Himax Technologies, Inc.

Hello, ladies and gentlemen, and welcome to HIMAX Technologies Inc. Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during this session, you will need to press Start11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press Start11 again. As a reminder, this call is being recorded. I would now like to hand the conference over to your host, Mr. Mark Schwellenberg from MZ Group. Sir, you may begin.

Thank you. Welcome, everyone, to the HIMAC's third 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 have allocated time for a question and a question and answer 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 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 risk factors can be found in the company's SEC filings, Form 20F. for the year ended December 31, 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 is 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, and thank you, everyone, for joining us. My name is Eric Lee, Chief IRPR Officer at HIMAX. On today's call, I will first review the HIMAX consolidated financial performance for the third quarter of 2023, followed by our fourth 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 IFIS basis. We are pleased to report that HMAC third quarter revenues and the profit both exceeded our guidance, while gross margin came in at the upper end of the guidance range issued on August 10, 2023. The better than expected results are attributable to the resilience of our core business in the face of macroeconomic challenges. Third quarter revenues registered $238.5 million, an increase of 1.5% sequentially and up 11.6% on a year-over-year basis, exceeding the guidance range of a 7% decline to flat sequentially. This can be credited to positive order momentum across all business segments. Growth margin came in at 31.4%, a substantial increase from 21.7% of last quarter and at the upper end of our guidance range of 30.5% to 32%. The Q3 growth margin improvement reflected the absence of the one-time expense incurred in the second quarter related to the strategic termination of certain high-cost foundry capacity agreements, in addition to a favorable product mix, primarily drive-driven by the remarkable performance of our automotive product line, which maintains a higher margin profile than corporate average. Q3 profit per diluted ABS was $0.064. exceeding the guidance range of 1.5 cents to 6 cents. Revenue from large display drivers came in at $43.7 million, a decrease of 3.7% sequentially but up 5.9% year over year. TVIC sales declined as expected. as customers already replenished their inventory in previous quarters and suspended further pull-ins. Monitor and Noble IC sales were up single digit and a nice double digit respectively in the third quarter, predominantly driven by rush order from key customers. Large panel driver IC sales accounted for 18.3% of total revenues for this quarter compared to 19.3% last quarter and a year ago. Moving on to our small and medium-sized display driver segment, revenue was $161.1 million, an increase of 7.2% sequentially and up 13.9%. compared to same period last year, surpassing the guidance range due to better than expected sales performance, particularly in automotive sector and the TDDI product. Q3 automotive driver sales saw a decent double-digit sequential increase thanks to a strong uptick in both TDDI and the traditional DDI-C as clients worldwide resumed order replenishment. Smartphone and tablet driver sales, on the other hand, decreased double-digit and mid-teen sequentially, reflecting continued soft market demand. In the third quarter, the automotive business remained our largest revenue contributor, accounting for nearly 45% of total sales. One notable highlight during the quarter was our commencement of the world's first mass production of LTDI. This further demonstrates our leadership position in the lucrative automotive display battlefield. Jordan will elaborate in a few minutes. Small and medium-sized driver IC segments accounted for 67.6% of total sales for this quarter. compared to 63.9% in previous quarter and 66.2% a year ago. Third quarter non-driver sales also exceeded guidance with revenue of $33.7 million, down 14.4% from a quarter ago, but up 9% compared to same period last year. The better than expected performance was a result of higher shipment of WLO and CMOS image sensor. T-Con business represented over 8% of our total sales in the third quarter, yet experienced a low teen sequential decline, hampered by decreased demand for both large display panels and AMOLED display for tablet. On a positive note, We continue to solidify our leadership in automotive TECOM market with local deeming technology adoption rising rapidly by leading panel makers, tier ones, and the car makers across the board. With numerous project awards already in hand, we expect a strong growth trajectory for automotive TECOM in next few years. Non-driver products accounted for 14.1% of total revenues as compared to 16.8% in the previous quarter and 14.5% a year ago. Third quarter operating expenses were $63.7 million, an increase of 19.8% from the previous quarter but down 12.5% from a year ago. As a reminder, We grant annual bonuses to employees at the end of September each year, including ISU and cash awards. Our 2023 annual bonus compensation of $10.4 million was in line with guidance, out of which $9.7 million, or 4.4 cents per diluted ABS, was immediately adopted and expensed in the third quarter. In comparison, bonuses for 2022 and 2021 were $39.6 million and $74.7 million respectively, of which $18.5 million and $24.8 million were invested and expensed immediately. The changes in Q3 operating expenses were mainly associated with the way we expense the employee annual bonus grant based on IFRS accounting. To clarify, the Q3 bonus expense includes two portions. First, as mentioned above, $9.7 million for the immediately lasted and recognized portion of the current year bonus grant. That is based on the expected profit for the full year. Second, $6.2 million for the amortized tranches of the PI year's bonuses. As a reference, the amortized expense of the PI year employee bonuses for full year 2023 would be as high as $21.8 million due to substantially high profits in 2021 and 2022. leading to a significantly increased bonus carryover amortization expense. This has caused the volatility in our IFRS figures for 2023. Why? For the annual bonus grant, HMAC has always followed a consistent compensation policy and the rules for employees. Amidst the prevailing macroeconomic headwinds, We are currently exercising strict budget and expense control, with four-year 2023 OPEX posed to decline compared to last year. Third quarter operating income was $11.1 million, or 4.6% of sales. compared to 1.8% of sales for the same period last year and minus 0.9% last quarter. The sequential increase was primarily a result of increased sales and the gross margin, partially offset by higher operating expenses in the third quarter. The year-over-year increase was primarily a result of lower operating expenses brought by lower annual bonus compensation, partially offset by lower gross margin compared to same period last year. Third quarter after-tax profit was $11.2 million, or 6.4 cents per diluted ADS, compared to $0.9 million, or 0.5 cents per diluted ADS last quarter, and $8.3 million, or 4.8 cents in the same period last year. Turning to the balance sheet, we had $155.4 million of cash, cash equivalents, and other financial assets as of September 30, 2023, compared to $2,027.9 million at the same time last year and $219.5 million a quarter ago. Third quarter cash flows were impacted primarily by two cash payouts, $83.7 million for annual dividend and $29.5 million for employee bonus. The employee bonus is comprised of $9.3 million for the immediately vested portion of this year's award and the $20.2 million for vested award granted over the last three years. Despite the substantial payout in Q3, we delivered strong positive operating cash flow of $16 million again due to the ongoing stocking process across major product lines with inventory experiencing a meaningful reduction compared to the past quarters. We had $42 million of long-term unsecured loans as of the end of the third quarter, of which $6 million was the current portion. Our quota and inventory as of September 30, 2023, were $259.6 million, markedly lower than $297.3 million last quarter. Accounts receivable at the end of September 2023 was $248.5 million, up from $239 million last quarter and down from $253.3 million a year ago. DSO was 95 days at the quarter end, as compared to 90 days last quarter and 74 days a year ago. Third quarter capital expenditures were $2.6 million versus $2.9 million last quarter and $3.4 million a year ago. The third quarter CapEx was mainly for our IC design business. As of September 30, 2023, HyMax has 174.7 million APS outstanding, little changed from last quarter. On a fully diluted basis, total number of ABS outstanding for the third quarter was 174.8 million. Now, turning to our fourth quarter 223 guidance, we expect fourth quarter revenues to decline 5% to 11% sequentially. Growth margin is expected to be around 30%, depending on the final product mix. The fourth quarter profit attributable to shareholders is estimated to be in the range of 9 to 13 cents per fully diluted ADS. I will now turn the call over to Jordan to discuss our Q4 outlook. Jordan, the floor is yours.