Himax Technologies, Inc.

Welcome to the HIMAX Technologies Incorporated 3rd Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we'll 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 Schwellenberg from MZ Group.

Thank you, Renz. Welcome, everyone, to HIMAX's third quarter 2021 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 comments, we have allocated time for questions and a Q&A session. If you have not yet received a copy of today's results release, 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. Unless otherwise specified, we will discuss our financials based on non-IFRS measures. You can find the related reconciliation to IFRS on our website. 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. The factors include, but are not limited to, the effect of the COVID-19 pandemic on the company's business, 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 application products, reliance on a small group of principal customers, the uncertainty of continued success in technological innovations, our ability to develop and protect are intellectual property, pricing pressures including declines in average selling prices, changes in customer order patterns, changes in estimated full-year effective tax rate, shortage in supply of key components, changes in environmental laws and regulations, changes in export license regulated by export administration regulations, EAR, exchange rate fluctuations, regulatory approvals for further investment in our subsidiaries, our ability to collect our accounts receivable and manage inventory, and other risks described from time to time in the company's SEC filings, including those risks identified in the section entitled Risk Factors. And it's Form 20F for the year ended December 31st, 2020, filed with the SEC as may be amended. except for the company's full year of 2020 financials, which were provided in the company's 20F and filed with the SEC on March 31st, 2021. 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 Lee, and I'm the Chief IRTR Officer. Joining me are Jordan Wu, our CEO, and Jessica Pan, our CFO. On today's call, I will first review HMIS consolidated financial performance for the third quarter of 2021, followed by the fourth quarter 2021 outlook. Jordan will then give an update on the status of our business, after which we will take questions. Our third quarter revenue met the guidance issued on August 5th. Five gross margin and EPS were both at the upper range of the guidance. Revenue, gross margin, and EPS, again, all reached all-time highs in the third quarter of 2021. For the third quarter, We recorded net revenues of $420.9 million, an increase of 15.2% sequentially, and an increase of 75.4% compared to the same period last year. The sequential increase was at the middle range of the guidance of an increase of around 13% to 17% quarter over quarter. The 61.7% gross margin at the upper range of the guidance of 50.5% to 52% was an increase from the already high level of 47.5% for the second quarter 2021. Now, ISIS profit per diluted ADS was 79.5 cents. At the upper end of the estimates of 75 cents to 81 cents. ISI's profit per diluted ADS was 68 cents towards the upper range of the guidance of 63 cents to 69 cents. Revenue from large display driver was $117.6 million in Q3, up 37.6 percent sequentially and more than doubled year-over-year, with sales growing through all three major product areas, namely TV, monitor, and notebook. Both monitor and notebook IT revenues delivered impressive growth of around 60% sequentially as a result of persisting IT demand derived from remote working and distance schooling. TB revenue was up over 20% sequentially, mainly due to strong shipment of high-end TB products, including those for award-leading end customers, despite a dip in worldwide TB shipment during the quarter. Large panel driver IC accounted for 27.9% of total revenues for this quarter, compared to 23.4% in the second quarter of 2021, and 23.2% a year ago. Small and medium-sized display drivers saw resilient sales with revenue of $252.3 million, up 9.4% sequentially and up 66.4% year-over-year. Automotive segments continued strong gross momentum and delivered a more than 30% sequential increase in Q3. Our automotive segment has repeatedly been the fastest-growing sector among the small and medium-sized display driver segments. Tablet sales demonstrated another consecutive sequential increase, up 0.15 quarter-over-quarter. Wire smartphone sales posted single-digit sequential decline reflecting our capacity allocation decision favoring tablet over smartphone. Small and medium sized driver IC segments accounted for 59.9% of total sales for this quarter, compared to 63.1% in previous quarter and 63.2% a year ago. The third quarter smartphone sales reached $77.1 million as mentioned earlier, down single digits sequentially, but up more than 20% compared to the same period last year. The smartphone segment represented around 18% of our total sales in Q3. Even with lower sales, our smartphone TPDI sales were still capped by severe capacity constraints. As highlighted many times before, our smartphone and the tablet TDDi share the same process pool. We continued with our strategy to favor tablet TDDi shipment over smartphone, as we are the preferred main or sole source vendor for major non-iOS tablet names. Sales of traditional smartphone display driver grew strongly in Q3 as expected due to seasonal demand from key customers. Nevertheless, the traditional smartphone DDI seeds are quickly being replaced by T-DDI and AMLA. Our tablet revenue made another record high in third quarter, reaching $94.3 million in sales that grew low-tinged sequentially and were up more than 75% year over year. Our tablet sales continued to grow with assessorated TDDI penetration among leading iOS names, where we continue to enjoy leading market share. Our position is particularly strong in high-end areas, such as active stylus design, high frame rate, and the bigger size tablet. It's worth highlighting that shipment of TDDi with active stylus feature already represented over 30% of tablet TDDi sales in Q3. Yet, our shipments were still limited by ongoing industry-wide capacity shortage. Revenue of traditional discrete driver ICs for tablet was up single-digit sequentially in third quarter, while its market continued to be quickly eroded by TDDI. Tablet revenue in this quarter represented the highest sales proportion of all product lines and accounted for more than 22% total sales. Our third quarter driver IC revenue for automotive amounted to $71.6 million, up 34.3% sequentially and up more than 150 year over year. Attributable to our market share gains in an expanding market as panel inside a car continue to grow in both quantity and size. Automotive driver RIC business accounted for around 17% of total revenues in the quarter. As a reminder, automotive driver RICs enjoy higher gross margins, and the higher revenue contribution from automotive can bolster our corporate gross margin. We expect to see robust and sustainable growth in this area for the coming quarters. Jordan will elaborate on this in a few minutes. Third quarter revenue from our non-driver business was $51 million, up mid-single digit sequentially and up more than 50% year-over-year. T-com business registered a mid-teen sequential growth and was up more than 140% year-over-year. driven by high value added product area such as 4K, 8K TV, gaming monitor, and low-power notebook. Non-driver products in Q3 accounted for 12.2% of total revenues as compared to 13.5% in the second quarter of 2021 and 13.6% a year ago. Now IFI's gross margin for the third quarter was 51.7%, up 4.2 percentage points from 47.5% of the previous quarter, and greatly increased from 22.4% of the same period last year. IFI's gross margin was 51.5% for the quarter, The sequential increase was mainly a reflection of the tight foundry capacity, which resulted in a more favorable IC pricing in the product mix. Our non-IFIS operating expenses for the third quarter were $44.5 million, up 13.1% from the previous quarter and up 14.2% from a year ago. mainly because of increased salary and R&D expenses. IFRS operating expenses were $68.5 million in the third quarter, up 73.1% from the preceding quarter and up 55.1% from a year ago. The difference is mainly due to the annual bonus compensation we award employees at the end of September each year. This year, the annual bonus compensation, including RSU and the cash payout, was in line with the guidance we mentioned on last earnings call that totaled $74.7 million, out of which $24.8 million was immediately invested in the third quarter. The remainder will be equally vested in the first, second, and third anniversaries of the grant date. Reflecting the higher sales and the better gross margin, non-ISIS operating income was $173.4 million or 41.2% of sales versus 36.8% of sales in the last quarter. Both income and operating margins reached historical highs. Now, ISIS after-tax profit was $138.9 million, or 79.5 cents, per diluted ADS, a new record high and up significantly from $109.1 million, or 62.4 cents, per diluted ABS of the last quarter. Turning to the balance sheet, we had $250.8 million of cash, cash equivalents, and other financial assets of September 30, 2021, compared to $142.9 million at the same time last year and the $270.4 million a quarter ago. The lower cash balance was derived mainly from $47.4 million payments of cash dividends and payments made for the purpose of securing long-term foundry capacity, somewhat offset by payment received from the customers for the purpose of securing their long-term chip supply. The third quarter saw a strong operating cash inflow of $60.5 million compared to $33.5 million at the same time last year, but lower than $85.2 million a quarter ago for the same reason stated above. Restricted cash was $156.8 million at the end of Q3 compared to $112.1 million a quarter ago and $104 million a year ago. The restricted cash was mainly used to guarantee the short-term secure borrowings for the same amount. We had $54 million of long-term unsecured loans as of end of Q3, of which $6 million was current Our quarter end inventory was worth $160.9 million up from $134.2 million last quarter and up from $125.7 million a year ago. Amid tight foundry capacity where demand still far outpasses supply, we continue to pursue an aggressive inventory buildup strategy. The vast majority of our inventory position now is composed of work-in-progress goods, while finished goods are promptly shipped as soon as they are ready. Accounts receivable at the end of September 2021 was $400.9 million, up from $329 million last quarter and up from $221.1 million a year ago due to higher sales. DSO was 100 days at the quarter end as compared to 99 days a year ago and 88 days at the end of last quarter. Third quarter capital expenditures were $2.1 million versus $1.4 million last quarter and $1.2 million a year ago. The third quarter CAPEX was mainly for R&D-related equipment for our IC design business. As of September 30, 2021, HyMEX had 174.3 million ADS outstanding, little changed from last quarter. On a fully diluted basis, The total amount of ADS outstanding was 174.7 million. Now, turning to our fourth quarter 2021 guidance. For the fourth quarter, we expect further revenue growth from the already high level of Q3 2021. We expect revenues to increase by 4% to 8% sequentially. Now, IFRS gross margin is expected to be around 50%, depending on the final product mix. Now, IFRS profit attributable to shareholders is expected to be in range of $0.78 to $0.83 per fully diluted ADS. IFRS profit attributable to shareholders is estimated to be in the range of 74.5 to 79.5 cents per fully diluted area. I would now like to turn the call over to Jordan. Jordan, the floor is yours.

Thank you, Eric. We still feel the pressure amidst stringent wear capacity shortage in the material process nodes where we are mainly anchored. While the semiconductor industry continues to push towards advanced process nodes for applications such as 5G and HPC that demand high processing power, the system implementations of these applications also boost the demands for various companion chips such as PMIC, CIS, and display driver, that all share similar mature process pools. In addition, major increases of weather consumption also come from a few fast-growing new areas, such as AIoT and EV, which also require mature process nodes. As we have highlighted many times, the industry has lacked mature process capacity investment in years, and the explosive demand from the above applications has led to significant capacity shortage. The display driver industry has been among the most impacted by the severe foundry shortage since the beginning of last year, and its supply-demand imbalance was exacerbated by the surge in demands of some applications triggered by the pandemic. We believe the supply demand imbalance will continue well into 2022. As such, we have made a long-term strategic decision to enter into multi-year contractual supply agreements with our foundry partners, covering a wide range of product lines. including large display drivers, tablet and smartphone TDIs, automotive and even OLED drivers, to safeguard the capacity needed for our short-term and long-term business. Naturally, in entering into supply agreements, our strategies towards some applications, notably automotive and OLED, are more aggressive than others. Backed by solid supply agreements, the automotive sector is on track to become our single largest revenue contributor starting 2022 and will be able to solidify our leading position by further widening the gap with our competitors. Meanwhile, we also seek out similar contractual arrangements with many panel houses and certain leading end customers. whereby customers make prepayments or deposits to us to secure their long-term cheap supplies. All of these contractual arrangements are made following meticulous calculations of in-depth supply demand projections among parties and typically cover the quantity deemed necessary to sustain the parties' businesses. They help alleviate the capacity pressure and are poised to boost collective organic growth of our customers, foundry partners, and ourselves for the next few years. Looking ahead to 2022, backed by secured capacity arrangements, the foundry capacity available to us is set to increase compared to this year, especially for automotive segment covering both traditional display drivers and TDI, where the overall shortage across the industry is expected to be the most severe. Revenue-wise, we are particularly upbeat about the gross prospect of a few high-margin product areas. The most notable of this is the automotive sector, where The robust demand for traditional driver IC is backed by strong capacity support, while TDDI, which we pioneered in mass production, is on track to grow exponentially from this quarter onwards. Moreover, non-driver products, especially our high-end T-Con and YSI ultra-low-power AI solution, a new addition to our revenue stream. are slated for vigorous growth in the next few years. The strength in these high margin businesses will provide a solid support for our corporate margin. Again, gross margin expansion will continue to be one of our major business goals. We expect a more diversified and balanced portfolio across sectors and are confident to deliver both top and bottom line growth in 2022. With that, now let us start with an update on the large panel driver IC business. For the fourth quarter, large display driver IC revenue is projected to increase by a high single digit sequentially. The buoyant market growth we experienced for notebook and monitor is expected to extend into Q4 with more than 20% sequential sales increase in both sectors. Conversely, our Q4 TV driver sales are expected to drop slightly due mainly to software and market demand. While we face partial market softness, we are armed with a diversified and comprehensive product offering covering TV, monitor, and notebooks, which allow us to take swift actions together with our customers and suppliers. to redirect the production towards where market demand stays strong. Looking into 2022, backed by tight strategic relationships with some of the leading end customers in TV, monitor, and notebook markets, our project design coverage across all markets with all major panel makers remains strong. with a prevailing shortage expected to continue, especially given that much of the global large display driver ICs are still manufactured on 8-inch wafer, where the room for capacity expansion is extremely limited. We remain positive on the prospect of our large display driver business. The consumer market continues to grow its appetite towards advanced displays with certain adoption of high-end features, such as slim border design, higher refresh rate, higher spec ratio, curved view displays, and low power, all of which implies much more IC use per device. These advanced features adopt more sophisticated IC designs and consume more web area. which lower the chip quantity output on a per-webber basis. On the other hand, it increases the content value in terms of dollar per-webber sales. We continue to lead in these areas with decent market share, providing one-stop shopping for clients who need to drive ICs, advanced ECONs, or total solution. Now let's turn to the small and medium-sized dispatch advising business. In the fourth quarter, revenue is expected to increase by low teens sequentially and more than 50% year-over-year. Sales of smartphones is set to grow by high teens sequentially and more than 30% year-over-year. As for the temporary segment, We expect sales to be flat sequentially after successive quarterly growths driven by the steady rise of CDDI penetration. The Q4 of automotive driver business, again, is poised to grow by double-digit sequentially and more than double year-over-year, despite the adverse impact on global automotive production caused by chip shortage. However, our growth is hindered by stored supply incapacity that prevents us from meeting all customer demands. In the first quarter, we expect smartphone, tablet, and automotive driver sales to be about equal in revenue contribution, with automotive sales outgrowing the other two segments. Let's have a quick review on each of the three major product segments within the small and medium-sized display driver IC distance. First, the smartphone driver IC distance. In Q4, we expect our smartphone TDI sales to increase double-digit sequentially despite the outbreak of Delta variant continuing to weigh heavily on worldwide smartphone market, especially in the in the Southern Asia area. Our supply for smartphone is still limited by the total capacity accessible to us, where we can only support shipment to selected names. Looking ahead at our smartphone TDD and lineups, we are undertaking new design developments supporting higher frame rate, ultra-slim bezel, and higher resolution features. Successful engagements with some key customers have been achieved in Q4 with more customers indicating their interest for their next launches. Traditional drivers for smartphones running at relatively low volume are expected to decline for the first quarter due mainly to DVDL replacement. Next, on tablet IC business. We maintain our leadership position in the tablet segment, particularly in advanced TDDI sector, where we have more than 60% global share in the non-iOS tablet TDDI market. In the fourth quarter, we expect sales of tablet TDDI to be up low teams, a continuation from the solid and high base in Q3. Our TTDR is supported for the future upgrades for customers' next generation products, covering higher frame rate, super high resolution, larger than 11 inches display, and better precision active sliders running on different operating systems. What's more, our temporary TTDR solution for the fast expansion educational market has been successfully and widely adopted by leading Chinese players. Revenue of traditional EDIC for tablet is expected to decline double-digit sequentially, resulting from replacement by TDDI, as we mentioned repeatedly, and also severe capacity constraint. Turning to the automotive sector, the highest gross area amount of display driver business In Q4, our automotive IT sales are expected to grow double-digit sequentially on the backdrop of worldwide key component shortage and serious poor congestion that is hurting automotive sales worldwide. Looking ahead, the increase in the number, size, and sophistication of displays inside the vehicle is evolving at a rapid rate. all indicating much more driver IC demand per vehicle. Having foreseen the growing automotive display demand, we entered into a long-term arrangement with a strategic foundry partner back in early 2020 and secured a major increase in capacity for not only this year but also next few years. That, together with our strong customer engagement, enables our robust shipment and sales growth amidst the prevailing IC shortage. Car interiors are increasingly catering to more stylish, interactive, and free-form displays with ever-improving image quality, made possible with panels equipped with advanced technologies such as TDI and Logo Dimming. In-sail TDDI for automotive, while still in small volume, will continue to increase in penetration and adoption on the center information display and rear seat infotainment display. Hymax is the frontrunner who kick-started the industry's first automotive TDDI mass production back in 2019, followed by our Gen 2 automotive TDDI, which also went into mass production in Q3. this year. Right now, we are dominating in the new TDDI design-ins with multiple TORN customers, panel makers, as well as car manufacturers across the continents. TDDI brings driver IC vendors much higher content value on a per-panel basis, provides better profit margin, and represents a high barrier of entry for latecomers. We are glad to report that while still accounting for a small portion of our automotive business for now, we shipped over a million automotive TDDI chips within the third quarter alone, making a major milestone for our automotive TDDI business. As automotive TDDI is being adopted and put into mass production rapidly as we speak, we anticipate more aggressive shipment momentum to carry over into Q4 and throughout 2022. We believe TDDI for automotive will soon become a major growth engine for small and medium-sized panel driver IC business. We mentioned in the last earnings call that we were also leading the industry with the first launch of the cutting-edge IoT DI, or Large Display Touch and Driver Integration solution. This technology incorporates sophisticated multi-chip system design and is essential for very large-sized, slim, and curved automotive displays. We are glad to report that the introduction of the technology was met with enthusiastic responses from several OEMs and panel makers. Combining all this leading technology with strong capacity support that we have secured with our foundry partners, we expect our automotive display drive IC business to enjoy exceptional growth going forward. Next, for an update on AMOLED, HIMAX remains committed to OLED technology where we continue to commit R&D effort on not only driver IC but also TCAN for smartphone, wearable tablet and automotive areas in partnerships with major Chinese and Korean panel makers. In the fourth quarter, we aim to successfully roll out production for the flexible AM OLED driver and TCAN for automotive application in collaboration with BOE Veritronics, a subsidiary of BOE, the world's largest TFT LCD player. In view of serious constraints on OLED display driver capacity in the next few years, we have also secured meaningful capacity for smartphone OLED drivers. Now, let me share some of the progress we've made on the non-driver IC distances. Let's start from the timing controller sector. We anticipate Q4 TCAM sales to decrease by mid-teens sequentially as a result of weaker demand in TV and Chromebook notebook sectors after multiple quarters of strong shipments. While it's still limited by accessible foundry capacity, we are optimistic about the long-term gross prospect of the TCAM business where we continue to engage customers with high-end portal areas, including 4K-slash-8K TV, gaming monitor, and low-power notebook. Looking ahead, we are particularly excited about the potential for automotive T-Con, where our cutting-edge local gaming T-Con has won numerous project awards and penetrated into new car model launches of OEMs and T1 carmakers. We believe TCAM segment will be one of the driving forces of our non-driver businesses moving forward. Next, on WO update. The first quarter WO revenue is expected to decline substantially as a result of lower shipment to anchor customer. Moving forward, we will continue to support the shipment for the customer's legacy products. Nevertheless, The WO technology continues to play an important role in shaping next-generation optical applications. Our exceptional optical design knowledge, together with our production-proven nano-imprinting capabilities and mass manufacturing experience, allow us to deliver high-quality solutions to meet the requirements of the future-generation optical applications across automotive, consumer, industrial, and medical applications. Next, to address our 3D sensing business, HIMAX's proprietary 3D decoder IC that provides accurate 3D perception data processing and low-power operation with rigorous data security protection plays a vital role in areas such as secure payments and personnel identification used in door lock and industrial access control applications. It has been broadly adopted in leading e-payment ecosystems in China since its initial mass production in the second half of 2020. Further new design sockets are on the way, which will lead to growing volumes starting next year, with accelerated adoption of our 3D total solution in various fields, such as manufacturing automation, medical inspection, automotive owner recognition, an intelligent service robot, and much more. Now, I'd like to turn to our wide-side smart sensing solution. To maximize market visibility and explore potential applications, we continue to push forward with two wide-side business models, namely total solution and discrete component. First, an update on Wi-Fi total solution. Our Wi-Fi total solution incorporates high-max ultra-low power CMOS image sensor, our proprietary AI processor, and CNN-based AI algorithm. It is designed for a wide range of ultra-low power use cases in consumer electronics that aim to modernize legacy endpoint devices which lack AI capability. with ultra-low power computer vision AI. Equipped with AI capability, Wi-Fi is capable of processing data locally on the end device with just metadata output while avoiding the need to transport massive data to the cloud, thereby improving response time, saving bandwidth and power, and last but not least, enhancing data security. We are pleased to report that the design win with a top tier name for a mainstream application that we indicated earlier is on track to enter into mass production in Q4. Equally important, the number of awarded projects is growing quickly, covering a broad range of applications, including notebook, home appliances, utility meter, automotive, battery-powered surveillance camera, perioramic, video conferencing, and medical, just to name a few. Some applications are already slated for mass production at the end of this year. In addition to consumer electronics players who aim to add AI capability to their products, within just one year since we started sampling, our Wi-Fi solution has also drawn much attention from cloud service providers who look for secure and low-power HAI devices to help collect big data for their cloud-based services. We are excited by the potential opportunities presented by the edge-to-cloud platform collaboration, opening up new market frontiers for us in areas such as smart city, smart office, healthcare, agriculture, retail, and factory automation. We anticipate more design win awards and growing modern shipments starting next year. For Wi-Fi key component business model, we continue to leverage our key partners to amplify our offering and encourage adoption of our Azure low-power solution in AI communities, which also have strong appetites for Azure low-power smart AI sensing. Being the official partner of prominent AI platforms such as Google TensorFlow Lite for microchip controllers, Microsoft Azure, ARM AI Partner Program, and TinyML Foundation. We get to enjoy the enormous network of these ecosystems and their numerous participants. We continue to receive inquiries from large corporations and individual developers alike, with hundreds of evaluation boards and development kits having been purchased online and distributed across the globe. Additionally, we continue our marketing efforts through joint webinars and other online activities with several well-known platform partners such as Edge Impulse, DigiKey, and SparkFun. We are confident that YSI will be one of our major growth drivers for our non-driver segments looking ahead into 2022 and much beyond. For non-driver IT business, we expect revenue to decrease single digits sequentially in the fourth quarter. That concludes my report for this quarter. Thank you for your interest in HIMAX. We appreciate your joining today's call, and we are now ready to take questions.

Thank you. At this time, I would like to take any questions to my tab for us today. If you would like to ask a question at this time, simply press star 1 on your telephone keypad. Again, that would be star 1 on your telephone keypad. Our first question comes from the line of Tristan Guerra from Baird. Your line is now open.

Hi, and good evening. My first question is, you know, looking at the weakness that you described in notebooks and TVs, you know, that's impacting your TECOM business, does that mean that we're closer to supply-demand balance than what you had expected just a quarter ago. I know that you're putting supply agreements in place, and you expect tightness in 22, but is it fair to assume that notably the weakness in notebooks that seems more sustainable than TVs, which have stabilized? suggest that maybe the whole industry gets to supply the bands earlier than previously expected. Any feedback there would be useful.

This is the operator, Mr. Chisangera. The presenters will come back to us in one moment.

Thank you.

Hello?

Hello? Yep. I'm not sure if you got my question or not, or maybe my question led everybody to disconnect.

We got disconnected, luckily, right after the prepared remarks. But we didn't get any of the questions. And we actually waited in the queue for the operator for quite a while. But anyway, we are back.

Can you hear me now? Yes. Okay, great. I thought my question maybe led everybody to disconnect. So my question is that, you know, given the weakness in notebooks and TVs that's driving you to project your T-Con business to be down mid-single digit in the quarter, Is that something, particularly if the weakness in notebooks is sustainable throughout the year, you know, unlike TVs where, you know, the business seems to be stabilizing? Is the ongoing weakness in notebook at some point accelerating the point where you get back to supply-demand imbalance or balance? You know, I know you've mentioned on the call that, you know, You're putting supply agreements in place and expect 22 to remain supply constrained. But again, if we see sustained weakness, notably in notebooks, does that mean supply-demand balance comes earlier than you previously expected? Any feedback would be useful here.

So particularly on notebook, so you want me to comment primarily on notebook rather than the overall market situation or supply-demand balance?

Supply-demand actually overall, so in other words, you know, if you have one of your end market that continues to be weak, does that mean that your overall business gets back in supply-demand balance, you know, earlier than you previously expected?

Okay, got it. Actually, We are actually rather bullish on our overall large display TRIVI-C business for next year, and that includes both TRIVI-C and TCAP. And now, I mean, surely everybody understands, you know, nowadays as we speak, the market is going through some toughness, particularly in low and small size TV segments. But in general, TV market remains soft. However, on the higher end, the demand is more persistent. While we are seeing pretty solid demand coming from IT sectors, both monitor and notebook. But most importantly, if you look at our projection for next year, As I said, we are very upbeat about the prospect of large display sectors, including all the three areas, notebook, monitor, and TV. While we are not particularly certain about the prospect of the market overall demand, our forecast is only as good as anyone's. Our optimism on our strengths going into next year has a lot of things that are particular to Hymex. There are also factors that are particular to display drive ICs. Again, the large display market may go soft or maybe it will stay strong, I don't know, for next year. But one very important factor for display driver IEC that many people neglect is the fact that overall the market is shifting towards higher end features and higher resolutions. That is going to change the dynamics of the highly processed, i.e., display driver IEC, wearer consumption substantially. So let me just repeat. So larger size, higher frame rate, higher end in general, whether it's notebook, TV, or monitor, while the number of units or panels ship and may remain the same. Or actually, it's only in direct relationship with the panel area or the glass area consumed. But when you go higher resolution, higher frame rate, better features, that tend to enlarge the wearer consumption of our display driver, I see a lot. Now, I'm going to give you one or two very specific examples, so you will get a very clear idea of what I'm talking about. If I take, for example, 4K TV, 60 hertz, against Full HD, also 60 hertz. By going from Full HD to 4K, you actually, with the same panel, you actually double your number of units of gyro IC needed, with each piece of IC actually area size slightly larger for 4K TV compared to Full HD. Now, if you take the same 4K TV, but you upgrade it from 60 hertz to 120 hertz, While the number of ICs remains the same, the die size of each IC, the die size actually will enlarge by almost 50% by going from 50 Hz to 120 Hz. So what I'm trying to say is the overall trend towards better features, higher performance TV, notebook, and monitor. Actually, it's going to provide a very, very strong support for display driver IC demand regardless of the strength or weakness of the large display panel business. That is point number one. Point number two, based on our internal analysis, which is derived out of extensive interviews and discussions with all foundry makers across the world who have a large display drive ICBC. Based on our interview and survey with them, we actually project some decline of their projected collective LHIC output next year because they are reallocating their waiver so that we are projecting LHIC waiver output may actually suffer from a little bit of decline next year against this. But seeing this, right, so seeing the two factors, one, the last display I see, actually the weather consumption is going to increase regardless of the market. And two, total weather output may actually decrease. So seeing these two factors combined, we actually went rather aggressive this year and we managed to successfully secure an increase of our weather capacity. next year against this year by actually adding a new, very important, a new foundry partner to our lineup. So we believe our accessible foundry capacity for last year's Fairtrade YIC may actually increase by a double digit next year. So last but not least, I think throughout this shortage and whatnot, we have been collaborating a lot closely with selected leading end customers. I'm talking about the leading end customer for TV and for monitor and for notebook respectively. So we enter into direct agreements and we study direct collaboration with them. And that actually also not only secure our our business for the coming years. It also enables us to, when the market shifts, demands shifting from one sector to another, we can actually react a lot more quickly compared to before. All these factors combined, I apologize, this is a very long answer, but all these factors combined, I think we are actually rather upbeat about our prospect for next year, high double-digit high-double-digit growth, potentially, for both the spray driver and decar.

Great. Thanks for the detailed answer. That's actually very useful. Just my follow-up question would be, do you expect your capacity, which you said is going to be up double-digit next year, to increase higher than the competition? which means that you would be able to gain market share as a result. And then the second part of the question is, is the discrepancy between your TCON business and the driver IC business really driven by the higher screen resolution and higher frame rate that you just described? Is that really the key reason for you predicting, you know, TCON would be down in Q4 but driver ICs would be up? And then finally, comment about the China power shortages and impact on the LCD panel production?

Okay. First, capacity, I think based on our analysis, the answer is yes. I would believe we are going to have some increase of capacity next year compared to this year for the industry. may actually suffer from some decrease of overall output. So the two factors together, certainly, I think we are likely to outpace our competitors in next year, hopefully, next year. And the second question is TECAN. I think the fact that we have one quarter of some dip in TECAN, I think it may only be a reflection of timing controllers, certain customers having inventory adjustment. Bear in mind, timing controllers typically are not purchased directly from panel makers. Rather, they are from their board manufacturers, board OEM, ODM manufacturers. Timing-wise, some mismatch, but in the long term, I think we believe our T-con market share will rise next year faster than display driver, because historically, our display driver market share is slightly higher than T-con. Now, with the tightness, we actually, we and our customers, I think we are both better of having our solutions shipped to customers on a bundled basis, meaning when much of them are bundled, our TCAN market share will get the approach to be more like driver IC, and again, historically our driver IC market share is higher than that of TCAN. Your last question is about China power shortage. We haven't really seen a direct impact on us, not yet anyway, so touch wood. I mean, the reason is very simple. panel industry is considered strategically important for the Chinese government, so they actually take measures to ensure that there's no power disconnection with the panel makers. And they also, in turn, are asking customers to look after their key suppliers. So again, so far we haven't seen any impact, whether there will be long-term repercussions, coming all the way to us, I don't know yet. But we haven't really seen or heard customers talking or worrying about this yet. Great. Thanks again. Very useful. Thank you.

Thank you. We ask for the attendees to limit your question to one question and one follow-up only. We have our next question from the line of Jerry Hsu with Credit Suisse. Please go ahead.

Thanks for taking my question. First question, I want to get some more color about, you know, your gross margin outlook in the fourth quarter and perhaps into 2022, especially that the gross margin guidance of around 50% seems like it's down, you know, one to two percentage points. from the third quarter. So can you comment a little bit on that, the reason behind it, and how should we think about the gross margin into first quarter next year or perhaps 2022?

Thank you, Jerry. Yes, we guided for a slight dip in gross margin Q4 against Q3. Bear in mind, we have been going through foundry capacity tightness and therefore we are taking up a lot of the foundry companies' price hikes over the quarters. The way we maintain or sustain or even improve our gross margin is to to transfer the additional cost to our customers. Your question is really about whether we will be able to continue to transfer such additional cost to our customers. In 2.4, if you look at the numbers in simple mathematics, we are still able to transfer the cost. We are just not adding further markup to the increase on top of the cost increase to our customers. Because it's quite simple, right? Our revenue will increase a bit, right? And if we transfer all the costs because there's a gap, because there's a gross profit, right? So if you transfer 100% exactly the cost into your customers, then naturally, by definition, your gross margin will come down slightly, right? So that's exactly what happens. So if you look at the numbers we indicated for Q4, It basically shows that we are transferring just about all of our cost increases to our customers who can still take the cost increase, apparently. That's why we are giving the guidance. Now, for next year, next year is too long and too early for us to comment right now, given the nature of the industry. I think there's no reason for us to be pessimistic about the prospect. I'm comparing, I'm talking about whether we can stay, continue to stay at such similar or such or similar high levels across the market. Again, our comment would be we are not pessimistic for a few reasons. One, I mean, for high V process, yes, the overall major capacity shortage studies, on track to last very much into the full of next year or even year after, given the fact that there is simply no meaningful addition to the industry's capacity pool for Hy-Vee. And secondly, particularly for Hymex, I talk about automotive business, which is on track to outgrow the rest of our business. both display driver IC and very importantly TDDI, which really will be a major year of increase next year. Automotives represent a better ASP and better margin. It's actually long-term sustainable margin as well. It tends to fluctuate a lot less compared to consumer electronics. That is one factor. I say in our prepared remarks that we believe automotive, as a standalone sector, will become the single largest revenue contributor next year. That shows our confidence. Also, there are more high-end products which are set to outgrow the rest of our businesses, including timing controllers and very interesting, Wi-Fi, which will be the first year of mass production. Starting from almost zero this year. That certainly is additional growth area and that is high margin area as well. All this together on top of the fact that throughout this tightness period, I think we have quite successfully managed to reposition ourselves so that we are now a lot more high end centric. we are a lot more focused on leading-end customers. And I think all these factors combined, and then our capacity will be limited, meaning we are giving away lower-margin business, low-end business. So hopefully, product mix-wise, we'll be able to defend our gross margin quite well next year.

Okay, thank you. And just one follow-up question. I think in the prepared remarks, I also mentioned only a little bit, you know, about the, you know, with WLO and also the LPOS. But I was just wondering, you know, for, I think, you know, for a lot of companies that have been talking about metaverse. So I'm just wondering, you know, from Hymax, a historical track record on, you know, on AR, VR, goggles, especially one of the tech giants invested in your, you know, air-cooled subsidiary. How should we think about, you know, Metaverse, you know, this, how's Hemex's position in the Metaverse world in the next couple of years? Thank you.

Honestly, I think quite well. But I think overall, you know, MetaWare, I guess these days people are focusing primarily on VR goggles and then certainly AR goggles as well. And our position is quite well, you know, primarily WLO and also Air Force. Now, admittedly, our exposure to VR is less than that to AR. And AR, I mean, is more challenging as a product, although it's a lot more exciting if it's successful, right? So I think the whole industry is still fighting through the battles of, you know, conquering the engineering barriers, trying to deliver something that consumers will go like, wow. So I think we are still going through that. In fact, our WO in particular, we have projects covering 3D sensing for VR devices and web guides and 3D sensing for AR devices. Obviously, I cannot disclose the details and specific customer names, but you are talking about some, if not all, of the biggest names in the tech world. They are working very closely with us. However, I don't think much will materialize in next year. I will be very honest about this. That is why we decided, given the limited time and space, we decided not to mention much about it. in our prepared remarks. And likewise for our L course. L course, bear in mind, is only applicable for AR. And L course, we are focusing on a lot of other things because we are working very hard with a few exams for AR goggles. So we also understand the technical challenges. And so that's why we actually put a lot of our L course effort into other areas. such as SUV for automotive, which are making good progress. However, given the nature of automotive, the real mass production with real volume will be still years away. And telecommunication, WSS, switch device, areas such as this. But yes, AR goggles, we remain an active player But we feel it is – we also understand there's a lot of hype, short-term hype recently, but we feel there may be some time to go before they really materialize.

Okay, thank you. So this is something that we should still, you know, continue to monitor in the next couple of years, right?

Yes, yes.

Okay, thank you.

Thank you, Jerry.

Thank you. Our next question is from the line of John Lopez with Vertical. Please go ahead.

Hi, good evening. Can you guys hear me all right? Yes. Oh, fantastic. Thanks so much. I have two questions. I guess the first one, just thinking about the near-term dynamics, I guess maybe I want to ask it this way. If we look at several of your panel customers, they're guiding their panel shipments and or area shipments to decline in Q4 versus Q3. If we look at your largest display peer, display driver peer, they seem to be guiding their revenues to decline in Q4 versus Q3. And there's, you know, kind of a whole bunch of weakness happening in the smartphone segment. Again, sort of materializing in Q3 and extending into Q4. You're guiding your sales to increase in Q4, and you're guiding your smartphone sales to increase more than your total sales. I'm wondering if you can just help us tease apart maybe what some of the differences are in your outlook versus that data set.

Well, again, twofold. One is compared to the panel industry, and the other one is compared to our peers, right? Compared to the panel industry, I think I've pretty much covered that in my response to the first question, where our display driver demand do not necessarily go in proportion to the panel output or the gas area consumption. For the reason I just mentioned, your feature upgrades, resolution upgrades, they tend to increase, in some cases, materially for the display driver weather consumption, while the glass area consumption may actually stay the same or even decline. I think that is the comparison to the customer side. Now, as for the competition, it's harder for me to comment. I think what I can say is that, as I said, we are giving up a lot on the low-end business because of two reasons, really. China local competition, they are subsidized, but they can only focus on low-end. They don't get really recognized by leading international and customers. And then they are very price aggressive and they are subsidized. So we tend to, throughout the foundry capacity tightness, actually before that we have started to shift, we have started to, in customers' new project design, our bidding will be very conservative in those low-end product areas where we focus only primarily on high-end. That is one thing. So there's a major product mix shift for us this year compared to last year, the year after, and then next year will be more so. So we are very much on, for example, for TV, Typically, a very easy definition for high-end against low-end would be media VDS interface for low-end and point-to-point interface for high-end. If you look at our product mix right now compared to just a couple of years ago, there's a major, major shift towards P2P interface. Now, with P2P interface, we are shifting a lot more. more towards what we call USID interface, which is the most high-end. So that product mix, I think, is a major difference. And now the high-end market demand is a lot more resilient compared to low-end. But I think that is one thing. And the second thing is that across TV and monitor and notebook, we have elected carefully and partner closely, tightly with typically the number one end customers. And so we enter into direct agreements with them. We have a lot of not just technical but business collaboration. And that also put our demand to be a lot more defensive to industry downtrend. So I can only talk about ourselves, and we have proven again and again and again that our guidance has been very robust and reliable, and I certainly hope and no reason to believe it will be different this quarter. So our guidance comes directly from our folks.

Thank you. Our next question comes from the line of Doni Tang with Nomura Securities. Please go ahead.

Thank you Jordan and Eric for taking my question. I only have two simple questions. So first one is related to your large display driver IC guidance in fourth quarter. So it looks like a little bit better than your peers. So just curious if our large display driver IC cells exposure to TV was lower than the IT panels. or we gain some market share temporarily in the fourth quarter. So that's my first question. And secondly, it's regarding to our wide-eye total solution. Because I remember in early this year, we mentioned about that we are relatively positive on the progress and could be some potential PCOE customers in the fourth quarter this year. So just wondering if you could give us some more update on this and if we have any volume shipment already for PCOEM customers. Thank you.

Excuse me, Mr. Dongli. Thank you. This is operator. We will have Mr. Jordan Wu and Eric Lee with you in one minute. Please stand by. Excuse me, this is the operator. I apologize, but there will be a slight delay in today's conference. Please hold, and the conference will resume shortly. Thank you for your patience. Please remain on the line. Your conference will resume shortly.

Hello? Hello?

Hello? Mr. Donnie Tang, please restate your question.

Hello?

Oh, okay. Yes, Eric, can you hear me?

Yes, we can hear you.

Okay, just two simple questions. The first one is your large display driver IC guidance looks like to be a little bit better than our peers. So just wondering that if you originally have bigger sales exposure to IT panels rather than TV panels or you temporarily get market share, In the fourth quarter, that's my first question. And second question is regarding to our YSI total solution. So previously, we seemed like more positive from our progress with PCOEM customers by end of this year. So just wondering if you could give us some idea if we have entered into like a volume production for our PCOEM customers in this quarter. Thank you.

The first question, whether we have high exposure for IT and notebook compared to TV. I don't have the answer right in front of me right now. I know we have very solid notebook, no, sorry, monitor, especially high-end monitor, like gaming monitor, not sure. And our notebook market share has been rising. And then, again, I emphasize we are collaborating directly with end customers, leading end customers. I think all these factors help. For TV, again, we are really moving away from media or VDS products, i.e. low-end products, and focusing not just on high-end products, but really focusing a lot on some of the leading end customers' products. So how that compares with our peers, and which peers, it's hard for me to comment, and whether we have particularly more exposure on this sector than the other. I'm not sure about that. And for YSI, we have said in a few quarters already that we have had a major design win with a leading end customer for a mainstream application. We never really said it's PC or whether it's OEM or otherwise. But yes, we are on track to start mass production in Q4, and that's what we have always indicated. Q4, it will not be throughout the whole quarter. So Q4 will be the commencement of mass production, but we've got a pretty solid forecast for the whole of next year. And I think given that it's really a new thing for the whole world and it's a brand new product for us, We only started first sampling only about a year ago. I think we are extremely pleased with the progress. In addition to that, we also have, with smaller volume, quite a number of different applications with some customers also on track for mass production, also starting this quarter as well. Next year, you will see some revenue contribution from the wide side, but it will still be no single-digit revenue contribution. But hopefully, you will outgrow overall business for a very long time. And certainly, we are confident this will be low-high-margin business.

Thank you, Jordan.

Thank you, Donnie.

Thank you. There are no further questions at this time. I will turn the call back over to Mr. Jordan Wu.

I apologize for the hiccups, but luckily we managed to finish just at the market open. So as a final note, Eric will maintain investor marketing activities and continue to attend investor conferences. So we'll announce the details as they come about. Thank you and have a nice day.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.