Himax Technologies, Inc. (HIMX) Q1 2014 Earnings Report, Transcript and Summary

Thank you, operator. Welcome everyone to Himax’s First Quarter 2014 Earnings Call. Joining us from the company are Mr. Jordan Wu, President and Chief Executive Officer, and Ms. Jackie Chang, Chief Financial Officer. After the Company’s prepared 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 call MZ Group at 212-301-7130, or access the press release on financial portals like Bloomberg, Yahoo or Google or you can download a copy from Himax’s website at www.himax.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. Factors that could cause actual results include, but are not limited to, general business and economic conditions and the state of the semiconductor industry; market acceptance and competitiveness of the non-driver and driver products developed by the Company; demand for end-use applications products; the uncertainty of continued success in technological innovations; and other operational and market challenges and other risks described from time to time in the Company’s SEC filings, including those risks identified in the section entitled Risk Factors in its Form 20-F for the year ended December 31, 2013 filed with the SEC as amended. Except for the Company’s full year of 2013 financials, which were provided on the Company’s 20-F, filed with the SEC on April 15, the financial information included in this conference call is unaudited and consolidated, and prepared in accordance with US GAAP. Such financial information is generated internally and has not yet been subjected to the same review and scrutiny, including internal auditing procedures and audit by independent auditors, to which the Company subjects its 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. At this time, I would like to turn the call over to Mr. Jordan Wu. Jordan, the floor is yours.

Thank you, John, and thank you everybody for being with us for today’s call. In today’s earnings call, in addition to reporting our performance in the first quarter, I will also highlight key milestones we achieved through the first four months of the year. I will then provide our outlook for the second quarter of 2014 and outline our product areas of focus of this year. Our CFO, Jackie Chang, will also provide additional details on our financial performance. Our 2014 first quarter revenues, gross margin, GAAP and non-G non-GAAP earnings per diluted ADS all met our guidance for the quarter. For the first quarter, we reported net revenues of $194.6 million with a gross margin of 24.7%. First quarter GAAP earnings per diluted ADS were $0.091 and non-GAAP earnings per diluted ADS were $0.094, both results falling at the top end of our guided range. As some of our longer term investors know, the first quarter has traditionally been the slow season due to the 10 less working days for Chinese New Year. As a result sequential revenues versus the fourth quarter were traditionally down, sometimes by double-digits. The fact that our revenues were flat with the fourth quarter of last year demonstrates our product and customer diversification strategies have been working We are gaining market share and for those also keeping track, we outperformed our competitors in the first quarter. Our first quarter revenues of $194.6 million represented a 10.8% increase from the first quarter of 2013 and a 0.3% sequential decrease from the fourth quarter of 2013. Revenues from large panel display drivers were $48.6 million, down 19.2% from a year ago and up 3.9% sequentially. Large panel driver IC accounted for 25% of our total revenues for the first quarter, compared to 34.2% a year ago…

Thank you, Jordan. I will now provide additional details for our first quarter financial results. Our GAAP operating expenses were $28.9 million in Q1 2014, up 9.4% from a year ago and down 2.4% from the previous quarter. Operating expenses increased from the previous year due to higher salary expenses for additional head count, annual pay raises and certain new product tape-outs during the quarter. GAAP operating income for the first quarter of 2014 was $19.1 million or 9.8% of sales, up 14% year-over-year and down 1.6% sequentially. Non-GAAP net income in the first quarter was $16.2 million, or $0.094 per diluted ADS, representing a growth of 8% year-over-year and a slight decline of 2.4% sequentially. Non-GAAP EPS per diluted ADS grew 7.6% from the same period last year and declined 2.4% over the previous quarter. Our cash, cash equivalents and marketable securities were $139.7 million at the end of March, down from $158.9 million at the same time last year and up from $128.1 million a quarter ago. On top of the above cash position, restricted cash was $108.3 million at the end of the quarter. The restricted cash is mainly used to guarantee the company’s short term loan for the same amount. We continue to maintain a strong balance sheet, and we remind investors that we remain a debt-free company. Inventories as of March 31, 2014 were $172.3 million, up from $138.3 million a year ago and down from $177.4 million at December 31, 2013. The lower inventory sequentially was a result of increased shipment in the quarter. We expect the inventory level to continue to decline by the end of the second quarter. Accounts receivable at the end of March 2014 were $204.5 million as compared to $189.9 million a year ago and $227 million last quarter. Days sales outstanding was 95 days at end of March, 2014, as compared to 97 days a year ago and 95 days at end of the last quarter. Net cash inflow from operating activities for the first quarter was $9.3 million as compared to cash inflow of $29.4 million for the first quarter of 2013 and cash outflow of $3.1 million for the fourth quarter of 2013. The decline year-over-year was mainly due to higher account receivables as a result of higher sales this quarter. The sequential increase was mainly the reflection of lower inventory at the end of this quarter. Capital expenditures were $2.7 million in the first quarter versus $4.7 million a year ago and $3.9 million last quarter. The capital expenditure in the first quarter consisted mainly of purchases of certain equipment for our R&D in-house testers and LCOS and MEMS product lines. As of March 31, 2014, Himax had 170.5 million ADSs outstanding, unchanged from the last quarter. On a fully diluted basis, the total number of ADS outstanding is 172.2 million shares. I will now turn the floor back to Jordan.

Thank you, Jackie. While pleased with our first quarter results, just like our investors, we are constantly looking ahead to future quarters. On April 15, we preannounced our revenues and also provided insight to a short-term inventory correction with one of our end customers in Korea. As much has been questioned about this, let me try to go on record and say that we constantly monitor the inventory position of ourselves, our customers and their demand forecasts, which are updated to us on a weekly basis under normal circumstances and more frequently when there are major changes. Our current demand forecast is made available to us in an agreed timeframe, it is our duty to deliver the goods on time. However, when there are significant downward adjustments, while we pride ourselves for being able to react swiftly, there is inevitably a short-term excess inventory issue to address. Over the last month, we did experience some rare and rather significant reductions of forecast from one of our major end-customers. While the customer has indicated that they will work with us to clear the excess inventory eventually, this has led to a significant impact on our second quarter results and brought down our Q2 sales growth by way over 10%. However, let me emphasize that we have not lost any customer in Korea, or anywhere, for that matter. As a semi company, we are not immune to customer’s forecast adjustments which can work in or against our favor. We believe this is a normal occurrence in the semi industry, which should not affect our long-term valuation. We remain hyper conservative to this reality and have successfully implemented a multi-year plan to diversify our products and customer base for this very reason. In some technology and semi companies, not getting an order could…

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Thank you. Our first question comes from the line of Suji De Silva of Topeka. Please proceed with your question. Suji De Silva – Topeka Capital Markets: Hi, Jordan. Hi, Jackie. First question is on the large Korean customer. What’s your visibility into the inventory that are being worked down into the third and fourth quarters?

Well, the customer does provide us with pretty long-term forecast. However, the longer term it goes, the more occupancy it is for obvious reasons. And what we can see right now is, as I said earlier, only rather recently they have reduced repeatedly, almost about 3 basis their forecast dramatically. And we believe certainly we had a lot of discussions with them and we see that they’re creating inventory position right now and that lead to a rather significant impact to us because the effect on creating their own inventory position means we are very at level way below their current shipment. And certainly we are waiting for their inventory position to be cleared and we know they have to be looking at the asset strategy right now. They are reviewing their market strategy. So I’m afraid I cannot comment on the long-term visibility. How we can assure you is that they show us in total will be clear with us and (indiscernible) is not a full vendor to them and we have continued a good relationship with them. I mean we know this is certainly amount of the reader in the software market and their market position is starting to go away. So I think this is the certain setback of them and being their longer vendor I think we just have to live with the short-term fluctuations. Suji De Silva – Topeka Capital Markets: Okay, thanks, Jordan, appreciate the color you can give there. And then my follow-up question is on gross margins. How should we think about the puts and takes of gross margin as we look into the second half 2014?

Second half, we believe, gross margin, it’s safe to go up compared to first half. I think for large panel, the 4K TV is slightly to account for high percentage of sales compared to the first half and second half and that certainly impacts a much higher rigid area. And so, as a result, I think the product is scheduled as most stable product and this is slightly to lift the gross margin for large panel. And for small panel, I think starting from Q3, we are looking to have a higher percentage of sales coming from high end dilution products such as HD and full HD, and, again, that sales is likely to leave our gross margin, both small panel. And so, non-driver products, our number one signal right now is CMOS image sensor. I said earlier in my prepared remarks that unfortunately in Q1 and Q2, we are suffering from low margin because of the reason I just mentioned. We are basically saving older generation products with higher costs. We and the customers are working very hard to try to replace their order generation with the U.S. So all that I have because that is certainly going to our gross margin and so four months, and third month, our major contributors to our (indiscernible) timing can stay well, ASIC services all these offset to enjoy second half on first half and they are already for the gross margin compared to our corporate average. So we are quite volatile with very necessities. We will not be able to have much in for gross margin in the second half. Suji De Silva – Topeka Capital Markets: Okay great. So I appreciate the color.

Thank you.

Our next question is from the line of (indiscernible). State your question.

Hi, thank you for taking my question. I’m just curious with the guidance that you’ve given for the June quarter would suggest with large panels you would see growth in non-driver, you would see double-digit growth, small and to mid display drivers would be flat to slightly down, it implies actual top line growth for the second quarter. So I’m just wondering where the disconnect is with the driving so far revenue.

Okay, great. Thank you. And then I was just wondering if you could give us any kind of color in terms of timing for LCOS on when you expect that to hit the model in a meaningful way, is that still expected in the second half of this year or is that now 2016 event?

Again, we cannot be too specific on all these because this will be seen – I mean given the customer conversation right now, will be seen if us giving some guidance for customers. Having said that, I think, it is fair to say that looking at contribution wise compares well our company’s overall revenue level, something we have already managed. So this year the contribution is fully on lightly to be significant. Depending on the next year, we do expect hopefully ship on its full handful customers while they’re just all major customers and certainly hopefully, if this goes well, I mean there will be other major events, hopefully probably shipments sometime in next year, but again even having very moderate as we are talking to customers. We tried to stop the commercialization of a very, very new product concept as we can all see from all the various pricing we closed regarding two of us, there are certainly positive and yes there are certainly a lot of negative comments about it. So we believe the customers and I think the industry up there try to learn about it. What we do know that is that, we’ve talked to many of our customers including some very big fans. Still working very hard, trying to create a good product with good apps and to the effect I think this is still new and that it involves a lot of product definition one of the customers we’ve dealt with much reference to speak of. Development. How long the development is going to take indeed a much bigger has a lot more high degree of uncertainty compared to our other spend product such as (indiscernible). So I’m afraid. I make all these comments I always have to have a qualified favor if you like. However, what we can see is that some of the customers including medium terms are created some develop should we might always if you get to free and I would also say that they are certainly committed to those product concept. You know by the effect of the amount of manpower and capacity they’re putting into this. So we remain very positive of all this, I think we are likely be the (indiscernible) work hard with our customer and then wait patient to probably to have them.

Great, thank you very much.

Thank you.

(Operator Instructions) Our next question is from the line of Jay Srivatsa with Chardan Capital. Please go ahead with your question. Jay Srivatsa – Chardan Capital Markets LLC: Yes, thanks for taking my question. Jordan, in terms of the Korean customer, what’s your read in terms of their position in the market related to the white-box manufacturers? Are you concerned that the inventory buildup could be a reflection of market share loss or is it just product transition timing?

So I’m sure they have to face their inventory plan on some sort of historical shipments right, so that kind of explains why they have to product to fairly come we think for these right now. So I’m sure they have to face their inventory plan on some sort of historical shipments right, so that kind of explains why they have to product to fairly come we think for these right now. Jay Srivatsa – Chardan Capital Markets LLC: All right in terms of the LCOS capacity and fab, given that you think this year could be slightly muted, are you holding back on the capacity increase and what is your current capacity today and what do you hope to be by the end of the year as you look into 2015?

We are holding it up for the rest of the year. I think it is pretty safe to say that. As for Mattio’s plan we are in intense discussion with multiple companies right now. The truth is that people are adding high however this is a new product handset and seeing the five years experience people are also on the one hand, on the other hand it will be converted above this and signal the reality because if we sit on the peak of HD value that’s going to higher our costs, therefore our customer costs. So it is fair to say that we are very, very careful about this and we are in constant and pretty regular close discussion with customers right now. It is relative, I like this opportunities extend our capacity in institution. Jay Srivatsa – Chardan Capital Markets LLC: Thank you.

Thank Jay.

Next question comes from the line of Daniel Heyler of Bank of America. Please proceed with your question. Daniel Heyler – Bank of America Merrill Lynch: Hi, good evening. Thanks for taking my question. I had a couple of questions, Jordan and Jackie. Excluding the crane costumer on the small, the driver ICs, I was wondering what the growth rate for the second and third quarter would look like excluding their decline?

I am afraid we cannot go so specific at all., it’s a single customer’s business. All I can say is sequentially in Q1 we enjoyed pretty significant double-digit growth in Q4 last year, and yet in Q2, the decline is probably beyond your imagination, it is very, very percentage wise, very, very big company. I’m sorry, I really cannot go specifics. Daniel Heyler – Bank of America Merrill Lynch: Sure. But is your China related business, is that growing single-digit or double-digit for second quarter?

Double-digit China. This the Korean customer, they reached up slow, okay put it on record try to create this. We are talking about – customer right, so we don’t ship directly to them. We are shipping our ICs in directly to them through some final fix panel markers, which the ICs from Himax is consigned ideal customer, but and we know how this a customer demanding file because firstly they correspond directly with us. This is unusual because many of our end customers don’t actually provide their forecast directly to us. They only provide total to panel makers. By this case because of our very, very significant position, close to very, very close to sales position for them. Then to next year we are all in sync with our suppliers i.e. panel makers. Like so and therefore we have a very accurate number as to effect to how these ICs are shipped through F&Y and the panel makers to these end-customers. So as a result we can actually do the math and as I will tell you later the goal each quarter and as I said earlier the Q2 decline is way beyond your imagination. So we do start having said that, as I say they’re not going to call away, they are strong, I think they will come back and so our business hopefully will pickup from there again, but so we can also for the same reason we can just screw that business and look at them in China. And for this reason I can also tell you about the our China business is now growing double-digit. Daniel Heyler – Bank of America Merrill Lynch: I guess that was trying to get my hands around is, what your market share in China if Samsung for instance or the Korean players are losing share in China to local players. Shouldn’t the China business for you for the other players be a lot stronger and shouldn’t that offset the weakness from your Korean player?

No, because of the significance of the big decline from the Korean player, so conceptually you are largely 9%, but you have to look at the magnitude of the decline. So we admit that the Korean main customers demand in Q1 at this peak accounted for a very, rather significant I would say, 40% maybe 40% plus of our smartphone sales. And Q1 it’s high market share globally, so if that would be in a way of although you saw that the value, look at their position in the global market. So if you take that into account then you probably as high as you look. So having said that our China business again through many panel makers they reach setup every Chinese end-customer. And our growth in Q2 remained double-digit and we are looking to again a pretty even growth in Q3 as of today. Daniel Heyler – Bank of America Merrill Lynch: Okay, great thanks. And I will squeeze in my second question, and then I will get back in line. So in the past you guys talked – you gave us some metrics, some of the things related to our costs, I think you’ve talked about maybe product, number of designs and number of project I think last time. So is there kind of – could you share some updates on the disengagements in projects, if there has been any change there?

Other projects related to LCOS? Daniel Heyler – Bank of America Merrill Lynch: Yes, I think last quarter, you said I just don’t know how many, but I think you talked about the number of kind of key number of OEMs that you’re working with and the number of projects.

Actually at LCOS, we are looking primarily the same customers. And many of them are leading brands across Asia, China and U.S. Some of them are IT companies and some others are Ethernet companies. And I would say some of them are super aggressive and super committed with hundreds of people dedicated to this project and some others and so this will be one extreme, and the other extreme would be people who employee with our assembles and took in with customers with that on the spec definition and movements and – took me they are behind in terms of projects. And I’ll tell you very busy right now working with all these customers, and then also what I will as discussed – HD have optical panel design and panel specification, for that we have to trigger the panel for that. So all I can say the process is still going, but it is nicely that's anybody with commercially a lot of product, we really see I would say even if it's fair statement. Daniel Heyler – Bank of America Merrill Lynch: Got it. Okay thank you.

Okay, thank you Chang.

Our next question is from the line of Anthony Stoss with Craig-Hallum. Please go ahead with your question. Anthony J. Stoss – Craig-Hallum Capital Group LLC: Two part questions. What your commentary related to 4G in China and handsets in the second half of the year, Jordan. I’d love to hear your view on the ASPs on the driver side of the business specifically within smartphones also Jackie, given your expectations of no major gross margin this year, help us understand your view on OpEx going forward for the remainder of the year thanks.

The ASP, we actually in the last earnings call we talked price competition in China in the smartphone segment. We see that trend that competition industry wise slowing down, certainly we are another price – but sometimes cause to kind of follow some of these prices, sometimes we don’t and sometimes we had to, so we actually proud to see that the sometimes competition to effective competition is not – so ASP wise I think Q3 from Q2 is slightly to go up because of the recent evaluation upgrade I mentioned earlier likely to account for higher percent of the total sales. And Jackie on OpEx

Yes, I think that our OpEx is projected to –

On CapEx – CapEx or OpEx? Anthony J. Stoss – Craig-Hallum Capital Group LLC: Operating expenses, thanks

OpEx is projected to be between $125 million to $135 million and with or without major LCOS launch. I think we will expect the OpEx to be about the same because we didn’t really foresee any incremental operating expense increase for the LCOS operation. Perfect because much of the ramp up cost already incurred prior to we launch a major product, so yes, so I would say that it's probably about $125 million to $135 million this year.

And I will just add to people favorably about this, our non-driver product is currently account for 14% or 18% as I mentioned earlier, this quarter is slightly to surpass 20% and we believe you will continue to out growth drivers in any possible future. And therefore we have to really continue to come into R&D of non driver product when it’s in the stage of picking up. And our R&D expenditure is which accountable up on with our OpEx. This is a driver, right now you are looking at anyway driver is a bit less than non-driver. And yes, non-driver is accounting for only 18% of total sales, last quarter. So we are hoping hopefully by the end of the year non-driver will achieve 25% and should mean, EBIT achieved by next – over the next few years, looks very interesting for us for non-driver. But for now and we actually said in our last few conference calls that we are planning to create our R&D expenses compared to last year, for this very reason. And provided the number, yeah. Anthony J. Stoss – Craig-Hallum Capital Group LLC: Thank you.

Thank you.

Our next question is from the line of Jerry Su of Credit Suisse. Please proceed with your question. Jerry Su – Credit Suisse AG: Hi, Jordon and Jackie. Two question from my side. First one is, Jordan, can you talk about your view on 4K TV, 2K TV right now. What’s the Siemens penetrating rate for Himax first half and also what’s going to be in second half? Second question is that, I noticed that your minority interest in first quarter, what you say the loss for minority interest declined dramatically. Is there a significant turnaround on your on several subsidiaries specific non driver – non-driver product lines. Can you talk about that as well? Thank you.

4K TV, I think globally the penetration is likely to – we actually getting more and more optimistic, compared to the full, and if you are asking us, I would say well above 1% or less. And then in the last earnings call I recall I come about the number will be 5% or 10% probably closer to 5%. And I think it is probably fair to say that it’s probably not getting close to the higher range of 5% to 10%, so this is penetration. So optimist of our customers even talking about 10% or more. So we are excited about this and as far as our global market share is concerned I think we are we see with the average in terms of our key shipments with our total TV shipments verus 4K TV. And I think, we believe our share on the 4K TV versus total TV or large panel business will continue to rise. And I think 4K TV i.e. the higher end TV has higher entry barrier technology wise. So I think we are in better position there, as a result. And also related to total IC for 4K TV coming and truly becoming very important, and with some very, very exciting project going with some of the top tier customers right now. So we are also excited about that. 4K TV for this reason as well. Your second question is about…

Minority interest. Yeah, Jerry the second question about minority interest declined quite a bit in the first quarter was mainly due to two of our four major subsidiaries, being Himax Media Solutions that make the ASIC services and also the Himax Analogic that makes the power and LED ICs.

Yes LED ICs

The LED ICs had turnaround and became profitable. So that reduces the minority interest that we will have to allocate to the subsidiaries on the wrong side. But they make money, we have to allocate the profit to them. So that’s really the reason why. So now leaves only the Himax display…

The LCOS company

Yes, LCOS company and also the Himax Imaging Technology that is the CMOS imaging sensor region that is still losing money. But we do expect one or both of them breaking even or be profitable this year. Jerry Su – Credit Suisse AG: Okay, thank you.

Thank you. Our next question is a follow-up from the line of Daniel Heyler, Bank of America. Please ask your question. Daniel A. Heyler – Bank of America Merrill Lynch: Well, thanks guys. We are pushing up against 9 O’clock. So I’m glad I can get this in. I wanted to ask about the – you’d mentioned some that you’re cleaning out your CMOS Image Sensor, older product inventory and you’re getting ready to launch your some new products. Could you elaborate on the products, you just mentioning eight megapixel. Is that a BSI product – BSI technology or is that going to start on a SSI. Just maybe elaborate on the new products that you’re launching in CIS and second half? Thanks.

The major BSI product we’re launching eight megapixel, which is really getting enjoying growing popularity design wise with customers. So that’s down slightly to be a real contributor in the second half, and as far as 2 mega and 5 megapixel is concerned our new generation products also at this time. Although together with some of our foundry partners, we do have pretty unique FSI design which enables our product to cutting to almost confined to be rather competitive. And later in the year we are going to launch around 1 megapixel BSI sensor for laptop and tablet, which is a full HD sensor. So that will likely be our second BSI product. Daniel A. Heyler – Bank of America Merrill Lynch: Okay. Thanks very much. Could you elaborate on the – so is the eight megapixel BSI, is that currently shipping in volume or is that a third quarter ramp?

No, it’s a third quarter thing, starting of third quarter. It’s going through design stage. Daniel A. Heyler – Bank of America Merrill Lynch: Got it. And is that on 12-inch wafer or is that going to be on 8-inch because I know capacity is pretty tight on 8-inch?

No, it’s 8-inch, but TSMC has – we will agree upon to capacity reservation with TSMC. So I think we all can. Daniel A. Heyler – Bank of America Merrill Lynch: Great. And then you’d mentioned surveillance within the CIS segment. Do you have SOC in that product or maybe give us some visibility on how you think that market is going to evolve and what products you have for surveillance?

We have seen surveillance in automotive for CMOS image sensor for the equivalent products because in terms of their performance requirements they are quite similar in nature. So when we design our product initially we tend to gather information, feedback seg wise from automotive and customers. And if an automotive design phase takes over, so with products being in place we almost try to promote it into surveillance market, which is primarily in China customer wise although the product sales are sold worldwide. And so that is really one thing and we are getting more and more excited about automotive market because relative rather than talking from the replacement market we actually start from branded market and we are talking about some of the people’s and premier leading brand names worldwide in both Japan and Europe and even in the U.S. so I think that is a strong indication that our technology is quite competitive. So if everything goes well I think the first shipments for first year automotive application will commence in, if not end of this year the early next year, and for that we also getting a lot new inquiries, some of them involving ASIC designs, ASIC sensor designs from our end customers. So we are excited about this because once you are in you are looking for a pretty decent period of time and the margin and the technologies are also quite attractive for us. And for surveillance market we work closely with a view IC makers. And, so they take our product package with a signal processing product still to surveillance market, which again albeit a more that is primarily in China and we are seeing the results there as well.

Thank you. At this time we’ve reached the end of our question-and-answer session. I’ll turn the floor back to management for closing comments.

Well, thank you very much for your time and we look forward to talking with you again in our next call in early August. And I’d just like to add a final note. Jackie, our CFO, will be on Non-Deal Road Show and also attending investor conferences in May and June and we are going to announce this as they come about. So, if you are interested you can contact our IR department and/or John Mattio if you are interested in meeting with him in person. So thank you again and have a nice day.

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.