Himax Technologies, Inc.

Hello, ladies and gentlemen. Welcome to the Hymax Technologies, Inc. 3rd Quarter 2022 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 call is being recorded. I would now like to turn the conference over to your host, Mr. Mark Schwallenberg from MZ Group.

Welcome, everyone, to the HIMAC's third quarter 2022 earnings call. Joining us from the company are Mr. Jordan Wu, President and Chief Executive Officer, Ms. Jessica Pan, Chief Financial Officer, and Mr. Eric Lee, Chief IRPR Officer. After the company's prepared remarks, comments, we have allocated time for questions in 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 IMAX's website at www.imax.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 results or events to differ materially from those described in this conference call. A list of risk factors can be found in the company's SEC filings. Form 20F for the year ended December 31, 2021, in the section entitled Risk Factors, as may be amended. except for the company's full year of 2021 financials, which were provided in the company's 20F and filed with the SEC on March 23rd, 2022, 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. It 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 everyone for joining us. My name is Eric Li, Chief IRPR Officer at HIMAX. On today's call, I will first review the HIMAX consolidated financial performance for the third quarter 2022, followed by our fourth quarter 2022 outlook. Jordan will then give an update on the status of our business, after which we will test questions. Our third quarter revenues and the EPS beat the guidance, while gross margins was at the mid-range of the guidance issued on August 11, 2022, despite macro headwinds continuing to challenge our business. Third quarter net revenue of $213.6 million decreased 31.7% sequentially, but exceeded our guidance of a decrease of around 35% to 39% sequentially. Increased sales momentum in our small and medium-sized display driver segment contributed to the better than expected sales results. Gross margin came in at 36.3%, a decrease from 43.6% last quarter, but at the mid-range of the guidance range of 35.5% to 37.5%. Now IFRS profit per diluted ADS was 17 cents, beating our guidance of 11.6 cents to 15.6 cents. IFRS profit per diluted ADS was 4.8 cents, exceeding our guidance of 0.2 cents to 4.2 cents. Revenue from large-scale freight drivers was $41.3 million in Q3, a decrease of 39.8% sequentially and below what we typically see on a seasonal basis. Customers across the board, from brands to panel houses, continued to impose stringent inventory control measures on the backdrop of slowing end-market sales and the stocking pressure. As guided, all three large display driver sectors, covering TV, monitor, and notebook, were down double-digit sequentially. Large panel driver IT sales accounted for 19.3% of total revenue for this quarter, compared to 22% last quarter and 27.9% a year ago. Moving on to our small and media-sized display driver segment. Revenue was $141.4 million, a decrease of 29.9% sequentially, primarily a result of the prolonged inventory reduction effort of our smartphone and tablet customers. Smartphone and tablet driver IT sales contributions were approximately equal in the third quarter. Despite the challenging macro environment, we continue to gain traction with our leading driver solutions being adopted by more customers for their next-generation products. As an illustration, our proprietary tablet TTDI solution, once again, was adopted by Xiaomi for their latest premium tablet and two-in-one laptop, where our TTDI supports larger size high frame rate display, and high precision active stylus features, as well as the most touch channels in the market to offer superior touch sensitivity. Meanwhile, for AMOLED business, our global leading customer had more AMOLED premium tablet models commence mass production this quarter, where we provide the total solution covering DDI-C and the TCAM. plus their sole source supply. In the third quarter, our AMOLED sales, including DDIC and TCAM, were up more than 45% sequentially and accounted for more than 8% of total sales. Q3 automotive business was once again the largest revenue contributor, representing over 35% of total sales. Q3 automotive sales declined double-digit sequentially as guided as customer continued with strict inventory control measures to destock from the accumulation during China city lockdowns in the previous quarter. Yet, on a year-over-year basis, automotive IC sales increased more than 80% for the nine months ended September 30, 2022, a result of our comprehensive product covering and increasing design wins for our automotive PDDI. For our e-paper business, another product in our small and medium-sized driver line-up, sales declined double-digit quarter over quarter due to customers downsizing their annual business plans amid a weak consumer electronics market. Small and media-sized driver IC segment accounted for 66.2% of total sales for the quarter, compared to 64.5% in the previous quarter and 59.9% a year ago. Third quarter non-driver revenue was $30.9 million, down 26.6%. 26.9% from a quarter ago. As expected, our T-Con business was done double-digit sequentially, pressured by lower shipment for TV, monitor, and notebook markets. Yet T-Con shipment for automotive enjoyed decent growth, and we anticipated its business momentum to accelerate in the coming quarters. T-Con business represented more than 7% of our total sales in the third quarter. Now, driver products in Q3 accounted for 14.5% of total revenue, as compared to 13.5% in the previous quarter and 12.2% a year ago. Now, IFI scores margin for the third quarter was 36.3%. a decrease from 43.6 percent of last quarter. As we previously reported, the incurred charges from agreements we entered with foundries and the back-end suppliers for securing capacity were the predominant factors that adversely impacted our margin profile in the third quarter. Price erosion because of inventory stocking also contributed to the margin contraction. IFRS gross margin was 36% for the quarter. Our non-IFRS operating expenses for the third quarter were $46.7 million, slightly up by 3.8% from the previous quarter and 5% from a year ago. The sequential increase was caused mainly by increased salary expenses, while year-over-year expenses increased because of higher salary and R&D expenses. IFRS operating expenses were $72.9 million for the third quarter, up 38.5% from the preceding quarter and 6.4% from a year ago. The higher IFRS figures were mainly due to the change of annual bonus compensation, which we award employees at the end of September each year. The 2022 annual bonus compensation, including ISU and the cash awards, was in line with guidance we mentioned on our last earnings call that totaled $39.6 million. out of which $18.5 million or 8.5 cents per diluted area was immediately vested and recognized in the third quarter of 2022. The remainder will be equally vested in three changes at the first, second, third anniversary of the grant date. The remaining compensation expenses will be recognized on a straight line basis over the vesting period of each trench. Third quarter non-IFIS operating income was $30.9 million or 14.5% of sales versus 29.3% of sales in the last quarter and 41.2% of sales from a year ago. Non-IFIS after-tax was $29.8 million or $17.2 million cents per diluted ADS, decreased from $76.8 million or $43.9 cents per diluted ADS last quarter. Turning to the balance sheet, we had $227.9 million of cash, cash equivalents and other financial assets as of September 30, 2022. compared to $250.8 million at the same time last year and $461.6 million a quarter ago. Our cash balance at the end of third quarter substantially declined following the annual cash dividend payout of $217.9 million in July. We had $48 million of long-term unsecured loans at the end of Q3, of which $6 million was the current portion. Our quarter-end inventory as of September 30, 2022, was $410.1 million, up from $337.3 million last quarter and up from $160.9 million a year ago. The elevated inventory level reflects the abrupt drop in the demand triggered by the strict customer inventory control due to sluggish end customer demand and murky visibility. The excess customer inventory, particularly in consumer electronics, adversely affected our sales resulting in high inventory level as our production always begins months in advance. Accounts receivable at the end of September 2022 was $253.3 million, down from $371 million last quarter and from $400.9 million a year ago. DSO was 74 days at the quarter end, as compared to 100 days a year ago and 93 days from last quarter. Third quarter capital expenditures were $3.4 million versus $2.5 million last quarter and $2.1 million a year ago. The third quarter CapEx was mainly for R&D-related equipment for our IC design business. As for September 30, 2022, HyMEX had 174.4 million ADS outstanding, little changed from last quarter. On a fully diluted basis, total number of ADS outstanding for the third quarter was 174.7 million. Now, turning to our fourth quarter 2022 guidance, we expect Fourth quarter revenue to increase 4% to 8% sequentially. Now IFI's gross margin is expected to be around 31.5% to 33.5%, depending on the final product mix. Now IFI's profit attributable to shareholders is expected to be in the range of $0.21 to $0.24 per fully diluted ADS. The fourth quarter IFRS profit attributable to shareholders is estimated to be in the range of 17.8 to 20.8 cents per fully diluted area, attributable to gains from disposal of long-term assets and certain financial arrangements. I will now turn the call over to Jordan to discuss our Q4 outlook. Jordan, the floor is yours.