Hello, ladies and gentlemen. Welcome to the Himax Technologies Inc Fourth Quarter and Full Year 2021 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [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.

Welcome everyone to Himax’s fourth quarter and full year 2021 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 comments, we have allocated time for questions in a Q&A session. If you have not yet received a copy of today’s results release, 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. Unless otherwise specified, we will discuss our financials based on non-IFRS measures. You can find the related reconciliation to IFRS on our website. 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 results or events to differ materially from those described in this conference call. These factors include, but are not limited to, the effect of the COVID-19 pandemic on the Company’s business; general business and economic conditions and the state of the semiconductor industry; market acceptance and competitiveness of the driver and non-driver products developed by the Company; demand for end-use applications products; reliance on a small group of principal customers; the uncertainty of continued success in technological innovations; our ability to develop and protect our intellectual property; pricing pressures including declines in average selling prices; changes in customer order patterns; changes in estimated full-year effective tax rate; shortage in supply of key components; changes in environmental laws and regulations; changes in export license regulated by Export Administration Regulations, EAR; exchange rate fluctuations; regulatory approvals for further investments in our subsidiaries; our ability to collect accounts receivable and manage inventory 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, 2020 filed with the SEC, as may be amended. Except for the Company’s full year of 2020 financials, which were provided in the Company’s 20-F and filed with the SEC on March 31, 2021, 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. Thank you everybody for joining us. My name is Eric Li and I am the Chief IR/PR Officer. Joining me are Jordan Wu, our CEO; and Jessica Pan, our CFO. On today’s call, I will first review the Himax consolidated financial performance of the fourth quarter and full year 2021, followed by the first quarter 2022 outlook. Jordan will then give an update on the status of our business, after which we will take questions. Our fourth quarter revenues were at the upper end of the guidance range, while gross margin and EPS both exceeded the guidance issued on November 4th, 2021. The fourth quarter revenues, gross margin and EPS all reached new records. Full year 2021 revenues surpassed $1.5 billion, along with record gross margin and EPS. For the fourth quarter, we recorded net revenues of $451.9 million, an increase of 7.4% sequentially and an increase of 63.9% compared to the same period last year. Gross margin was 51.8%, an increase from the already high level of 51.7% in the third quarter and above our guidance of around 50%. Non-IFRS profit per diluted ADS was 84.9 cents, exceeding the estimates of 78.0 cents to 83.0 cents. IFRS profit per diluted ADS was 81.5 cents, higher than guidance range of 74.5 cents to 79.5 cents. Revenue from large display drivers was $125.0 million in Q4, up 6.3% sequentially and nearly double year-over-year. Monitor revenue came in better than expected, up more than 30% sequentially, ahead of our prior guidance of a more than 20% increase, due to accelerated orders for high-end monitors from certain end customers. Notebook sales continued strong growth momentum, delivering double digit sequential growth as a result of strong shipment of high-end products to world-leading notebook vendors. As expected, the fourth quarter TV IC…

Thank you, Eric. Our spectacular results in 2021 were achieved thanks to macro level tailwinds, our efforts to secure solid capacity, and a steadfast focus on optimizing product mix and solidifying strategic customer relationships. All of these factors contributed to the record sales and profit margins. Now as we look ahead into 2022, against the backdrop of the industry-wide foundry capacity shortage which is expected to extend well into 2022, the visibility into certain areas of consumer electronics is rather limited with global consumption potentially impacted by the ongoing COVID-19 pandemic, port congestion, worldwide inflationary pressure and worries over geographical conflict. However, we are upbeat about our year ahead growth prospect, backed by a few product areas, notably the automotive and ultralow power AI image sensing businesses, which we feel confident will stay strong regardless of the macroeconomic concerns. We anticipate these two products, both with good gross margin, will outgrow other product lines in 2022. Robust demand for our traditional automotive driver IC is backed by strong foundry capacity support while automotive TDDI is on track to experience exponential growth throughout 2022 and beyond. We expect to reach 10 million units cumulative shipment in automotive TDDI in as soon as the second quarter of this year. In the first quarter of 2022, our automotive product sales, including traditional driver IC, TDDI, Tcon and OLED driver, are expected to represent more than 25% of our total sales. As the contribution of automotive revenue grows, it will better position our long-term product mix in terms of both profit margin and business visibility. Meanwhile, we are highly encouraged by the early success we have seen with ultralow power AI image sensing business thus far after a leading customer adopted it for a mainstream application. We expect to see more design-wins awarded across…

[Operator Instructions] And our first question coming from the line of Tristan Gerra with Baird. Your line is open.

Hi, good evening. I'm trying to reconcile the commentary that you had on the call about panel inventory adjustments and also some weakness in smartphones with supply expected to remain tight. So if you could help us understand that you're improving your mix, but are you expecting those final inventory adjustment to basically adjust very quickly, in which case then is the reason why you expect your supply to remain tight? Or is any other factors that I should be considering to reconcile the two?

Thank you, Tristan. I understand your question is directed towards only smartphone. Am I correct?

Well, even overall, because I figure that it is panel inventory adjustment. Eventually, it can have an impact on the overall demand, even though you mentioned that -- actually, I think the commentary that you had for panel inventory adjustment was if I heard well in the large panel driver IC business?

Right. Okay. Firstly, on smartphone, I mean, I think everybody understands the market is relatively slow globally. Having said that though, I think we are relatively immune from the slow market in the sense that we have relatively small exposure to the smartphone market with our sales currently only about 20% going to smartphone, ironically limited by capacity as we reported repeatedly in the past. And I would admit, I don't have very good visibility on smartphone, when as you correctly mentioned, customers do have inventory pile up. However, again, we mentioned before, our pool of capacity for smartphone and tablet, it's the same pool. It's the same thing, right? So with the same limited amount of capacity available to us, we still have to make the choice of supporting tablet over smartphone because in tablet, we simply have a much higher market share with customers relying upon Himax a lot more than smartphone. So on a combined basis in these two sectors, which is more than 40% of total sales combined, we are still running at a pretty serious shortage. Although, when we say the market visibility is limited, I think, if I speak to the customers across the board, whether it's smartphone, tablet or TV or monitor or notebook. I think other than the very exception of automotive, where we remain super positive, the shortage there is severe and we just are backing our foundry and the customers are backing us to ship more, right? So if I put that aside, all other sectors I have to say, when I talk to customers across the board, while nobody has a very upbeat growth prospect year-over-year, no one is also predicting a major decline either. And that is a reflection of low visibility that we just reiterated. However, on this level of demand last year, we as well as the whole industry were running at a pretty severe shortage, and we are also seeing no major capacity increase, right, at least throughout the entire 2022, right? So last year, there was a shortage. This year, it is highly, highly unlikely the demand is going to shrink in a meaningful way. So I think that is why as well as our peers are, and our foundry partners as well, in fact, are saying the shortage is likely to remain. If there should be a demand recovery, whether it's Q2 or the second half, I think shortage certainly will become more severe and vice versa, which, again, we have limited visibility. We just have to watch the market very closely. I don't know if that answers your question, Tristan?

Yes. No, I certainly appreciate the color. And then for my follow-up, I'm looking at the gross margin implications. So it sounds that as wafer pricing continues to go up, you weren't able to offset that or fully offset that in Q1 and thus that brings basically a little bit of a sequential decline in gross margin. Given what you've mentioned about demand and supply, do you think that you have the ability to have pricing match further wafer price increases throughout the year, given the supply constraint that you've mentioned? Or do you think that the inventory adjustment will prevent you from having pricing that will mature higher cost beyond Q1?

I think, firstly, we are not seeing major or meaningful further price increase of foundry from this point over, at least not in this year, right? So our higher cost in this quarter is a reflection of the pricing which took place in Q4 compared to Q3, right? So this is how our business goes, right? We negotiate price. We agree a price with the foundry. We then place order and they start fabrication process for us, which typically will then take 3 months and you pass a little bit for back end. So that becomes the shipment. So Q4, wafer start becomes the Q1 shipments, right? So the new prices we agree with foundry during Q4 become our cost for Q1. In Q3, foundry price was higher than that of Q3 -- sorry, sorry, let me repeat, Q4 foundry price was higher than that of Q3, meaning our Q1 shipping costs will be higher than that of Q4. I don't know if that is clear. And that explains why with this short-term decline in gross margin, a little bit of decline, because our customers are very basically telling us, hey, you have upped your prices a lot last year. And now the market is slowing down, and we really cannot accept for the price up. So although our foundries are also telling us the same thing, right, they are saying, well, it looks like the market cannot accept further price hikes. So although the foundry is saying the same thing to us, however, the price hike that took place in Q4 already was built in into our Q1 costs, and that explains a little bit of squeeze in our gross margin. Now going forward, again, when I talked to all my foundry partners, no one is projecting further meaningful…

Great. That’s very useful. Thank you very much.

Thank you, Tristan.

And our next question coming from the line of Jerry Su with Credit Suisse. Your line is open.

Thanks for taking my question, Jordan. Just wanted to follow up on your comment on gross margin. As you mentioned that foundry is less likely to further increase the price in this year. And then I think you also mentioned that the automotive probably will be the largest contribution of your revenue. So with this dynamic, does that means that your gross margin actually could at least hold at the current 46% to 48% level if the end demand does not change too much?

I think that's a fair assumption, yes. I mean, given all other things, pretty much staying or close to the current level. I think our mix is highly likely to improve, given the fact that we are very confident about our automotive sector outgrowing the others where automotive in general, enjoys better margin than the rest. So given all other factors being similar to the current level, then yes, I think there's a good chance we may actually sustain or improve our gross margin from this point onward.

Okay. Got it.

Hello?

And just a quick follow-up, yes, thank you. And just a quick follow-up on the Q1 guidance for the non-driver because I think you have guided on non-driver, but you only mentioned that timing control has declined in single digit. I'm just wondering what is causing the non-driver business to see a double-digit decline. Well, what's the missing point here?

I think Tcon, there's a short-term sequential decline, right? The Chromebook, TV being soft, et cetera, you know the story, right? So having said that, I think we are very confident about our Tcon growth for this year, year-over-year I think overall, because we mentioned we have positioned ourselves much better right now compared to a year ago when -- whether it's TV, notebook or monitor, we are focusing on higher-end products and having a stronger and more direct relationship with end customers, right? So we are fairly confident about Tcon growth. Also in addition to that, our bundle sales approach, I think it's going to play a role here as well. Bundle sale means Tcon bundled together with driver IC, right, as a total solution. So we are saying Tcon sequential decline in this quarter will be a short-term phenomenon. For the whole year, we still remain confident. I think you were saying the decline for non-driver overall the missing point. I think is in CMOS image sensor primarily. A little bit on WLO, where major customers, their legacy products is declining in volume, but that is playing much less impact on us now than before. CIS, where we have a major market share in notebook and notebook short-term demand is not good. Although notebook, I think, if I may comment a little bit on CIS outlook for this year, the notebook market is undergoing a major upgrade, which you see mostly in the camera, from HD to full HD, right? So that is good news for us. So we are going to benefit, especially starting from second half of the year from this trend. Having said that, I think webcam, which was a major contributor last year, because of the COVID situation. And when you can not upgrade your notebook, you buy a new webcam to support your video conferencing, right? So there was a major, major surge in demand last year. But with COVID, hopefully, leaving us, the webcam demand is likely to decline, right? So I think we are building in that assumption into our CIS forecast. And that results in a slower CIS. And also in Q1, we do see the trend of webcam having declined in projection.

Okay. Got it. Thank you for the color. And then maybe just one last question. I think you spent some paragraph discussing the coverage of metaverse. Question is actually more related to the different display technology. I think in the previous couple of years after shipping the LCoS of some of the AR glasses. But I think more recently, we can see that some of the display technology has been shifting to OLED, [Technical Difficulty] and also potential [Technical Difficulty]. I just wanted to know from your point of view, if you look at the LCoS versus the other 2 technologies, do you think that you have enough confidence or breakthrough that can bring LCoS back to become the mainstream in the next couple of years?

Thank you, Jerry, for the question. I think you correctly mentioned, we have been in AR glasses for many, many years, right? And we are certainly -- I mean, no doubt we are the pioneer in providing a key technology to enable AR glasses, which is microdisplay, right? So we are in the product, you know, of literally all of the most notable AR glasses products so far, although none of them have been a commercial success as we all appreciate. Now I think the lessons learned across the whole industry has included and most importantly, our end customers through all these years is that we have finally come to a good consensus as to what kind of products or technology required for the industry to put forward AR glasses, which is attractive enough for general public, right? So I'm not talking about fancy technology, see I'm just talking about common sense, right? Firstly, you need to have a [Inaudible] design, fancy design, right, similar to your sunglasses with similar shape and weight even, right? And that is the first requirement, very important. Secondly, you need to have your display be in full color. And then display needs to provide over decent image quality and certainly affordable price. And lastly, but very importantly, a decent large enough size of field of view, FOV. So all these are the required barriers for a product, which hopefully will really attract the attention of general public. And our products, together with our end customers, in the past, they missed many of such criteria, right? So throughout all these years, I think the industry has finally come to this conclusion that this is the target we are shooting for, so can we provide the technology. And I can tell you with a good degree…

Very detailed question and help us to understand a lot about the difference between the technologies. Thank you.

Thank you, Jerry for the question.

And our next question coming from the line of Donnie Teng with Nomura Securities. Your line is open.

Hi, Jordan. Hi, Eric, thank you for taking my question. I just have two very short questions. First one is that it sounds like back in late last year, originally, I think we were relatively positive on the first quarter outlook. And then maybe after these 1 to 2 months, the market has been a little bit weaker than expected. So just curious about that. What kind of products in that has been weaker than what you have seen maybe for 1, 2 months ago, for example, it's like smartphone or tablet or any other application that you are seeing or weaker than expected demand in the past 1 to 2 months? And secondly is regarding to the gross margin, again. So I remember that automotive driver IC gross margin should be higher than corporate average. So I'm just curious that if looking at the fourth quarter gross margin and the first quarter gross margin, does automotive driver IC gross margin all higher than corporate average in these 2 quarters? Or it's also declining a little bit in the first quarter? Thank you.

Firstly, on the first quarter outlook, I think your impression about like slowing the market demand. I think we kind of get a similar feeling. I think it's primarily for smartphone. And again, automotive remained very strong. And TV, I think, overall, is slow, although we feel there are talks about customers absorbing their inventory. And hopefully, starting from Q2 for the second half, there will be renewed demand coming from TV. And IT, the visibility is not great in a sense that end customers are revising up their forecast, rather they are staying on the sideline, but they are not revising down their forecast either, right? So I think your impression of slowing down forecast, maybe, primarily driven by smartphone. Your second question about automotive, I think gross margin and related to automotive, I think, certainly, automotive is gross margin higher than our average. And I think more importantly, the visibility is much better as well. Visibility not in terms of just sales forecast, but also in terms of pricing, right? I cannot say I have very strong visibility for TV monitor, notebook or other things. But I can say with good confidence, the visibility of pricing. So I think that's an important factor. And also, overall, I think in Q1, for example, large display driver, I think, based on our guidance is going to be about flat, while overall guidance is lower, right? And lastly, large display driver has lower gross margin compared to -- last year compared to small smartphone or tablet, certainly auto. So I think that also explains partially the lower gross margin on top of the explanation I gave to Tristan earlier.

Okay. Got it. So just to clarify. So in terms of the ranking of the gross margin, it's like auto is the highest, right, and followed by largely like small, medium driver IC, and lastly, large display driver IC prices. Is that correct?

Correct.

Thank you so much, Jordan.

Thank you, Donnie.

And I’m showing no further questions at this time. I would now like to turn the call back over to Jordan Wu for any closing remarks.

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

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.