Earnings Labs

Himax Technologies, Inc. (HIMX)

Q1 2020 Earnings Call· Thu, May 7, 2020

$10.96

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Transcript

Operator

Operator

Hello, ladies and gentlemen. Welcome to the Himax Technologies Incorporated First Quarter 2020 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 like to turn the conference over to your host, Ms. Maili Bergman from MZ Group.

Maili Bergman

Analyst

Welcome, everyone, to Himax's first quarter 2020 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, 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 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 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, 2019, filed with the SEC in March 2020. Except for the company's full year of 2019 financials, which were provided in the company's 20-F and filed with the SEC on [March 25], 2020, 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 the independent auditor to which we suggest our annual consolidated financial statements. And they vary materially from the audited consolidated financial information from 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.

Jackie Chang

Analyst

Thank you, Maili. And thank you everybody for joining us. On today's call, we will first review the Himax consolidated financial performance for the first quarter, followed by the second quarter 2020 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. In light of the prevailing uncertainties clouding the global financial markets, we decided to preannounce preliminary key financial results for the first quarter on April 3, 2020 with revenues met guidance, while gross margin and EPS both exceeded the guidance issued on February 13, 2020. Today our recorded results for revenues, gross margin and EPS were all in line with the preannounced results. For the first quarter, we recorded net revenues of $184.6 million, an increase of 5.5% sequentially, and an increase of 13% compared to the same period last year. Historically, the first quarter has seasonally been the bottom of the year in terms of sales, due to the Lunar New Year holidays, [often] down by more than 10% sequentially. The coronavirus outbreak has prompted more than half of the provinces in China to extend the New Year holidays by at least a week in an effort to contain the spread of the virus. The management of logistics including worldwide custom operations in various ports in the supply chain were impacted significantly during this period of time. Despite these dramatic headwinds, we were able to deliver strong financial results in the first quarter, specifically with double-digit revenue growth year-over-year. The 5.5% sequential increase of revenue was at the new range of our guidance of an increase of between 1% to 10% quarter-over-quarter. Gross margin was 22.7%, exceeding the…

Jordan Wu

Analyst

Thank you, Jackie. Since the Q4 '19, we've started to see a major turnaround in literally all aspects of our business with positive momentum and a strong outlook. This has been due to design wins with new and existing customers across all major product lines. However, the strong momentum was interrupted at around the time of the Lunar New Year holidays, when many areas of China started to impose strict lockdown measures in the face of the COVID-19 outbreak. Uncertainty in the marketplace has continued since. Despite supply chain disruptions caused by China lockdowns, we delivered decent results in the first quarter, although the results could have been better without the coronavirus. China has recently reopened and other countries are seemingly [Audio Gap] first quarter, our second quarter business is being affected by the COVID-19, especially for TV and automotive-related products. However, home working and online education have driven a surge in demand for notebook, monitor and tablet related products. We are also seeing a very strong momentum in our smartphone TDDI business on the backdrop of a sluggish global smartphone market. TDDI for tablet, which has made a decent contribution to our first quarter result, is the major highlight of our business right now as the technology is being adopted and put into mass production rapidly as we speak. We are the dominant TDDI supplier to global Tier-1 Android tablet makers, making Himax the market leader in the emerging trend to replace the traditional design of having two ICs, namely [Audio Gap] in Q2 and throughout the rest of 2020. Despite the coronavirus, we are still making great progress, and remain committed to ongoing R&D projects for forward-looking products, notably ultralow power smart image sensing, TDDI for automotive, 3D sensing and AMOLED. All of these new product areas are…

Operator

Operator

[Operator Instructions]. Your first response is from Tristan Gerra of Baird. Please go ahead.

Tristan Gerra

Analyst

I know visibility is very low. But you mentioned that notebook demand was expected to be resilient even into the second half or at least in Q3. Could you give us a bit more color as what you're hearing from customers in terms of demand for some of your other end markets into Q3, whether you expect more segments to weaken further or do you see any areas that are potentially going to be rebounding in Q3?

Jordan Wu

Analyst

Right, thank you, Tristan. The situation is evolving and I think, yes, the visibility is low and people are cautious. But I think it is also fair to say that what we're seeing right now is that people’s confidents are growing as opposed to a month ago, for example, in literally all aspects of our businesses or positions. So notebook certainly is one of the areas. And also don't forget, I also mentioned monitor repeatedly, where we just happen to be a major driver IC supplier into the segment. So what we are looking right now is extraordinary growth in Q2 and another very strong growth year-over-year for Q3 and Q4. Although because the -- we are building our production so fast that it is likely that, if you look at the second half against first half, the monitor business is likely to be flat or slightly down. But on a year-over-year basis, still very strong. So, I talked about notebook and monitor. And one thing we like to highlight repeatedly is the tablet market. Tablet market overall is strong, again, for the same reason, the pandemic, where people are working from home and so on. And tablet is especially meaningful for Himax because as I said earlier, we have a dominant position in TDDI -- in Android tablet for traditional driver IC and now we are almost a sole supplier for TDDI into tablets for Android. For which we are seeing exceptionally strong growth. The mass production started in Q1, very strong growth in Q2 and another very strong growth in Q3 and Q4. So, both year-over-year -- Y-o-Y and [Audio Gap] our automotive demand for the third quarter and even for Q4 is, I would say, extraordinarily high. I would say, the reasons -- one of the reasons…

Tristan Gerra

Analyst

And then just a quick follow-up. What is your view about inventory management in -- at your customer? Are they starting to reduce inventories given the headwinds in terms of firm demand? How do you see inventory levels now in the supply chain and how they think -- you think they will be trending over the next couple of quarters? And finally, do you see any changes in your lead times or expect any changes in the coming quarter?

Jordan Wu

Analyst

Firstly, on lead time. I will get back to the inventory level in a minute. We did suffer from [Audio Gap] and adapt to the new circumstances pretty rapidly and pretty -- I would say pretty amazingly. So, as I speak right now, I think in terms of, on the supply side, logistics, customers -- customs and so on, I think that sector has been fairly to a very large extent eliminated. On the inventory management, what's very interesting is that we are seeing customers with wide portfolio products are adjusting their production plan very, very quickly to address the new market demands or weakness thereof. So -- and plus, we also have to adjust our sales and production and planning very fast to meet their demands. So, honestly in a few areas, we are actually seeing kind of tightness of supply because of the pull in request, ramping in [Audio Gap] So, I hope -- I mean certainly again the visibility is limited. But what we're seeing is -- are watching extremely closing, paying much more attention than usual in terms of market demand changes and try to address their production accordingly with very fast speeds and we try to also accommodate such quick actions. And so, hopefully we are not seeing [Audio Gap] So, so far I am not too worried about that inventory, inventory build up so to speak.

Operator

Operator

Thank you. Your next response is from the line of Jerry Su of Credit Suisse. Please go ahead.

Jerry Su

Analyst

I just want to follow up on large sized driver IC revenue decline, high-single-digit in Q2. But if we look at your comments about the notebook monitor related, it seems that part is being quite strong. So, are you seeing a very big slowdown for TV? Because if we look at the supply chain, panel makers or your lot of peers, I don't think they sound like TV driver IC shipment is going to see that kind of a decline into second quarter. So, can you help us understand how is that evolving? Thank you.

Jordan Wu

Analyst

Thank you, Jerry. Indeed, large panel, we said high-single-digit second quarter decline in spending in TV. And TV in terms of volume is certainly much bigger than monitor and notebook. And so, if I share with you the whole year picture, TV, based on the current forecasted pipeline is likely to be down year-over-year by high-single-digit to high-teens, while monitor is likely be up by more than 20% and monitor up by double-digit, mid-teens. So, however, although the monitor and notebook are so strong, TV, where across the whole segment of large display driver -- large panel display driver to be down high-single-digit. So indeed that is primarily TV. Although, as I said, we just have to assess -- actually just earlier today, in fact, one of our major customers in China, which previously announced to us, the supplier that in Q3 they are planning to cut back their TV production. And now they say they're changing their mind and they actually doubled this further TV outputs. So, they say Q3 TV is likely to be at a level similar to Q2 and so on. So, as I said earlier, when answering questions Tristan’s question, I said the market is evolving and it appears to be looking more positive now than even a month ago or even two weeks ago. But I think overall still TV is a sector that is likely to be -- to suffer from some decline this year.

Jerry Su

Analyst

And then a second question on the WLO. I think you mentioned that your customers’ facilities are shut down. Can you give us a little bit more color on that which region or country and when do you expect that shut down or the factory to restart?

Jordan Wu

Analyst

I can only tell that the country is not China. It is the module factory that we started to ship our optics into, right? And it has been that way since day one of our production. And actually towards the end of Q3, that country started to impose very strict incoming flight restrictions. So we, actually together with our customers, we rushed our shipments towards the end of Q3 and early -- end of Q1 and early Q2, and thereafter somewhere in April, that entire region where the factory is located was completely shut down. So there's actually no workers in the factory. There's not even people to receive our goods. And therefore, nobody can achieve anything. And I mean, that kind of disruption, honestly, in our entire portfolio of shipments and operation was very rare, but it did happen, right? So, I would say in Q1 for WLO we probably overshipped and that probably represents some cushion of comparable good inventory for the customers to use for their Q2 production I would say. So -- and Q2 -- because of this unfortunate incident that shipment is likely to be rather dramatically reduced from Q1. And honestly, there's nothing we could do about it.

Operator

Operator

Thank you. I'm showing no further questions at this time. I'd like to turn it back over to the presenters for closing remarks.

Jordan Wu

Analyst

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

Operator

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating and have a wonderful day.