Good day, ladies and gentlemen and welcome to the Himax Technologies Second Quarter 2016 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. [Operator Instructions] As a reminder, this conference is being recorded. I would now turn the call over to your host, John Mattio. Please go ahead.

Thank you very much, operator. Welcome everyone to Himax’s second quarter 2016 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’ve allocated time for questions in a Q&A session. If you have not yet received a copy of today’s release, please call Lamnia International at 203-885-1058, or access the press release on financial portals, or download a copy from Himax’s website at himax.com.tw. Before we begin the formal comments, I would 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. Factors that could cause actual results to differ include, but are not limited to, general business and economic conditions, the state of the semiconductor industry, market acceptance and competitiveness of the driver and non-driver products developed by Himax, demand for end-use application products, the uncertainty of continued success in technological innovations, 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. Except for the company’s full year of 2015 financials, which were provided in the company’s 20-F filed with the SEC on April 13, 2016, the financial information included in this conference call is unaudited and consolidated, and prepared in accordance with U.S. GAAP 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 the company subjects its annual consolidated financial statements, and they 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. Now, 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 our earnings call on which we will detail results from the second quarter 2016 and provide our third quarter 2016 guidance and outlook. Our CFO Jackie Chang will give further specifics on our financial performance after my overview. We are pleased to begin by saying that our revenues, gross margin and EPS for the quarter were as pre-announced on July 5. For the second quarter, we reported net revenues of $201.1 million, with a gross margin of 26.1%, both reaching the high end of our guidance, while GAAP earnings per diluted ADS came in at 11.5 cents, exceeding our guidance. The second quarter revenues of $201.1 million represented an 11.5% sequential increase and 18.8% increase year-over-year. The sequential growth was due mostly to strong sales in small and medium sized driver IC, mainly increased orders, order flow from our Chinese smartphone customer base and their demands for higher resolution display drivers. Accelerating our AR related business from our leading US customer also contributed to the second quarter growth. Revenue from the large panel display drivers was $67.5 million, up 2.8% sequentially, and up 24.4% from a year ago. Large panel driver ICs accounted for 33.6% of our total revenues for the second quarter, compared to 36.4% in the last quarter and 32.1% a year ago. As opposed to original guidance of high-single-digit sequential growth, our large panel driver business grew just low-single digit due to a certain customer’s short-noticed adjustment of production plan for its monitor products. Without the last minute change, we could have achieved high-single-digit sequential growth that we guided. Despite the lower than expected sales mentioned above, our large panel products actually enjoyed close to 25% year-over-year growth, mainly thanks to strong demands from Chinese…

Thank you, Jordan. I will now provide additional details for our second quarter financial results. GAAP operating expenses were $30.6 million in the second quarter of 2016, down 4.4% from the preceding quarter and little changed from a year ago. GAAP operating margin for the second quarter of 2016 improved to 10.9% from 5.2% for the same period last year and 8.4% a quarter ago. The GAAP operating income increased 44.3% sequentially and 146.8% year-over-year. Second quarter non-GAAP operating income, which excludes share-based compensation and acquisition-related charges, was $22.4 million, up 42.8% sequentially and up 133.5% from the same quarter of 2015. Second quarter non-GAAP net income was $20.2 million, or 11.7 cents per diluted ADS, compared to $13.5 million last quarter and $9.3 million in the same period last year. Turning to our balance sheet, our cash, cash equivalents and marketable securities were $179.3 million as of the end of June 2016, compared to $164.5 million at the same time last year and $168 million a quarter ago. On top of the above cash position, restricted cash was $138 million at the end of the quarter, a decrease of $42.5 million from the preceding 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 June 30, 2016 were $186.7 million, little changed sequentially and year-over-year. Accounts receivable at the end of June 2016 were $187.9 million as compared to $182.3 million a year ago and $173 million last quarter. Days sales outstanding was 90 days at the end of June 2016, as compared to 95 days a year ago and 87 days at end of the last quarter. Net cash inflow from operating activities for the second quarter was $13.1 million as compared to an outflow of $13.8 million for the same period last year and an inflow of $21.5 million last quarter. Capital expenditures were $1.7 million in the second quarter of 2016 versus $2 million a year ago and $2.2 million last quarter. The capital expenditure in the second quarter consisted mainly of purchases of R&D related equipment. During the second quarter, we declared an annual cash dividend of 13 cents per ADS, totaling $22.3 million, which was paid out in early August. Our dividend is determined primarily by the prior year’s profitability. Our decision to pay out 89% of last year’s net profit demonstrates our continued support for our shareholder base and strong confidence in the outlook for our revenues and earnings growth in 2016 as well as in our long-term growth prospect. As of June 30, 2016, Himax had 171.9 million ADS outstanding, unchanged from last quarter. On a fully diluted basis, the total ADS outstanding are 172.4 million. I will now turn the floor back to Jordan.

Thank you, Jackie. The increasing momentum of our large panel driver IC sales will continue to come from China and the world’s accelerating 4K TV adoption. Our smartphone driver IC business has rebounded well this year, reflecting our leading position in Chinese smartphone market where our end brand customers are performing strongly, and better demand are stimulated by rising 4G adoption. Leveraging on our technology leader and early mover advantage in AMOLED driver and pure in-cell TDDI technology, we are well positioned to benefit from increasing adoption of AMOLED and pure in-cell displays. For non-driver products, the true highlight of the year will be LCOS microdisplay and WLO products, which are integral parts of the ecosystem for the booming AR sector. During the first three quarters of the year, LCOS and WLO combined will grow more than ten times through accelerating shipment to our existing AR customers. We are also making good progress in new territories such as IoT and machine vision with our CIS and WLO products, evidenced by more design-ins and engagements with leading consumer electronic brands and a leading international smartphone chipset maker. Overall, we are seeing strong momentum across all our major product lines and feel very good about the growth prospects of 2016 and beyond. With that, I will now provide our third quarter guidance, followed by a more detailed outlook. For the third quarter of 2016, we expect revenues to be up 5% to 10% sequentially. Gross margin is expected to be flat to slightly down sequentially, depending on our final product mix. GAAP earnings attributable to shareholders are expected to be in the range of 6 to 8 cents per diluted ADS based on $172.4 million outstanding ADSs. Non-GAAP earnings attributable to shareholders are expected to be in the range of 10 to…

Thank you. [Operator Instructions] Our first question comes from Anthony Stoss with Craig-Hallum. Your line is open.

Hi, Jordan and Jackie. On the $80 million to $100 million capacity expansion, what gives you the confidence in adding that additional capacity in lieu of the AR, it looks like it came up a little short in June. And then secondly, phenomenal growth on the smartphone side, what can you do to expand capacity in Q3 and beyond. Thanks.

The first question, we have been actually pushed by our customers, many customers, about the issue of capacity, regarding the LCOS and WLO. This certainly includes glasses for AR device and also the 3D scanning device that I just mentioned, the DOE collimator with infrared sensing. So both these areas -- actually major areas will require additional capacity. Now, we are having so many design-ins, design-wins. We saw many customers expected mass production timetable to be next year and the year after. So, I mean, if we don’t start now, I think it -- our reach is tremendous in terms of having spent so much time and money on R&D and having calculated so many top tier high quality customers and yet, don’t have the capacity ready for them. Without capacity, our design efforts and R&D really means nothing. So we actually have gone through very detailed plans and this plan has actually been with us for a very long time and now, we believe it is really handful for us to get started, because as I mentioned earlier, even if we start the planning now, and start to do the construction soon, the commencement of mass production of the new facility will only start about a year-and-a-half later. So we are actually, our concern is more on the situation where the capacity does not come along early enough rather than having been able to find sufficient demand to free up the capacity. And also another point I want to highlight is that for the LCOS and WLO, certain parts of the capacity can be added incrementally. So if you look at our investment plan I discussed earlier, we are pleased that we acquired a very large piece of land, which actually accounts for pretty significant portion of the $80…

And then it’s my follow-up Jackie, can you give us the dollar amount, the revenue and AR in the quarter? Thanks.

We’re actually not disclosing that but I think is now over close to about 10% for the quarter and certainly the business will accelerate throughout 2016 and beyond.

I just want to add, bear in mind, the real high quality AR classes are a separate area in the marketplace without very much shipments but even with such space and small volume, the AR revenue is already close to 10% of sales as Jackie just mentioned. This shows the potential, that is because our portion in the total bill of materials is rather significant and this further evidence the fact that this industry offers tremendous growth for Himax.

Our next question comes from Tristan Gerra with Baird. Your line is open.

Just a quick follow-up question on your non-driver business, would you be able to provide a – what your outlook from your revenue standpoint is for the non-driver business for the whole year?

For this year?

Correct, just for us to get a sense as to what we should expect in terms of year-over-year growth and whether there was any changes relative to prior guidances in that business?

We actually – we’re not really giving the full-year guidance, but I think the non-driver business overall for this year should grow probably over 30%, 35% to 40% year over year.

We expect growth to be much higher next year.

And then as a follow-up, if you could provide what the unit growth was your small, medium and also large panel business in Q2?

The volume growth...

One second place.

For the second quarter, large driver IC - shipments actually grew about close to 50%. While the small medium shipment grew about low single digit year-over-year.

Our next question comes from Tom Sepenzis with Northland Capital. Your line is open.

Jackie, I think for September you guided 13.5% tax rate what should we be expecting is that the rate going forward or does it bump back up next year?

Well, actually we said assuming change rate remain about the same, the tax ratio will be actually lower for next year because our LCOS and WLO division, are making little profit, they will probably contributing to a lot higher profit and that will sure offset the tax liability for the whole company as the subsidiary does have very high credit - tax credit, parent company was not able to utilize in the past years when the subsidiary was actually losing money and now that returns profitable this year and 2017 certainly is going to improve quite a lot more, I would expect the income tax rate to actually be lot lower next year.

And then, could you just talk a little bit Jordan may be about what the CMOS issues are?

CMOS image sensor?

Yes.

We haven't performed well this year in the first half I mean certainly and that was a manufacture why non-driver sector overall has not grown even more strongly. And I think one of the issues we face right now and in the past was the very intense competition in the smartphone sector. We did offer, we do, we sell to five megapixel, eight megapixel and 13 megapixel sensors into the smartphone market but then again we are a latecomer and as big as the market size is, the competition is very tense. So starting from a few quarters ago we made a strategic decision to turn our distant focus for smartphone to overall non-smartphone that includes primarily smart sensor, multimedia sensors and very importantly but for longer-term automotive sensors. We have actually very exciting progress in terms of interaction in our projects of automotive sensors but as you guys would appreciate. Automotive takes a very long time from development to mass production. So that is more of a long-term focus. Shorter term, multimedia is now a very strong segment for us. Devices such as drone, surveillance, home appliances and others, actually gaining very good traction each quarter. And also a very, very important decision we made is to define new products spec for potentially niche markets in IOT and other things. So two of the very significant examples we mentioned we actually announced sometime ago and we reiterated just now in my prepared remarks what is what we call our ultra-low power always on sensor. This sensor consumes a fraction of power consumption compared to ordinary ultra censors and then therefore can be lid up always and all the time that is why we call the always on sensor. We have good design activities already in into TV, refrigerator and…

Our next question comes from Jaeson Schmidt with Lake Street Capital. Your line is open.

First one just wondering on gross margin with a stepped down in Q3, I assume that’s driven by mix, is there anything else that’s contributing to that and how should we look at gross margin than going forward beyond Q3?

You are absolutely right driven by mix and really there is not much I can add further. Beyond Q3, if you talk about the short-term like Q4 then it certainly is again always an issue the product mix. And admittedly our price pressure on driver IC remains quite high. Our panel marker customers are working hard try to turn profitable right now. So, although the panel price or the overall display environment has been much improved from first half when they are actually making losses now they are all geared up trying to make a profit. So the pricing pressure remains high on our side. If the more favorable environment persists into Q4 and beyond which many observers believe will be the case, then believe in Q4 or going forward the next quarters our pricing pressure will probably be less but that’s certainly is not something I can be very, very certain about. Now if you look at longer term, like if I take just on top of my head say second half next year or even longer term then I will feel a lot more upbeat about our gross margin potential, which I think will be lifted by the margin sales of non-driver businesses in particular AR, VR and the niche market CIs I just described, all these issues related to AR, VR, LCOS and WLO, niche market CIs, all these areas I think will produce much better gross margin and certainly don’t forget on-sale touch and in sale touch for these new territories will offer much better gross margin.

And then turning to the LCOS WLO expansion plans, obviously this has been driven by what you’re seeing in your pipeline but just any LCOS WLO customers have exclusivity on a certain percentage of this expected expand?

No, other than the equipment they can sign, for obvious reason there were exclusive right for those equipments but other than that no. I mentioned earlier in my prepared remarks we have 30 plus customers probably [indiscernible] already but, we have very comprehensive design base across the players that you read every day from means just that for obvious confidential reasons which - but we are very comprehensive in the sectors customer coverage for the obvious reason we can offer exclusivity to anybody.

Our next question comes from Charlie Chan with Morgan Stanley. Your line is open.

So my first question is regarding your large panel driver ICPCs, it has been growing strongly over the past few quarters. So from your observation, have your customer can have inventory for large panel driver IC and do you think that this can continue to grow into next quarter?

Our customers in this area, large panel in particular, we operate with our customer on a hub basis, I mean we ship our ICs to their hubs and they withdraw the ICs just-in-time basis. So, really if there is so called “inventory” as such it’s reflected in our balance sheet rather than our customers. So that’s one point and then if you look at our balance sheet, our inventory level has remained healthy I would say nothing out of the extraordinary and if you look at, now I think another question so in the driver IC inventory, on the customer side, another issue is our customer’s panel inventory, I think the industry has been pretty healthy right now, the inventory, the growth of supply chain is quite lean and with other reported reduction of Korean panel makers in their panel they try to [indiscernible] which for them is more profitable. So, it has created a supply kind of tension across the industry, so that's why I think on the last panel inventory label I think the industry has remained pretty healthy right now.

And my next question is on your AR smartphone business because your customers are exciting, they have a strong commitment for your next technology investment but at the same time since some of product launch at the beginning of the year, so far we haven't seen a concrete demand over the sellthrough data. So what is the discount mentioned between customers plan and the real customer demand, so if you can share with us for example if you get some sellthrough data on your customer and why your customer can be so aggressive for future capacity, it will be very helpful.

Many of our customers which engage us design activities haven't even started shipment yet, I would say vast majority of customers haven't even started shipment yet. As far as the so-called connected concern, I think we have to appreciate that the AL device as of today is actually very difficult to manage with the display certainty in the very normal area in which I think as you all know we play a major role. So unlike a smartphone there are so many references, the industry is not so mature, AR device because of the issue, the reason you mentioned there are simply aren't that many products around in the marketplace and nobody can claim this product will be perfect or close to mature. There is really no reference, no good reference of which to design your device. So every single customers, big customers in particular have to move the device almost from scratch, right. So the designs likely actually take a long time and what we're seeing is also they are investing a lot which is still admittedly to the outside world and to creating software platform for us encouraging as developers or industrial corporation or media players or movie entertainment players to come along. So they are actually tremendous amount of activity going on under the water right now and our customers are seeing requests and demand from their customers and they will in turn come to us and say hey where's my capacity, I have been paying you the development fees and this is my effective timetable and where is my capacity, do we have sufficient capacity, we are getting so many of such enquiries these days like we still obliged to commit our capital into a major expansion.

Do you foresee any demand come comes from consumer markets or most of those demands are come from enterprise users or applications? Thanks.

Certainly the more viable players now focus on enterprise market first which I think is healthy and positive for the industry long-term because in the price market tends to grow slower and has smaller sized compared to consumer market. It does demonstrate the fact that AR device is much more than just gaming, it can be used for many, many applications. And also with enterprise kind of wholesale sales, right wholesale customers or customers are in better position to depart the device to improve the device to get direct feedbacks and to do co-development on applications with AR customers and get very useful feedbacks for the product category to continue to improve. So we actually are in total agreement with our customers that we should not try to attack the product too early to much prematurely to the consumer market, having said that though we do have quite a few customers having again obviously I cannot mention names and not let alone they are details. They are very seriously trying to get into consumer market, some of them are our existing AR customers, they are developing AR devices internally.

Our next question comes from Jerry Su with Credit Suisse. Your line is open.

The first question, I would like to ask about on the capacity expansion plan you mentioned, you have laid out on equivalent basis for LCOS and also for wafer level optics. Could you let us know what is the existing capacity now for LCOS based on 12-inch wafer equivalent and now so that [indiscernible]?

I think on average, our standard design because as we’ve indicated the capacity expansion is facing on 12-inch wafer and the 8-inch – 12-inch for LCOS and 8-inch for WLO but will cover different level of design, right but based on the standard design, our current capacity for LCOS is above anywhere from 200,000 to 300,000 ICs per month.

Let me do this way, our current equipment firstly on LCOS, the new capacity were in rough 12-inch wafer, the current capacity is 8-inch wafer, right. So the pro area is about 2.25 times difference. In our current LCOS capacity, our main equipment can accommodate the same 3,000 wafers, but again, it’s on age basis. However, for us to reach the full capacity of 3,000 average wafers we will need to debottleneck certain backend facilities plus how I describe the potential increase of capacity to cover demands for next year when our new capacity has not come online, but I made some remarks earlier about that. And I also mentioned that such increase capacity will not take up too much of additional capital expenditure because the main equipment has already been invested. Right now without debottlenecking our 8-inch wafer input capacity is only about half of the total capacity of 3,000. Forgive me for the complicated answer because the issue is rather complicated. So, right now is about $1.05 an inch, now with little investment debottlenecking, we will be able to do 3000 8-inch and the new capacity will be 3000 12-inch which implies one and two times the capacity even after the debottlenecking of these capacity. Okay, I hope that it is all clear on LCOS. Now on WLO, now the 8-inch class I mentioned in my prepared remarks we are talking about - we talked about - we talk about 6000 8-inch equivalent mother glass input, the reason we had the equivalent in our old days because in our - I cannot disclose too much detail because that involves proprietary technology but our current process involves 8-inch mother glass. In the future we should be able to cut from much bigger mother class and with the ability for our production life. So that's why we say the new capacity we say its’ 6000 8-inch equivalent. Now in our existing capacity, they are two portions, one is our investment and the other portion is customers consignment. I cannot comment too much on customer consignment on confidential reason but existing one, our own investment has less than half of this capacity right now.

So which it’s less than 3000 8-inch equivalent?

Wafers.

Next question in the guidance is provided by segment it seems like that large sizes going double-digit and the other two segments high single digit? I think based on revenue mix, this should suggest your Q3 revenue should be at very high end of your guidance or even should be higher, so I don't - could you help us understand why you guided 5% to 10% growth, I think you should be ending up like 9% or 10% QonQ?

I think we mentioned earlier in Q3 the smartphone which is our number one sector is going to be only flat and that is the main reason. And also we certainly always like to be in a bit of a conservative side. So I think as of today, when we look at our forecast, certainly you are right, we are - our forecast focused looks to be probably on a more towards the higher level guided range but again platform opportunity because of capacity constraints will grow this quarter.

And then last question for Jackie, what is the guidance for OpEx for Q3 and also for full-year?

For the full-year, I think what we expect around probably $138 million including our view of a lot higher levels than last year of probably around $8.1 million that will be charged this year. So actually if you take our non-GAAP operating expenses actually only increased around 1% year over year so we are continuing to monitor our operating expenses very, very closely.

[Operating Instructions] Our next question comes from Donnie Teng with Nomura Securities. Your line is open.

My first question is about your strong growth on large driver IC business, may I ask set for potential market share again, do you think it is related to Samsung shutdown it’s LCD panel production line, so that is why your China panel makers are also gaining market share?

Not directly, I mean, not directly, our China customers have a large capacity this year compared to last year, if fact the next two years they will continue to grow their capacity and I think that is the main reason. And also for 4K TV, 4K TV needs more drivers and 4K TV this year is expected to reach almost a quarter of the total core demand so that is very helpful for us. So I think that should be the main reason. And certainly because of Samsung's decision we are indeed seeing some Samsung sourcing more panels from China and that certainly benefit us as well.

And my second question is a follow-up on gross margin. So, as you mentioned above, it is mainly due to product mix as large driver IC carries a lower gross margin, but you also mentioned above the SP pricing pressure. So, if we compare larger driver IC with small driver IC which one will have a relatively larger pricing pressure on third quarter or in the coming quarters?

Large panel.

And my third question is related to your 80 million to 100 million investment for the LCOS and WLO. So since we already had a 20 million CapEx last year, so I'm wondering what is our CapEx planned this year and next year, so is the 20 million CapEx last year already included in 80 to 100 million investment you announced?

No. It was mainly for WLO and some cost equipment, and certainly they are our usual CapEx including our design tools and so on and so forth. But the answer is no, all this 80 to 100 million CapEx is new.

Could you tell us what kind of CapEx number for this year or next year, so we can see this total 80 to 100 million in the next one or two years.

It will not be very much in this year. This year we are primarily on planning and ordering and preparation. A big chunk of it will be in next year, next year will be the peak. We announced further details in due course and as of today, while we are still talking to our various construction vendors and equivalent vendors, I mean we feel it’s still a bit too premature to give a specific in terms of timetable for the CapEx. I can say for more certain that the bulk of it will be next year.

Got it.

I mentioned earlier we feel confident that this can be financed from our resources and bank facilities.

So could you tell us the CapEx number this year, so because…

The actual CapEx for 2016 was actually low over $10 million and then we spent a lot higher than that may be around $11 to $12 million this year. And as Jordan said most of the new capacity expansion CapEx will happen next year.

And I'm showing no further questions, I will now turn the call back over to Jordan Wu for closing remarks.

As a final note, Jackie Chang our CFO, she will maintain investor marketing activities and attend as usual investor conference in US and Asia, and we will announce the details as they come about, please contact our IR department and/or John Mattio if you're interested in speaking with the management. Thank you and have a nice day.

Thank you ladies and gentlemen, it does conclude today’s conference, you may all disconnect and everyone have a great day.