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spk00: Hello, ladies and gentlemen. Welcome to the High Max Technologies Incorporated fourth quarter and full year 2022 earnings conference call. At this time, all participants are in the 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, please go ahead.
spk01: Thank you. Welcome, everyone, to the HIMAC's fourth quarter and full year 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 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. 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. A list of risk factors can be found in the company's SEC filings, Form 20F, for the year ended December 31st, 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 23, 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. and may vary materially from the audited consolidated financial information for the same period. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. I would now like to turn the call over to Mr. Eric Lee. Eric, the floor is yours.
spk02: Thank you, Mark, and thank you, everyone, for joining us. My name is Eric Lee. Chief IRPR Officer at HIMAC. On today's call, I will first review the HIMAC consolidated financial performance for the fourth quarter and the full year 2022, followed by our first quarter 2023 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 financials include share-based compensation, acquisition-related charges, and cash award. We pre-announced preliminary key financial results from the fourth quarter 2022 on January 12, 2023, where revenues and EPS both exceeded guidance, while gross margin came in moderately below the guidance range issued on November 10, 2022. Today, our reported results for revenues, gross margin, and EPS are all in line with the pre-announced results. Fourth quarter net revenues of $2,062.3 million increased 22.8 percent sequentially, substantially exceeding our guidance of an increase of around 4% to 8% sequentially, despite the macro headwinds continuing to challenge our business. The increased sales momentum was attributed to our continuous effort to deplete inventory, particularly in the small and medium-sized TDDI segments. IFIs and non-IFI scores margin both came in at 30.5%, a decrease from 36% and 36.3% respectively last quarter, and lower than the guidance range of 31.5% to 33.5%. Price erosion from offloading assets inventory was the predominant factor that adversely impacted our margin profile. Contributing to margin contraction was higher cost of the inventory, sourced primarily during 2021 and early 2022 when foundry and the back-end pricings were higher due to capacity constraints. Yet, IFRS profit per diluted ADS was 24.1 cents, exceeding our guidance of 17.8 cents to 20.8 cents. Now IFRI's profit per diluted ADS was 27.3 cents, beating our guidance of 21 cents to 24 cents. Revenue from large display driver was $43.5 million in Q4, an increase of 4.3% sequentially, exceeding our prior guidance of flat from last quarter. TV sales grew nicely as expected, increasing single-digit quarter-over-quarter, and appear to have bottomed following several quarters of shock correction, while both monitor and notebook sales were better than guided. Large panel driver IT sales accounted for 16.6% of total revenues for the quarter. compared to 19.3% last quarter and 27.7% a year ago. Moving on to our small and medium-sized display driver segments, revenue was $177.4 million, an increase of 25.5% sequentially, and ahead of our guidance of a single-digit increase primarily a result of increasing shipment of TTDI in all three sectors, namely smartphone, tablet, and automotive. Despite the challenging macro environment, our fourth quarter revenue for the tablet was up more than 100% sequentially, thanks to the strong shipment in high-end TTDI products, an illustration of our leading solutions being adopted by more customers for their next-generation product, supporting large-sized, high frame rate displays and high-precision active stylus features. Meanwhile, the AMOLED total solution sales, including TCAM and DDIC, increased mid-teens quarter-over-quarter and accounted for more than 8% of total sales. mainly attributable to our tablet AMOLED total solution, supporting the mass production of premium tablet models for a global leading customer. Q4 automotive driver sales increased single-digit quarter-over-quarter, better than guided customer results, especially for TDDI. Automotive driver business once again represented the largest revenue contributor with over 30% of the total sales in the fourth quarter, a result of our comprehensive product coverage and the increasing automotive TDDI design wins across panel house, tier one, and auto brand. It's worth noting that our automotive TDDI sales surged by more than 170% on a year-over-year basis. boosted by the robust adoption of the technology for customers' new generation car models. Small and medium-sized driver IC segments accounted for 67.6% of total sales for the quarter, compared to 66.2% in the previous quarter and 61.2% a year ago. Fourth quarter non-driver sales also beat guidance with revenue of $41.4 million, up 33.8% from a quarter ago. Our T-Com business was up a solid double-digit sequentially, bolstered by higher shipment of large-sized display drivers, automotive driver, as well as tablet drivers for AMO late. For automotive T-Com, we anticipate business momentum to accelerate in coming quarters backed by a strong order pipeline and a rapid expanding design wing across different continents. T-Com business represented over 8% of total sales in the fourth quarter. Non-driver products in Q4 accounted for 15.8% of total revenues as compared to 14.5% in the previous quarter and 11.1% a year ago. Our IFRS operating expenses for the fourth quarter were 52.5 million dollars a decline of 27.9 percent from the previous quarter and a down 6.2 percent from a year ago. The sequential decrease was caused mainly by decreased annual bonus and the salary expenses, partially offset by an increase in R&D expenses. As previously mentioned, we typically grant annual bonuses, including cash and ISU. to our staff at the end of September each year, which can lead to higher IFRS operating expenses in the third quarter compared to the other quarters of the year. The year-over-year expense decrease was primarily related to the special bonus we awarded our employees at the end of Q4 2021. Excluding the special bonus paid in Q4 last year, the IFI's operating expenses would have increased 2% year-over-year during the fourth quarter. Now, IFI's operating expenses were $45.6 million for the fourth quarter, down 2.2% from the preceding quarter and down 6% from a year ago. Fourth quarter IFRS operating income was $27.5 million or 10.5% of sales versus 1.8% of sales in last quarter and the 39.4% of sales from a year ago. Now IFRS operating income was $34.5 million or 13.1% of sales compared to 14.5% last quarter and 41.1% quarter last year. IFRS after-tax profit was $42.2 million or 24.1 cents per diluted ADF compared to $8.3 million or 4.8 cents per diluted ADF last quarter. We made divestiture of long-term assets during Q4 2022, which resulted in an operating income of around $11 million on the after-tax basis. First quarter non-IFIS after-tax profit was $47.7 million, or 27.3 cents per diluted ADS, compared to $29.8 million, or 17 cents in the previous quarter. Now let's have a quick review on the 2022 four-year financial performance. Revenues totaled $1.2 billion in 2022, representing a 22.3% decline compared to 2021. Unexpected lockdown in China, geographical tensions and the macroeconomic related factors created a challenging operating environment and impaired our business performance for the year. The halt in consumer demand and the significantly reduced visibility at panel houses and OEMs toward the end of first quarter adversely impact IC demand and consequently our sales. Given the nature of wafer production, which usually starts months in advance, the abrupt drop in demand resulted in a rapid increase in our inventory. Revenue from large-panel display drivers totaled $264 million in 2022, declined 37.7% year-over-year, representing 22% of total sales as compared to 25.7% in 2021. Small and medium-sized driver sales totaled a decrease of 19.2% year-over-year, representing 64.8% of our total revenues as compared to 62.3% in 2021. Non-driver product sales totaled $158.4 million, a decrease of 14.7%. percent year-over-year, representing 13.2 percent of our total sales as compared to 12 percent a year ago. Our automotive segment continued to see extraordinary business momentum in 2022. Automotive sales enjoyed the highest growth among all product lines up more than 50% on top of the remarkable strength in 2021 when sales grew more than 110%. For the year, sales of traditional DDIC for automotive were up over 30%, while automotive TDDI sales surged by more than 300%. As we mentioned repeatedly, Automotive displays continued to be adopted at a rapid rate in number, size, and technological sophistication, implying higher content value of driver IC per vehicle. As a market share leader in automotive display ICs, we continued to gain ground not only in DDIC but also in TTDI, supported by over 200 design wins, with the numbers still increasing as we speak. While our overall annual sales declined due to the unusual and abrupt demand halt, several new sales streams have started to contribute during 2022. including ICs for AMOLED and ultra-low-power Wi-Fi smart sensing. Both personal lines enjoyed higher than corporate average gross margin in 2022. On AMOLED, we provided AMOLED DIC and TCAM for automotive and the tablet displays. In addition, we are making good progress with leading panel houses for the development of AMOLED display driver for smartphone, TV, and the notebook applications. We anticipate the shipment of smartphone AMOLED drivers to start in the second half of 2023 for key customers in China and Korea. On the wide-side product line, we continue to support Dell for its production run-up in a range of newest models using our first-generation W1 solution. In addition, the host of leading laptop vendors and the CPU platform players have shown strong interest in broadening AI use cases of future generation smart notebook by adopting our next generation WE2 AI processor. Jordan will elaborate on this in a few minutes. backed by a strong business pipeline and the robust design-in activities in numerous AIoT applications with customers from all over the world, we expect strong sales momentum for Wi-Fi in 2023. IFI's gross margin in 2022 was 40.5%, decreased from 48.4% in 2021. The decline was largely attributable to price pressure resulting from excess inventory level following the sudden halt in demand beginning in the second quarter. In addition, charges related to unmet minimum purchase order from contract with foundry and the back-end suppliers entered during the unprecedented shortage in 2021 also lead to the eroding margin. Now IFRs gross margin was 40.6% in 2022, decreased from 48.5% in 2021. IFRs operating expenses in 2022 was $229.5 million, up 12.8% from 2021. The increase was primarily a result of vested portion of the annual bonus compensation awarded to employees in 2022, as well as previous year, along with increased salary and R&D expenses. Now IFRS operating expenses were $181.3 million, up 5.7% compared to 2021. 2022 IFIS operating income was $257.6 million or 21.4% of sales, a decrease from $545 million or 35.2% of sales in 2021. Now IFIS operating income was $306.8 million in contrast to $578.3 million in 2021. Our IFRS net profit for 2022 was $237 million, or $1.36 per diluted ADS, as compared to $436.9 million, or $2.37 per diluted ADS. 50 cents per diluted ADS in 2021. Now IFI's net profit for 2022 was the $276.1 million or $1.58 cents per diluted ADS as compared to $663.6 million $463.6 million or $2.65 per diluted ADS in 2021. Turning to the balance sheet, we have $229.9 million of cash equivalent and other financial assets as of December 31, 2022. compared to $364.1 million at the same time last year and $227.9 million a quarter ago. The substantial decrease in cash was a result of annual cash dividend payout of $2017.9 million particular offset by $82.9 million of operating cash inflow in 2022. We had $46.5 million of long-term unsecured loans as of the end of fourth quarter, of which $6 million was current portion. Our year-end inventory was $370.9 million down from $410.1 million last quarter and up from $198.6 million a year ago. Accounts receivable at the end of December 2022 was $261.1 million up from $253.3 million last quarter and from $410.2 million a year ago. DSO was 79 days at the quarter end as compared to 97 days a year ago and 74 days last quarter. Fourth quarter capital expenditures were $2.3 million versus $3.4 million last quarter and $2 million a year ago. The fourth quarter CAPEX was mainly for R&D-related equipment and in-house tester of our IC design business. Total capital expenditures for 2022 were $11.8 million, mainly for design tools, R&D equipment, as well as in-house capture of our IT design business as compared to $7.6 million in 2021. As of December 31, 2022, HIMAX has 174.4 million ADS outstanding unchanged from last quarter. On a fully diluted basis, total number of ADS outstanding for the fourth quarter was 175 million. Now, turning to our first quarter 2023 guidance, we expect first quarter revenues to decrease 12% to 17% sequentially. IFRS gross margin is expected to be around 28% to 30%, depending on the final product mix. The first quarter IFRS profit attributable to shareholders is estimated to be in the range of 3.5 cents to 7 cents per fully diluted ADF. Now, IFIS profit attributable to shareholder is expected to be in the range of 6.5 cents to 10 cents per fully diluted ADS. To note, the EPS guidance already accounts for certain fine exchange loss attributable to NT dollar appreciation against the U.S. dollar based on the prevailing exchange rate. As a reminder, much of our local incurred expenses, including the bulk of employee salaries, as well as outstanding income tax payables, are NT dollar-based. I will now turn the call over to Jordan to discuss our Q1 2023 outlook. Jordan, the floor is yours.
spk05: Thank you, Eric. Historically, the first quarter has seasonally been the slowest of the year due to the Lunar New Year holidays. On the backdrop of sluggish global demand and the surge of COVID-19 cases in China, despite their government lifting COVID restrictions, many Chinese factories extended their shutdown period through the Lunar New Year. This added uncertainty to an already stagnant business environment, causing our customers to hesitate to place new orders while cautiously managing their inventory levels and further clouding our business visibility. As uncertainty persists, our objective first and foremost is to strictly manage our inventory level, as we have been aggressive in doing so by sacrificing short-term gross margin to offload excess stock. We also continue to curtail our weather starts while striving to win more projects from customers, specifically for the purpose of digesting our excess inventory. Our inventory position has much improved since its peak during the third quarter last year, and we anticipate it will continue to decrease to near our historical average no later than the third quarter of 2023. With that said, our Q1 gross margin remains under pressure. As Eric mentioned earlier, the cost of our excess inventory is high from being sourced during tight inventory, tight capacity constraint in 2021, when foundry and back-end prices were at peak levels. Another contributing factor to Q1 margin contraction stems from market price decline of certain unsold inventories, which will necessitate write-downs. However, we believe this effect will gradually diminish throughout the year as the market has shown signs of recovery across many business areas. Now, withstanding the pressure from the discussing process, we continue to work diligently towards improving our gross margin as the primary objective. Despite the expected short-term margin compression, we remain confident in our gross margin prospects, backed particularly by several high-visibility product areas, most notably the higher-margin automotive and wide-side smart image sensing businesses, which look set to outgrow other businesses. Looking ahead, the semiconductor industry appears to be trending toward the post-pandemic era. While the supply chain gradually stabilizes and chain inventory reverses to healthier levels, we believe a decent recovery is forthcoming. On the revenue front, we expect the first quarter to be the trial of the year, with sales rebounding in the second quarter and business momentum continuing to improve into the second half of 2023. With that, I will begin with an update on the large panel driver IC business. Our first quarter 2023 large display driver IC revenue is projected to be up high single digit sequentially. We expect monitor IC business to be on a recovery trajectory as customers have started to replenish chips due to reduced channel inventory after multiple quarters of the stocking. Monetary IT sales in the first quarter are set to grow by a decent double digit. TV panel prices also show signs of stabilization from restocking demand, particularly for mainstream models that were likely strengthened into Q1, parking the seasonal factor. We anticipate our sales for TV segment to increase single-digit sequentially in Q1. Conversely, on notebook segment, the highly publicized downward trend lingers on with further declines from enterprise IT budget cuts in tandem with customers' continuous stringent inventory control measures. Turning to the small and medium-sized display driver IT business, We expect Q1 revenue for this segment to decrease by double digit sequentially. Q1 automotive IC sales are anticipated to be down mid-teens as our customers continue to reduce inventory for traditional DBICs. However, we see strong momentum for our automotive TDDI sales, which are poised to grow by single digit. backed by our solid new design pipeline which has been rapidly expanded for many quarters. Additionally, we anticipate customers' inventory adjustment in DDIC will find equilibrium, leading to a strong recovery in the second quarter. Both smartphone and tablet IT sales are set to decline double-digit quarter-over-quarter due to seasonality and customers' continuous stocking measures. Now for a more detailed update on the automotive segment. The trend for the automotive interior continues to be in favor of more stylish and diverse designs, made possible with increasing quantity and size of panels inside the vehicles, equipped with advanced interactive display technologies as we have previously discussed. As a leader in the automotive display IC market, we provide a one-stop-shop offering of the most comprehensive product portfolio for automotive display in the industry, ranging from traditional DDIC to new technologies such as TDDI, Level Dimming T-Comp, LTDI, and AMOLED. Our business feasibility for automotive segment for 2023 remains much better than those of consumer electronic products. In addition, we see a favorable trajectory in our automotive TDDi business, backed by a prompt expansion of TDDi adoption and our fast-growing new project wings. As TDDi technology is essential for large-sized interactive, stylish, curved, and free-formed automotive displays required of future generation vehicles. We believe our automotive TDDI sales will be one of the primary driving forces for our long-term business growth. Moreover, we anticipate the market share of our automotive TDDI will surpass that of DDIC, which has already reached 40% globally. Furthermore, HIMAX is also the first in the industry to launch the LTDI, or Large Touch and Display Driver Integration, automotive display solution, catering to the need for ever larger screens inside vehicles. The LTDI solution requires even higher levels of integration of display and touch technologies for the next generation, typically larger than 30-inch automotive displays, where the solution can cascade up to 30 chips in support of ultra-high resolution displays, usually more than 7K by 1K, and high-precision touch sensitivity. United with a top-tier automotive digital platform provider, our cutting-edge LTDI technology was showcased at CES 2023 by one of our leading panel customers for a 55-inch pillar-to-pillar in-sail touch display that provides seamless, intuitive, and advanced tactile experience for future generation smart cabins. Our LTDI is scheduled to start mass production in the second quarter this year, substantially ahead of competition. More design collaboration in some multi-automobile vehicles are underway. Next, for an update on AMOLED, we continue to gear up for AMOLED drive IC development jointly with major Korean and Chinese panel makers in various applications. For tablet, we are seeing shipments on the rise for premium models. that adopt advanced AMOLED displays, of which HIMAX offers both DDiC and TCAM, and has commenced production to certain leading brands. For automotive AMOLED display, we continue to win project awards for our flexible AMOLED driver and TCAM with both conventional car makers and LEV vendors. Finally, we are making good progress with leading panel houses for the development of AMOLED display drivers for smartphone, TV and notebook applications. We expect to commence our AMOLED driver production from the second half of 2023. Our AMOLED business including display driver and TCAM, is slated for strong growth in the next few years. As a reminder, for smartphone AMOLED display driver, we already have secured meaningful capacity. Now let me share some of the progress we made on the non-driver IC businesses. Starting with an update on timing controller. We anticipate Q1 TCAN sales to decrease by mid-teens sequentially, hampered by decreased shipment of tablet product for AMOLED displays. On a positive note, our position remains unchallenged in automotive TCAN for local dimming technology, which not only improves display contrast ratio, but also drastically reduces display power consumption. which is critical for large displays and EV models. With years of strenuous work on this high entry barrier technology, we have developed comprehensive local dimming TCAM product offerings that can support a wide range of designs covering super high frame rate of 240 Hz and resolutions of up to 8K. We have won numerous project awards from various name panel makers, tier ones, and car makers for premium new car models, with a small number of which already commenced mass production recently. Local DB&T account is set for robust growth starting 2023. We anticipate Q1 automotive decon sales to increase more than 150% year-over-year and represent over 2% of our total sales. Switching gears to the WiseEye AI total solution, which incorporates high-max proprietary ultra-low-power AI processor, always-strong CMOS image sensor, and CMN-based AI algorithm. We continue to support the mass production of DAOs, notebook, and other endpoint AI applications, such as automatic meter reading, shared bike parking, video conference device, door lock, and medical capture endoscope. We are more committed than ever to strengthen our Wi-Fi product roadmap and retaining our leadership position in Azure Low Power AI processor and image sensor for endpoint AI applications. At this point, at this year's CES, we teamed up with several industry-leading ecosystem partners and customers to jointly introduce our neo-modern Azure Low Power TinyAML solutions in various real endpoint AI applications. including a surveillance camera with Nova Tech, a leader in surveillance system SOC, a smart home with useful sensors, a startup founded by Pete Walden, the former Google TensorFlow tech leader. We also joined forces with Seed Studio in smart agriculture and Wen Tai Technology in smart office, both leading players in their respective areas. These are just a few examples of real adoption of our ultra-low-power Wi-Fi solution in the emerging endpoint ultra-low-power image AI era. We continue to see increasing deployment of our Wi-Fi solution in diverse applications, driven by the mega-trend of AIoT and growing demand to add image AI capability to everyday objects. To highlight our surveillance camera demonstration, HIMAX and Novatex jointly showcased a leading ultra-low-power pre-roll AI solution, enabling battery-operated surveillance camera with comprehensive event recording capability through what is called negative time recording. The pre-roll function powered by our W1 processor features an always-on video recording operation at a slow frame rate using only single-digit miniWAS power consumption. Meanwhile, The WE-1 AI processor intelligently senses specific motion events, such as certain human behavior or suspicious activities. All these are taking place while the core vision processor remains powered off. Once the classified event is identified, the WE-1 processor activates the core processor, which then initiates a high resolution recording of the event, while stitching the pre-roll video clips of the W1 processor layer 2. This is a substantial improvement compared to what existing surveillance solutions offer in terms of security, as users receive a thorough video stream complete with pre-roll video clips. of what preceded the motion events. It also significantly reduces the overall power consumption, made possible for battery-powered surveillance system. With its significant features in pre-roll and ultra-low power, YSI is gaining traction in various surveillance fields, covering doorbell, door lock, and dash cam. Numerous engagement and design projects have been in progress with advanced customers across different domains after CES. Also during this year's CES, we debuted our next generation WE2 AI processor that offers 40% peak power saving and 30-fold inference speed, implying over 50 times power efficiency on a per inference basis. compared to the first generation WE1 processor, which is already in the industry among AI processors and mean for similar target markets with the exceptional local inferencing capability. The new WE2 AI processor performs the face landmark detection to identify facial regions, including eyes, mouth, nose, and jaw, to enable advanced, accurate, and precise facial expression recognition, such as head pose estimation, gaze, direction, fatigue detection, et cetera. These new features provide additional vital intelligence to a broad array of applications on top of the facets of our leading WE-1 AI processor. that provides contextual awareness with the ability to visually detect user engagement levels based on presence, movements, and facial direction. Several leading laptop names have shown strong interest in our WE2 processor after witnessing our live demonstration at CES, leading to many follow-up engineering activities. Additionally, we continue to partner with leading notebook CPU and AP SoC players with the aim of expanding our engagement with leading global laptop NEMs and IoT players, working on the enrichment of various new AI features and use cases for next-generation smart notebook and IoT applications. Given a consistent product roadmap, improving product performance, and broader customer attraction from various domains, we believe that YSI will emerge as a multi-year structural growth driver for Himex. Lastly, for an update on our optical-related product lines, including WLO, Aerocos, and 3D Sensor, Himex is one of the few companies in the technology industry with a wide array of optical-related product lines that are critical for the realization of metaverse. Our technology leadership and manufacturing expertise are evidenced by the growing list of AR, VR, cargo device customers, and ongoing engineering projects. We continue to work on strengthening our optical-related technologies suite, while collaborating with some of the world's largest technology companies that remain deeply committed to investing in its development. Now, to quickly review some of our recent progress. First, on 3D sensing. we see increasing adoption of our optical components and or 3D sensing technologies that enable new ways people interact with AI and VR applications. At CES 2023, we introduced a series of next-generation 3D vision processors to support the variety of state-of-the-art 3D sensing technologies in time of flight and structure-light. Our structure-light AI processor can provide 3D eye tracking functionality to report the exact eye positions with the industry's highest response rate and low friction to enable high precision and disease-free spatial reality applications. We feature a live demonstration of a 3D naked eye display at CES with our eye-tracking technologies becoming a hot focus point. Viewers experience a 3D holographic view from all angles without needing additional wearables to enjoy immersive and advanced visual experience without the side effects of fizzing, nausea, or dizziness. Moving on to W.O.O. On 3D gesture control, our WO technology is deployed to empower 3D perception sensing for precise, controller-free gesture recognition in VR devices. Our collaboration with a leading VR player is going smoothly, and we expect volume production starting middle of this year. On 3D scanning for object reconstruction, Our 3D sensing technology, which incorporates both our 3D projector and 3D decoder, is being deployed by a leading customer's 3D scanning device for the purpose of generating real-time digital twins, avatars, and 3D environment surroundings that ultimately help users transit and connect seamlessly between physical and digital worlds. The collaboration is ongoing with promising progress, and we expect it to hit the market next year. As I mentioned before, metaverse-related deployments or developments are early in the lifecycle, but overall remains an attractive opportunity for us potentially. HyMET is well positioned with years of research and development a unique product portfolio, production history, and key partnerships to capitalize on its growth as the industry continues to emerge and mature. For non-driver IC business, we expect revenue to decrease mid-teens sequentially in the first 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.
spk00: To ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from Jerry So, Credit Suisse. Your line is now open.
spk04: Thanks for taking my question. Hi, Jordan and also Eric. My first question is that, you know, on your prepared remarks, you mentioned that the fourth quarter gross margin was impacted by some charges related to and also the backend for some unmet minimum loading. I want to know, is this still impacting your first quarter and also second quarter margin?
spk05: Thank you, Jerry. So shall I address the first question first, right? Yes, please. Okay. To give you a sort of more comprehensive story, such charges, i.e., the charges related to our not fulfilling the LTA application, volume application, vis-a-vis our whether foundry or backend partners, and the resulting penalty incurred. Such charges in 2022, meaning last year, total about 1% of total sales of last year. And certainly it's very much back and loaded, as you can imagine, because in the first quarter of last year, there was actually still a shortage of supplies. So there was no such issue. starting mostly in the second half, that we started to face such issues. The penalty, such penalty, will still exist in Q1 this year, which will be a bit larger than that for Q4 last year. But we are not disclosing the detailed number here because they are not really the predominant factor leading to the slight contraction of our gross margin Q1 versus Q4. However, if you look ahead into the rest of the year, we believe when we when our inventory level becoming more normal and oil starts gradually normalizing, then there will be certainly be less charges of this nature going forward for this year. Bear in mind, we, I mean, you know, certainly all these countries are entering into when the industry was suffering from, you know, serious capacity shortage. And we believe quite a number of such countries, while they may appear to be a bit problematic in some cases in the short term, they remain important countries for us going forward or in the long term you know i would i would point out to our 28 nanometer lta for smartphone oled and certainly equally important for our ddic and for for for automotive sector which is a is a very strong supporting factor for success in the automotive market. And there are other LTAs, primarily in the areas of smartphone and tablet TDDI. We are indeed facing demand issues. And with this project, again, when the industry recovers, over time and also when our inventory level comes down to a more normal position, then there will be a lot less problematic. In the meantime, we are certainly in discussion with our foundry partners, you know, trying to achieve some flexibility in terms of execution of such contracts. For example, you know, we may agree to extend the duration in exchange for a smaller penalty in the short term, or we may change product line, you know, by loading certain other products to them, more of certain other products to them in exchange for, you know, uh our shortage to meet our commitment for the lta areas so there are such negotiation and discussion going on and we are in good progress uh so far so i think uh while uh such how much such penalty incurred throughout the year would depend largely on the on the on the market situation. But as we mentioned earlier, we believe the market will be recovering throughout the year. So we are not pessimistic about this going forward this year.
spk04: Okay, thank you. Second question is regarding the guidance outlook. For the first quarter revenue, I think you have guided a lot of side travel IT and also timing control that will decline sequentially. These things will be a little bit different from your peers. I think they are guiding for up QOQ. Can you give us some color on what you are seeing on the industry trend and why there is such a difference? And then on the automotive side, I think last year had a very strong growth of 50% year over year. How should we think about the growth for 2023? And then I also want to know what's your opportunity in mini-LED and also the micro-LED display for automotive? And how should we think about the return close rate for this automotive business? Thank you. OK.
spk05: There are a lot of questions. Let me see. To recap, your first question is about the large panel display and key count. Okay, being different from here, so the second question is about automotive prospect for this year, basically, right? And third question is micro LED. Micro LED and mirror LED. Yes, correct. Okay. Can I address the second question first, automotive? I think it's probably the most important of the three questions, given our exposure to the automotive market. We did suffer from a few causes of sequential decline. Bear in mind, in Q1 last year, we were suffering from shortage with our supply, being short of the demand. But there's a sudden stop of demand, a major disruption in China, particularly because there was a sudden lockdown across a big geographical area, especially, for example, in Sichuan, which is a local, a major center for automotive manufacturing. So a lot of our customers are stuck. They didn't know how to react to the overall lockdown. So while we shipped a lot of ICs to them with their solid demand in hand at the time, they were not able to produce them or ship their products because of lockdowns. So inevitably, the second quarter ICs we shipped to our customers became their inventory. And the such inventory will then be digested throughout Q3, Q4, and even up to Q1 this year. Okay. So that explains, you know, big picture-wise, you know, why the automotive DDIC, we have suffered some decline sequentially over the last few quarters. Our TDDI automotive, even during such period, has demonstrated a very strong momentum, growing sequentially, year over year, strongly. Because it's a relatively new product, and also it's in hot demand, relatively speaking, because they are newer products. and which are typically designed for new models, many of which are EV models. And EV models, in difficult times, are encouraged by the government, incentivized by the government, so they are in better demand compared to traditional models. And therefore, our TDDI, for a few factors I mentioned, still enjoy very good momentum and growth. even during this period of difficulty. We believe DDIC will rebound strongly from Q2 because after about three quarters of inventory digestion, I think throughout the ecosystem, the inventory level has been back to normal. However, whether we were enjoyed a similar strong growth as we enjoyed over the last two years. Bear in mind in the year before, we had 110% growth year over year. And last year, even Even in the economy, we are facing headwinds. We still enjoy 50% automotive growth. So in DDIC this year, such similar growth will be unlikely. I think for a few reasons. One, our market share is already close to 40%. It's arguably as high as one can get. So we are, our DDIC demand is now going pretty much in line with the market and the automotive market for a few factors, I think you know this better, unlikely to see a major growth this year. So therefore, we don't think our DDIC will enjoy the similar growth rate compared to last year. However, our TDDF Automotive will definitely continue to enjoy very strong growth with high double digits, very decent double digits year over year. Quarter-by-quarter sequential growth and half-over-half sequential growth, I think, are very well expected. That is because we simply enjoy very good design wind pipelines. In my previous remarks, I talked about more than 2,200 projects of design wind. actually out of which only about 20% are currently mass production. So there are still a lot of upside, not just this year, in the next few years. And so for last year, our automotive TDI already accounted for about between, for about 17% of our automotive sales. Very much industry average is single digit. So we already 17%. And we expect by year 2025 or 2026, this number will be more than 40%. So that explains our confidence, that demonstrates our confidence that automotive CDTI We'll continue to enjoy very good growth going forward, not just this year, but also next few years. And on top of that, there are a few things that are very exciting, equally exciting. In our prepared remarks, we talked about the timing controller with the global dimming feature. We are the clear industry leader or arguably the only company providing the solution right now in the marketplace. We are getting very good project wins across the board with customers starting from premium models and now certain customers even thinking about making it more into a mainstream model. So I think this year you'll be, again, very high double digit growth. and strong growth for the next few years as well. And LTDI, large display, touch and drive-wise integration. Likewise, we talk about our early-mover advantage and CS demo and second quarter this year commencement of production ahead of the industry again, and this will be a long-term growth engine as well and Finally All that all that were in our view will continue to be a premium niche market for automotive but we are we already have a few customers and putting our product into mass production. We are the 986 collaborating with certain leading customers for all their players. And so I think this is long-term looking good as well. So I think with automotive business, I think our overall market share is set to further growth from the existing already very high level of close to 40%. And business visibility is among the strongest of all sectors. So this, I think, will continue to represent our single biggest revenue contributor over the years. As for... Last display, I think our view for the whole year is going to enjoy the growth. And Q1 versus Q4 to us is . And we have seen TV market stabilizing, price rebounding, and all indications. are basically saying, telling us that the TV market, especially the high end point-to-point interface, 4K TVs, I think where we have a good presence directly in partnership with leading brand and customers. I think starting from second quarter and through the second half, this is set to enjoyable growth. Monitor and notebook prospects are more questionable. I'm saying they do, we do have limited visibility. Although we are starting to hear from end customers, leading end customers, that there's a good likelihood they are, they are the stocking process will be coming to a conclusion probably towards the end of second quarter with hopefully the third quarter and going forward slowly and gradually picking up their restocking process. But again, I think we are watching the market closely, especially for monitor and high monitor, where we draw a very good market position. But I have to say, the business prospect is not very good for the time being, the visibility. And, Michael or Ed, we believe, we haven't talked about this in public and in our prepared remarks a lot, but we actually doing a lot of work for micro-LED. But in short, we are a lot more focused on ultra-large display micro-LED, where we are developing very comprehensive solutions covering display drivers, timing controller, PMIC, and others for certain strategic partners. And also with various leading panel makers, we are working on For example, ASIC, timing controller designs, etc. But in the next year or two, this remains a very small niche market. It's an emerging market only, and that is why, in the interest of time, we have decided not to talk about it too much. Our view on very small displays, for example, AR, VR, related to micro-LED application, our view is a lot more negative. For a lot of technical reasons, that is our view. So we are putting a lot less resources into them, although there are inquiries from our customers for development, but we are a lot more hesitant and conservative in that regard. So for micro-LED, our focus will be in ultra-large displays And surely in the next few quarters, we will give people a lot more updates as our developments unfold into a more mature stage. But we are not very much into a small size ARV kind of microarray because we are not too keen about such technologies prospects.
spk00: Awesome. Okay. Thank you.
spk04: Thank you for your answer.
spk05: Okay. Thank you, Jerry.
spk00: As a reminder, to ask a question, please press star 11 on your telephone. Please stand by for our next question. Our next question comes from Jason Singh with CLSA. Your line is now open.
spk03: Hello. Can you hear me?
spk05: Yes.
spk03: Thank you for taking my question. My first question is, can you give us some details on your pricing trend in coming quarters? Are we planning to lower the maybe waiver price or packaging price in coming quarters or in Q1? I mean, maybe for your non-LTA shipments.
spk05: Thank you. Whether it's LTA or non-LTA, I think our foundry partners have made it rather public that they are not about to, in any meaningful way, lower their leasing price this year. And I think the reason is quite simple. They have seen high inventory levels across the board which they are customers meaning design houses so you know by lowering the price they are unlikely to stimulate the demand so why bother so whether it's lta regulated price or non-lda finding price we are not anticipating uh the listed price from Foundry to go down in any meaningful way this year. However, when it comes to good new orders, I think their doors are always open for specific deal by deal, case by case negotiations. That is the first point about on the supply side. On the demand side, there are, I would say, three points I want to mention. One, there are indeed overall price pressure upon us because the economy, the overall economy, the macro factor is just very bearish. and uh we have all seen our panel customers are losing money right in a in a rather meaningful way so i think they are under a lot of cost pressure as well so such pressure will to some extent be transferred to us and certainly i mean we will not uh you know uh agree to all their price demands and there will be a lot of negotiations but uh You know, there are some indeed, some price pressure. That is my first point. And my second point is the products with excess inventory. I'm talking about mainly smartphone TDI, followed by tablet TDI. you know, primarily in these two areas where across the board we are seeing our peers having certainly pretty meaningful access inventory. So, and the demand is, the demand visibility is not positive either, right? So, there will be price competition in order to offload everybody's inventory level. So that is certainly a price pressure. And we are taking a similar position, right? And not to mention, you know, the inventory will prepare when our costs were at its peak. So the gross margin over here certainly are not looking pretty in the foreseeable future. So all these have been factored in to our guidance or our prospect for the whole year. So that is the second question. And however, there are other areas where the pricing environment is a lot more healthy. For example, our automotive sector, I talked about the demand and our revenue declined over the last few quarters, but even during those quarters, the price erosion, the extent of price erosion was nothing to compare with the same for smartphone and tablet. Smartphone automotive has been a lot more stable. And And I think we are seeing the same throughout this year, the rest of this year, as we anticipate, as I said earlier, good rebound starting from the second quarter and certainly second half versus the first half. And TDDI certainly, we are seeing very strong demand. So there are indeed still certain sectors where the pricing environment is relatively healthy. our unique timing controller, our Wi-Fi certainly is a unique product area, and some other things, air mode as well, more stable compared to... So I would say last year we suffered quite a bit for large display driver because the market was just not very good, and Ditto for smartphone and tablet, TVDI. the bearish environment still lingers on for smartphone and tablet TTPI, where a large panel has been stabilized, I would say. Does that address your question, Jason?
spk03: Okay, thank you. And my second question is, you know, during this down cycle, especially demand weakness, do we also see, you know, market competition? I mean, maybe
spk05: uh market share pressures for our large display or small display size i think uh the the the the pressure comes primarily on last display first uh our strategy has been i cannot say there's no such pressure coming from competition but our strategy for PV has been to form a strong partnership directly with the leading end customer, with the leading end brand customer for their relatively high-end models. And certainly, even with that, we are still subject to certain fluctuations, but I think the competition is a lot less compared to the mainstream TV models with the general panel maker customers or mainstream monitor or notebook models. For monitor and notebook, what's interesting to note is that certain leading end customers, especially Americans, are facing the struggle in between the US and China, are hedging their bets by asking their supply chain to be away from China. And that certainly benefits us somehow, but certainly we are also working very hard with our Chinese ecosystem supplier. But this seems to be, although panel makers are still predominantly Chinese, but when it comes to component, especially IT components, there is still such a discussion. So I think our certainly will shift our focus from more towards leading non-China end customers. Although we are all dealing with mainly Chinese panel makers, but leading non-China end customers and less on Chinese end customers. I'm talking about large panel, whether it's TV, notebook or monitor. I'm talking about last panel. So I think there appears to be this trend, and actually, it's not coincidence, but we, even before the two governments struggle, you know, becomes apparent, before then, we have actually strategized ourselves as such by focusing, you know, facing shortage. So we need to make a choice. We need to fit on certain customers, you know, in a way against, you know, certain other customers. And we have been strategizing ourselves by, you know, forming partnerships with leading international end customers. So such strategy kind of plays well when it comes to, you know, this new development in between China and the US.
spk03: Got it. And my last question is I know that LTPS LCD now is improving on the automotive applications. So can we expect that this kind of migration can boost the adoption rate on the automotive TDDI?
spk05: Yes, indeed. As the, as the, the resolution becomes higher, and, you know, refresh rate becomes higher touch panel, you know, fancier tech panels, I think the, the, you know, higher and fancier panels, there's a trend towards low temp poly panels, as opposed to, I mean, the traditional former silicon panels does enjoy cost advantage. But when it comes to higher end, higher resolution, higher refresh rate panels, Northern Poly does enjoy advantage. And we are seeing many such projects together with our TDI solutions going hand in hand. Yes.
spk03: So I want to have a follow up question. Do we have the penetration rate of automotive TDDI? Do you have some kind of number?
spk05: For the overall industry, I don't have the number in hand. But I did mention earlier that for Himex alone, last year automotive TDDI accounting for about 17% of our total automotive sales. And certainly automotive TDI in terms of ASP is a bit higher than traditional DDIC. But in terms of revenue percentage, that gives you an idea. However, bear in mind our number is substantially higher than the industry average, which we believe is way below 10%.
spk03: Okay.
spk05: Yeah. So I would say I want such percentage number is probably kind of double the industry average. And certainly we expect this number to steadily increase. It's not going to be as dramatic as how we saw in smartphone and tablet, you know, in the last few years. But I mentioned for Himex ourselves, we expect the number to be up from around 70% last year to about 40% or above by 2025 or 2026. So that is certainly a major good news for us.
spk03: Got it. That's all of my questions. Thank you.
spk05: Thank you, Jason.
spk00: I show no further questions at this time. I would now like to turn the conference back to Jordan for closing remarks.
spk05: As a final note, Eric Lee, our Chief IRPR Officer, will maintain investor marketing activities and continue to attend investor conferences. We will announce the details as they come about. Thank you and have a nice day.
spk00: This concludes today's conference call. Thank you for participating. You may now disconnect.
spk06: The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 11. The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 1 1.
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