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.