not believed to be the same level each quarter. I think that you can pretty much model in your financial model, probably half of that, as an average because we do use our fund in making different deposits and stuff and we do generate certain interest income but that's not really stable income for us each quarter. So it varies. So I will just use average.

Jordan Wu

We capitalize that. We put our funds in the (inaudible) possible ways, which I mean obviously also means low interest. So I think it should also be over time a direct function of our cash position, because we do place our deposits in the safest possible way.

Kyna Wong - Bank of America

And on that I have one more question about the OpEx for the R&D expense. Which product you pace more R&D or likely 90% of your additional R&D spending will be placed in the non-driver side? Can I say that's right?

Jordan Wu

Well no. I mean certainly for LCOS for CMOS image sensors and also even our ASIC services, where we are seeing (inaudible) activities, business opportunity coming to us. So we are expanding quite aggressively over there. However for example in our smartphone and tablet market, or even touch panel controller business, we're actually also seeing, there is a lot of new activities coming to us. So I think in terms of the growth in R&D expenses, certainly non-driver would be a bit higher than in driver. However it doesn't mean driver is not growing. It is actually growing fast as well.

So I think overall what we have seen is as you all are well aware, our business rebounded very strongly in last year. So towards the end of last year, into this year, and prior to even next year I think we are seeing a lot of great opportunity ahead of us and certainly to fully take advantage of that, we have to expand our R&D base. So we understand that will impact our short term P&L but I think it's something we just have to do.

So in comparison to the year before last year and few years back, when our business was on the low side and as we look at our financials we maintained a pretty stable R&D expense over those years, but starting from somewhere last year and to this year I think we are more aggressive in terms of R&D spending. We’re kind of tight rope (ph) right now.


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

Jun Zhang - Wedge Partners

In terms of slowing down TV market and there is some smartphone inventory correction, Jordan, do you expect this is going to only be a one quarter issue or will continue to Q4. That's my first question.

Jordan Wu

Thank you Jun. Low visibility is the key. So we usually don't want to comment too much Q4 right now.

Jun Zhang - Wedge Partners

So also on the CMOS 8 megapixel, I know someone already asked a question, but I think what's your confidence to picturing the CMOS image sensor market, especially in the 5 and 8 megapixel image sensor markets?

Jordan Wu

We have certainly starting from, in terms of mainstream main camera for smartphone, that's our current market in the 5 megapixel and the 8 megapixel which are the two product specs for the mainstream smartphone's main cameras. And for this market we are certainly starting from second year in China and also (inaudible).

We are in discussion with certain top brands, however we are not hopeful that given if we are very successful, design stage will take quite some time. So I think at least the next two quarters you should not expect to see Himax breaking into top tier brands. But certain brand names which are not necessary top tier but offer exciting potential for us, which we do have good designer activities going around at the moment.

Jun Zhang - Wedge Partners

My last question is, do you see the growth momentum from the LG or the other panel makers in China or in Taiwan that could potentially offset the decline from Innolux in the next few quarters?

Jordan Wu

That's the plan. Yes that's the plan and we're working very hard on that.


Thank you. We have reached the end of our time for the question and answer session. I would now like to turn the floor back over to Mr. Jordan Wu for any concluding comments.

Jordan Wu

Okay thank you everyone for taking the time to join today. We look forward to talking with you again at our upcoming earnings calls in early November and Jackie our CFO will attend Oppenheimer's conference in New York City and do a Road Show in September. So you can contact John Mattio of MZ Group or our department if you are interested in meeting with us in person. So thank you again and have a nice day.


Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation.

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