Himax Technologies, Inc.

Hello, ladies and gentlemen. Welcome to the HIMAX Technologies, Inc. Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. 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. Please go ahead.

Welcome, everyone, to HIMAC's fourth 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 remark, we have allocated time for questions in a Q&A session. 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 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 or events 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 HIMAC. 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. Thank you, and thank you, everybody, for joining us. My name is Eric Li, and I am the Chief IRP Officer. Joining me are Jordan Wu, our CEO, and Jessica Pan, our CFO. On today's call, I will first review the HIMAX consolidated financial performance for the first quarter and the full year 2020, followed by the first quarter 2021 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 financial includes share-based compensation and acquisition-related charges. The impact of COVID-19 has persisted globally New lifestyles, social activity, and economic practice are all dynamically evolving. One of these inferences is the unexpected, long-lasting, strong demand for electronic devices and components, which is broadening capacity shortages in semiconductor foundries and back-ends. In such a favorable but challenging business environment, we continue to steadily implement prudent execution and deliver strong business performance along the way. We pre-announced preliminary key financial results for the first quarter on January 7 with revenues, gross margin, and EPS all exceeding the guidance issued on November 12, 2020. Today, our reported results for the revenue, gross margin, and EPS are all in line with the pre-announced results. Both revenues and the gross margin hit record highs in first quarter of 2020. For the first quarter, we recorded net revenues of $275.8 million, an increase of 14.9% sequentially and an increase of 57.6% compared to the same period last year. The 14.9% sequential increase of revenue exceeded our guidance of an increase of around 10%, quarter over quarter, thanks to strong momentum across all major business segments. TV, monitor, automotive driver ICs, and CMOS image sensor contributed more to the better than guided sales than other segments. Gross margin of 31.2% exceeded the prior guidance of around 29% and significantly improved from the 22.3% of the third quarter 2020. ISRS profit per diluted ADS was 19.5 cents exceeding our guidance of around 15 to 16 cents. Strong sales and improved gross margin contributed to the better than expected earning results. Non-IFRS profit per diluted ADS was 19.7 cents, exceeding our guidance of around 15.1 cents to 16.1 cents. Revenue from large display drivers was $64.2 million, up 15.2% sequentially and up 11% year-over-year. The sequential growth was driven by a continuous strong demand for IT products, including notebook and monitor, derided from the ongoing remote working and the distant education. TV revenue was up slightly quarter over quarter and outperformed our previous guidance of a mid-single-digit sequential decline due to better home entertainment demand from the stay-at-home economy. Large panel driver RIC accounted for 23.3% of total revenues for this quarter compared to 23.2% in the third quarter of 2020 and 33.1% a year ago. Small and medium-sized display drivers continue to grow in the first quarter as guided, with revenue of $177.9 million, up 17.3% sequentially and up 119.4% year-over-year. Smartphone and tablet display TDDIs grew robustly in the first quarter, but was offset by a decline of DDICs. For year-over-year perspective, both smartphone and tablet demonstrated extraordinary sales growth, yet growth was constrained by the severe foundry capacity shortage. Small and medium-sized segments accounted for 64.5% of total sales for the quarter, compared to 63.2% in the quarter of 2020 and 46.4% a year ago. Smartphone sales continued growing in the first quarter, with revenue reaching $66.6 million, up 5.1% sequentially and 173.1% year-over-year. It represented more than 24% of our total sales in Q4. Our smartphone TTDI sales were up around 10% sequentially and up more than 300% compared to the same period last year. The sequential growth was due to favorable mix of both product and clientele. In consideration of capacity limitation, our strategy is to prioritize our support to those customers with whom we are major supplier or have long-term business relationships. Sales of traditional smartphone DDICs fell by around 10% sequentially and were up around 20% from the same period last year. As we have repeatedly indicated, traditional smartphone DDICs are quickly being replaced by TDDI and AMLA. Our capital revenue, one of our top sale contributors throughout 2020, reached $67.4 million for the first quarter, another record high. The Q4 sales grew 25.3% sequentially, and 291.5% year-over-year. The tablet revenue accounted for more than 24% of our total sales in the first quarter, slightly higher than that of smartphone. Despite smartphone have a much bigger market size than tablet, sales of our smartphone and the tablet were equally weighted for the first quarter, indicating our favorable capacity of location toward tablet segment of reflection of our leading position in that market. For tablet TTDI, the sequential revenue increased significantly by over 80%. This marked the third consecutive strong quarterly increase since the initial mass production in the first quarter of 2020. It reflects the robust customer demand from the Android tablet market where we are main or sole source of buyers to all leading end customers. Improved product mix with increasing shipments in high-end products with active stylus also ascribed to the satisfactory sales growth and help our overall margin improvement. Revenue of traditional discrete driver ICs for tabulate decreased 12.3% sequentially but increased 68.8% year-over-year in the first quarter. Our first quarter driver IC revenue for automotive amounted to $37.5 million up 32.4% sequentially and up 11.9% year-over-year as carmaker resumed production in response to a recovery of global automotive demand from Q3 2020. However, we were unable to scale off fast enough to meet this surging demand for all customers due to capacity shortage. Automotive driver IC, accounted for more than 13% of total revenues. During 2021, we expect to further our automotive display driverizing market share from the current level of more than 30%. Jordan will elaborate on this in a few minutes. First quarter revenue from our non-driver business was $33.7 million. up 3.3% sequentially, but down 6.4% year-over-year. The sequential increase was mainly a result of increased shipment of TCAM ICs for high frame rate and high resolution displays, as well as CMOS image sensor products with strong demand coming from notebook and web camera applications. However, The increase in sales was offset by a decrease in WAO shipments to an anchor customer. The year-over-year reduction in sales was due to a decrease in WAO shipment. Non-driver products accounted for 12.2% of total revenue as compared to 13.6% in third quarter of 2020 and 20.5% a year ago. Growth margin for the first quarter was 31.2%, up 890 basis points sequentially and up 1,060 basis points from the same period last year. The much improved growth margin can be ascribed to two main reasons. and several product mix and industrial capacity shortage. The growth of higher margin products, notably TDI, TCAM and automotive drivers, outpassed that of other product category during the quarter, thereby enhancing our corporate gross margin. The leap of gross margin for the first quarter also reflected strong overall demand and the better product pricing on rising material costs across foundry, assembly and testing, all undergoing severe capacity shortage. Not meeting all demands, we were able to allocate the limited capacity to the product with better margins. Our IFRS operating expenses were 43.8 million dollars in the first quarter, down 0.8% from the preceding quarter, but up 17% from a year ago. The sequential decrease was caused by negative difference in RSU expenses, offset by increased cash bonus as we reported in the last earnings call. To further reward employees for the better than expected financial results, and higher R&D expenses. The year-over-year increase was a result of increased salary and cash bonus, along with higher R&D expenses. Despite a year-over-year increase in operating expenses, the operating expenses ratio was reduced from 21.4 percent in Q4 2019 to 15.9 percent in Q4 2020. reflecting our careful management over operating expenses. Non-IFRS operating expenses for the first quarter were $43.5 million, up 11.8% from the previous quarter and up 18.1% from the same quarter in 2019. Reflecting higher sales and better gross margin, IFRS operating profit was $42.2 million for the first quarter with operating margin of 15.3%, up from 3.9% in prior quarter and up from minus 0.8% in the same period last year. First quarter non-IFRS operating profit was $42.5 million, or 15.4% of sales, higher from 14.7 million, or 6.1% of sales last quarter, and up from minus 0.4% from the same period last year. IFI's profit for the first quarter was $34 million, or 19.5 cents per diluted ADS. compared to $8.5 million or 4.9 cents per diluted ADF in previous quarters and $1 million or 0.6 cents per diluted ADF a year ago. First quarter non-IFRS profit was $34.2 million or 19.7 cents per diluted ADF compared to non-IFRS profit of $12.6 million or 7.3 cents per diluted ADF last quarter and the non-IFRS profit of $1.5 million or 0.9 cents per diluted ADF for the same period last year. Now, let's have a quick overview on 2020 full-year financial performance. revenue totaled $887.3 million in 2020, a 32.1% growth over 2019. In the first half of the year, COVID-19 and the US sanctions on China brought turbulence to the market. However, all business rebounded strongly throughout the second half with fresh demand brought by the new stay-at-home economy. Among all three major product categories, small and medium-sized display drivers posted the highest growth of 67.7 year-over-year in 2020, with sales totaling $515.7 million. Us leading Android tablet brands all adopted our TDDI solutions and Global Smartphone Sales rebounded. We saw extraordinary business momentum for both product areas in 2020. Revenue from large panel display drivers totaled $240.8 million in 2020, a mild increase of 1.5 year-over-year. During the pandemic, The surge in IT demand boosted our sales on monitor display drivers up by high teens and notebook display drivers up around 60% respectively. TV sales, however, declined by high single-digit year-over-year due to weakness in global TV market, which was negatively impacted by COVID-19 outbreak. Non-driver product sales totaled $130.8 million, an increase of 2.9% year-over-year. The year-over-year increase was mainly from TCOM amidst the growing need for high frame rate and high resolution display and the CIF due to the continuous strong demand in notebook and web camera for work from home and online education. This increase was offset by WLO as a legacy product of an anchor customer gradually decreased. Growth margin in 2020 was 24.9%, up from 20.5% in 2019. The year-over-year improvement was mainly due to strong sales in second half and a more favorable product mix. As previously mentioned, robust amendments pushed foundry capacity constraints to a more severe level, which in turn enabled better pricing. IFRS operating expenses were $162.9 million, up $6.6 million, or 4.2%, compared to last year. The increase came from higher expenses in share-based compensation, cash bonus, R&D expenses, as well as salary, but offset by lower traveling fee. Notably, the stronger NT dollar against US dollar in 2020 contributed to the around $3.9 million of operating expenses increased because while our accounting was US dollar dominated, we pay the bulk of our employees' salary as well as much of our Taiwan local incurred expenses in NT dollars. However, the operating expense ratio of 2020 was reduced to 18.4% from 23.2% in 2019, indicating our consistent management of operating expenses. IFI's operating income was $57.9 million, in contrast to a loss of $18.3 million from 2019 due to higher sales and higher gross margin. For the same reason, IFI's operating income was $64.4 million, an increase of $80.9 million from a loss of $16.3 million in 2019. Our IFI's profit for the year was $47.1 million, or 27.2 cents, versus a loss of $13.6 million, or 7.9 cents per diluted ADF. Now, IFI's profit for 2020 was $52.3 million dollars or 30.2 cents per diluted ABS up 64.4 million dollars year over year from a loss of 12.1 million dollars last year. The upswing in income was a result of better sales and higher gross margin along with well managed operating expenses. Turning to the balance sheet. We have $201.4 million of cash, cash equivalents, and other financial assets as December 31, 2020, compared to $112.1 million at the same time last year and $142.9 million a quarter ago. The high cash balance was mainly a result of an operating cash inflow of $67.7 million during the quarter. Restrictive cash was $104 million at the end of Q4, the same as the preceding quarter, compared to $164 million a year ago. The restrictive cash was used to guarantee the short-term secured borrowing from the same amount. We had $58.5 million of long-term unsecured loans as of the end of Q4, of which $6 million was current portion. Our year-end inventory of December 31, 2020, were $108.7 million, down from $125.7 million last quarter and $143.8 million a year ago. Accounts receivable at the end of December 2020 was $243.6 million, up from $221.1 million last quarter and up from $164.9 million a year ago. DSO was 100 days at the year end. as compared to 90 days a year ago and 99 days at the end of last quarter as highlighted in last earnings call. Given the foundry and the back-end capacity shortage, our inventory level will stay at a relatively low level in the quarters to come. Net cash inflow from operating activity for the first quarter was $67.7 million as compared to an inflow of $33.5 million last quarter and an inflow of $23.4 million for the same period last year. Cash inflow from operations in 2020 was $102.6 million as compared to $7.7 million in 2019. First quarter capital expenditures amounted to $0.8 million versus $1.2 million last quarter and $2.7 million a year ago. The first quarter CapEx was for R&D-related equipment. Total capital expenditure for the year was $5.8 million, mainly for design tools and R&D-related equipment. In comparison, the capex for 2019 was $45.9 million, of which the vast majority was for the purchase of land, the construction of a new building, and the WLO capacity expansion. As of December 31, 2020, Hymax has 173.8 million ADS outstanding, little changed from last quarter. On a fully diluted basis, the total number of ADS outstanding is 174.1 million. Now, turning to our first quarter 2021 guidance. For the first quarter, we expect further revenue growth from the already high level of Q4 2020 in most of our business sectors. Growth margin should see another uptick and could reach another quarter high. For the first quarter, we expect revenue to increase by 5% to 10% sequentially. Growth margin is expected to be 37% to 38%. depending on the final product mix. With increase of both revenue and margin, net income should increase substantially in the first quarter. IFRS profit attributable to shareholders is expected to be in the range of 30 to 34 cents per fully diluted ADS. Now IFRS profit attributable to shareholders is expected to be in the range of 30.1 to 34.1 cents per fully diluted ADF. Revenue, gross margin, and EPS will all likely reach quoted highs during this quarter. With that, I will now turn the call over to Jordan. Jordan, the floor is yours.