Himax Technologies, Inc.

Hello, ladies and gentlemen, and welcome to the Himex Technology, Inc. First Quarter 2020 Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require any assistance during the conference, please press star-zero on your touch-tone phone. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host. Ms. Miley Bergman from MZ Group.

Welcome, everyone, to HIMAC's first quarter 2020 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 remarks, we have allocated time for questions and a Q&A session. If you have not received a copy of today's results, please email hymax at mdgroup.us or access the press release on financial portals or download a copy from Hymax's website at www.hymax.com.tw Before we begin the formal remarks, I'd like to remind everyone that some of the statements in this conference call, including statements regarding expected future financial results and industry growth, are forward-looking statements that involve a number of risks and uncertainties that could cause actual events or results to differ materially from those described in this conference call. Factors that could cause actual events or results to differ materially from those described in this conference call include, but are not limited to, general business and economic conditions, the state of the semiconductor industry, market acceptance and competitiveness of the driver and non-driver products developed by HIMAS, demand for end-use application products, The Uncertainty of Continued Success in Technology Innovations, as well as other operational and market challenges and other risks described from time to time in the company's SEC filing, including those risks identified in the section entitled Risk Factors in its Form 20F for the year ended December 31, 2019, filed with the SEC in March 2020. Except for the company's full year of 2019 financials, which were provided in the company's 20F and filed with the SEC on March 25, 2020, the financial information included in this conference call is unaudited and consolidated and prepared in accordance with IFRS accounting. Such financial information is generated internally and has not been subjected to the same review and scrutiny, including internal auditing procedures and external audits by an independent auditor to which we subject our annual consolidated financial statements. and may vary materially from the audited consolidated financial information from the same period. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. I will now turn the call over to Ms. Jackie Chang. The floor is yours.

Thank you, Mari, and thank you, everybody, for joining us. On today's call, we will first review the HIMAX consolidated financial performance for the first quarter, followed by the second quarter of 2020 outlook. Jordan will then give an update on the status of our business, after which we will take questions. We will review our financials on both IFRS and non-IFRS basis. The non-IFRS financials exclude share-based compensation and acquisition-related charges. In light of the prevailing uncertainties clouding the global financial markets, we decided to pre-announce preliminary key financial results for the first quarter on April 3, 2020, with revenues met guidance, while gross margin and EPS both exceeded the guidance issued on February 13, 2020. Today, our reported results for revenues, gross margin, and EPS were all in line with the pre-announced results. For the first quarter, we recorded net revenues of $184.6 million, an increase of 5.5% sequentially, and an increase of 13% compared to the same period last year. Historically, the first quarter has seasonally been the bottom of the year in terms of sales due to the Lunar New Year holidays, opened down by more than 10% sequentially. The coronavirus outbreak has prompted more than half of the and Zeng Li. The management of logistics, including worldwide customs operations in various ports and the supply chain were impacted significantly during this period of time. Despite these dramatic high winds, we were able to deliver strong financial results in the first quarter, specifically when double-digit revenue The 5.5% sequential increase of revenue was at the mid-range of our guidance of an increase of between 1% to 10% quarter over quarter. Growth margin was 22.7%, exceeding the prior guidance of an increase of 1% to 2% from the 20.6% delivered in the previous quarter. A more favorable product mix among small display products Improved WO factory utilization and higher than expected engineering fees from new project engagements and hence the growth margin for the first quarter IFRS profit per dilute ADS was 1.9 cents exceeding our guidance of minus 0.5 cents to 1.8 cents Improved growth margin and lower than expected operating expenses contributed to the more positive earnings 5S Plus diluted ADS was 2.2 cents, exceeding our guidance of minus 0.2 cents to 2.1 cents. Revenue from large display drivers was $61.4 million, up 6% sequentially and down 12.3% year-over-year. The sequential growth was driven by Chinese panel customers ramping of new LCD FAPs, as well as the building of inventories in anticipation of growing demand and higher panel prices in 2020. The revenue was, however, lower than the level of the same quarter last year when the production outputs of panel makers reached the peak. Since then, they have cut back their production each quarter to address overall weakness TV demand and industry-wide capacity oversupply. Large panel driver ICs accounted for 33.2% of total revenue for the quarter compared to 33.1% in the fourth quarter of 2019 and 42.9% a year ago. Revenue for small and medium-sized display drivers was 87.5 million, up 7.9% sequentially and 29.5% year-over-year. The segment accounted for 47.4% of total sales for the quarter, compared to 46.4% in the fourth quarter of 2019 and 41.4% a year ago. The sequential sales growth was driven primarily by a surge in tablet sales, offset by a decrease in smartphone TPDI and automotive sales. The strong year-over-year growth was attributed by both tablet and automotive sales. Sales into smartphones were down 7.6% sequentially, but up 6.3% year-over-year. The sequential decline was caused mainly by lower TPDI instruments, reflecting certain customers' delays into the second quarter for their new product launches with our TPDI solutions. The coronavirus outbreak caused serious disruptions in customers' engineering work after the Lunar New Year holidays. leading to delay in new product verification and launch timetables. The first quarter sales of traditional DDICs declined by 5.7% sequentially but increased 13.5% from last year. Display drivers and PDDI for tablet and other consumer products were up 51.7% sequentially and doubled year over year. This was mainly due to customers' strong demand from newly launched tablets using TPDI as well as surging needs for online education and home working. We should emphasize that tablet TPDI was one of the main growth drivers for Q1 and will represent a significant growth opportunity for our business through the rest of 2020. While we only started mass shipment of in-cell TPDI for tablet this quarter, He already represented around 5% of our total revenues in the first quarter. Jordan will elaborate on this later. Our drive IC revenue for the automotive application was down 9.7% sequentially. It was up 6.2% from the same period last year. Revenue from our non-driver businesses were $35.7 million, down 26% sequentially, but up 38.7% year over year. Non-driver products accounted for 19.4% of total revenues as compared to 20.5% in the fourth quarter of 2019 and 15.7% a year ago. Growth margin for the first quarter was 22.7%, up 210 basis points sequentially and 10 basis points from the same period last year. Growth margin outperformed our guidance of an increase of 1% to 2% compared to the 20.6% of the fourth quarter of 2019. A more favorable product mix among small and medium-sized display driver products improved WOSF utilization and higher engineering fees from project engagements were the factors behind the sequential growth. Increased shipment of WHO product to an anchor customer led to higher capacity utilization of our WHO FAPs and therefore better growth margin compared to the same period last year. Our IFRS operating expenses were $37.3 million in the first quarter, down 0.4% from the preceding quarter and down 7.4% from a year ago. The year-over-year decrease was the result of decreased salary and R&D expenses. Non-IFRS operating expenses for the first quarter were $36.7 million, down 25% from the previous quarter and down 7.8% from the same quarter in 2019. IFRS operating margin for the first quarter was 2.5%, up from minus 0.8% in the prior quarter and Minus 2.1% in the same period last year. The sequential and year-over-year improvements were primarily a result of higher sales, better gross margin and lower operating expenses. First quarter non-IFRS operating profit was $5.3 million, or 2.9% of sales, up from non-IFRS operating loss of $0.7 million. or minus 0.4% of sales last quarter and minus 1.8% for the same period last year. Both sequential and year-over-year improvement were for the same reasons stated above. IFRS profit for the first quarter was 3.3 million or 1.9 cents per dilute ADS compared to profit of 1 million or 0.6 cents per dilute ADS in the previous quarter. and loss of 2.3 million or minus 1.3 cents per diluted ADS a year ago. FIS earnings per diluted ADS exceeded prior guidance of a per diluted ADS of around minus 0.5 to 1.8 cents. The better-than-expected earnings were due to improved gross margin and lower operating expenses. The sequential and year-over-year increase were a result of higher sales, better growth margin, and lower operating expenses. First quarter non-IFRS profit was $3.8 million or $0.02 per diluted ADS compared to non-IFRS profit of $1.5 million or $0.09 per diluted ADS last quarter and non-IFRS loss of $2 million or minus $0.01 per diluted ADS for the same period last year. Non-IFRS earnings per diluted ADS exceeded prior guidance of around minus 0.2 to 2.1 cents. Turning to the balance sheet, we had $126.6 million of cash, cash equivalents, and other financial assets as of end of March 2020, compared to $108.2 million at the same time last year and $112.1 million a quarter ago. We deliver an operating cash inflow of $10.6 million during the first quarter. The higher cash balance from the last quarter was mainly due to additional unsecured borrowings of $10.6 million during the quarter. On top of the cash position, restricted cash was $164 million at the end of the quarter, the same as the preceding quarter and a year ago. The restricted cash is mainly used to guarantee the secure short-term borrowing for the same amount. We had $67.9 million of unsecured short-term loan at the end of Q1 compared to the $57.3 million a quarter ago and $14 million at the same time last year. Our inventories as March 31, 2020 were $148.4 million. Little changed from 143.8 million last quarter, but down from 189.3 million a year ago. Accounts receivables at the end of March 2020 were 186.7 million, up from 164.9 million last quarter and 176.2 million a year ago. Day sales outstanding was 92 days at the end of the quarter, as compared to 97 days a year ago. at 90 days at the end of last quarter. As highlighted in the last few earnings calls, in response to capacity shortage at Foundry and certain packaging material, we had to keep the inventory level higher than usual in 2018. Given the unfavorable market conditions and easing of Foundry capacity in 2019, we have started to control our inventory level since the first quarter of 2019. We believe inventory has reached a healthy level by now, but given the prevailing market condition, we will monitor our inventory carefully. Net cash inflow from operating activities for the first quarter was 10.6 million, as compared to an outflow of 22.1 million for the same period last year, and an inflow of 23.4 million last quarter. First quarter capital expenditures amounted to $3.1 million versus $6.3 million a year ago and $2.7 million last quarter. As reported in the last earnings call, the CapEx for both new building construction and the 3D sensing capacity expansion were concluded in the fourth quarter of 2019. The first quarter CapEx was for R&D-related equipment for our IC design business. As of March 31, 2020, Himex had 172.2 million ADS outstanding, no change from last quarter. On a fully diluted basis, the total number of ADS outstanding was 173.3 million. As we mentioned in the last earnings call, the coronavirus outbreak created major uncertainties in the marketplace and new challenges for our operations. We have taken swift actions and work extremely closely with both our customers and suppliers in an effort to adapt to new circumstances. Among other things, we have proactively monitored the logistics and customs operations in various ports in China to identify any potential impacts to the supply chain and quickly adjusted the production and shipping plans accordingly. At this time, China reopening and other countries moving in the same direction. The market appears to be stabilizing, but business outlook remains murky. For the second quarter, we are confident in the smooth operation of our supply chain, and the current driver IC shipment pipeline remains strong for notebook, monitor, smartphone, and tablet. However, TV and auto businesses are under pressure as global consumption appears to have shrunk Among our non-driver IC products, WHO sales were reduced significantly from the last quarter. Jordan will elaborate on this in a few minutes. The second quarter growth margin is likely to be lower than that of the first quarter. Notably, the automotive display driver, which enjoys the best growth margin among our driver IC products, is being hit by the coronavirus. while the monitor business, which is expanding in volume right now, is relatively low in gross margin. In addition, as mentioned above, the second quarter WLO sales will drop significantly. This will also lead to much reduced gross margin of WLO for its lower SAB utilization. For the second quarter, we expect revenue to decrease slightly by within 5% sequentially. Growth margin is expected to be between 20.2 to 20.6%, depending on our final product mix. IFRS loss attributable to shareholders are expected to be in the range of around 1.5 cents to 0.5 cents per the alluded ADS. Non-IFRS loss attributable to shareholders are expected to be in the range of 1.3 cents to 0.5 cents. to 0.3 cents per fully diluted ADS. I will now turn the call over to Jordan. Jordan, the floor is yours.