Good day, ladies and gentlemen, and welcome to the Himax Technologies Third Quarter 2019 Earnings Conference Call. [Operator Instructions] I would now like to introduce your host for today’s conference, Maili Bergman with MZ Group. You may begin.

Welcome, everyone, to Himax’s third quarter 2019 earnings call. Joining us today from the company are Mr. Jordan Wu, President and Chief Executive Officer; and Ms. Jackie Chang, Chief Financial Officer. After the company’s prepared remarks, we have allocated time for questions in a Q&A session. If you have not received a copy of today’s results release, please e-mail himx@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 the 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 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-user 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 the section entitled Risk Factors in its Form 20-F for the year ended December 31, 2018, filed with the SEC in March of 2019. Except for the company’s full year of 2018 results, which were provided in the company’s 20-F and filed with the SEC on March 28, 2019, the financial information included in this conference call is un-audited 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 auditing 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 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, Maili, and thank you, everybody, for joining us. In today’s call, we will first review the Himax consolidated financial performance for the third quarter, followed by the fourth quarter 2019 outlook. Jordan will then give an update on the status of our business. After which, we will take questions. We will review our financials on both IFRS and non-IFRS basis. The non-IFRS financials exclude share-based compensation and acquisition-related charges. Our third quarter 2019 revenues, gross margin and EPS all met our guidance issued on August 8. For the third quarter, we recorded net revenue of $164.3 million, a decrease of 3% sequentially and a decrease of 12.8% year-over-year. The sequential decline was mainly due to the anticipated lower sales into TV and smartphone segments. Gross margin was flat sequentially at 19.5%. IFRS loss per diluted ADS was $0.042. Non-IFRS loss per diluted ADS was $0.04. Revenue from large display drivers was $50.1 million, down 15.6% sequentially and down 24.5% year-over-year. Clouded by panel makers’ ongoing inventory correction, driven by weak TV demand and industry-wide oversupply, our large panel driver ICs continue to experience lower shipments and pricing erosion in the third quarter. Large panel driver ICs accounted for 30.5% of our total revenues for the third quarter compared to 35% in the second quarter of 2019 and 35.2% a year ago. Revenue for small and medium-sized display drivers came in at $77.1 million, down 5.6% sequentially and down 9.2% year-over-year. The segment accounted for 46.9% of total sales for the third quarter as compared to 48.3% in the second quarter of 2019 and 45.1% a year ago. The sequential revenue decrease was mainly due to lower smartphone TDDI and tablet cells, while automotive segment recorded better-than-expected sales. The year-over-year decline was mainly due to lower automotive and tablet…

Thank you, Jackie. As I mentioned last quarter, 2019 has been a challenging year for Himax. Uncertainty in the global economy continues to overshadow the marketplace, where we are seeing waning demand in all industries that consume display. This, combined with the prevailing LCD industry capacity oversupply, has led to severe pricing pressure for panels, which inevitably affected the sales and margin of display driver IC across all major product segments, including TV, smartphone and automotive. As we look forward, although at this time, we have limited visibility, we do not anticipate the business environment to improve in the near future. Our strategy is to focus on delivering P&L improvement by executing on the technologies we already developed for both driver IC and non-driver IC areas. One of our major focus areas for business during 2019 has been TDDI for smartphone. This business was negatively impacted by the severe foundry capacity shortage that occurred during 2018 and resulted in our inability to meet our customers’ delivery requirements. Although the capacity constraint was resolved towards the end of 2019, the delay eliminated our ability to participate in major design opportunities that would have driven the business in 2019. While we expect the 2019 smartphone TDDI sales to increase more than 40% against last year, the growth will be below the target we set for ourselves. Even the outlook for smartphone TDDI remained weak in Q4 we do anticipate a strong rebound for Q1 2020 and a robust growth for next year. I will elaborate on this in a few moments. Now, let me give you update for some of our major business areas. Let us start with the large-panel driver IC business update. The current market for television sales is weak, driving an overcapacity of LCD display. As a result, since…

[Operator Instructions] Our first question comes from the line of Jaeson Schmidt with Lake Street. Your line is open.

Hey guys. Thanks for taking my questions. I just want to get a sense of your confidence that some of these headwinds you’re seeing in Q4 will start to abate in 2020. And more so, could you just talk about your overall visibility beyond Q4?

I assume you refer to our entire portfolio of businesses. So I’ll probably start – I have to start sector by sector because they do differ. Firstly, on large panel, I think I mentioned earlier the industry is suffering from overcapacity, and I think that is the consensus among the industry players, so we do have limited visibility. And the interesting thing is that while the customers are uncertain about the demand outlook for next year, they are seeing the risk of the – the interest is suffering from foundry capacity shortage for driver IC again because large panel, in particular, depends largely on up to now on 8-inch wafer foundry. For the 8-inch, because of a few new applications which speak volume, notably under-display fingerprint, has consumed a lot of 8-inch capacity. So I think it is reasonable to assume that there’s a good likelihood we’ll see industry-wide tightness again next year for 8-inch. So I think we’ve foreseen this quite a long time ago, so we started to get ourselves really well prepared for 12-inch. That covers both foundry and the back-end. So I would argue we are among the pioneers and among the most ready in terms of 12-inch preparation. So, a few of our leading customers are working closely with us to try to secure the production plan for the entire of next year and this is backed by our pretty comprehensive design portfolio among leading panel makers. So I think while it is probably too early and a bit hard to predict the industry outlook for the large kind of business next year, I think we are pretty confident about market share because of the reasons I mentioned. On small panel, firstly, on smartphone, we said it we repeat it again and again in our…

Now I really appreciate all that color. I will jump back in the queue. Thank you.

Thank you, Jaeson.

[Operator Instructions] We do have a question from Jerry Su with Credit Suisse. Your line is open.

Hi, Jordan. Thanks for taking my question. I just want to get your thoughts on the TDDI opportunities for next year. I think you have mentioned that there are some design activities or design wins that you have secured. So just wondering, for 2020, what do you think of the industry’s overall shipments and what’s Himax opportunities or if you can give us your target run-rate? I think that, that will be very helpful. Thank you.

Jerry, I’m afraid I’ll be a bit reluctant to give you a run rate forecast for such a long period of time because 1 year is a long time, as you know, in our business. And I think I don’t want to give a premature indication of the so-called run rate. Some number indication, so to speak. I can tell you with we’re confident that – we indicated Q1 will see a strong rebound. I think Q2 visibility remains positive. The tricky part of this industry is that, as we all know, now the cell phone makers are highly concentrated their business. So you’re talking – really talking about just a handful of leading makers and you – and then with those leading makers, they only have a few, a small number of major phone programs each year. So you hit one of a few of those programs or you don’t. That makes a huge difference. And so what I can tell you, though, is that we are penetrating. So but before, that is on the end smartphone device makers’ level. And on the panel makers’ level, for us, the TDDI provider, first, we need to get into the panel makers’ technology platform, for which, I think, we have achieved a very good success among the – in particular, Chinese panel makers. So from those panel makers, we’ll then start to engage together with panel makers the end device makers. And also another point which makes early prediction difficult is that the Gen 2 technology, Gen 2 technology, we talked about a few technologies, but right now, it appears that only the high refresh rate or what we call 120 hertz or 90 hertz kind of solution is getting traction because of the requirement for smartphones targeting gaming or 5G, high refresh rates. Having said that though, this TDDI or in-cell technology will be competing up against the AMOLED, so we are one of the pioneers in terms of providing such TDDI, and we are working together with both panel makers and device makers. But again, success or failure or success or lack of success in a number of major projects can make us – the picture very, very different. So I’m afraid we will have to give you updates further down the road. Having said that, though, I can tell you, capacity is much, much less of a concern for us at the moment. And certainly – and then that doesn’t mean next year, the industry will not suffer again from capacity shortage, but I think we are much better prepared this time than in 2018. So I think many of our customers, including end customers, right now turn to us also because of these reasons. So we are feeling good about 2020, but I’ll be reluctant to give early indication on numbers.

Got it. And then next, on pricing, I don’t know what you are seeing on pricing in the recent months because you have mentioned that previous one or two quarters have seen some pricing pressure. I am just wondering how should we think about the TDDI pricing maybe in 4Q and also in 1Q next year?

I think for pricing pressure still remains in this quarter, but we are seeing signs of easing in pricing pressure exactly because of the reasons I mentioned, the seemingly rising concern of capacity tightness. So when you see the device makers come in proactively to guys like us and asking for capacity securement and such and such discussion or even signing of contracts and so on, you know something is happening. And when that happens, certainly, naturally the pricing pressure will be softened. But I think pricing pressure comes mainly from the competition of AMOLED because in-cell display has to compete with AMOLED and also certainly among the TDDI solution providers, ourselves. And also the industry right now, you’re already talking about two mainstream resolutions, full HD+ and HD+. It used to be full HD+ enjoys better pricing, and that is why we kind of developing HD+ when we suffer from capacity constraint last year. But in terms of margin, I think both are reaching a similar kind of level, so we are not seeing much of a difference. And again, our strategy has turned, and we are focusing on both rather than just 1 business because we are now fully backed by capacity. So I think next year, pricing pressure, I can’t say is going to go away because the competition continues, right? And smartphone outlook is not looking very, very promising, I mean certainly with the 5G coming and all that. But I think the one thing that can change the picture is the capacity situation.

Got it. And then speaking of capacity, I think previously we have secured some wafer capacities before, I think, early in the year. But given the slower ramp-up or shipments of your – of the TDDI, I’m just wondering will there be any impact on those wafers or commitment you have made to the foundries?

We have actually recently engaged and confirmed the 2020 production plan or their commitment to us and our commitment to them as our key foundry partner. So I think that should not be an issue for Himax.

Okay. Thank you, Jordan.

Thank you, Jerry.

Thank you. And I’m not showing any further questions. I’ll now turn the call back over to Mr. Jordan Wu, President and CEO, for closing remarks.

Jackie, our CFO, will maintain investor marketing activities and continue to attend investor conferences. We’ll announce the details as they come about. So thank you, and have a nice day.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.