Good day, ladies and gentlemen, and welcome to the Himax Technologies’ First Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, there will be a question-and-answer session and instructions will follow that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Greg Falesnik, Managing Director for MZ North America. Sir, you may begin.

Thank you, operator, and welcome everyone to Himax’s first quarter 2017 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 email greg.falesnik@mzgroup.us or access the press release on financial portals, or download a copy from Himax’s website at www.himax.com.tw. Before we begin the formal remarks, 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 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 to differ include, but are not limited to, general business and economic conditions, the state of the semiconductor industry, market acceptance and competitiveness of driver and non-driver products developed by Himax, demand for end-use application products, the uncertainty of continued success in technological innovations, as well as 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, 2016 filed with the SEC in April 2017. Except for the Company’s full year of 2016 financials, which were provided in the Company’s 20-F and filed with the SEC on April 11, 2017, 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 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 will now turn the call over to Mr. Wu. Jordan, the floor is yours.

Thank you, Greg. And thank you, everybody for being with us for our earnings call on which we will detail results from the first quarter 2017, as well as provide our second quarter 2017 guidance and outlook. Our CFO, Jackie Chang will then give further specifics on our financial performance after my overview. Our 2017 first quarter revenue, gross margin, GAAP earnings per diluted ADS all met our guidance for the quarter. For the first quarter, we reported net revenues of $455.2 million, with a gross margin of 23.1%. First quarter GAAP earnings per diluted ADS were $0.08. The first quarter revenues of $455.2 million represented a decrease of 23.7% sequentially and 13.9% year-over-year. I will go through the issues causing the revenue decline below. Revenue from large panel display drivers was $59.3 million, now 12.4% sequentially and down 9.8% from a year ago. Large panel driver ICs accounted for 38.2% of our total revenue for the first quarter, compared to 33.3% in the fourth quarter of last year and 36.4% a year ago. The decline was due to fewer working days in China and Taiwan and phase-out of certain customers’ old models. In addition, the scale 5.6 earthquake that struck Tainan in early February also somehow impacted some of the customers’ productions and therefore its driver IC shipment. In spite of the lukewarm sales, our engineering collaboration and design-in activities with large panel customers across China, Taiwan and Korea all remain robust. Such activities will lead to future rebound in sales momentum. Revenue for small and medium-sized drivers came in at $66.6 million, down 33.2% sequentially and down 16.1% from the same period last year. Driver ICs for small and medium-sized applications accounted for 42.9% of our total sales for the first quarter, as compared to 49% in the…

Thank you, Jordan. I will now provide additional details for our first quarter financial results. Our GAAP gross margin for the first quarter was 23.1%, up 400 basis points from 19.1% in the fourth quarter of 2016, and down 310 basis points from 26.2% for the same period last year. Our GAAP gross margin for the fourth quarter of 2016 was lower due to a one-time, non-cash inventory write-down totaling $12 million, on top of $2.7 million originally estimated for the quarter. Excluding the additional inventory write-down, our gross margin for the first quarter would have been down 190 basis points from 25% in the fourth quarter of 2016. The sequential and year-over-year decline was due to unfavorable product mix and margin decline in large panel driver ICs and non-driver product segments. Jordan just talked about our increased expenses earlier. GAAP operating expenses were $34.3 million in the first quarter of 2017, up 7.1% from the preceding quarter and up 7.3% from a year ago. The sequential increase was primarily the result of an increase in R&D expenses while the year-over-year increase was due to higher salary expenses. GAAP operating margin for the first quarter of 2017 was 1%, down from 8.4% for the same period last year and down from 3.4% in the previous quarter. The GAAP operating income decreased 77.1% sequentially and 89.6% year-over-year. The sequential and year-over-year decrease was a result of lower sales, lower gross margin and higher expenses in the quarter. First quarter non-GAAP operating income, which excludes share-based compensation and acquisition-related charges, was $2.1 million or 1.3% of sales, down from 8.7% for the same period last year and down from 3.6% a quarter ago. The non-GAAP operating income decreased 71.8% sequentially and 86.8% from the same quarter in 2016. Again, the sequential and…

Thank you, Jackie. The factors causing our slow first quarter will remain in the second quarter. However, looking ahead into the second half, we believe our overall financial performance will be resilient. We are positive on our Driver IC’s business outlook because of expected shipments for certain customers’ 4K TV models and TDDI products. Various areas of the non-driver IC businesses are also expected to contribute to the improvement of our overall financials from second half of the year. Before we detail the prospects for our 2017, we felt it is important to update the status of our CapEx plan and highlight our progress in 3D scanning technology which is a major reason why we impact on this rather aggressive CapEx plan. We believe 3D scanning is one of the most significant new applications for the next-generation smartphone. The view is echoed by many industry researchers. We are now seeing strong demand for 3D scanning products from multiple top name customers who are either collaborating with us or engaging us for advanced-stage discussion. Thanks to our absolute technology leadership. Our SLiM product line is a state-of-the-art total solution for 3D sensing and scanning based on structured light technology. We offer fully integrated structure light modules with vast majority of the key technologies inside also provided by ourselves. These technologies includes advanced optics utilizing our WLO technology, laser driver IC, high precision active alignment for the assembly of laser projector, high performance near-infrared CMOS image sensor and last but not least, an algorithm chip for 3D depth map generation. While we prefer to offer total solution, we can also provide aforementioned individual technologies separately to selected customers, so as to accommodate their specific needs. Of the above technologies, the two items requiring CAPEX for us are advanced optics, built using our…

Thank you [Operator Instructions] Our first question comes from Tom Sepenzis with Northland. You may begin.

Yes, hi, thanks for taking my question. I just wanted to touch on TDDI and when you think you are going to start to see meaningful revenue there? Is that going to be in the next – starting in this quarter or is that a second half of the year type event?

TDDI will start to bring in revenue contribution in Q3, meaning next quarter. But if you talk about more meaningful contribution, I would say, probably Q4. And, again, on the wafer size, this is our long-term growth engine. So, I think starting next year, this will be a major contributor for our – top on our sales.

Great, thank you. And similarly, with AMOLED, I think you said that, you are starting to sample in the current quarter. So when would you expect to see AMOLED DDI IC revenue?

It will be more of a 2018 to 2019 story depending very much on our customers’ progress. Now we’ve mentioned earlier, our AMOLED customers are now only in China and limited for 26 phase out AMOLED, in fact the AMOLED investments given the viewers plan was to pass loss for their TFT LCD capacity investments. So this how serious and how committed they are. However, I think AMOLED after all is a rather complicated technology. So, I think we are ready and our samples are ready and some of our samples are already nicely qualified by our customers, but it really depends very much on our customers’ bring up and when we will be ready to start like meaningful mass production and I think until it really happens, I think we cannot tell for sure, but we are very committed to supporting our customers to make that happen sooner rather than later.

Great, thank you. And then, given clearly the large investments that you are making in the 3D imaging area, can you talk about your degree of confidence in actual customer wins there. When can we expect to see revenue contribution from that area?

Very high. [Indiscernible]

I am sorry, I didn’t hear you.

I think, what’s very unique about us is that, all these technologies are home grown. This is very different against our – one or two of our major peers. So, we did mentioned in our prepared remarks that we prefer to offer total solution meaning if 3D sensing module which can be embedded in your cell phone and with signals talking to AP and thereby create a 3D type snap for apps. So that is our preferred approach. By doing that, we one needs to have a projector which is comprised of laser beam, which we all source. Right now, we are having partnership with in this 3D sensing area the biggest player in the world and also we don’t rule out the partnership with other people. There are actually plenty of laser players who all came from the older communication industry type growth. So, they have plenty of idle capacity sitting there and all get excited about the potential for 3D scanning. So there are actually a lot of people we can work with. And then, a very key component you see optics are typically in the form of DOE, a diffracted optical element and certain lenses. And that we are capable designing DOE upon customers’ request. They are specific requirements, they are specific intensive target applications and algorithms. So we can actually tailor made the design for that and we also do our in-house manufacturing with our major strong areas. We have a lot of past experience using our WLO technology to manufacture some of that lens for our smartphone cameras and AR devices for work types and other things. So we have a lot of mass production experience already in WLO and that is I think one of the reasons why many 3D scanning customers have come…

Great. Thank you very much.

Thank you, Tom.

Thank you. Our next question comes from Tristan Gerra with R.W. Baird. You may begin.

Hi, first question, could you talk about the ASP changes for your large and also small driver IC annual business sequentially?

Tristan, we are seeing the large driver ASP decreasing about 2.3% quarter-over-quarter and about double-digits year-over-year and for small medium, we are looking at about 5% price decrease quarter-over-quarter and about 2.5% year-over-year. Yes, both, we are recently seeing that stabilizing because the driver IC is moving to higher resolutions.

Great, that’s useful. And then, how many customers do you think are going to ship your TDDI solution this year? And what type of revenue should we expect from TDDI in the second half of this year?

I think there will be – I mean, multiple customers they are multiple design wins. However, how many of them, who were actually taking their products into the market within this year, I think I cannot tell for certain, maybe as we get into next quarter we will be able to offer more clarity. And I think total revenue maybe $20 million for us. Although, again, this is going to be early-stage revenue for us. So the degree also will be slightly higher, maybe much better than this and maybe misses slightly we will see.

Okay, and then on the 3D sensing solution where you are making large investments and it sounds like you have – you see good potential for customer diversification next year. Are there any other solutions out there that are not vertically integrated, meaning that, any smartphone – China smartphone we end up once to use 3D sensing, where obviously can they go except using a Himax solution given that some of the Tier-1 OEMs in smartphones have their own solution? I just wanted to kind of get a sense of the competitive landscape from an IT standpoint in 3D sensing?

I will be reluctant to comment specifically our potential customers although I – we feel very confident. We are the – we enjoy a very good leadership position right now. However, I thought I can comment on this is a type of technology that in theory can provide 3D sensing. Our technology, our focus technology is something called structure light and there is a second type of technology call ToF or time of flight and then there is a third type called stereoscopic, basically using the old camera. I think the industry is quickly catching a consensus that structured light is going to win – it’s going to be the eventual winner. From the overall perspective of performance causing power consumption and size. Now, if I compare structured light, we see – now all these technologies are not new. They are actually already applied but they are applied for industrial applications. Our contribution – our major contribution is to transform such technology into a solution suitable for smartphone and I don’t need to tell you the smartphone is the biggest market ever. So, this is a holy grid. So, none of them actually has fundamental patents because we are already in existence for quite a while, but they are being applying in industrial applications. Now, in comparison to TOS structured light offers much better, much higher resolution with the potential for even higher resolution, meaning we can offer a resolution roadmap similar to what you have seen over the last few years with your cameras, CMOS image sensors, starting from VGA, and 3 megapixels, 5 megapixels, now you are talking about 13 even 20 megapixels. People are hungry for resolution and once they have something. And we believe 3D sensing will be the fence. Now with TOS, because it’s limited by its pixel size. TOS pixel size is large and physic – in terms of physics it’s very, very difficult to shrink. So, structured light offers much better resolution today and much better resolution roadmap tomorrow. I think I that is the major advantage. Now with stereoscopic, the major problem is that, we cannot really operate properly without proper visible light, meaning when you don’t have visible light or you have very low light, then you probably need additional illumination to make it happen. But that is actually additional cost because you are already talking about two very expensive sensors and now you have additional illumination and that makes the whole thing rather costly and also calibration and assembly are triangular to have high precision alignment of the two lenses is very tricky. So, I think for these reasons, most people believe structured light will be the ultimate winner and that is why most people have come to us and they are already on day one basing on structured light technology.

That’s very useful. Thank you.

Thank you.

Thank you. Our next question comes from Jaeson Schmidt with Lake Street Capital. You may begin.

Hey guys. Thanks for taking my questions. I just want to start on operating expenses. I know they are going to be up significantly in Q2, but how should we think about OpEx ramping in the second half of this year?

I think, again, we mentioned in our prepared remarks, if you look at – if you only look at the increase of R&D expenses, meaning now against the fourth, the incremental about half actually comes from – in the second quarter actually comes from WLO. Now, this is hopefully, a one-off and it’s not going to continue into second half – or the future because, remember, I mentioned, actually starting with last quarter and repeated this quarter that we are trying to meet a urgent short-term demand, major demand for capacity from a certain customer for our WLO capacity and for that reason, we cannot even wait for new building to complete we have to retrofit our existing headquarters to make through for the equipment. But now, it’s everything has been in a rush. So, in Q1 and very much in Q2, here in Q2, that additional capacity has incurred lot of expenses for us. When before we started to rent, meaning we start to get revenue from our customers. So, that includes installation of equipment, bring equipment we have to do a lot of experiments to improve our process. We improved the product design. Lot of customer support activities as well, I mean, we even have to increase our analyst people, because we need to raise stock whereas to control the affirmation of the equipment, et cetera, et cetera. So, once we start to moving to mass production hopefully, a lot of such pre-run activities were diminished. I will not say you’ll build up with zero, but you will be much less – in the mean time, our mass production will bring revenue as opposed to Q2 wherein there is literally no revenue. Right, so that is the major hit. I am not saying WLO in the future we…

Okay, and then, just last one for me. I know you talked a lot about the 3D scanning opportunity. I know, it remains early, but can you help us understand kind of the size of the customer engagement pipeline at this point?

There are so many quite a few top names, but we have limited bandwidth, so we cannot cover everybody who have come to us, but we cover quite a few top names. And our goal for this year up to about first quarter or first half of next year is to lock down such top-tier customers. Some of them again request our total solution and some of them only needs individual technologies. But regard we are now dealing with almost exclusively only top names. So we do have quite a few of them. And our goal is to lock down such customers and really support them and fine tune our sales get our sales ready for the first phase of rent and if we can achieve that, then I think going forward, the future will look very, very interesting for us, because the top-tier hopefully will continue to be our customer for next-generation and second-tier customers will come to us because of experience. So I think, this is not a time to rest and that is we have to continue to commit our R&D expenses. It is very critical moment.

Okay, thanks a lot.

Thank you, Jaeson.

Thank you. [Operator Instructions] Our next question comes from Charlie Chan with Morgan Stanley. You may begin.

Hi, Jordan. Hi, Jackie. Thanks for your business update. So, for the 3D sensing, do you expect any revenue contribution in third quarter, because it seems like you run further capacity in 3Q. I am not sure you take a mid key smartphone product launch in this fall?

Kind of comment on that is, if I – still you’ll be too customer-specific. So, can’t comment on that.

Okay, okay, within your non-driver IC business outlook in the second half, what product lines that you think has the biggest upside? You mentioned several products like 3D sensing, touch controllers, CIS, cell phones, and that we should try to see get that momentum in the second half?

No, we believe CMOS in sensor, right now look very encouraging. We expect that to grow double-digit in the second quarter. While others may stay flat, because there are many product areas where the customer is experiencing the redesigning of the product.

Okay, okay, I see. So, again, so, for the structured light deal, components, what are the test order do you see…or WLO?

Your question was about the growth areas for second half and – you will see us and certainly also WLO out of our new and temporary investment which we mentioned will start bring new agreements product in two divisions in second half. So that is WLO also.

Okay, okay. Thanks. And my next question is regarding your recent announced acquisition with a emerging – so when will you incorporate that technology to your technology?

As far as we can tell, right now, but this is so new, our view may change. But as far as we can tell right now, our early type of market will be stuff like the home security – home like people count in or industrial people, people count industrial, commercial people counted, such applications. We just announced the investment which announcement will hopefully within a year’s time. These two fueled acquisitions. So we have started to opt for it as if this is one team rather than two. But it’s going to take some time for the integration of the two teams and also for the creation of our joint offering. But, we have done some road shows and we have attended some trade shows. The approach and the technology potential we offered the response from customers, primarily in – again in IOT home security, surveillance type of applications have been overwhelming. I will have few – if you ever ask this later, because this is really early stage. We only made the announcement about a month or two ago. So, we are going through a lot of team integration and product and technology integration. But in the mean time, we are talking to customers. We are trying to decide which horses to bet on first. But, I am sure we will be able to report more clarity and better progress update in due course.

Sure, sure. That’s fair enough. So, that – Jackie, if we may – can we get your full year financial projection on top-line gross margins? Do you have a full year financial projection that can you share with us?

We don’t actually provide annual projections, Charlie, I think, specifically we have emphasized a couple of product areas that we will see growth in the second half of the year and specifically in the fourth quarter and certainly, second half will be better than the first half. So let’s keep it that way, yes.

Okay, okay.

These things are new. So, I mean the degree of uncertainty is higher and – but, I mean, bear in mind, this is the year of investment for quite a few things which I believe we are pretty focused through.

Okay, okay, thank you.

Thank you, Charlie.

Thank you. Our next question comes from Donnie Teng with Nomura. You may begin.

Hi, CEO and CFO. My first question is regarding to the CapEx. So the CapEx this time your announcement is that, you are going to spend $80 million. But I remember, during the last earnings call, you mentioned that it’s including IC design business, the overall CapEx this year could be $80 million to $89 million. So, I am wondering why there is differences between this time and last time?

Actually, $80 million is for – is on top of our ongoing CapEx and maybe this year, CapEx is 10 plus million only. So if you add that on, I think it’s consistent with our previous announcement.

Okay, got it. Great, and my second question is regarding your TOE project, because in early days, there are rumors that you are facing some competition. So there is some ASP pressure, but as you mentioned that your product is quite unique, so, may I say, if there is really any ASP pressure that could be due to your inexperience to engaging with customer or maybe it is a very new product? So, the price may be adjusted from time-to-time?

I really can’t comment on rumors. If anything I would say, right now, I will not call it TOE, because, I will talk about WLO which in the case, it was new addition of capacity and we said you will bring up – bring in our revenue and profit contribution in the second half. But, WLO can make things in addition to TOE, net of TOE. And right now, I mean, our discussion with our customers are – I would say 99% on technology how to bring in up rather than price. So, I mean, I don’t know where the rumor comes from, but – and I can’t comment on that piece of rumor. But on the other hand, I would say, you are absolutely right in saying that it’s in so early stage. People should be focusing on technology rather than cost and that is indeed true.

Got it. And my last follow-up question is for – how do you think about the yield range of the WLO project right now? And do you still see this project to have a higher than corporate average gross margin?

Gross margin, definitely yes. You are right, it’s confidential, I cannot comment, but I would say, this is our strength because of the past experience we have worked with quite a few top-tier extremely demanding customers with some of them, we actually work together. We learned a few tricks from them as well how to further yield together. How to get the product manufacturing right, how to get the cost right. So, I would say, actually many people come to us because of exact – experience. As far as that is statistically how much we have achieved our yield, I really can’t comment. It’s top confidential for us.

Got it. But I guess, probably it is on schedule or it improve well.

Definitely.

Can I say that?

Yes.

Okay, got it. Thank you so much.

Thank you.

Thank you. Our next question comes from Jerry Su with Credit Suisse. You may begin.

Hi, Jordan and Jackie. My first question is on the WLO. I think you mentioned that you are targeting to ramp up mass production bump this quarter. Just wondering, could you give us a little bit more detail equipment installation and also qualification? What gives you the confidence that you can now ramp up for the quarter?

I mean, certainly, I mean there are customer demands, that’s why we have to rush in this CapEx and equipment bring up. So they are real customers and they are real requests and they are real timetables and I can only say that everything so far is going smoothly and is very much in line with our target timetable and our customers’ target timetable. But, this is so customer-specific. I really can’t comment on that. Once we achieve, once we pass the quarter, we are reporting the financial results, but at this stage, I really can’t say much beyond this. But it’s all been planned and we are going smoothly the timetable of the target. That’s all I can say.

Okay, but what will be the risk for this business, if it’s not ramped up in the quarter?

The reason is simple, whatever reason that we cannot – or our customer cannot take into mass production, I can’t see any right now, but this is –it’s not taking off, but we are focusing on bringing it up right now.

Okay. The next question on the driver IC side, I think you have mentioned that, or if you look at your Q1 outlook, Q2 guidance, drive IC business seems to be doing a little bit weaker than the industry of your peers. But you have mentioned that you have for the large and small medium size, probably you can have more of recovery from second half in 2018. So could you share a little bit about what gives you sort of confidence that the driver IC business will recover in the next – if it could happen in 2018?

I think, starting from the easier parts, the automotive sector, I think we remain sure and even in Q1 and Q2. So, it will continue to be strong. So, there is not much to talk about there. In large panel, as we mentioned, we were – our business in Q2 for large panel and even potentially in Q3, will be affected by certainties I envisage with our customers and we admit that, because this is business and I evolve certain engineering hiccups I would say. I cannot elaborate much more than that. But I think, the problem has been solved through cost being – and the most important thing is, our new design have won us a few major wins right now or the last month or two. We will see mass production starting from Q4. So, I think we have in our prepared remarks mentioned that Q3 for large panel is likely to remain weak because, again of such – designed in the past. But I think if you look at – if you look slightly longer in terms of rise, China is still expanding its capacity like big time, right, up to – I just did my math up to 2019, now if you talk of ten new fabs, including two within this year to be brought up in China, mostly by Chinese companies, but some by non-Chinese companies. Out of the ten, about, I think six are gen 8.5 or 8.6 and as another four are even bigger fabs, 10, 10.5 or 11. Right, so, the capacity is still increasing and I think the market will solve the additional capacity because people would appreciate having a bigger screen TV and starting I think as early as Tokyo Olympics IHTV is likely to start to take off. I…

Okay. Thank you. Thank you, Jordan.

Thank you, Jerry.

Thank you. I am showing no further questions at this time. I’d like to turn the call back over to Jordan Wu for closing remarks.

As a final note, Jackie Chang, our CFO, will maintain investor marketing activities and attend future investor conferences. So we will announce the details as they come about. So please contact our IR department and/or Greg Falesnik, if you are interested in speaking with the management. Thank you and have a nice day.

Ladies and gentlemen, this concludes today's conference. Thanks for your participation. Have a wonderful day.