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Himax Technologies, Inc. (NASDAQ:HIMX)

Q2 2012 Earnings Call

August 9, 2012 8:00 a.m. ET

Executives

John Mattio - Investor Relations, MZ North America

Jordan Wu - President and Chief Executive Officer

Jackie Chang - Chief Financial Officer

Analysts

Jay Srivatsa - Chardan Capital

Peter Liao - Nomura

George Chang - Yuanta Research

Kyna Wong - Merrill Lynch

Operator

Greetings. Welcome to Himax Technologies Incorporated Second Quarter 2012 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 today. It is now my pleasure to introduce your host John Mattio, Senior Vice President of MZ North America. Thank you. Mr. Mattio, you may begin.

John Mattio

Thank you very much, operator. Welcome everyone to Himax’s second quarter 2012 earnings conference 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 release, please call MZ Group at 212-301-7130, or the press release can be accessed on financial portals like Bloomberg, Yahoo, or Google, or you can download a copy from Himax’s website at www.himax.com.tw.

Before we begin the formal remarks, I’d like to remind everyone that some of the statements in this conference call, including statements regarding expected future financial results and industry growth are forward-looking statements that involve a number of risks and uncertainties that could cause actual events or results to differ materially from those described in this conference call. 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 applications products; reliance on a small group of principal customers; the uncertainty of continued success in technological innovations; and other operational and market challenges including company’s Taiwan depository listing, TDR; the capability to maintain the full two-way fungibles between the company’s ordinary shares and ADSs; 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, 2011 filed with SEC as amended.

Except for the company’s full year of 2011 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 US GAAP. Such financial information is generated internally and has not yet been subjected to the 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 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, Chairman and CEO. Jordan?

Jordan Wu

Thank you, John, and thank you everyone for being with us for today’s call. In this earnings call, in addition to reporting our performance for the second quarter, I will also summarize key growth drivers and highlight milestones we have achieved so far in the first half of 2012. I will then provide our outlook for the third quarter 2012 and outline our strategic focus areas for the rest of the year. Our CFO, Jackie Chang, will provide further details on our financial performance.

We issued our second quarter earnings press release yesterday. Q2 revenues came in at $189.5 million while gross margin was 23.1% and GAAP earnings per ADS were 8.9 cents, mapped with what we stated in the preliminary results issued on July 9. These strong results reflect further progress we have made across our organization. Starting with our sales performance, second quarter revenues of $189.5 million represented 18% growth year-over-year and 13.7% increase sequentially. Strong sales in our small and medium-sized drivers and non-driver ICs remained the top contributors to our revenue growth.

Our sales to non-related parties increased an impressive 36.5% year- over-year and grew 21.9% sequentially. Revenues from large panel display drivers were $79.7 million, up 4.3% from a year ago and also increased 11.7% sequentially. Large panel drivers accounted for 42.1% of our total revenues for the second quarter compared to 47.6% a year ago and 42.8% in the previous quarter. The sales increase was mainly due to the growing sales to the panel customers in China. Thanks to the new capacity ramp currently underway in China, we anticipate this positive trend to continue in the second half of the year.

Sales of small and medium sized applications came in at $83.8 million, up 34.7% from the same period last year and up 15.8% sequentially. The growth was mainly a result of strong sales in a number of fast-growing product segments including smartphones, automotive and tablets. Sales for smartphone driver ICs, particularly those to the China market, were particularly robust. Our small and medium sized driver sales totaled $83.8 million for the second quarter, a record high in our history. Revenues from our non-driver businesses were $26 million, an increase of 18.4% from the same period last year and up 13.2% sequentially.

Non-driver product revenues accounted for 13.7% of total sales as compared to 13.7% a year ago and 13.8% in the previous quarter. We were able to deliver a decent growth for our non-driver revenues as a whole in Q2. Touch panel controllers, power management ICs, CMOS image sensors and wafer level optics were among the non-driver products which delivered outstanding sequential growth. Whereas, LCOS micro-display and TV chipset units saw revenue declines both sequentially and year-over-year as both product lines were undergoing business repositioning. I will elaborate on some of these product areas a bit later after Jackie’s remarks our financials.

Revenues from related parties in the second quarter 2012 remained flat from the previous quarter. Overall sales from related parties continued to decline as a percentage of our total sales, reflecting strength in our non-large panel driver businesses. Related party sales were 33.4% of total sales in Q2, as compared to 42.4% a year ago and 37.9% in the previous quarter. We continued to transform our product mix and expand our reach to other customers. A more diversified customer base will further reduce our dependence on any single customer and help minimize our business risk.

Our GAAP gross margin for the second quarter was 23.1%, a 450 basis points improvement compared to 18.6% a year earlier and a 20 basis point improvement from the 22.9% in the previous quarter. This is the third consecutive quarter of gross margin improvement and the highest level since the fourth quarter of 2008. This increase in our gross margin is a direct result of a richer mix of higher margin products. Continued gross margin improvement will remain one of our main focuses.

For the second quarter, GAAP net income was $15.1 million, or 8.9 cents per ADS, compared to $3.6 million, or 2 cents per ADS in the corresponding quarter a year ago, and $11.3 million or 6.6 cents per ADS in the first quarter of 2012. GAAP net income grew 316.8% year-over-year and 33.5% quarter-over-quarter. GAAP EPS per ADS grew 342.5% from the same period last year and 34.7% over the previous quarter.

In summary, we are pleased with our second quarter performance where we achieved both top and bottom line growth. This signifies the success we have achieved for more balanced sales from various product lines and a more diversified customer base. In addition, we delivered strong growth in our higher margin products and kept our operating expenses under control. All of these factors resulted in substantial improvements in our bottom line profitability. We are confident that Himax is heading in the right direction to achieve additional improvements for the balance of 2012 and beyond.

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 our outlook for the third quarter of 2012. Jackie?

Jackie Chang

Thank you, Jordan. I will now provide additional details for our second quarter financial results. Our GAAP operating expenses were $23.5 million in Q2 2012, down 11.2% from $26.5 million a year ago and down 0.6% from $23.7 million in the first quarter of 2012. GAAP operating income for the second quarter of 2012 was $20.2 million or 10.7% of sales, up $16.8 million or 492.3%, as compared to $3.4 million or 2.1% of sales during the same period in 2011. And up $5.7 million or 39.7% from $14.5 million, or 8.7% of sales in the previous quarter.

Non-GAAP net income in the second quarter was $15.9 million or 9.3 cents per diluted ADS, up from $5 million or 2.8 cents per ADS for the same period last year, and up from $12.1 million or 7.1 cents per ADS in the previous quarter. Non-GAAP net income for the second quarter 2012 grew 216.8% over the same period last year and 31.1% over first quarter of 2012. Our cash, cash equivalents and marketable securities available for sale were $103.2 million at the end of June 2012, little change from $104.1 million for the same period last year and $102.1 million a quarter ago.

Inventories at the end of June were $139.2 million, up from $124.4 million a year ago and up from $118.5 million a quarter ago. The increase in inventory from last quarter is primarily because some customer orders originally scheduled for shipment towards the end of Q2 got pushed back to the third quarter. Accounts receivables at the end of June were $212.9 million as compared to $179.3 million a year ago and $189 million last quarter. Days sales outstanding were 109 days at end of June, 2012 compared to 108 days last year and 103 days at end of the last quarter. The days sales outstanding increase over the last quarter was attributed to increased sales from large panel customers in China, who like large panel customers elsewhere, are granted slightly longer payment terms.

Net cash inflow from operating activities for the second quarter was $3.2 million, which consists of net income before depreciation and amortization of $18.1 million, offset by increase in receivables, inventory and trade and tax payables. We spent approximately $1 million in capital expenditures in the second quarter versus $8.7 million a year ago and $1.6 million last quarter, bringing the total capital expenditures to $2.6 million in the first six months of 2012.

On June 11, we declared a cash dividend of 6.3 cents per ADS, totaling $10.7 million for 2011, paid out on July 25, 2012. This payout is consistent with our cash dividend policy which has always been based primarily on our prior year’s profitability. The decision to pay out 100% of our last year’s net profit signifies our board’s confidence in the positive business outlook for 2012. With regards to our $25 million dollars share buyback program, we have purchased a total of $12.3 million or approximately 8.9 million shares ADS through June 30, 2012, including $1.14 million or approximately 0.6 million ADS purchased in Q2 2012.

As of June 30, 2012, Himax had 169.5 million outstanding equivalent ADSs. We will continue to execute the remaining share repurchase program in accordance with Rule 10b-18. Before I turn the floor back to Jordan, let me quickly summarize our financial results for the six months ended June 30, 2012. Revenues were $356.2 million and gross profits were $81.8 million, representing growth of 18.1% and 40.6% over the first half of 2011 respectively. Our gross margin increased to 23%, up from 19.3% in the same period last year, a 370 basis point improvement.

Our GAAP operating expenses were $47.2 million for the first six months of 2012, down $5.1 million or 9.7% from $52.3 million for the same period 2011. This significant reduction was due to a better overall cost control and the reduction in the ramp-up costs for production of WLO, WLM and LCOS products at Himax’s dedicated factories for these product lines.

Operating income of $34.7 million representing a 482.4% increase from the first half of 2011. The improvement in operating income was mainly the result of gross margin expansion and cost control measures discussed earlier. GAAP net income for the first half was $26.4 million or 15.4 cents per diluted ADS, up from $6.3 million or 3.6 cents per ADS for the same period last year. GAAP net income for the first half of 2012 grew 316.2% over the same period last year.

Non-GAAP net income for the first half was $28.1 million or 16.4 cents per diluted ADS, up from $9.2 million or 5.1 cents per ADS for the same period last year. Non-GAAP net income for the first half of 2012 grew 206.6% over the same period last year. All of the above are strong indications that our overall business has come out from the trough of last year. The management is committed to continuing the improvement of our overall financial performance.

I will now turn the floor back to Jordan to discuss our growth strategies and third quarter guidance.

Jordan Wu

Thank you, Jackie. I will now discuss each of our major business segments in greater detail. I’ll start with now our largest business segment, small and medium sized drivers. Thanks to our leading technology and strong execution we have enjoyed a phenomenal growth in this product category for quite some time. It has not only lifted our overall sales but also contributed to the diversification of our revenues. As recent as Q4 2009, small and medium sized drivers’ quarterly sales were only $37.7 million, or 21.1% of our total sales at the time. In comparison, they were $83.8 million in Q2 this year, or 44.2% of total sales.

In particular, smartphone applications have delivered the strongest growth since the third quarter of last year mainly due to our successful penetration into the first tier brands in China. We remain bullish on the growth prospects of the smartphone segment, having had recent successful new product launches and project wins from leading smartphones brands across China and internationally. However, we do foresee our smartphone driver growth momentum slowing down in the third quarter with sales expected to remain flat from those of the second quarter. Our main clientele in China, many of them leaders in higher-end market, are experiencing competitive pressure from second tier and white box players who are launching numerous entry-level phones, dubbed by some pseudo smartphones, to penetrate the marketplace.

While the existing first tier customers will continue to be our area of focus, we intend to regain our growth momentum by actively improving our engagement with China’s second tier handset manufacturers. Beyond handsets, our numerous design wins in tablets, notebook and automotive display applications also contributed to growth in the second quarter. These products will continue to produce noteworthy shipments in the second half of this year. We experienced second quarter growth in the large panel business in all large panel product categories, mainly, thanks to the growth from panel manufacturer customers in China who expanded their capacity and increased their capacity utilization.

We expect the growth trend in China to continue through the remainder of 2012. Large panel display drivers remain one of our long-term focuses and we intend to commit additional R&D investment in this business. I mentioned earlier that there were highs and lows in the performance of our non-driver areas in the second quarter. I will now highlight those key areas and share with you about where we are and our strategy going forward. I’ll start with CMOS image sensor. We delivered a decent sales growth in CMOS image sensor in the second quarter thanks to some early shipments of our 1-megapixel products which were taken by customers to manufacture the new generation notebook PCs with the Windows 8 operating system.

As many of you are aware, 1 megapixel, or so-called HD sensor is replacing the 300,000 pixel VGA sensor to become the mainstream for notebook PCs after Windows 8. However, with the delay of Windows 8 launch from Q3 to Q4, we are seeing a sudden and drastic demand slow down for 1 mega-pixel sensor during Q3. Given our design-wins with a number of tier-one notebook names, we expect such demands to resume in Q4 and accelerate in next year, assuming Windows 8 is launched in Q4 as most people now expect.

Our multi-finger capacitive touch panel controllers have been growing very nicely since we shipped our first product in the last quarter of 2011. We have seen increasing orders for various panel size smartphones and expanded our share in the existing leading smartphone brand customer. Additionally, we have secured design wins from new handset customers to begin shipments in the third quarter of 2012. We believe touch panel controller is a long-term growth engine for Himax.

I mentioned earlier that two of our non-driver product segments are undergoing business repositioning, namely LCOS micro-display and TV chipset. Our original focus for LCOS micro-display, namely embedded Pico projector in hand phone, has proven premature with sales peaking in the second quarter of last year and declining ever since. We are now shifting the focus of our LCOS micro-display business to a new application, head-mounted display. It is a new and exciting product area with a great deal of potential and is an application where we believe our technology is superior to other competing technologies.

In addition to head mounted display, we are still working with numerous partners to create new Pico projector applications using our LCOS micro-displays. We talked about the repositioning of our TV chipset business in one of our previous earnings calls. Basically, starting the second half of last year, we exited the integrated TV chipset business and switched our focus in this area to the provision of two product lines. One, comprehensive and competitive monitor and projector scaled products, and two, tailor-made video processing IC solutions and silicon IPs.

We are extremely encouraged by our early success with the engagements of several top-tier brand customers who need such tailor-made ICs to create differentiation for their end products. While such engagements have generated immediate development fee incomes, overall short-term revenues for this business are lower due to lost revenues from the TV chipset product line which we have exited. The lost revenues will be more than recovered once some of these tailor-made ICs start mass production next year.

For the reasons above, we do foresee some decline in our non-driver business as a whole in the third quarter. However, we expect it will regain its upward momentum starting Q4 and going forward. We remain confident that our non-driver businesses still represent our long-term growth engine. For the third quarter of 2012, we anticipate revenue to be around flat compared to the second quarter of 2012, gross margins to be slightly up and GAAP net income attributable to shareholders to be between 4 cents to 6.5 cents per diluted ADS based on 169.6 million outstanding ADSs, about 10 to 16.3 times compared to the same period last year.

Our third quarter GAAP earnings per diluted ADS guidance has taken into account our expected 2012 grant of restricted share units, or RSUs, to our team at the end of September. The 2012 RSUs, subject to Himax’s board approval, is now assumed to be valued in the range of $11 million to $12 million, of which approximately 60% will be vested and expensed immediately on the grant date. Excluding share based compensation and acquisition related charges, our third quarter 2012 non-GAAP earnings are expected to be between 8 cents to 10.5 cents per diluted ADS based on 169.6 million outstanding ADSs. And this per EDS number is about 3 to 3.9 times compared to the same period last year.

Our cumulative GAAP net income per diluted ADS through the third quarter 2012 is forecasted at 19.4 cents to 21.9 cents, about 5 to 5.6 times year-over-year. Our non-GAAP net income per diluted ADS through the third quarter 2012 is forecasted at 24.4 to 26.9 cents, about 3.1 to 3.4 times year-over-year.

With that, 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 2012. Operator, we will now open the floor for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first quarter is from the line of Jay Srivatsa with Chardan Capital. Please state your question.

Jay Srivatsa - Chardan Capital

Yeah, Jay from Chardan Capital. Jordan, can you give us some sense on how you see the smartphone market in China as you look beyond Q3. It appears that there might be some temporary transition from the feature phone to the smartphone in China and that might be causing some disruption. Can you give us a little bit more color on how you see that market developing as you look ahead to Q4 and more so into fiscal ’13.

Jordan Wu

Right. As you know, I think China probably moves very fast. Everything changes extremely fast. So starting from around Q3 marks the only, when China started to see some authentic smartphone manufacturers launching, like (inaudible) smartphone till now the market has changed so much. So I think to answer your question I need to have a disclaimer that I don’t have a crystal ball, there might be a big change in the market. But I think that the essence of the market, today what we have seen is, well, in the truth about one year of market production led by third tier mainly.

Now the second tier, the so-called ramp-ups are coming in to join the party and they have been able to provide more ‘cost effective form’ to cater towards like entry-level customers and also third world countries. And so that is on the one end of the market, being very lower-end. On the other extreme of the market, we have seen internet companies also coming to the party by launching, in this case, extremely higher spec platforms. Trying to pull a part of the share as well. So the traditional, so-called first tier brand names, I think they are a little bit caught by surprise. I think we have been seeing them adjusting their second half forecast forward over the last few months because I think they do need time to sit back and think what is going on in the market place.

And the operator, the carrier, continues to be the biggest buyer and I think that will not change. But carrier as usually has been using this what we call tender system to squeeze the price of the provider of the phones. So, however, we do see that second-tier in ramp-up phase, they are having a hard time getting into carriers market. Although they maybe even (inaudible) to cut their prices. So I think our view is that the third tier eventually within about next year, you know next two years is a long time from now trying to spend it, but I think eventually next year the first tier ones would feel, occupy the bigger chunk of the market.

And we continue to believe smaller players who are now extending their wings to cut their price, will still have a hard time because this industry requires a lot of software engineering and content and cooperation with carrier, are really important. Much more important than the feature phone. So we have seen the first tier brands, the traditional first tier brands as well as the high-end kind of internet companies who do might sell software or applications. I think we do see them picking up the bulk of the market. However when it comes to, call it phone export countries, the third world countries, it harder to sell. I think it maybe a place for the white box or second tier may have a better chance.

Jay Srivatsa - Chardan Capital

All right. Switching to microdisplays. You have done a lot of work in that space related to near-eye type products. Can you give us some update on where are some of those projects and when do you expect some of them to come into market and start to become meaningful to you in terms of revenue?

Jordan Wu

Himax as a company has actually been doing head-mounted displays for a very, very long time. We are talking about almost a decade. But the end product, which is not meant for us rather it’s meant for our content customer. Great product, has not become mature until I think recently. And I said earlier in my remarks that we do enjoy a very strong competitive advantage in our product technology. Our patent for this particular product area. So that kind of explains why I think we referred it, so that we have committed more resources.

This tier, non-existent but we believe very very promising product area. As far when it will materialize and become meaningful to us, I think once OED picks up, it will certainly become rather meaningful to us. Both top and bottom line. And I think our customers are telling us with different template or they are medical customers that I think sometime next year I think is a good bet for the people to come start to see this gradually competent product in the market place.

Jay Srivatsa - Chardan Capital

All right. Last earnings call you talked about ASIC services, how you -- to some of that. Can you give us some update on where you are in terms of providing ASIC services to clients and then how is that changing your business model as you look ahead.

Jordan Wu

I think we are emphasizing that the same [pin] and the same IP part of our TV processor or TV controller business, right. And we kind of admit that we are too late. We want to exit from that market, too competitive for us. And we kind of repositioned our business and we repositioned the team, utilizing basically same IP and the same knowhow. Now almost as soon as we announced it to the market, we have had some of the meeting coming from suppliers, surprisingly some of the biggest names in the market. And they are across TV, projector, or in this case thermal display, even cellphone. So a lot of them enquired with interest.

And we are teaming up with -- engage a few customers successfully in the design of (inaudible) for ASIC. Applications for CDIC, for (inaudible) IC. And I tried to explain earlier, at this moment this is how you start a ASIC business. The first step is, you pick up your IP team and then you try to engage your customer, once you have successful engaged then hopefully we will be awarded with some (inaudible) or tooling charges and development fees. That is kind of your part and parcel for day to day of payroll (inaudible). But you got to really pretty make money once some of those ASICs start mass production, because in this business, in addition to the NIEs we charge, we also sell the ICs to them, the ASIC ICs to customers.

So in that case typically such IP do enjoy much better gross margin then our driver IC or other stuff. So I think that such customer for mass production of this ASIC IC shipment, I think will be first half of next year. And its -- I mean there is no guarantee, right. I mean people typically come to us for such a thing. I mean why do they not want to buy ICs from the shelf because they want to create differentiation. They want the end product to be somewhat different. And that is these things are conducted confidently, and we kind of are above with respect we (inaudible) for them.

So there is no guarantee. Every single bet will become a reality, a success. But we certainly we also listen to our customers, we try to understand their projects, we try to come in the potential of those. So we do believe some of these will start to become material in the third part of next year.

Operator

Thank you. Our next question is from the line of Peter Liao of Nomura Group.

Peter Liao - Nomura

Thank you for taking my questions. My first question is upon smartphone type IC. Based on your third quarter guidance, does it mean that you have lower market share for the second tier as (inaudible) does in China. And also what do you see in the, track price competition inventory in China’s smartphone driver IC market right now.

Jordan Wu

You first question whether we have smaller market share, basically...

Peter Liao - Nomura

Lower, I mean....

Jordan Wu

Are you probably saying whether we have growing the first tier market and second tier market in China where we have a smaller market share, so can we see it. Is that your question?

Peter Liao - Nomura

Yes.

Jordan Wu

I think it’s the fair to say the SAES -- currently the [ECCS] and also actually our smartphone market share is much higher than our feature phone market share. And your second question is, price pressure, right?

Peter Liao - Nomura

Yes.

Jordan Wu

I think price pressure will inevitably come from all directions because I mean as we told earlier, first tier competition is fierce in the second tier. Try to defend their market share, right. So the price pressure will come from both first tier and second tier. But we will try to defend our gross margin for sure. There are cost cut measures, there are new product launches and etcetera. And certainly we have to adapt to the market situation. But in summary I think there are price pressure but we will try to defend our gross margin. We repeat it again and again that gross margin improvement is our focus.

Peter Liao - Nomura

Thank you. And also talking about (inaudible) inventory for like a China smartphone IC is a big high. So perhaps you can give us some color on that?

Jordan Wu

Sorry, I couldn’t really hear that. Can you repeat the question?

Peter Liao - Nomura

I heard that inventory for China mobile enterprise is a bit higher redundancy, and perhaps you can give us some color on like inventory side in the channel for smartphone IC?

Jordan Wu

Okay. Yes, indeed. I think that is -- already because we towards the end of last quarter, I think we trigger the first tier in the smartphone makers, seeing rather this ‘unexpected competition’. They are kind of there to take a post and review the situation before they move off again. So that caused some inventory build up along the supply chain. But I wouldn’t say it will be a problem for too long. I mean the market continues -- the market overall continues to have a pretty strong momentum. Or strong on the relative term compared to other markets in the world.

And bear in mind China also -- we are talking about China being a manufacturer for our market and China manufactures phones all for export. So we are talking about the local brands or the exports to third countries, which is still a very large area and untapped market for anybody. So I think they do, even they experience the feature phone. They do enjoy a very strong advantage compared to international brand. So I would not underestimate their ability to absorb such inventory in a short time.

So we don’t think -- a little bit of pressure of, yes, in Q3, but we don’t foresee this to become a real longer-term problem.

Peter Liao - Nomura

Okay. I see. And my second question is regarding the large driver IC and given the slow growth for larger size panels including TV and IT panels. So even though newer China panel makers, they bring up their capacity very aggressively this year. But with the growth unlike China panel makers be offset by lack of market share loss for Taiwan panel makers or also offset by multi-channel technology.

Jordan Wu

I am not sure we are losing our panel market shares as such, greatly. I mean cannot predict the future, but I don’t think we have been losing market share in panel. In the past of couple of years, yes, but probably that’s to a much lesser degree right now. I think it’s fair to say I think with our increase of market share in China, I think overall -- our overall market share must have increased somehow. Whether this multichannel trend is going to affect the overall large panel driver IC market? Historically, the answer clearly is, yes.

Going forward, I would still say, yes, with the caveat which is on people trying to have small channels for each piece of IC trying to cut costs. Both IC costs and their bonding cost. But I think we have gone to an extreme already, to the extent that now we are talking about 1300 plus channels per [foot] driver. To the extent that the IC has to cover such a big area but failure is becoming a issue and when people are after very narrow TV trend. TV product as a fashion, as a value addition. I think the trend maybe somehow coming backwards. People would need to come back to smaller channel ICs in order to get over that problem.

So, overall, whether this is sufficient to offset the trends towards higher channel crowd, I really don’t know. But they are two opposite chains and don’t interact now. And also, I would also that the number or channels count, parallel, short-driver for TV I think has gone as far as it can go already, arguably. So it is unlikely to -- we are unlikely to see this trend pressure coming from higher channels counts technology over the last few years. Which certainly negatively affected the overall market size. I think the trend is substantially slowing now already because as I said, we have gone as high as we can go and people are now actually going back.

Peter Liao - Nomura

Okay. Thank you.

Jordan Wu

Peter, I think this is a fair overall description, as far as the number is concerned, it’s really very had to tell.

Peter Liao - Nomura

My third question is regarding touch controller IC. And I know you are doing well in the smartphone but there is a new trends for Windows 8 notebook. And would that be a positive growth for you in the future? How do you see that?

Jordan Wu

Not in, not in this coming one of two quarters, but definitely, yes, for the future. I think with Windows 8 it is highly likely that your desktop PC will have touch panel. And now the real barrier is about the cost of the panel. And so our focus on the development of the technology for control IC is to -- actually, let me go back, so it is about the cost of the panel. So what's stopping the penetration of touch panel validation over laptop is cost. Cost and cost only.

So the industry is under tremendous pressure and is undergoing very fast in technology improvement over the cost reduction issue. Well, you know that to achieve lower cost there are technology that is required of the [transmitter], the controller IC. Then I think we believe are in bleeding edge over there. Although it is still in development or sampling stage. So that’s why I said, as far as revenue growth is concerned, touch panel, we are quite happy that the second half was opening decently. Now they will come from four months sales only. But we hope and we believe next year we start to see a contribution from Windows 8 notebook as well. And that is totally a very important for us, of our technology focus right now.

Peter Liao - Nomura

Thank you. And may I ask you to allow to ask one more question?

Jordan Wu

Yeah, sure.

Peter Liao - Nomura

Thank you. My final question is regarding your (inaudible) since there is a new trend -- there is a trend for higher resolution for all of panels, including TV and notebook. And I know in the notebook that new interface, EDP to replace LBDS. So how do you see the change? Will be of threat to you, positive upside to you? Since you are also well in the (inaudible) business?

Jordan Wu

Well, thank you for the question. It’s a very good question. Yes, it will provide benefit for us in the long-term and you are absolutely right that we are a major player in (inaudible) business. And EDP is a new interface, a high-speed interface which is only required for super-high resolution. So not all tablet, all notebook PCs will require that. But personally, if you ask me about the current volume industry wise, it’s small. But will that become the trend, I would certainly say yes. Because as we all know, panel prices can only go one way which is south. So the one way to defend your price of the panel is to increase your resolution. So I think that has to be trend.

And we are a leader in the EDP development for sure. We are sampling our EDP 1.3 and we are taking the leading edge in this area, although the revenue contribution is still very minimum at this stage.

Operator

Thank you. Our next question is from George Chang of Yuanta Research. Please state your question.

George Chang - Yuanta Research

Just a few quick ones. Number one, how much is smartphone revenues in second quarter? Maybe in terms of percent or absolute dollar amount?

Jordan Wu

We don’t really disclose such number, but it was (inaudible) of our total sales. Sorry, about 20% of our total sales.

George Chang - Yuanta Research

20% of our total sales. So that portion probably came down a little bit from -- did it go up or it come down from Q1?

Jordan Wu

It went up a lot from Q1. It went up by almost 50%.

George Chang - Yuanta Research

Went up by 50%.

Jordan Wu

Yeah, went up by almost 50%.

George Chang - Yuanta Research

I see.

Jordan Wu

(inaudible)

George Chang - Yuanta Research

In absolute dollar terms?

Jordan Wu

Yeah.

George Chang - Yuanta Research

Okay. And this will be flat going into third quarter?

Jordan Wu

Yeah.

George Chang - Yuanta Research

Would you say the mix of the smartphone changed a lot in the second quarter? Like WVGA, half VGA, and also what's the mix?

Jordan Wu

I think industry wise for half VGA is still the mainstream in China, right. And in particular we mentioned earlier this so-called pseudo-smartphone, they typically have half VGA as there standard resolution. And I would say a wild guess, it’s probably two to one of all the March. Half VGA versus WVGA and these two are the mainstream worldwide. And I think our market share in WVGA is higher than half VGA, although we mentioned earlier that one the sources of pressure over our smartphone driver business is the people, there the trend moving outward in terms of resolution. So half VGA is -- we do have comparative product lines, we do have a good customer base and we just need to put our act together and try to regain further market share from there.

George Chang - Yuanta Research

Okay. So it sounds like the second quarter went up 50% QoQ in revenue wise. That was more driven by volume not so much by the blended ASP change due to the product mix?

Jordan Wu

Let me see. I am sorry I don’t have the detailed number right in front of me but I would say it is probably both. Because we have always shipped quite a lot of WVGA since second half last year. And we were amongst the earliest to enter into the market. We brought out this at a time very high end product. And we had very good penetration. So rather compared to our peers I would say, coming to Q3, our blended ASPs probably under a slight pressure because we are to pick from our half VGA.

George Chang - Yuanta Research

I see. So the mix of half VGA will increase in third quarter putting some pressure on blended ASP?

Jordan Wu

Yeah. That’s the plan because we need to get back to that white box second tier market. You know half VGA is dominant.

George Chang - Yuanta Research

Right. So in second quarter was WVGA more than 50%?

Jordan Wu

You mean volume wise or?

George Chang - Yuanta Research

Yeah, volume wise?

Jordan Wu

Certainly, not volume wise, not volume wise. I am saying our relative market share of WVGA is higher than half VGA by volume wise. WVGA to half VGA is about 1:2. Half VGA is bigger (inaudible).

George Chang - Yuanta Research

Okay. For Himax as well?

Jordan Wu

For Himax as well, yeah.

George Chang - Yuanta Research

Okay. I see. And also Jordan, did you guys ships any tablet driver IC?

Jordan Wu

Yeah, a lot.

George Chang - Yuanta Research

And is that included....?

Jordan Wu

We are out in China....

George Chang - Yuanta Research

Is that included in the small/medium business or the large panel business?

Jordan Wu

It’s in small/medium business.

George Chang - Yuanta Research

And when you say a lot, can you give us a rough percentage of the small/medium business?

Jordan Wu

I would just say -- this may be [incorrect] answer. (inaudible) compared to last year there is a very strong growth in tablets. They represent a very very strong growth. So I probably said it too quickly. In terms of our total sales, I think it is still small. It is certainly less than 5%.

George Chang - Yuanta Research

Less than 5% of the total sales?

Jordan Wu

Yeah. But it surely is the largest, fastest growth for us right now.

George Chang - Yuanta Research

I see, I see, that’s fine. And also on tablets, the ASP for the tablet driver IC, is that more -- is that closer to like smartphone driver IC or is that more similar to the large panels, like source...?

Jordan Wu

It’s in between but closer to large panel.

George Chang - Yuanta Research

But closer to large panel.

Jordan Wu

Yeah, because with -- well, I think for cellphones, for smartphones, cellphone driver IC has a very wide price range. It can go as high as almost $3 for very high end drivers and with the memory. It can go to as low as let's say $1. So it has a very wide range. And also, it makes a big difference whether the IC is memory embedded or not. But for tablet typically they have don’t have memory, so price typically is lower.

George Chang - Yuanta Research

Price typically is....

Jordan Wu

Is lower than smartphone driver IC.

George Chang - Yuanta Research

Lower than smartphone driver IC.

Jordan Wu

Yeah. On ASP basis.

George Chang - Yuanta Research

And similar to those of the large panels? Like the typical source gate ICs?

Jordan Wu

This is closer to notebook kind of ICs.

George Chang - Yuanta Research

Okay. And would you say like may be five ICs per tablet, is that the right assumption for us to model?

Jordan Wu

Less than that. It depends on customer’s design. Less than that. I would say it’s more like three.

George Chang - Yuanta Research

Three. Okay. Last question on the large panel. The revenue from Chi Mei or related party was flat in absolute dollar terms in second quarter after a small rebound in first quarter. I thought that the market has been talking about that Himax and Chi Mei has been doing really good on the 39-inch, 50-inch TV. So indirectly you guys also benefit. What's your take on that in terms of second quarter, this part is now -- is this not growing or...?

Jordan Wu

Well, certainly Q1, Q2, both Chi Mei and us enjoyed very strong growth, as you said, over 39 or 50 inch TV. And certainly, I mean it is unlikely to be growing like that for ever. So (inaudible) let me see. I think quarter-over-quarter we are seeing about flat, Q3 over Q2.

George Chang - Yuanta Research

Q3 over Q2?

Jordan Wu

Yeah, flat. But certainly Q1-Q2, the growth is very high because this year we started from very little pace but now after the two quarters the pace is already quite high. So Q3 over Q2, we will see about flattish kind of volume or revenue.

George Chang - Yuanta Research

Okay. So revenues from related party will be flat in third quarter?

Jordan Wu

Yeah, flat.

George Chang - Yuanta Research

Which means the mix is not going to change then?

Jordan Wu

That’s right.

George Chang - Yuanta Research

Because your (inaudible)?

Jordan Wu

That’s right.

Operator

Thank you. Our next question is from Kyna Wong of Merrill Lynch. Please state your question.

Kyna Wong - Merrill Lynch

Actually from the above questions I capture the message that large panel driver IC is likely to grow in third quarter and the small and medium sizes should also maintain but non-driver IC were likely to decline in third quarter, right?

Jordan Wu

I would say, although in large panel there will be some decline in the driver, that’s the focus right now. But non-driver accounts for relatively small out of the whole pie. So if you ask me about large panels, small panels quarter-over-quarter they are supposed to remain above flat.

Kyna Wong - Merrill Lynch

Got it. So in terms of the gross margin, would the smartphone we may have a driver to increase your margin performance? Or some other cost control or (inaudible)?

Jordan Wu

Well, from this quarter certainly not from driver -- not from smartphone drivers. Although it tried to be in the past few quarters, smartphone drives certainly has been the key engine to drive our gross margin. But in this quarter they are present in, such as touch-panel controller and tablet, and certainly our cost control as well. And while we guided for margin to go slightly up.

Kyna Wong - Merrill Lynch

I see. And my next question is about second half of year. Like 4Q, what do you see about 4Q, is large panel size, do you think that momentum from China customer will continue and the non-driver will pick up in fourth quarter. So what you see about the fourth quarter from the current point of view?

Jordan Wu

You first thought about large panel driver from China, yes, given the macro environment remaining relatively stable, I would say for sure large panel driver from China in Q4 will grow. And non-driver in Q4 definitely will also grow. I think coming from CMOS image sensor after Windows 8, we mentioned earlier. And touch panel controller, these two items in the Q. And also from our ASIC business as well. And timing controller, I think we are looking pretty good as well. So I think we certainly believe, we hope we will regain our non-driver growth momentum starting from Q4.

Kyna Wong - Merrill Lynch

I see. So I remember the company is looking for sequential growth per quarter this year. Do you think you still (inaudible) target for the objective?

Jordan Wu

I think it’s a good question. I mean certainly we have guided for flat Q3, right. But in terms of Q4, I mean traditionally Q3 is supposed to be the half season, you know October (inaudible) Chinese holiday and (inaudible) getting ready for that. So we typically ship a lot in Q3 and then slow down in Q4, up there in a [free fall] already have inventory for their manufacture. The Chinese, I mentioned holiday as well as Christmas. But I think interestingly we are seeing that the so called the industry seasonality is getting blurred. It’s almost changing every year. So it’s becoming confusing in the sense that actually we would believe even that end of Q2 and beginning of Q3 are looking slow. There is a good probability that Q4 may actually pickup. And again, there is huge uncertainty which is the global economy, which is totally beyond my scope. So I'm again assuming, since overall events are relatively stable, this not major negative events then -- I mean Q4 we have China smartphone, we have Win 8, we have quite a few things that are looking actually promising. So it’s hard to say but we remain kind of cautiously optimistic about Q4 prospect. I think it is fair to say. And specifically on our sales, certain areas on our non-driver, we think will grow and we certainly hope smartphone will also grow as well.

Operator

Thank you. (Operator Instructions) At this time we have come to the end of our question and answer. Now I will turn the floor back to management for closing comments.

Jordan Wu

Well, thank you everyone for taking the time and thank you for your patience. We look forward to talking with you again at our next call in early November. And as a final note, Jackie, our CFO, will actually be on a road show in the U.S. in early September. So please contact her and/or John Mattio at MZ Group if you are interested in meeting with us in person. So thank you again and have a nice day.

Operator

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

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