Good day, ladies and gentlemen and welcome to the Himax Technologies, Inc. First Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the call over to Greg Falesnik. You may begin.

Thank you, operator. Welcome everyone to Himax's First Quarter 2018 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 results release, please e-mail 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'd like to remind everyone that some of the statements in this conference call, including statements regarding expected future financial results and the 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 events or results to differ materially from those described in this conference call 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 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 2017, filed with the SEC in March 2018. Except for the company's full year 2017 financials, which were provided in the company's 20-F and filed with the SEC on March 20, 2018, the financial information included in this conference call is unaudited and consolidated and prepared in accordance with IFRS accounting. Such financial information is generated internally and has not been subjected to the same review and scrutiny, including internal auditing procedures and external audits by an independent auditor, to which we subject our annual consolidated financial statements and may vary materially from those 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 Ms. Jackie Chang. The floor is yours.

Thank you, Greg and thank you, everybody for joining us. Our outline for today's call is first, review of the Himax's consolidated financial performance for the quarter, followed by the second quarter 2018 outlook. Jordan will then provide an update on the status of our business, after which we will take questions. We will review our financial on both IFRS and non-IFRS basis. The non-IFRS financials exclude share-based compensation and acquisition related charges. We mentioned in the last earnings call that beginning in January 1, 2018 we will adopt international financial reporting standards, IFRS, to prepare our consolidated financial statements. We don’t expect the transition from US GAAP to IFRS to have any significant impact on our financial results. To illustrate the difference, we prepare the comparison table under both US GAAP and IFRS using 2017 numbers. The comparison table is included in our first quarter 2018 earnings press release. Our first quarter 2018 revenues came in at the high end of our guidance while gross margin and IFRS loss per diluted ADS were both better than guidance. For the first quarter, we reported net revenues of 162.9 million, a decrease of 10.1% sequentially and an increase of 4.9% year over year. Gross margin was 22.5%, 50 basis points higher than guidance. IFRS loss per diluted ADS was 1.6 cents, better than the guidance range of 2 to 3 cents. Revenue from large display drivers was 59.3 million, up 1.6% sequentially and up 0.1% year-over-year. Large panel driver ICs accounted for 36.4% of our total revenues for the first quarter, compared to 32.3% in the fourth quarter of 2017 and 38.2% a year ago. The first quarter is traditionally the bottom of the year because it has fewer working days due to Chinese New Year. Against seasonality, our large panel…

Thank you, Jackie. We expect the solid rebound in the second quarter overall and sequential growth across all three major product categories. With that, let me now give you some insights behind our guidance and trends that we see developing in our businesses. Our large display driver IC business recorded low-single-digit growth in the first quarter against seasonality due mainly to our Chinese panel customers' capacity expansion and the market's increasing 4K TV demands. As many of our panel customers continue to ramp new fabs and run the existing capacity at high utilization, we would likely see continued growth in the second quarter, on the back of the first quarter's strong performance. We remain the market leader in the large panel driver IC business in China and will be a major beneficiary from China's ongoing capacity expansion. In the last earnings call, I highlighted that the whole industry is going through a capacity shortage of 8-inch foundry where the vast majority of large panel driver ICs are fabricated. We were not able to fulfill some orders due to tight foundry capacity during the first quarter. While the capacity shortage continued into the second quarter when we still cannot fulfill all the orders, we have successfully added a 12-inch fab into the pool of our foundry capacity to ease the shortage issue. We expect to make small volume shipment for TV related driver IC products from this fab starting the second quarter. However, the ultimate ramping schedule will depend on how fast our panel customers can go through their customer qualification, something all our major customers are working very hard on. With the 2020 Tokyo Olympics approaching, TV makers are rushing to develop super high end products with 8K resolution. I am pleased to report that our team has recently secured…

[Operator Instructions] Our first question comes from Gus Richard of Northland.

Yes. Thanks for taking my question. I was just wondering if you could provide a little more color on the revenue from the structured light product in the fourth quarter. Is that multiple OEMs, preproduction, just any color you can provide would be helpful? Thank you.

In the fourth quarter? You mean this year.

This year. Correct. I believe you said in your prepared remarks that that you would start to see revenue in the fourth quarter and I was just wondering if you could provide a little more color around that.

I am afraid it’s obviously too early to provide the so guidance on the revenue potential for the fourth quarter or even next year. I think we have said that there will be limited adoption in 2018. The thing is that development, especially on the software side, to finalize everything, including the most important online payment, secure online payment, is, I said earlier, is more challenging than we anticipated. But I think, I mean, our job, Himax’s job is primary to provide the total solution hardware, which we said earlier, we believe is mass production rate in, I think the thing is, we need to get the hardware ready before our ecosystem partners and our customers get to the next steps, including among others, ported to the various platforms and facial recognition and finally secure online payment to get a certification. So, we said earlier that we expect from the existing, deciding customers, their mass production timetable be Q1 next year, given the lead time required, there is good potential that we will start to make shipments to such customers towards the end of the year. I think it is fair to say that projection is a bit difficult to make right now, because I mentioned earlier, there are three approaches of next generation biometric authentication to replace the existing capacity fingerprint. The thing is, the customers right now are invariably in all three, many leading customers that we are seeing, so we actually took into certain customers on all three approaches and they are, where they are, some of them are having real projects for all the three technologies right now. They are, in the meantime, evaluating the pros and cons of each approach and trying to determine, which technology should be placed with which model at which time. And that makes our so called projection, early projection a bit more difficult than usual. But I think, so I’m afraid to say that we are reluctant to give indication for the revenue potential for Q4, but if everything goes as planned, we do expect explosive growth for next year. As far as the relative waging of the three technologies, and three approaches and which customer and which model will adopt which technology, I think it’s all being developed right now and so while we have very strong confidence that all the three will have tremendous growth and certainly mass production in next year, but and also we are confident that we will be at least production ready towards the end of this year, but as far as the short term Q4 revenue potential is concerned, I think we are reluctant to make indication at this stage.

And then just in terms of your capacity constraints, could you sort of give a little bit more color on the qualification process and when your customers will or the bulk of your customers will be able to or enough of your customers will be able to qualify the new 12-inch fabs to alleviate your constraints?

Yeah. We mentioned two areas of capacity constraint very much, namely large display driver IC and TDDI solutions. Firstly, on large display driver IC, traditionally, because of technology reasons, large display driver IC has been fabricated in 8 inch fab, not just for Himax. I think it’s a common phenomenon across the whole industry, because 8 inch fabs give you the right cost and technology combination. Now, unfortunately, 8-inch fab in terms of capacity always is extremely tight. So – and that is why we have successfully developed – actually, we started the development well over a year ago for seeing the capacity shortage. So we have started making small shipments for large display driver IC in the new China based foundry, which is 12-inch. We have fully qualified ourselves and I think all our major customers have also qualified our processes. However, the key is now for us and now even for our customers to qualify the process, the key is for the customers’ end customers, i.e., TV makers to qualify for the change of foundries. And that can take time. However, I said in my prepared remarks, that all customers are working extremely hard to try to make that happen, because everybody realizes the capacity for 8-inch is very tight and there is no -- we are not seeing – nobody is seeing the end of the tunnel, right. And I think the end customer has also realized that. So. I think, I certainly hope it will go as mostly as I am indicating right now and I have no reason to believe why it will not, but in my official answer, I fear to say the end customers’ configuration is the key, although in terms of 12-inch or large display driver IC, the good news is, we…

[Operator Instructions] Our next question comes from Tristan Gerra of Baird.

Just extending a little bit on the foundry capacity shortage issue, are you able to quantify the magnitude of the revenue impact for Q1, Q2 and the rest of the year. And also does that provide a mix improvement opportunity as maybe you can emphasize some higher margin products in the past, that's why you're being constrained.

Firstly, on foundry constraint, we have outstanding shortage, meaning let’s take the end of this quarter as example, right, the customers wishing us to make delivery and we are unable to, meaning, we have to postpone the delivery schedule. I think if you look at the total volume, it could be in a range of 10 million to 20 million ICs easily which compares to 100 million plus product shipment is something quite significant. I’m sorry, Tristan, what is your second question again?

And so thanks for quantifying the impact in Q1. Is the impact expected to remain in the same range as what you just mentioned for Q2 and for the second half and is there any opportunity for mix improvement as you are unable to ship some products?

I think in our guidance for Q2, the assumption behind the guidance is also around the same amount of shortage that we are assuming. I said earlier I am hoping that large panel, given that we are more than ready to switch to a new 12-inch foundry, in fact because 12-inch is brand new fab, the yield is even higher than our 8-inch foundries. And the customers realize that, but the thing is again, they have to go through the end customers’ qualification. So, again, I’m optimistic in the sense that end customers are also realizing the issue, however, to my response is that, TV market and the large panel display market overall is not the – the demand is not growing strongly. In fact, the demand is relatively soft. So that is certainly an active factor in terms of end customers’ qualification -- urgency for qualification. However, I think people understand, this is a long term issue is, it’s something the industry overall has to deal with. So whether you deal with this later or earlier, one way or the other, you have to sort it out. So I think again, I am optimistic and I’m seeing customers being very serious about getting the qualification completed and but on our end, we are fully ready. So, it's probably harder for me to predict the second half, but I have no reason to be pessimistic because customers are, I think, we just have to go through the procedure customer by customer.

Okay. That's very useful. And then just a quick follow-up. If you could provide an update on the OLED capacity ramp at BOE, the timing of when you expect that to become meaningful and also are you seeing any cannibalization in this recovering phase of the China smartphone market from OLED screens supplied by Samsung?

Our next question comes from –

Sorry, operator. I haven’t responded to the question. On OLED, we are still making designs with, you mentioned BOE, right. BOE has started some early production. I don’t want to comment too much on the customers’ activity, including their volume and ER rates. But BOE has repeatedly indicated to us that Himax overall is their strategic partner and they do want us to, again to this sector, which is very important for them long term, although in the short term, certainly, there will be quite a bit of learning curve to go through for our customer. And BOE is certainly among, if not the most greatest OLED player in China. And BOE has all the commitment, all the government support to develop OLED. So if you look at their plan and if even, if even their plan is only partially executed, I think the impact to Samsung and or LGT for that matter will be rather significant I would say. But certainly, it’s early to say, right, because they’re only ramping the first fab, but they do have, they have multiple fabs in progress or being planned, which are approved by the government or supported by the government or even has the foundry security. But I think as far as the final timing is concerned for them to really ramp those fabs about in some other cases, start consulting those fabs, I think they will still have to look at the market, certainly the first fab success will be important for them. Does that answer your question?

Our next question comes from Jaeson Schmidt of Lake Street Capital.

Thanks for taking my questions. Jordan, wondering if you could comment on how we should be thinking about the mix in 2019 between structured light 3D and stereoscopic 3D? And relatedly, if you've seen any change from your customer standpoint on which solution that you guys are more interested in?

If you ask me the -- this is a qualified question, Jaeson. I’m sorry for that, but I’m trying to give the best highlight, the best insight I have right now, but my answer can change next quarter as the market develops. The way I look at it right now, I mean, we started by talking to customers about structured light, because that was the -- from Himax’s point of view, was the first to get ready and also that was the technology offered by Apple. Initially, customers were starting to take it, because Apple was launching the phone and all that. But as time goes by, firstly, Apple’s phone sales probably was not as exciting as most people expected in the first place and the reality is that the structured light is quite expensive. And overtime, because of all these reasons, we are promoting additional tool, technologies to our customers, because we have to serve their interest and bear in mind, Apple is the only one in the world who can offer phones of such high price and with such high profit margin. So many of our customers, other than probably their premium models, they really cannot afford structured light to be honest and we actually said that from the outset, from the very beginning. So when we started promoting ST or stereotype 3D, we got a lot of excitement from the customer because of the cost issue. Now the readiness of -- on the hardware side, the readiness of stereo 3D is slightly behind that of structured light, we did realize actually they are the major advantage to this timetable, in the sense that the dual camera for RBG for picture taking, dual camera is already quite mature after probably three years of smartphone adoption. So the whole…

No. That makes sense. And then as a follow-up, wondering how we should be thinking about your ASP at your largest WLO customer for future generation platforms. Do you expect to be able to maintain your ASP as is.

I really cannot comment on specific ASPs, but it’s – I can give you a broad idea of which is existing product is way below $1. Our future – in certain of our future R&D projects, we are working on together. I mean obviously I cannot give more specifics other than that. The ASP have been many, many times higher, because the design is a lot more complex and the build material equipment requirements are a lot higher. So I think if you line, we are moving up the ladder quickly and by great deal and our bigger customer has demonstrated they are confident and trust on us, while really allocating some of their most important, most critical and yet most challenging projects to us. So again I cannot give you specific numbers, but future products upon commencement or mass production, the ASP could be many, many times higher. You will certainly by way of, by unit of 100s running.

Our next question comes from Suji Desilva of Roth Capital.

On 3D sensing, the three different alternatives there. Can you talk more specifically about the content opportunity portfolio and ASP for each of the differential, just to understand how they stack up cost wise and content wise for you.

Ballpark. I'm going to give total solution, total solution, hardware, total hardware dilution, excluding the application. Total hardware dilution ballpark structured light is more than 20,000. As far as stereo 3D is concerned, it’s 10000 plus, ten plus thousands, likewise for fingerprint, for under display fingerprint, probably slightly lower by about the same. The content is different however for Himax. Our content proportion is the highest in structured light, because of the fact that we are the top solution and we actually produce from in-house quite a bit of the content inside. We only outsourcing stuff like laser, filter, lens and certainly the whole margin. And so for stereotype 3D, we have essentially of the whole module is relatively simple compared to structured light and that is why I think it is too of interest that we try to outsource as much as we can to specialize our camera module vendors. So and also the projector is a lot more simplified compared to structured light, however rather than having one sensor for structured light approach, here, you have two sensors. So in the sensor on faces, we have doubled the revenue potential for stereotype compared to structured light, however, all the rest is the smaller. So I would say for structured light, our content percentage in solution is probably 60% plus for stereo 3D. For stereo 3D, probably with a low ASP and therefore in the fingerprint, slightly less than half. Whereby we provide basically a sensor, which is quite a large sensor, because your finger has really big area, right, your thumb has a pretty big area and the fingerprint sensor and in the sensor for optical fingerprint has very, very large pixel size. And it has too, the total size has to be big enough to cover your finger. So the size is quite big. So the ASP is quite significant, a few dollars. I can’t recall the detail, but our content percentage is close to half of the whole thing.

And then specifically on the underglass fingerprint, how many customers do you expect might be adopting that technology in late ’18, early ’19 timeframe, just to understand how many customers you’re working with on that?

Quite a number of customers are talking to us or actually working with us, however, they are, I mean, for example, one is still, two, they’re still trying to decide whether it’s one of the three, which approach or which product. So I think we are talking to all top tier Android customers. As far as -- and that we are not just talking to them, we are actually working with them, with real engineering stuff. As far as exactly how many, and how many of them with how many projects will go into mass production this year or early next year is too early to say, but I can tell you that the collaboration or design in activities are very good. But clearly, there is actual design win activity, I really can’t say, I think it’s slightly early, probably by next quarter update, I can probably give you better insights.

Our next question comes from Charlie Chan of Morgan Stanley.

So my first question is regarding your engineering packaging, we’ve seen like the key bottleneck is customers’ qualification on the mobile payment. But do you think the 3D sensing can also happen in a rear side 3D sensing, because, for rear side maybe it’s not for mobile panel, but for AR gaming or ecommerce? Do you plan to go ahead to develop rear side 3D sensing. That is number one. And also besides the smartphone, do you see any adoption for your 3D sensing using other consumer electronics. This is my first question. Thanks.

On the rear side camera side, actually, we worked together with QUALCOMM for more than five years and that was actually our initial target and we did have a fairly prototype product for that. However, we put that aside because for the obvious reason, everybody is switching focus into front side and we saw specific applications of look and online payment. I do believe eventually, the main camera side with 3D sensing capability will be popular, because of potential in very small applications such as AR. However, I think the trouble is, everybody has got that idea, but what do you want to put that idea into execution and into real products, except what is the application, what is the key application, that we’re convincing consumers to pay. I think you will see it pick sometime for the market to develop, to think about development. So I see almost all my customers asking the same question and they are all working very hard and the obvious question they had, quad sensing is going to be the central application for the main camera because it’s same formation, it’s obvious, but I feel we see that becoming concrete and ideas are being put into real projects. I think we can’t say for sure, but as far as hard word is concerned, which is, we just have to, I mean certainly there are engineering work to be done, but we think it is the major thing to do, eventually. As far as non-smartphone is concerned, I think also it is quite obvious we are already in discussion and in some cases, still in discussion with other customers for IoT application, home or business applications, home applications and certainly cargo applications, although the market size is quite small right now and most interestingly to me is automotive applications. People are bringing extremely interesting ideas to us right now, however we are quite limited by our resources and smartphone being smartphone, the size is just so big and effective. So we feel it is the right thing to do that this for now, we develop our resources to smartphone and make it happen and make it a success before we start to get into other applications, because I mean interior, we can get our solutions to customer’s needs, however it will take some engineering work, right. So we have to be careful in terms of our recent allocation. What is your second question, Charlie?

Okay. Thanks. So my second question is regarding your gross margin trend, the [indiscernible] because your foundry customers now are, they are raising their wafer price to pass through the cost. So what does it mean to your gross margin trend in the coming quarters?

I think for now, we believe we can fully pass on the additional cost to our customers and that is the ongoing discussion we have with our customers to a lesser extent, starting from Q2, but certainly more generally from Q3. So I am seeing no issue, because the whole industry is suffering from shortage. So our customer realize that it is only reasonable that we pass the additional cost on to them.

Our next question comes from Jerry Su of Credit Suisse.

First question is on the active stereoscopic 3D camera. I think you mentioned you’re working with some partner. Can you quantify, is only platform or you have opportunities to go into multiple platforms for this solution.

We are working more closely with a partner who intends to offer multiple platforms of theirs, AP platform of theirs for our ASC. And we are – and I believe we are their exclusive partner, they are only using our solution for that purpose. And we are actually, we don’t exclude talking to other customers and they are also stereo camera algorithm, who has good software capability from algorithm to applications. And they are -- such house is coming to us asking for collaboration for us to provide a total solution for hardware as well. So there could be such opportunity as well. But certainly, right now, the priority is given to a world leading AP platform provider, but there will be multiple platforms. Yeah.

And then the second question on the, I think you have partnership in some components, starting from last year, so one of the major smartphone maker. Just wondering on the Android side, do you have any opportunities or what are you seeing right now for shipping, level of uptakes, DOE or other components into a platform apart from the total solution you have already mentioned?

Yes. We mentioned in our earlier earnings calls that for our structured light total solution, our intention is to provide total solution, however, when it comes to a very select leading smartphone majors who have their in-house capabilities for total system or module integration, then we certainly don’t rule out providing individual components to them, most typically projector. And there are indeed such projects going on at the moment, both for structured light and also for ASC. And actually, these are very active projects going on at the moment. But again such customers are very selective.

[Operator Instructions] Our next question comes from Andrew Uerkwitz of Oppenheimer and Company.

I just got two quick ones. I don't -- in the comments to begin, you didn't mention a phase 2 CapEx plan and on the previous two calls, you talked about having more detail, I believe right around this time. So I was just curious what the plan there was.

We have decided to put that on hold well for the time being, because I said earlier, the development in particular software into end product is taking longer than we anticipated. So it is only natural that we defer our phase 2. In our earlier announcement, we focused primarily on structured light. But the way we are seeing it right now although, again I want to emphasize, we'll get a lot better clarity one quarter or two quarters from now. A lot of capacity for us in WO is shared and active alignment as well in shared in between ASC type and structured light type, right, and I also indicated earlier that the way I see it right now, in terms of volume potential, ASC can be even bigger than structured light. So when this happens, there is certainly a very, very high likelihood, we have to rush our phase 2 probably, but before that clarity is clear is better for us. We are deferring our phase 2.

And then on the second question, when you think about the TDDI ramp, how do you think your share will shape up throughout the end of the year and then how cannibalistic is it with your traditional small town TDIC business?

We all know smartphone, the whole market in terms of number of units maturing. So it is actually not growing anymore. So one additional demand for TDDI means a diminishing of demand for traditional driver IC. That’s the hard fact. Our TDDI, we mentioned, volume wise, we mentioned our effort to try to eliminate the capacity constraint and by adding new foundry capacity and hopefully starting from Q3 and Q4 mass production, if that goes smoothly, then there is no reason to believe that we will not be able to hit our target of about 10 million units per quarter in either Q4 this year or early next year. Certainly, the ASP for 3D is much higher, a few times higher compared to traditional driver IC.

There are no further questions. I would like to turn the call back over to Jordan Wu for any closing remarks.

As a final note, Jackie, our CFO, will maintain investor marketing activities and she will continue to attend these conference. We will announce the details as they come about. Thank you and have a nice day.

Ladies and gentlemen, that does conclude our presentation and you may now disconnect. Everyone, have a great day.