Himax Technologies, Inc.

Gentlemen, welcome to the Himex Technologies, Inc. 3rd Quarter 2020 Earnings Conference Call. At this time, no participants are on a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded, and if you require any further assistance, please press star 0. I'd now like to turn the conference over to your host, Mr. Mark Schwadenberg from MZ Group.

Welcome, everyone, to IMAX's third quarter 2020 earnings call. Joining us from the company today 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 comments, we have allocated time for questions in a Q&A session. If you have not yet received a copy of today's press release, please email HIMX at mzgroup.us, 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 HIMAX 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 20-F for the year end 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 our subordinates which are subject are 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 would now like to turn the call over to Mr. Eric Wei. Eric, the floor is yours.

Thank you, Mark, and thank you, everybody, for joining us. My name is Eric Li, and I'm the Chief IRPR Officer. Joining me today are Jordan Wu, our CEO, and Jason Harpin, our CFO. On today's call, we will first review the HMAC's consolidated financial performance for the third quarter, followed by the first 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 financials include share-based compensation and acquisition-related charges. In addition to impact of COVID-19, which remained harsh in many parts of the world, the prolonged US-China trade tensions and sanctions brought turbulence to the market and resulted in new market dynamic during the third quarter. The unsealing stay-at-home economic created new demand but pushed foundry capacity constraint to a more severe level. Despite these challenges, we continued to ask you efficiently and deliver strong business results in the changing environment. We pre-announced preliminary key financial results for the third quarter on October 6th for the revenue, gross margin, and EPS, all exceeding the guidance issued on August 6th, 2020. Today, our reported results for revenue, gross margin, and EPS are all in line with the pre-announced results. For the third quarter, We recorded net revenue of $239.9 million, an increase of 28.3% sequentially and an increase of 46.1% compared to the same period last year. The 28.3% sequential increase of revenue exceeded our guidance of an increase of around 20% quarter over quarter. display driver of TV, tablet, smartphone, and automotive, as well as CMOS image sensor all contributed better than guided sales. Gross margin was 22.3%, exceeding the prior guidance of FLAT to slightly down from 21% of the second quarter. IFRS profit per diluted ADS was 4.9 cents, exceeding our guidance of around 2 cents to 2.8 cents. Strong sales and improved gross margin contributed to the better-than-expected earning results. The EPS increase was, however, offset by the ISU expense which was higher than what was indicated on the last earnings call. But we raised the ISU amount to reward the team for the better than expected financial results. We will elaborate on this in a few minutes. Now IFI's profit per diluted ADS was 7.3 cents. exceeding our guidance of around 3.5 cents to 4.3 cents. Revenue from large display driver was $55.7 million, down 6.3% sequentially and up 11.3% year over year. The sequential decline was driven by significantly lower shipment of monitor ICs due to customers' inventory correction following a demand hike in the first half. If combining the first three quarter of 2020, our sales into monitor segment still increased 22.1% from last year. The demand for monitors remains robust and we expect a strong rebound in the fourth quarter. of setting monitors third quarter weakness was a surge in TV and notebook sales. TV segment revenue increased 17.6% sequentially, reflecting strong consumer spending and home entertainment demand. Panel makers' building of inventory in anticipation of higher TV panel prices also contributed It was no surprise that notebook sales recorded the highest growth among large display products, increasing 31.5% quarter over quarter, thanks to the continual demand for telework and e-learning, with panel customers seemingly still sitting on low inventories. Large panel driver RICs accounted for 23.2% of total revenue for the quarter, compared to 31.8% in the second quarter of 2020 and 30.5% a year ago. Small and medium-sized DC driver recorded a very strong third quarter, with revenue of $151.6 million up 53.5% sequentially and up 96.6 year-over-year. TDDI for both tablet and the smartphone posted extraordinary sales growth in Q3. For the automotive segment, we delivered a decent low-teens sequential growth amidst a declining automotive market worldwide. Small and medium-sized segments accounted for 63.2% of total sales for the quarter, compared to 52.8% in the second quarter of 2020 and 46.9% a year ago. Are smartphone sales the best-performing product category of all in Q3? reached a quarterly record high of $63.3 million, up 153.6% sequentially and 101.2% year-over-year. It represented more than 26% of our total sales in Q3. Our smartphone TPDI sales were up 155.7% consequentially and up 193.7% from the same period last year. The significant sequential growth was a continuation from Q2 when the product category already grew 69% from the previous quarter. However, as mentioned in our last earnings call, the growth was capped by an industrial-wide wafer foundry shortage. Our smartphone and tablet TDDiIC share the same pool of foundry capacity and we were, and still are, unable to meet all the demands for these products. The Q3 strength in smartphone TDDi reflected customers' aggressive new product launch plans with our TDDi solutions, as well as our ability to price our products higher to reflect the tight wafer foundry situation. Amid the economic downturn and lackluster overall smartphone consumption, OEMs are pushing more for budget handsets using TFT LCD screens instead of more expensive AMOLED displays. Sales of traditional smartphone DDICs also surged by 147.8% sequentially and were up 5.3% from same period last year with demand from key brand customers. We believe such sold sales of traditional smartphone DDICs were a short-term rebound as the product category is quickly being replaced by TDDI and AMLA, as we have repeatedly indicated. Grameo for Tablet posted a third consecutive record high with Q3 sales growing 26% sequentially and the 336.4% year-over-year. The quarterly revenue reached $53.7 million accounting for more than 25% of our driver IT revenue. We expect our tablet segment sales to continue to grow as overall market demand for tablet remain robust for more home working and online education needs. and the TDDi penetration in tablet market continue to pick up. Our tablet TDDi has the leading market position at the time when TDDi is quickly become mainstream for Android tablets. Third quarter tablet TDDi sales increased over 35% sequentially and were better than our guidance of a 20% increase. This marked the second consecutive quarter of increase in tabulated TBI shipment since the initial mass production in the first quarter of 2020 and we are firmly in the leading position among peers. However, as mentioned above, the sequential growth was crippled by tight foundry capacity as we couldn't ship enough to meet all customer demands. Revenue of traditional discrete driver IC for tabloid also delivered 20.3% sequential growth and was up 164.5% year over year in the third quarter thanks to a strong order from both leading brand and white box names. Our third quarter driver IC revenue for automotive was up 13.2% sequentially and up 3.9% year over year despite a sluggish global automotive market. The sequential growth was old to a large extent to the aggressive pursuit of market share gains by China's panel maker customers to which we are a major supplier. These customers are comfortable with Hymax leading technology and the proven production record which supports them in their effort to run up production swiftly. With global automotive demands showing signs of recovery, We expect to see robust and sustainable growth in Q4 and into 2021. Jordan will elaborate on this in a few minutes. Third quarter revenue from our non-driver business was $32.6 million, up 13.3% sequentially, but down 12.1% year-over-year. The sequential increase was mainly a result of higher engineering fee income and increased shipment of the TCAM for higher frame rate and the high resolution display, as well as CMOS image sensor product with demand coming from notebook and IP camera applications. However, the increase in sales was offset by a decrease in WLO shipment to anchor customers. Non-driver products accounted for 13.6% of total revenue as compared to 15.4% in the second quarter of 2020 and 22.6% a year ago. Gross margin for the third quarter was 22.3%, up 130 basis points sequentially and up 280 basis points from the same period last year. The sequential increase was contributed by a favorable product mix of more shipment of better margin product such as tablet and automotive IC, high engineering fee income and the resale of certain product whose value has been written off previously in accordance with our inventory management protocol. Weighing on gross margins where lower WLO shipment which decrease factory utilization and the increased shipment for smartphone ICs which register a lower gross margin than corporate average. Gross margin increased 2.8% from last year thanks to a more favorable product mix with more shipment of tablet and T-com, high engineering fee income, and resale of return of products. Likewise, the gain was offset by lower WLO and higher smartphone shipments. Our IFRS operating expense were $44.2 million in third quarter, up 17.4% from the preceding quarter and up 11.4% from a year ago. The sequential expense increase was caused mainly by $4.8 million of ISU, the immediately invested portion of the total ISU grant. which was higher than the $3 million dollars guided on the last earnings call to beneficially compensate employee from better of profit. The $1.8 million dollars additional RSU expense represent 0.9 cents lower in after tax EPS. The increase of salary also contributed to the higher operating expenses. The year-over-year increase was a result of increased RSU. As an annual practice, we reward employees with an annual bonus at the end of September, which always leads to a sequential increase in third quarter IFRS operating expense compared to other quarter of the year. This year, the ISU grant totaled $5 million, out of which $4.8 million was vested immediately and expensed in the third quarter. Non-IFI's operating expenses for the third quarter were $38.9 million, up 4.8% from the previous quarter but down from the same quarter in 2019. IFRs operating margin for the third quarter was 3.9%, up from 0.9% in prior quarter and up from minus 4.7% in the same period last year. The sequential increase was mainly due to higher sales and better gross margin but offset by higher operating expenses. The year-over-year improvement was primarily a result of higher sales and improved growth margin. Third quarter non-IFI operating profit was $14.7 million, or 6.1% of sales higher from non-IFI operating profit of $2.1 million for 1.1% of sales last quarter and upfront minus 4.4% from same period last year. ISRI's profit for the third quarter was $8.5 million or 4.9 cents per diluted ADS compared to profit of $1.4 million or 0.8 cents per diluted ADS in the previous quarter and lost of $7.2 million or 4.2 cents per diluted ADF a year ago. Third quarter non-IFIS profit was $12.6 million or 7.3 cents per diluted ADF compared to non-IFIS profit of $1.7 million or 1 cent for the same period last year. Turning to the balance sheet, we have $142.9 million of cash, cash equivalents, and other financial assets as of the end of September 2020 compared to $128 million at the same time last year and $107.1 million a quarter ago. The higher cash balance was mainly a result of an operating cash inflow of $33.5 million during the quarter. Restricted cash was $104 million at the end of the quarter compared to $164 million of the preceding quarter and a year ago. The restricted cash is used to guarantee the short-term secure borrowing for the same amount. We repaid a total of $60 million per quarter. Short-Term Secure Borrowing during the quarter and in the meantime, the restricted cash deposit was reduced by the same amount. Separately, during this quarter, we entered into a new 10-year unsecured loan agreement of $60 million and repay all short-term unsecured borrowers totaling $58.4 million. As a result, we had $16 million of long-term unsecured loans as of the end of Q3, of which $6 million was current portion. There was no more short-term unsecured loans as of end of the quarter compared to $58.4 million a quarter ago and $90.6 million at the same time last year. Not only have we strengthened our balance sheet by replacing all short-term unsecured borrowings with 10-year loans, we also managed to secure favorable terms of new loan-to-loan so that the additional interest payments are minimal. Accounts receivables as of the end of September 2020 were $221.1 million, up from $206.1 million last quarter and $157.3 million a year ago. DSO was 99 days at the end of the quarter, but compared to 86 days a year ago and 101 days at the end of last quarter, Inventory, September 30, 2020, was $125.7 million, down from $161.5 million last quarter and $167.6 million a year ago. The much lower inventory level in Q3 was a result of strong customer demands and Mi Tai Foundry Capacity. While we will continue to pursue an aggressive inventory build-up strategy, our inventory position will likely remain at such low level in the foreseeable future, given the severe foundry capacity shortage prevailing in the marketplace. Net cash inflow from operating activity for the third quarter was $33.5 million as compared to an inflow of $24 million for the same period last year and an outflow of $9.2 million last quarter. The quarter capital expenditures amounted to $1.2 million versus $33.5 million $1.2 million a year ago and $0.7 million last quarter. The third quarter CapEx was for R&D related equipment for our IC design business. As of September 30, 2020, Hymax has 172.4 million ADS outstanding. Little changed from last quarter. On a fully diluted basis, the total amount of ADS outstanding was 173.4 million. Now, turning to our first quarter guidance. For the quarter, we expect further revenue growth from the already high level Q3 in most of our business sectors. Gross margins should see a major uptick and could reach a quarterly historical high for us. For the first quarter, we expect revenue to increase by around 10% sequentially. Gross margin is expected to be around 29%, which depends on final product mix. With the increase in revenue, and the margin growth in first quarter, net income should increase sequentially. To further reward employee, there will be another three million of cash bonus in the first quarter, which will be expensed immediately. This represents 1.4 cents lower in EPS. IFR's profit attributable to shareholders is expected to be in the range of around 15 cents to 16 cents per fully diluted ADS. Now IFRS profit attributable to shareholders is expected to be in the range of 15.1 cents to 16.1 cents per fully diluted ADS. I will now turn the call over to Jordan. Jordan, the floor is yours.