Hello, ladies and gentlemen, welcome to the Himax Technologies, Incorporated Second 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, Mr. Mark Schwalenberg from MZ Group.

Thank you. Welcome, everyone, to Himax's second quarter 2020 earnings call. Joining us from the company are Mr. Jordan Wu, President and Chief Executive Officer; Ms. Jessica Pan, Chief Financial Officer; and Mr. Eric Li, Chief IR/PR Officer. After the company's prepared remarks, we have allocated time for questions in a Q&A. If you have not yet received a copy of today's results, please email himx@mzgroup.us, 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 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. Eric Li. Eric, the floor is yours.

Thank you, Mark, and thank you, everybody, for joining us. My name is Eric Li, and I am the new Chief IR/PR Officer. Joining me are Jordan Wu, our CEO; and Jessica Pan, our newly appointed CFO. On today's call, we will first review the Himax consolidated financial performance for the second quarter, followed by the third 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. We pre-announced the preliminary key financial results for the second quarter on July 6, 2020 with revenue, gross margin and EPS, all exceeding the guidance issued on May 7, 2020. Today, our reported results for the revenues, gross margin and EPS were all in line with the pre-announced results. For the second quarter, we recorded net revenues of $187.0 million, an increase of 1.3% sequentially and an increase of 10.4% compared to the same period last year. The 1.3% sequential increase of revenues exceeded our guidance of a slight decrease within 5% quarter-over-quarter. Higher demand of large display drivers for monitors and greater-than-expected shipment volume for both smartphone and tablet contributed to the better-than-guided sales. Gross margin was 21.0%, exceeding the prior guidance between of 20.2% to 20.6% due to a more favorable product mix among large display products. IFRS profit per diluted ADS was 0.8 cents, exceeding our guidance of a loss of 1.5 cents to 0.5 cents. Strong sales, improved gross margin and lower-than-expected operating expenses contributed to the better-than-expected earnings results. Non-IFRS profit per diluted ADS was 1.0 cents, exceeding our guidance of a loss of 1.3 cents to 0.3 cents. Revenue from large display drivers was $59.5 million,…

Thank you, Eric. While the COVID-19 does not look to be going away anytime soon, most countries have greatly eased lockdowns while still taking measures to contain the spread of the virus. Although the pandemic has brought major disruptions to the markets we operate in, many of our panel customers have been fast to react to the changing environment by quickly shifting their production to where the demands are. What that reflected in our business is the very strong sales for notebook and monitor markets in the first half with the momentum now switching to TV and smartphone, while tablet is set to stay robust throughout the whole year. While businesses have been largely reopened, a big part of the society still stays mostly at home with much of the activity being operated online. The stay-at-home economy has proven to benefit several consumer electronics markets to which we supply our products. Our demand visibility has, therefore, been much improved from the first half. However, as Eric mentioned earlier, the industry is going through a severe foundry capacity shortage right now, which is limiting the growth in almost all of our businesses, especially the smartphone and tablet TDDI as well as CMOS image sensor products. Separately, we are working towards capitalizing on our unique non-driver technologies where we have invested heavily in the last few years, notably, 3D sensing for smartphone and smart door lock as well as ultralow power smart image sensing for products such as notebook, TV, doorbell and air conditioner. I will elaborate on these a bit later. As indicated in our guidance, we now expect a strong top line growth for Q3. Our next goal is to improve our gross margin. This will be an important target for Q4 and next year. Now let me take you…

[Operator Instructions] And your first question comes from Tristan Gerra with Baird.

Hi, great quarter. Would you be able to quantify the revenue impact of the foundry shortages on your Q3 guidance?

Foundry shortage. It's almost across the board actually covering large and small display drivers, and even CMOS image sensors. What happens is for mature technologies, very severely for 8-inch, but even for 12-inch. With the 5G smartphone and other things coming up, foundry capacity, we believe, will be a long-term phenomena. Foundry capacity shortage will be a long-term phenomenon. So we made the right decision to develop a new and major foundry partner being PSMC back in 2018, for TDDI and that was from other best decisions we've we made at the time. Because without that, we wouldn't have been able to see the growth. But I think foundry capacity shortage, unfortunately and fortunately, in fact, is here to stay and is not going away anytime soon we believe. I don't know if there are any more specifics you want to know about.

Okay. That helps. I was just wondering maybe what percentage higher your revenue guidance will be, if you were able to access all the capacity that you need?

Much higher. Much, much higher. Yes, and also good news or bad news, but for fact it's going to be much higher, especially for smartphone and tablet TDDI. So let me just probably take this opportunity to elaborate just a little bit. Again, the more specially impacted areas of smartphone and the tablet TDDI. For both, we use the same pool of 12-inch foundry. Q3, the shortage is severe and Q4, also very, very bad. Now with the limited capacity available to us, we have to make a very difficult allocation choice. So one of our guiding principle for such allocation choice is we will give preferred allocation to where we are the main source or even the sole source. And if you follow this guidance, then inevitably, our allocation will favor tablet more than smartphone because with tablet, we have a very large market share. And we mentioned in our prepared remarks, we are the sole or dominant or major vendor to literally all the Android tablet brands. So if you look at Q3, we expect to see a very strong growth for small and medium-sized market together, but the tablet growth is higher than smartphone. And if you look at Q4, where our allocation will be skewed more even more toward tablet because the shortage is just pretty severe. So Q4, in all likelihood, will see very, very strong tab let growth, again, for TDDI, but probably some decline in smartphone because of our allocation choices. Overall, however, our allocated total foundry capacity for TDDI 12-inch for Q4 will be higher than for Q3, but certainly not enough for us to take up all the orders. I hope that adding comment is helpful.

Yes, definitely very, very useful. And then just the last question on the same topic is do you feel that your competition is facing the same issues and as such you don't expect market share shift because of you being impacted more from a capacity access standpoint than your competitors?

Yes, we believe so. And based on my customers and some of the key vendors who get to see many of my competitors' production or working process status. We are probably one of the players whose position is better off compared to some of our peers. So yes, I think it's an industrywide phenomenon, it is everybody, pretty badly, unfortunately.

Okay, thanks again. Very useful.

Thank you, Tristan.

[Operator Instructions] And our next question comes from Jerry Su with Credit Suisse.

Yes. Hi, thanks for taking my question. Just curious, I think for the third quarter guidance, it seems to be pretty strong, but the gross margin is still remain at the similar range or versus the previous quarter. I'm just wondering because when we look at the gross margin profile of Himax in the past, it could go to around at least low to mid-20s. I'm just wondering why in the next quarter or even with the growth in the top line, but gross margin is still not able to see a more meaningful uplift?

That's a very good question, Jerry. Firstly, certainly, it has everything to do with the product mix, right? And if you look at our gross margin across some of our major segments. Right now, the sectors enjoying the product segments, enjoying the higher gross margins are automotive driver IC automotive display driver IC and WLO. WLO, however, depending on our capacity utilization, right? And among the lower gross margin segments include smartphone. And it's not only because of the rather severe competitive situation out there. So Q3 compared to Q2, we are not growing because Q3 similar to Q2, the smartphone as a percentage, especially for TDDI has grown remarkably from Q1, and that is actually the main reason to explain why the gross margin for both quarters are lower than that of Q1. Also, if you recall, our WLO shipment was very, very strong. And it declined rather significantly in Q2 and Q3. And again, as I said earlier, WLO enjoyed good gross margin, especially when the shipment is high, and therefore, the capacity utilization is also high. And also, the third reason, I think, is the rather sluggish automotive segment overall. And again, automotive historically and still now, and still, in any foreseeable future will be among the highest gross margin sectors for us. So I so that kind of explains the low growth, the unsatisfactory gross margin for Q2 and also Q3. I mentioned in my prepared remarks that raising gross margin is now a short-term goal and that covers Q4 and certainly the whole next year. And I think we have a fairly good degree of confidence that our gross margin will recover. I think in general, foundry tightness, as you pointed out, is in general, good for design house gross margin. So I think we're going to take advantage of that, firstly. And also, I mentioned earlier, because of allocation decisions in Q4, tablet will grow strongly while smartphone can even suffer a decline. So for that reason, I think Q4 gross margin will also grow, among other reasons. And if you look at next year, we do have some new products in the pipeline, which go upon mass production, we enjoy very, very strong gross margin, much, much higher than our corporate average, stuff like WiseEye is especially and certainly 3D sensing as well.

Okay. Got it. And then, one follow-up on WLO. I'm just wondering when can we see a more meaningful volume recovery for this business going forward?

For WLO. We so far, we have been our business has been very concentrated on one anchor customer. So for that reason, I'm afraid, I really can't comment too much because that kind of imply into customers' activity, rightly or wrongly, right? So I'm not going to do that. I think what we are working very hard toward is to diversify our customer base and application. And certainly, it's involved a lot of R&D and customer engagement, so the lead time will be required. But we talked about our ToF engagement where we are engaged by the smartphone end customers, the world's leading sensor vendors and some of the world's leading laser vendors. So we had working together trying to put together some good solutions, especially for Android markets, right. So exactly what is going to happen. I can't really say because it's up to the end customer, meaning the smartphone makers to decide. But I can tell you we are making exciting progress. Can we see some volume production next year? Possibly, but nothing is certain in the pipeline yet, I have to say. But I can also say the development and also the performance thereby, is looking very exciting. And we are also expanding our coverage to other applications, including very notably, automotive. With which, again, where we are working with some of the leading say, laser drivers, among others, altogether try to penetrate to start with, for example, in automotive, in-cabin sensor in-cabin 3D sensing. So we are making good progress there as well. So and also with the anchor customer, we have quite a number of exciting but challenging joint development projects. So if you look slightly longer time horizon, I think this is a very, very exciting area. Where we can enjoy tremendous growth, but I just can't comment much on the very short-term.

Okay. I think that’s good one for me. Thank you.

Thank you, Jerry.

There are no further questions at this time. I will now hand the call back to Jordan Wu for closing remarks.

As a final note, Eric Li, our Chief IR/PR Officer, will maintain investor marketing activities and continue to attend investor conferences. We will other details as they come about. Thank you, and have a nice day.

That concludes today’s conference. Thank you for your participation, you may now disconnect.