Himax Technologies, Inc.

Hello, ladies and gentlemen. Welcome to the High Max Technologies, Inc. Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Mark Schwallenberg from MZ Group. You may begin.

Thank you. Welcome everyone to the HIMAC second quarter 2023 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've allocated time for questions and a Q&A session. If you have not yet received a copy of today's results released, Please email HIMX at mzgroup.us, access the press release on financial portals, or download a copy from Hymax's website at www.hymax.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 factors can be found in the company's SEC filings form 20F for the year ended December 31st, 2022 in the section entitled risk factors as may be amended. Except for the company's full year of 2022 financials, which were provided in the company's 20F and filed with the SEC, On April 6, 2023, 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.

Thank you, Mark. Thank you, everyone, for joining us. My name is Eric Lee, Chief IRP Officer at Hymax. On today's call, I first review IMAX consolidated financial performance for the second quarter 2023, followed by our third quarter 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 an IFI basis. Challenging business conditions due to ongoing macro headwinds persisted during the second quarter, yet we continued to execute successfully with gross margin surpassing the guidance range, while both revenues and the EPS landed at the upper end of guidance range issued on May 11, 2023. Second quarter revenues registered $235 million a decrease of 3.8% sequentially, yet at the upper end of our guidance range. This was attributable to improved order momentum, particularly in the automotive DDIC, large display driver RIC, and the non-driver business. Gross margin came in at 21.7%, a decrease from 28.1% of last quarter, but above our guidance range of 20% to 21% due to a favorable product mix. As we previously reported, Q2 gross margin was impacted significantly by a one-time expense related to the strategic termination of certain high-cost foundry capacity agreements in addition to price erosion related to destocking. Q2 profit per diluted ADS was 0.5 cents at the upper end of the guidance range of minus 2.9 cents to 0.6 cents. Revenue from large display drivers came in at $45.4 million, a decrease of 14.3% sequentially, yet above our PI guidance. Monitor IC sales surpassed our PI guidance up single-digit sequentially, driven by our clients' proactive pull-forward in preparation for the Q2 sales festival and the recovery of gaming display. Notebook sales notably outperformed our guidance, thanks to a strong shipment to key customers. TBIC sales declined as expected, as customers suspended pull-ins having already replenished their inventory over prior two consecutive quarters. Large panel driver IC sales accounted for 19.3% of total revenues for the quarter, compared to 21.7% last quarter and 22% a year ago. Moving on to our small and media-sized display driver segment, revenue was $150.3 million, a slight decline of 2.9% sequentially. Smartphone and tablet driver sales increased mid-teens and single digits, respectively, in second quarter, as we saw a recovery in business momentum, particularly in TTDI products. Q2 automotive driver sales decreased single-digit sequentially, but outperformed our guidelines, guidance of low-teens decline as clients resumed all the replenishment for both traditional DDIC and the TDDI. Automotive driver business was still our largest revenue contributor with around 30% of total sales in the second quarter. We are particularly confident in our automotive TDDI growth potential backed by hundreds of design wings already secured, significantly ahead of our peers, and among these design wings, only a small portion has commenced mass production. With the design wing projects under our belt, we believe we can continue to grow our market share in automotive TDDI. In addition to our already dominant position in traditional DDICs, where we have a 40% global market share, small and medium sized driver IC segment accounted for 63.9% of total sales for the quarter, compared to 63.3% in previous quarter and 64.5% a year ago. Second quarter non-driver sales also exceeded guidance with revenue of $39.3 million, up 7.9% from a quarter ago. The better than expected sales performance was a result of higher shipment for TCAM and CMOS image sensor. Despite the slight sequential decline in TCAM sales in second quarter, it surpassed guidance of a low-teens decline bolstered by a better-than-expected shipment of monitor and automotive TCOM. TCOM business represented over 9% of our total sales in second quarter. Lastly, for WHO, notably during the quarter, we commenced the volume production to one leading North American customer for their new generation VR devices, to enable gesture control. Non-driver products accounted for 16.8% of total revenues as compared to 15% in the previous quarter and 13.5% a year ago. Our operating expenses for the second quarter were $53.2 million, an increase of 4.3% from the previous quarter and 1.2% from a year ago. The sequential increase was mainly a result of increased R&D expenses. Yet amidst the prevailing macroeconomic headwinds, we remain focused on strict cost controls. Our second quarter operating expenses include the amortized expenses for annual bonus rent made in five years of $6.4 million as compared to $6.5 million in previous quarter and $7.4 million a year ago. As a reminder, we grant annual bonuses to employees at the end of September each year, including RSU and the cash award. A portion of those bonuses is immediately vested and recognized in the third quarter with the remainder equally vested in three trenches on the first, second, and the third anniversaries of the grant date and recognized on a straight line basis over the vesting period of each trench. Second quarter after-tax profit was $0.9 million or 0.5 cents per diluted ADS compared to $14.9 million or 8.5 cents per diluted ADF last quarter. Turning to the balance sheet, we had $219.5 million of cash, cash equivalents, and other financial assets as of June 30, 2023, compared to $461.6 million at the same time last year, and $223.8 million a quarter ago. Second quarter operating cash inflow was approximately $1.7 million as compared to an inflow of $66.4 million in Q1, primarily due to $51 million income tax paid during Q2. an illustration of our continuous effort to deplete inventory for the past few quarters. We had $43.5 million of long-term unsecured loans as of the end of second quarter, of which $6 million was the current portion. During the third quarter, we have made a payment of $83.7 million for annual dividend to shareholders. Further, we expect to pay out a total of around $30 million for employee bonus awards, comprised of around $9.3 million for the immediately vested portion of this year's award, and the $21 million for vested awards granted over the last three years. Despite the substantial employee bonus payout, we still expect to generate positive operating cash flow in Q3 again due to the ongoing stocking process across major product lines. Our quarter end inventories as of June 30, 2023 $297.3 million, markedly lower than $335.2 million last quarter. Accounts receivables at the end of June 2023 was $239 million, down from $252.2 million last quarter and down from $371 million a year ago. DSO was 90 days at the quarter end. as compared to 93 days last quarter and a year ago. Second quarter capital expenditures were $2.9 million versus $2.8 million last quarter and $2.5 million a year ago. The second quarter CAPEX was mainly for our IC design business. As of June 30, 2023, HyMAS has 174.4 million ADS outstanding unchanged from last quarter. On a fully diluted basis, total number of ADS outstanding for the second quarter was 174.7 million. Now, turning to our third quarter 2022 guidance, I'm sorry, 2023 guidance, we expect third quarter revenues to be flat to decline 7% sequentially. Gross margin is expected to be around 30.5% to 32%, depending on the final product mix. The third quarter profit attributable to shareholders is estimated to be in the range of 1.5 to 6 cents per fully diluted ADS. As we have done historically, we will grant employees annual bonus, including RSUs and the cash awards on or around September 30 this year. The third quarter guidance for profit per diluted ADS has taken into account the expected 2023 annual bonuses, which subject to board approval is now assumed to be around $10.5 million. out of which $9.3 million, or 4.2 cents per diluted ADS, will be vested and expensed immediately on the grand day. As a reminder, the total annual bonus amount and the immediately vested portion are our current best estimate only, and the actual amount could vary materially, depends on, among other things. our Q for profit and the final board decision for the total bonus amount and the investing scheme. As is the case for previous year, we expect the annual bonus grant in 2023 to lead to higher third quarter operating expenses compared to other quarters of the year. In comparison, the annual bonus for 2022 and the 2021 were $39.6 million and $74.7 million, respectively, of which $18.5 million and $24.8 million lasted immediately. I will now turn the call over to Jordan to discuss our Q3 outlook. Jordan, the floor is yours. Thank you, Eric.