Himax Technologies, Inc.

Hello, ladies and gentlemen. Welcome to the High Max Technologies, Inc. Second Quarter 2020 Earnings Conference Call. At this time, our participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the call, please press star, then zero on your touchtone telephone. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Mark Schwallenberg from MZ Group.

Thank you. Welcome, everyone, to HIMAX's second quarter 2020 earnings call. Joining us from the company are Mr. Jordan Wu, President and Chief Executive Officer, Ms. Jessica Pan, Chief Financial Officer, and Mr. Eric Lee, Chief IRPR Officer. After the company's prepared remarks, we have allocated time for questions and a Q&A. If you have not yet received a copy of today's results, please email HIMX at mzgroup.us, access the press release on financial portals, or download a copy from HIMX's website at www.himx.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 Hymax, Demand for End-Use Application Products, The Uncertainty of Continued Success in Technological Innovations, as well as other operational and market challenges 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, 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 for the same period. The company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events, or otherwise. I will now turn the call over to Mr. Eric Lee. Eric, the floor is yours.

Thank you, Mark. and thank you everybody for joining us. My name is Eric Lin and I am the new Chief IRP Officer. Joining me are Jordan Wu, our CEO, and Jessica Pan, our newly appointed CFO. On today's call, we will first review the high-mass consolidated financial performance for the second quarter, followed by the third quarter 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 the non-IFRS basis. The non-IFRS financial is to show share-based compensation and acquisition related charges. We preannounced the preliminary key financial results for the second quarter on July 6, 2020 with revenue, gross margin, and the EPS, all exceeding the guidance issued on May 7, 2020. Today, our reported results for the revenue, gross margin, and the EPS were all in line with the pre-announced results. For the second quarter, we recorded net revenues of $187.0 million A increase of 1.3% sequentially and an increase of 10.4% compared to the same period last year. The 1.3% sequential increase of revenues exceeded our guidance of a slight decrease with 5% quarter-over-quarter high demand of large display drivers for monitors and greater than expected shipment volume for both smartphones and tablets. contributed to the better-than-guided sales. Gross margin was 21.0%, exceeding the prior guidance between 20.2% to 20.6% due to a more favorable product mix among large display products. IFI's profit per diluted ABS was 0.8 cents, exceeding our guidance of a loss of 1.5 cents to 0.5%. , Strong Sales Improving Growth Margin, and the Lower-than-Expected Operating Plans Contributed to the Better-than-Expected Earnings Result. Non-IFRS Profits Per Diluted ABS lost $0.01, exceeding our guidance of a loss of $0.03 to $0.03. Revenue from large display driver was 59.5 million, down 3.1% sequentially and up 0.2 year-over-year. The sequential decline was driven by lower shipments into TV due to weakness in the global TV market, which are severely impacted by COVID-19 outbreak. TV segment revenue decreased 21.7% year-over-year, of setting the weakness in the TV segment was the surge in the demand of telework and online education tools that spurred the sales in our monitor and notebook segments to an increase of around 60.0% year-over-year in Q2. Watch Panel Driver IT accounted for 31.8% of total revenue for the quarter. compared to 33.2% in the first quarter of 2020 and 35.0% a year ago. Running for small and medium-sized display drivers was 98.8 million, up 12.9% sequentially and 20.9% year-over-year. The sequential growth was driven primarily by tablet and smartphone sales. are offset by a decrease in the automobile segment. The strong year-over-year growth was attributable to remarkable tablet sales, especially our TDI product for tablet. The segment accounted for 52.8% of total sales for the quarter, compared to 47.4% in the first quarter of 2020 and 48.3% a year ago. Sales into smartphones were up 10.9% sequentially but down 26.8% year-over-year. Our smartphone TDDI was up 69.0% sequentially and up 0.3% from the same period last year. Strength in the smartphone TDDI segment reflected customers' aggressive new personal launch point with our TDDI solution. We reported earlier that the launch of several customers' new smartphones with RT-DDI solutions inside were delayed because of the pandemic. Many of those projects started mass production in Q2, leading to the strong sequential growth. Sales of traditional DDI seats for smartphones declined by 43.6% sequentially and were down 58.3% from the same period last year. Our traditional DDIC, which represents just 26.3% of the smartphone segment in Q2, declined significantly, a trend that was expected as we have repeatedly reported that the traditional DDIC was quickly being replaced by TDDI and AMLA for smartphone applications. We expect to see a short-term spike of traditional DDIAC demand for smartphones during the third quarter, arising from orders from certain brand customers. However, again, following short-term fluctuations, we expect to see continuous decline in the traditional DDIAC for smartphones. The ongoing COVID-19 pandemic has eroded worldwide smartphone market demand with a more than 10.0 expected decline during 2020, according to several research institutes. Despite this challenging condition, we expect to see smartphone PPDI sales in the second half of 2020 due to a more diversified customer base, strong product roadmap, and enriched product portfolio. were anticipated, boosted by the strong momentum in those traditional discrete driver IC and PPDI product lines. Tablet was the best performing product category of all in Q2, up 55.1% sequentially and 174.8% year-over-year. It represented around 23.0% of our total sales in Q2. We expect this product segment to continue to grow in the second half as the overall market for tablets look to remain robust thanks to work-from-home and online education demands. In addition, there is new demand for tablet DPPI, of which the sales were up 83.2% sequentially in Q2. A thin-cell touch display is quickly becoming a new mainstream for Android tablets. Jordan will elaborate on the Outlook Tablet TPDI in a few minutes. Supported by demand for remote work and education, the revenue of traditional display driver IC for tablets delivered more than 40% sequential growth and more than 70.0 year-over-year in the second quarter. Specifically, we shipped more of the higher ASP IC with higher resolution and the cost packaging for large size green bezel tablets to a certain leading brand name. As expected, all driver IC revenue for the automotive application was down 15.2% sequentially as a result of global production and the car sales coming to a certain halt in most of the world. However, A year-over-year basis, automotive driver IT revenue was up 0.1% despite the effects of the pandemic. Second quarter revenue from our non-driver business was 28.7 million, down 19.5% sequentially, but up 1.7% year-over-year. The sequential decrease was mainly due to significant shipment reduction of WLO products to an anchor customer and the low engineering fee income for other non-driver products. Affecting the weakness in WLO, CMOS image sensors had higher revenue contribution from notebook and IP camera applications for remote work and online education purposes. Non-driver per dollar accounted for 15.4% of total revenue as compared to 19.4% in the first quarter of 2020 and 16.7% a year ago. Worth margin for the second quarter was 21.0%, down 170 basis points sequentially but up 150 basis points from the same period last year. The sequential decrease was caused by lower WLO shipment and weak automotive sales, two of our higher gross margin products. The decline in the engineering fee received was also a factor behind the sequential decline year-over-year basis. It was up 1.5%, mainly due to a more favorable product mix with more shipments of WLO and TECOM products Our IFRS operating expenses were $37.6 million in the second quarter, up 0.9% from the preceding quarter, but down 3.3% from a year ago. The year-over-year decrease was a result of the decreased salary and the traveling expenses. Non-IFRS operating expenses for the second quarter were 37.2 million, up 1.4% from the previous quarter, but down 3.2% from the same quarter in 2019. IFI's operating margin for the second quarter was 0.9%, down from 2.5% in prior quarter, but up from minus 3.5% in same period last year. The sequential decrease was mainly due to lower gross margin. The year-over-year improvement was primarily a result of higher sales, better gross margin, and lower operating expenses. Second quarter non-IFIS operating profit was $2.1 million, or 1.1% of sales lower from non-IFIS operating profit of $5.3 million. or 2.9% of sales last quarter, but up from the minus 3.2% for the same period last year. IFRS profit for the second quarter was 1.4 million or 0.8 cents per diluted ADS compared to the profit of 3.3 million or 1.9 cents per diluted ADS in the previous quarter and the loss of 5.2 million or 3.0 cents per diluted ADS a year ago. Second quarter non-IFRS profit was 1.7 million or 1.0 cents per diluted ADS compared to non-IFRS profit of 3.8 million or 2.2 cents per diluted ADS last quarter and the non-IFRS loss of 4.8 million. or 2.8 cents for diluted ADS for the same period last year. Turning to the balance sheet, we have 107.1 million of cash, cash equivalent and other financial assets as of the end of June 2020 to 122.4 million at the same time last year and 126.6 million a quarter ago. The lower cash balance at the end of the second quarter was mainly a result of a repayment of unsecured borrowing of $9.4 million and an operating cash outflow of $9.2 million during the quarter. On top of the cash provision, restricted cash was $164.0 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 have $68.4 million of unsecured short-term loans as of the end of Q2 compared to $67.9 million a quarter ago and $77.0 million at the same time last year. Account receivables at the end of June 2020 were and the 6.1 million, up from 186.7 million last quarter and 176.2 million a year ago. DSO was 101 days at end of the quarter as compared to 96 days a year ago and 92 days at the end of last quarter. Inventory of the June 30, 2020 were 186.7 million and Hsieh-Hsieh. In response to an industrial-wide capacity shortage and in preparation for a strong Q3 forecast, we had to increase inventory levels during Q2. We believe our inventory position is healthy, giving solid forecasts and a purchase orders received from customers. While we monitor our inventory carefully by working closely with our customers, we will continue to build up our inventory position aggressively in the foreseeable future given the prevailing severe foundry capacity shortage in the marketplace. We expect the inventory level to be significantly lower over the course of Q3. again because of very tight foundry capacity and strong customer demand. Net cash outflow from operating activities for the second quarter was $9.2 million as compared to an outflow of $17.7 million of the same period last year and an inflow of $10.6 million last quarter. Net cash outflow was mainly caused by more aggressive inventory build-up. Second quarter capital expenditure amounted to $0.7 million versus $5.7 million a year ago and $3.1 million last quarter. As reported in the last earnings call, the CapEx for both new building construction and the 3D sensing capacity expansion were already concluded in the first quarter 2019. The second quarter CAPEX was for R&D related equipment for our IC design business. Before concluding my report of the second quarter results, I would like to provide an update on dividend. We typically make annual cash dividend payment at the middle of the year based on Pi Year's possibility. Our board of directors has decided that we will not pay cash dividends in 2020. The decision was made with full consideration of HIMAC's 2019 financial results as well as 2020 operation and capital requirements. As of June 30, 2020, IMAX has 172.3 million ABS outstanding, little change from last quarter. On a fully diluted basis, the total number of ABS outstanding was 173.2 million. Q3, 2020 guidance. At this point, we expect to deliver strong growth for the third quarter. We see very good momentum in our smartphone TTDI business against the backdrop of a depressed global smartphone market. Our tablet ICs, both discrete drivers and the TTDI, made a remarkable contribution to our first half results and are on track to carry a nice momentum into the second half. We also foresee decent growth for the notebook TV, and TCAM products for the next quarter. However, third quarter growth will be constrained due to an industrial-wide foundry shortage. Similar to our usual practice before 2019, we grant ISUs rather than stock options on September 30 this year for employees' share-based compensation. As a reminder, we did not grant ISU last year. Rather, 2,226,690 units of stock option were granted to the team at an exercise price of $2.27 last September. All third-quarter IFIS earnings per diluted ABS guidance has taken into account the expected 2020 ISU grant, which subject to both approvals is now assumed to be around 3.0 million or 1.3 cents per diluted ABS, almost all of which will be vested and expensed immediately on September 30, the grant date. The grant of IFUs would lead to higher third-quarter IFIs operating expenses compared to other quarters of the year. For the third quarter, we expect revenue to increase by around 20% sequentially. Gross margin is expected to be slightly down for second quarter, depending on our annual product mix. IFRS profit attributable to shareholder is expected to be in the range around 2.0 cents to 2.8 cents per fully diluted ADS. Now IFRS profit A treatable to shareholders is expected to be in the range of 3.5 cents to 4.3 cents per fully diluted ADS. I will now turn the call over to Jordan. Jordan, the floor is yours.