Hello, ladies and gentlemen. Welcome to the Himax Technologies Incorporated Third Quarter 2020 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to your host, Mr. Mark Schwalenberg from MZ Group.

Welcome everyone to Himax’s third quarter 2020 earnings call. Joining us from the company today 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 comments, we have allocated time for questions in a Q&A session. If you have not yet received a copy of today’s press release, please e-mail 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 these 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 and 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 and its Form 20-F for the year end 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 are 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 would now like to 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 Chief IR/PR Officer. Joining me today are Jordan Wu, our CEO and Jessica Pan, our CFO. On today’s call, we will first review the Himax consolidated financial performance for the third quarter followed by the fourth 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 addition to impact of COVID-19, which remained harsh in many parts of the world, the prolonged U.S. China trade tension brought turbulence to the market and resulted in new market dynamic during the third quarter. The unceasing stay-at-home economic created new demand, but pushed foundry capacity constraint to a more severe level. Despite these challenges, we continued to ask you efficiently and delivered strong business results in the changing environment. We pre-announced preliminary key financial results for the third quarter on October 6 for the revenue, gross margin and the EPS, all exceeding the guidance issued on August 6, 2020. Today, our reported results for revenue, gross margin and the EPS are all in line with the pre-announced results. For the third quarter, we recorded net revenue of $239.9 million, an increase of 28.3% sequentially and an increase of 46.1% compared to the same period last year. The 28.3% sequential increase of revenue exceeded our guidance of an increase of around 20% quarter-over-quarter. Display driver of TV, tablet, smartphone and automotive as well as CMOS image sensors, all contributed better than guided sales. Gross margin was 22.3%, exceeding the prior guidance of flat to slightly down from 21% of the second quarter. IFRS…

Thank you, Eric. Before we walk through each of our major product segments, I would like to briefly comment on the background for our upbeat Q4 gross margin guidance and our view on the sustainability of the higher margin. First off, gross margin expansion has always been at the top of our agenda and we will surely work hard toward continuous profitability improvement. The upbeat Q4 gross margin guidance is mainly a reflection of the tight foundry capacity, which results in better pricing and more favorable product mix. The foundry industry appears to be going through a structural change in the supply demand dynamics for the mature process nodes, both 8-inch and 12-inch. We believe the current tightness is likely to persist throughout the next few years. Major volume applications such as display driver ICs for TDDI and AMOLED, PMIC for 5G smartphone, CIS that is ever upgrading in resolution, just to name a few, are significantly expanding in wafer consumption and competing for the same pool of mature nodes, while the industry has no major expansion plan in sight for such capacity. As Eric mentioned, we are experiencing major foundry supply shortages in quite a few of our major business areas, including TDDI and DDIC for smartphone, tablet and automotive applications as well as CMOS image sensor. For next year’s wafer demands, we have has secured with our foundry partners a capacity which is already larger than our total shipment for this year. On top of that, we are developing additional capacities for various product areas with an aim to further our available foundry pool for the next few years. Some of these new capacities will start making contributions next year. We will report the progress in due course. Another important factor for continuous gross margin improvement will come…

[Operator Instructions] Our first question will come from the line of Tristan Gerra from Baird. You may begin.

Hi, guys and congratulations on the results. Given the capacity that you secured for next year as well as your own capacity plans, what type of revenue do you think this is going to support for 2021?

I said earlier in my prepared remarks, we have secured with our various foundry partners, that is one way of arrangements, many of which are legally binding a capacity, a total capacity covering all type of our products. That has already been higher than our actual shipments made during this year, okay? So that is our starting point and something that is not enough for us. That is not going to satisfy our expected demand for next year. So in the meantime, we are developing quite aggressively, again, with different foundry partners, covering different product areas to expand our capacity. But I have to say that such development is something we’re not starting to take, it started actually quite some time ago. But this is not something that you can turnaround overnight. So I think additional capacity on top of the capacities we have already secured with our foundry partners. You will see – I mean, for example, in Q1, the addition will be rather limited. And there will be some contribution from Q2 and more Q3 and furthermore in Q4 and even more, probably much more going forward. So it’s a aggressive effort. However, it has to be a gradual process. And again, the capacity is so tight nowadays, I mean, you guys all know. So we just have to accept the reality and manage our customers, manage our products, prioritize our production, and in the meantime, continue to develop new foundries and new capacities. And it’s fair to say, we are making good progress. And right now, what we are seeing is – for our sales the most severe are basically three areas. The first area being smartphone and tablet TDDI, which share the same pool and our strategy, given our very high market share in the Android…

Okay, that’s very useful. And then just as a quick follow-up, what are the implications for ASPs for the rest of – for this quarter and for next year?

On an apple-to-apple basis to reflect the foundry capacity tightness, certainly, we are able to raise our ASP in a degree that it certainly varies in accordance with the different degrees of tightness in capacity. So the sectors that I just named tend to – will tend to enjoy better ASP increase compared to those sectors that I didn’t mention just now, primarily large panel display drivers. Although they are still tight, but they are not in severe shortage, let me put it that way. So I think we have very good visibility in Q1, unusually good visibility in Q1 with customers all lined up with the appeal and whatnot. And I can say with fairly good confidence across – toward the whole first half, I think the visibility is quite good. Longer term, it certainly hasn’t propelled. It’s going to depend largely on the development of COVID situation. We all know that nobody has the answer. I think the quarter is something beyond our control. What we can control ourselves is aggressive design-in and design win engagement at this moment, while taking advantage that we are one of the largest players in the marketplace and adding the capacity is very tight. So I think we have made tremendous progress across different product segments for new design-ins and design wins. And our engagement has reached out much more compared to the past, not just panel makers, but also to system makers and product indirect customers. So I think that longer term is going to be a major plus for us. Historically, our engagement with such end customers typically are more toward technology discussions – technology engagements. Now a lot of it is also about this – I think that is a very important benefit because of the tightness. I guess…

That’s very useful. Thank you very much.

Thank you, Tristan.

And our next question will come from the line of Donnie Teng from Nomura. You may begin.

Thank you, Jordan, Eric and management team for taking my question and congratulations on the very strong guidance. My first question is regarding to the guidance, so could you elaborate a little bit more or quantify how do you come up with like 10% sales growth in fourth quarter by breaking down into maybe roughly shipment and ASP growth if possible? Thank you.

I am afraid I can’t really give too much specifics on revenue and ASP growth. But again, I can give you a broad idea. ASP growth come primarily from TDDI, both for smartphone and tablet as well as automotive, right, those shortage sectors. And for large panel, I think ASP has sustained in a solid level, but I can’t say they enjoy major growth like for those other sectors. And so for large panel, the market is – the foundry situation is tight, but it’s not in shortage as such. So I think that is kind of the background. But why – I mean we guided for about 10% sales growth for Q4, I think that is – we are – I think that is quite solid. And I think firstly TV is probably the only major sector that is set to decline a little bit, probably mid single-digit because TV makers after quite a couple of good seasons, they are entering into some kind of inventory correction period. But other than that, I mentioned, for monitor, first three quarters combined very strong compared to last year, but the third quarter, there was a major dip. But we don’t see that as a weakness in demand, rather for monitor, it is really customers’ inventory adjustment. So Q4, we are seeing a major rebound. And notebook also is kind of close to 100% kind of increase sequentially. And certainly, the biggest growth will come from tablet in kind of revenue contribution. Tablet TDDI continue to grow in penetration and we dominated the market. So Q4, TDDI for tablet will be up something like 80%, right? And with good ASP contribution because a good percentage of TDDI goes into what we call IC tables, the active stylus, and that always will enjoy better ASP and better margin. Smartphone will be up high single-digit. Again, demand is much higher than our supply, the major capacity constraint. But the good news is, we are – we continue to gain market share in smartphone, although under such difficult situations in terms of foundry. In automotive, I have mentioned, we’ll be up more than 20% sequentially. We are very, very happy with more of a rebound in the midst of a pretty bearish market for automotive worldwide. And so that kind of gives you a flavor of the major revenue contributions, meaning monitor, notebook, smartphone, tablet and auto, with the major – with the only major declining sector being TV, which is only down – could be down like mid-single-digit only. So it’s across the board pretty even, the growth.

Thank you, Jordan. And can I have a follow-up? Under this kind of situation, are you considering to raise price further in the first quarter, including in large display driver ICs or raise again on TDDI, as you just mentioned?

I think we have to respond to the markets and our competitors’ move. But I think in all likelihood, the answer is yes. But we will just have to wait. We’ll have to continue to observe the market and manage the customer, and we’ll see. But I mean, certainly, the likelihood of our lowering – our ASP I think is very, very low.

I see. And my second question is regarding to the gross margin. Do you think this kind of 29% level will be a new norm or may I ask if your foundry partners have all raised the wafer price in fourth quarter yet or some of them will not raise the price until first quarter next year? Thank you.

They certainly have raised their prices for Q4 to a very large degree. And certainly – and also our second suppliers have worked, especially for testers and for timing control, the packaging as well. And your question whether this 29%-ish kind of growth module will be a new norm, we certainly hope so. And certainly, we have all the intentions to keep it this way and to actually grow from here further next year and beyond for the reasons I mentioned. I think, one, our foundry tightness for material technology appears to be a long-term thing. And two, our capabilities to grow potential capacity actually is going to enhance our – it is going to help defending our margin as well because customers were – will be happy to come to Himax more than less because we do have upside volume to grow. And thirdly, we have very good solid design wins across the board. I just mentioned, covering not just direct customers, but also indirect customers, that is very helpful. I’m talking about from TV all the way to automotive. So I think this is very exciting development. And lastly, longer term, I just want to emphasize again the importance of our new product areas such as WiseEye. I think that will be very exciting. It’s long-term, it’s something it will have less top-line contribution than bottom line because margin will be much, much higher for such products. And it’s something – timing controller, we have seen it is all within expectation. We have seen very healthy growth this year. And I think the growth is in all likelihood is going to continue into next year and beyond. So yes, the short answer is, yes. We intend to defend such a level of margin and try to even improve it further for next year.

Thank you, Jordan. And kind of a follow-up is that, when you say that all the – most of your foundry partners have raised the price, is that in like wafer in base overall base cost. I’m just curious that I’m not sure whether it’s some foundry partners wafering, so the actual price – wafer price hike should be more...

Sorry, sorry. We were out. We were output. We – accounting wise, when we say they have raised the price, for us it is – the increase in our cost of goods sold. I mean in inventory already it’s we were out, and that is related to the shipments we make. So we are talking about the Q4 COGS. That’s what we are referring to when we talk about foundry raising their prices.

So they...

They are raising prices much earlier on because the foundry production there is probably about a quarter of lead time.

Yes. Is there any write-off, inventory write-off in fourth quarter as well as third quarter?

Certainly. There are always inventory write-offs each quarter. But I think largely, thanks to our efforts over the last year or two to much tighten our inventory management. I think we are able to lower our overall inventory write-down each quarter. And on top of that, it is just a lucky coincidence that the market is so tight that inventory now it is actually not only it is a problem in the sense that we feel our inventory level right now is too low rather than too high and the write-down requirement is much less than otherwise. So, two factors, our much improved inventory write – inventory management internal procedure and secondly, the tightness of the market. And I mentioned probably twice in my prepared remarks that in certain circumstances, there are certain goods that we have, according to volumes and inventory management protocol, which has been going on for many years. We have written down certain products, while the goods were still kept. We are not going to sell them, although accounting wise there maybe much decrease in cost or the cost base can in some cases decrease to zero, but because of tightness of the market, we are able to sell those products. So, that certainly is very high margin, but the revenue contribution wise it’s really quite small, but there are such instances. So, it’s just a reflection of how tight the market is right now.

Yes. Thank you so much, Jordan. Congratulations again.

Thank you, Donnie.

Thank you. Our next question will come from the line of – from Jerry Su from Credit Suisse. You may begin.

Hi, thank you for taking my question. First question regarding on the TDDI, can you talk a little bit about what’s beyond tablet, automotive, etcetera, I think we have heard some of the industry, all your peers, a lot of carmakers are interested to adopt TDDI on notebook and also other applications, which area you are seeing more opportunities and what’s the entry barrier there?

I think given the current tightness of capacity for smartphone and tablet already, I really don’t feel there is much room for notebook in the foreseeable future. First off, because we do have the technology and if TDDI for notebook is to happen, it’s going to have rather similar ICs compared to those for tablet as you only mentioned, right. I think for us, TDDI, I mentioned already, so I will just repeat it very briefly. I think automotive is the major growth area. Automotive had different reasons. It’s not asking for – isn’t asking for the thin border or light display, it’s not. It is really for three reasons. One, when the ambient light or sunlight is very, very bright, you feel better, the consumer can feel better with in-cell display, because you don’t feel kind of additional layer of course on top of your panel, right. And right now it appears to be even more convincing reason for in-cell and TDDI is that our ultra-low displays are getting much larger in size and much higher in resolution and people are talking about its strength, such as what they call pillar-to-pillar displays. We are talking about in some cases about 50-inch, 60-inch, even 70-inch panel displays for automotive. So, we want to make a display so big you do need to double in-cell technology, because with in-cell, you don’t have to have the trouble of bounding a third layer of glass, which is split on top of the already completed image display. And if you – the third layer of glass, the bounding, if it goes wrong, it is going to damage the already finished display, which is very expensive as we mentioned. And when you have display so large, it’s very difficult to bound, especially for automotive when you make – you were making such a large display, you need to enable what I call free form design, meaning the display is under a straight piece of glass. So that makes the bounding process even harder. So it is now proven to be a necessity. Now, when the display size go to a certain level, you do have to have TDDI and now for larger display for automotive, is looking to be a major trend. So, I think again we are the leader in that space and we are very excited about this development. So, I think TDDI for automotive application is going to be important for the industry and certainly for Himax.

Okay, thank you. And then the second question is about the AMOLED driver IC and you mentioned in the prepared remarks that you are expecting to see some more revenue contribution from 2021. Can you elaborate a little bit more about which area will see a faster growth, I mean – or for Himax to faster penetrate into? Is it wearable or should we think about it as smartphone and also beyond the Chinese panel makers, any opportunities to get into the Korean panel makers, AMOLED? Thank you.

Thank you, Jerry. I don’t want to comment too much, especially I can’t cover too much specifics before it happens. So again, I want to repeat, we are very committed to this. So we are not going to be absent from this very important long-term market. You have mentioned quite a few applications, meaning wearable, auto, smartphone and tablet we are in all of them. And we have good high-quality solid major engagements with direct panel makers and indirect end user customers in literally all of them. Which one will enter mass production earlier than others, I think it’s probably a bit premature to tell. So if you would allow us to elaborate further when it happens, but I can say, certainly we are targeting mass production starting next year and the major contribution certainly, hopefully, will come from smartphone, correct. That is quite obvious followed by tablet and then wearable, auto will be the lowest, right, but I think I can’t – I don’t want to start uncovering them before it actually happens, but I think we are very, very close to some major breakthrough. So we will see.

Okay. And then about the panel customers are you seeing opportunities to penetrate into the Korean auto customers?

I can’t comment on that. It’s too customer specific, because they are really just one for large panel and for small panel when it comes to Korea panel makers devices. I think that will be 12 years if I make any comments one or the other, sorry about that.

Okay, that’s fine. Okay. Thank you.

Thank you, Jerry.

Thank you. And I am not showing any further questions in the queue. I would like to turn the call back over to management for any closing remarks.

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

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