Q4 2019 Himax Technologies Inc Earnings Call

Feb 13, 2020 PM UTC 查看原文
HIMX - Himax Technologies Inc
Q4 2019 Himax Technologies Inc Earnings Call
Feb 13, 2020 / 01:00PM GMT 

Corporate Participants
   *  Jacqueline Chang
      Himax Technologies, Inc. - CFO
   *  Jordan Wu
      Himax Technologies, Inc. - Founder, CEO, President & Director

Conference Call Participants
   *  Jaeson Allen Min Schmidt
      Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst
   *  Sujeeva Desilva
      Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst
   *  Maili Bergman
      MZ Group S.A. - MD of MZ North America

Operator   [1]
 Ladies and gentlemen, thank you for standing by, and welcome to the Himax Technologies Fourth Quarter and Full Year 2019 Earnings Call. (Operator Instructions). Please be advised today's conference is being recorded. (Operator Instructions).

 I would now like to hand the conference over to your speaker, Maili Bergman, Managing Director of MZ Group. Please go ahead.

 Maili Bergman,  MZ Group S.A. - MD of MZ North America   [2]
 Thank you so much. Welcome, everyone, to Himax's Fourth Quarter 2019 Earnings Call. Joining us from the company are Jordan Wu, President and Chief Executive Officer; and Ms. Jackie Chang, Chief Financial Officer. After the company's prepared remarks, we will have allocated time for questions in a Q&A session. If you have not yet received a copy of today's results press 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 I begin with the formal work, I'd like to remind everyone that some of the statements in this conference call include statements regarding expected future results, financial future results and industry growth and 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 may 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 the other operational and market challenges and other risks described from time to time in the company's SEC filings, including those identified and in 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 29, 2019. 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 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 those 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 Ms. Jackie Chang, CFO of Himax. The floor is yours, Jackie.

 Jacqueline Chang,  Himax Technologies, Inc. - CFO   [3]
 Thank you, Maili, and thank you, everybody, for joining us. In today's call, we will first review Himax's consolidated financial performance for the fourth quarter followed by the first 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 preannounced preliminary key financial results for the fourth quarter on January 7, 2020, as the revenue, gross margin and EPS of the quarter all exceeded our guidance issued on November 7, 2019. Revenue and gross margin were in line with the pre-announced results while EPS were at the high end of the range.

 For the fourth quarter, we recorded net revenues of $174.9 million, an increase of 6.5% sequentially. And a decrease of 8.4% compared to the same period last year. Revenues were better than our guidance of flat quarter-over-quarter, both display driver and non-driver businesses contributed to the better than guided sales. Gross margin was 20.6%, exceeding the prior guidance of a slight increase compared to third quarter's 19.5%. A more favorable product mix amongst small display products, improved WLO factory utilization and higher-than-expected engineering fees from new project engagements, enhance the gross margin for the fourth quarter.

 IFRS profit per diluted ADS was $0.006, exceeding our guidance of a loss of $0.03 to $0.045 Stronger sales and improved gross margin, both contributed to the better-than-expected earnings. In addition, we booked a revaluation gain of $3.8 million from an investment we made in an AI start-up during November 2017. The revaluation gain was not included in November guidance. Non-IFRS profit per diluted ADS was $0.009, exceeding our guidance of a loss of $0.027 to $0.042 cents. Revenue from large display drivers were $57.9 million, up 15.6% sequentially, and down 22% year-over-year.

 The sequential growth was driven by Chinese panel customers' ramping up new LCD fabs and their building of inventories in anticipation of growing demand and price hike in 2020. The revenue was, however, lower then level of the last quarter of 2018 when the production outputs of panel makers reached the peak. Since then, they have cut back their production every quarter to address the overall weak TV demand and industry-wide oversupply. Large driver ICs accounted for 33.1% of our total revenues for the quarter compared to 30.5% in the third quarter and 38.9% a year ago. Revenue for small and medium-sized display drivers was $81.1 million, up 5.1% sequentially and up 1.6% year-over-year. The segment accounted for 46.4% of total sales for the quarter, compared to 46.9% in the third quarter and 41.8% a year ago.

 The sales growth, both sequentially and year-over-year was primarily driven by higher automotive and tablet sales, offset by a decrease in TDDI sales for smartphone. Although the decrease was less than previously expected.

 Sales into smartphones were down 22.5% sequentially and down 14.3% year-over-year. Both the sequential and year-over-year declines were caused mainly by lower TDDI shipments.

 However, on a full year basis, our 2019 TDDI shipments were close to double compared to the prior year as our fulfillment was capped during 2018 due to capacity constraint.

 Starting 4Q '19. Our business started to see a major turnaround. Thanks to our penetration into more Tier 1 smartphone OEMs, the industry's rapid rollout of TDDI in mid- to low end smartphones and our aggressive move to develop new foundry for TDDI. Jordan will elaborate on this in a few moments.

 The fourth quarter sales of traditional TDDI fees declined by 20.2% sequentially, but increased 14.3% from last year.

 Display drivers for tablets and other consumer products were up 26.5% sequentially, better than our prior guidance of 20% increase. This was due to customers inventory replenishment and strong demand from certain brand customers. The fourth quarter sales of tablet and consumer products were also up by 25.8% year-over-year.

 Our driver IC revenue for the automotive application was up 23.2% sequentially, better than our guidance of more than 15% increase. It was up 1.9% from the same period last year. Revenues from our non-driver businesses were $35.9 million, down 3% sequentially and 2.6% year-over-year.

 Non-driver products accounted for 20.5% of total revenues as compared to 22.6% in the third quarter of 2019, and 19.3% a year ago. Gross margin for fourth quarter was 20.6%, up 110 basis points sequentially, but down 370 basis points from the same period last year. Gross margin outperformed our prior expectation of a slight increase compared to the 19.5% of the third quarter. A more favorable product mix amongst small and medium-sized display driver products, improved that will all factory utilization and higher engineering fees from project engagements were the factor behind the sequential increase.

 Increased shipment of the WLO product to an anchor customer led to a higher capacity utilization of our WLO fab and, therefore, better gross margin compared to the same period last year. The year-over-year decline was largely due to smartphone TDDI ASP erosion, arisen from increased competition as well as more TDDI shipments for lower end market.

 Moreover, our large panel driver IC businesses faced headwinds during 2019, when the cost of our COF packaging material went up for capacity shortage and the display industry suffer from a severe capacity oversupply.

 Our IFRS operating expenses were $37.4 million in the fourth quarter, down 5.6% from the preceding quarter and down 8.8% from a year ago. The sequential decrease was caused by decreased salary and R&D expenses. The year-over-year decreases was also a result of decreased salary and R&D expenses, offset by the increase of depreciation expense.

 Non-IFRS operating expense for the fourth quarter were $36.8 million, down 6.2% from the previous quarter and down 9.5% from the same quarter in 2018. IFRS operating margin for the fourth quarter was minus 0.8%, up from minus 4.7% in the prior quarter and down from 2.8% in the same period last year.

 The sequential improvement was primarily a result of higher sales, better gross margin and lower operating expenses. The year-over-year decline was a result of lower sales and gross margin, offset by lower operating expenses. Full quarter non-IFRS operating loss was $0.7 million or minus 0.4% of sales versus non-IFRS operating loss of $7.3 million or minus 4.4% of sales last quarter, and down from 3% for the same period last year. The sequential improvement in year-over-year declines were for the same reasons stated above.

 IFRS profit for the fourth quarter was $1 million or $0.006 per diluted ADS compared to loss of $7.2 million or $0.042 per diluted ADS in the previous quarter, and IFRS profit of $8.5 million or $0.049 per diluted ADS a year ago. IFRS earnings per diluted ADS exceeded prior guidance of per diluted ADS loss of around $0.03 to $0.045. The better-than-expected earnings were due to stronger sales, improved gross margin, lower operating expenses and a revaluation gain of $3.8 million or $0.022 per diluted ADS from a previous investment in an AI start-ups made during November of 2017.

 This was the second revaluation gain we booked for the same investment with the first such gain of $2.9 million or $0.017 per diluted ADS, booked in the same period last year.

 The year-over-year decline was a result of lower sales and gross margin, offset by lower operating expenses. Excluding the revaluation gain, our IFRS loss for the quarter was $2.7 million or $0.016 per diluted ADS, compared to a loss of $7.2 million or $0.042 per diluted ADS in the previous quarter and profit of $5.6 million or $0.032 per diluted ADS from the same period last year.

 Fourth quarter non-IFRS profit was $1.5 million or $0.009 per diluted ADS compared to non-IFRS loss of $6.9 million or $0.04 per diluted ADS last quarter and non-IFRS profit of $8.7 million or $0.05 per diluted ADS for the same period last year. Non-IFRS earnings per diluted ADS exceeded prior guidance of a loss per diluted ADS of around $0.027 to $0.042. The better-than-expected earnings were due to the reasons mentioned above.

 Excluding the revaluation gains, our non-IFRS loss for the quarter was $2.2 million or $0.013 per diluted ADS compared to non-IFRS loss of $6.9 million or $0.04 per diluted ADS last quarter and profit of $5.8 million or $0.033 per diluted ADS for the same period last year.

 Now let's have a quick overview of the 2019 full year financial performance. Revenue totaled $671.8 million in 2019, a 7.2% decline over 2018. Revenues from large panel display drivers totaled $237.3 million, a decrease of 8.9% year-over-year, representing 35.3% of our total revenues as compared to 36% in 2018.

 Small and medium-sized driver sales totaled $307.4 million, a decrease of 5.6% year-over-year, representing 45.8% of our total revenues as compared to 45% in 2018.

 Non-driver products sales totaled $127.1 million, a decrease of 7.5% year-over-year, representing 18.9% of our total sales as compared to 19% a year ago. Gross margin in 2019 was 20.5%, down from 23.3% in 2018. The year-over-year decline can largely be attributed to smartphone TDDI ASP erosion due to increased competition and significantly more shipments of TDDI for lower-end market. Moreover, our large panel driver IC business was impacted by industry-wide TV panel oversupply and high material costs.

 On the positive side, more WLO shipments in 2019, led to improved capacity utilization of our WLO fab, and therefore, better gross margins.

 IFRS operating expenses were $156.2 million, down $9.3 million or 5.6% compared to last year. The decrease was primarily the result of lower salary, R&D expenses and share-based compensation, despite higher depreciation expense out of our new building.

 As highlighted earlier, we did not issue RSUs in 2019 like we did in previous years but granted stock options to employees instead. The fourth quarter stock option related compensation expense was $0.33 million. IFRS operating loss was $18.3 million, a decline of $21.7 million from 2018 due to lower sales and lower gross margins, offset by lower operating expenses. For the same reason, non-IFRS operating loss was $16.4 million, a decrease of $25.4 million from 2018. Our IFRS loss for the year was $13.6 million or $0.079 per diluted ADS versus a profit of $8.6 million or $0.05 per diluted ADS.

 Non-IFRS loss for 2019 was $12.1 million or $0.07 per diluted ADS, down $25 million year-over-year.

 Turning to the balance sheet. We had $112.1 million of cash, cash equivalents and other financial assets as of the end of December 2019 compared to $117.7 million at the same time last year and $128 million a quarter ago.

 We made an operating cash inflow of $23.4 million during the fourth quarter. The cash position was, however, reduced from last quarter, because we paid $33.4 million of unsecured borrowings and made a CapEx of $2.7 million during the quarter.

 On top of the cash position, restricted cash was $164 million at the end of the quarter, the same as the preceding quarter and a year ago. The restricted cash is mainly used to guarantee the secure short-term borrowings for the same amount. We have $57.3 million of unsecured short-term loans at the end of fourth quarter, substantially lower than the $90.6 million a quarter ago.

 Our year-end inventories as of December 31, 2019, were $143.8 million, down from $167.6 million last quarter and $162.6 million a year ago. Accounts receivables at the end of December 2019 were $164.9 million, up from $157.3 million last quarter, but down from $189.3 million a year ago.

 Days sales outstanding was 90 days at the end of the year as compared to 95 days a year ago and 86 days at the end of the last quarter.

 As highlighted in the last earnings call, in response to capacity shortage of foundry and certain packaging material, we had to keep the inventory level higher than usual in 2018. Given the unfavorable market conditions and easing of foundry capacity in 2019, we have started to control our inventory level since the first quarter of 2019. We believe inventory has reached a healthy level. And given the prevailing uncertain market conditions, we will monitor our inventory situation very carefully. Net cash inflow from operating activities for the fourth quarter was $23.4 million as compared to an inflow of $2.3 million for the same period last year and an inflow of $24 million last quarter.

 Cash inflow from operations in 2019 was $7.7 million as compared to $4 million in 2018. Fourth quarter capital expenditures amounted to $2.7 million versus $5.2 million a year ago and $31.2 million last quarter. The vast majority of the third quarter CapEx was for the purchase of land, the contraction of a new building and WLO capacity expansion.

 The investment project has been concluded with a final payment of $1.5 million made in the fourth quarter. The investment in design tools and R&D related equipment for our traditional IC design business, was $1.2 million in Q4 versus $2 million in Q3. Total capital expenditure for the year was $45.9 million, of which $7.3 million was design tools and R&D related equipment. In comparison, the CapEx for 2018 was $49.7 million, of which $7.6 million was for design tools and R&D related equipment.

 As of December 31, 2019, Himax had 172.2 million ADS outstanding, no change from last quarter. On a fully diluted basis, the total number of ADS outstanding is 172.6 million. Historically, due to the Lunar New Year holidays, the first quarter has seasonally been the slowest period of the year in terms of sales, opens down by more than 10% sequentially.

 At this time, however, based on our current pipeline, we are experiencing strong sales in the first quarter, brushing aside a seasonal factor. Jordan will elaborate later. However, the coronavirus outbreak currently taking place in China and all over world does represent a major uncertainty to our operations, especially for the short term. We are working extremely closely with both our customers and suppliers in our joint efforts to mitigate the risks.

 We have started to see some downward adjustments of Q1 forecast over the past week or 2, mainly from certain China-based customer for small-sized display drivers and CMOS image sensors, who are still scrambling to restore their operation into order.

 Our Q1 guidance below has taken into account those downward adjustments. In comparison, we're seeing relatively little impact of forecast from large display customers who are demanding that our supply be uninterrupted by the incident with mass majority of operations located outside of China.

 Our suppliers are largely unaffected by the coronavirus outbreak. The focus there is primarily the logistic management, including the customs operation in various ports in China. It is worth pointing out that we have very little short-term exposure on both customers and suppliers side and in terms of our own operations to Wuhan and the Hubei province, the epicenter of the outbreak.

 The situation is still evolving on top of the downward adjustments of forecasts we have seen. We have deliberately widened and reduced the low end of the quarter's guidance to reflect the risks associated with the coronavirus outbreak. For the first quarter, we expect revenue to increase between 1% and 10% sequentially, an increase of 8.2% to [17.8%] (corrected by company after the call) on a year-over-year basis. Gross margin is expected to increase by 1% to 2%, sequentially, depending on our final product mix.

 IFRS profit attributable to shareholders are expected to be in the range of around minus $0.005 to positive $0.018 per fully diluted ADS. Non-IFRS profit attributable to shareholders are expected to be in the range of minus $0.002 to positive $0.021 per fully diluted ADS. I will now turn the floor over to Jordan, the CEO of the company.

 Jordan Wu,  Himax Technologies, Inc. - Founder, CEO, President & Director   [4]
 Thank you, Jackie. When we hosted our third quarter earnings call this past November, we were facing trends in the marketplace that created headwinds for us specifically. At that time, our performance and forecast reflected challenges we face in our smartphone TDDI business. This was exacerbated by lower supply of capacity in the LCD industry that negatively impacted our display driver IC sales and margins.

 As a result, our overall sales and outlook were weak. Since that time, we have started to see major turnaround in literally all aspects of our businesses. The trends we are seeing in Q1 is expected to extend into Q2 and throughout the rest of 2020.

 Notwithstanding the uncertainty arisen from the coronavirus, we are confident that we will see decent growth across the board for all our major product categories in 2020.

 Now, let me take you through each of our major business areas. Lets start with the large-panel display IC business update.

 For the first quarter, we expect the large display driver IC segment revenue to increase by about 10% sequentially. Sensing strong signs of panel price recovery. Panel makers began to replenish their inventory and increase production, starting the end of Q4 2019.

 Our leading Chinese panel customers are particularly active in getting further market share, taking advantage of Korean panel makers ongoing fab restructuring.

 As the leading IC supplier, Himax is well positioned to benefit from the increased demand coming out of the major Chinese large display players. These market trends that tend to emerge during Q4 2019 are expected to drive strong results in Q1 that will accelerate throughout 2020. On the supply side, we reported during the last quarter's earnings call, that Himax and some of our major panel customers were already seeing foundry capacity shortage of 8-inch silicon wafers for display driver ICs.

 In anticipation of this, we have strategically prepared to ready our 12-inch foundry that was associated backend packaging and testing ahead of our peers, to cover the potential 8-inch capacity shortfall. Our design project coverage is strong across all leading Chinese panel makers. We are very positive on the business outlook for our large display driver for 2020.

 Looking at technology development, the upcoming 2020 Tokyo Olympics will be broadcast in 8K resolution. All top-tier TV brands have been trying to boost sales for 8K models ahead of the event.

 At the CES last month, many of these brands showcased 8K TVs that contained Himax technology. Although the penetration of 8K TVs is still low, we expect this to be a strategic opportunity for Himax as 8K TV sales would boost demand for not just our driver IC, but also timing controller contents.

 Now let me turn to the small and medium-sized display driver IC business. Beginning with an update on our smartphone segment. Our TDDI product road map as well as new design wins with end customers and a foundry capacity advantage have positioned Himax to gain market share, starting in the first quarter and throughout 2020.

 The smartphone market continues to embrace new technologies and are moving towards higher frame rate displays to enable smoother screen viewing and gaming experience. This will drive the adoption of next-generation high frame rate TDDI solutions, for which Himax is a leading technology provider.

 Also, the demand for 5G in China is expected to drive worldwide smartphone growth in 2020, which, in turn, stimulate the growth of TDDI.

 All these trends will benefit Himax. However, as indicated earlier, the small display business, among which smartphone TDDI is the major item, will be the most impacted by the coronavirus outbreak in the short term.

 Again, we are working with our customers extremely closely, adjusting our operations to support their short-term needs in combating the coronavirus outbreak.

 Regardless of the coronavirus, we are confident that our smartphone TDDI business will grow strongly from last year. The price erosion of TDDI we have seen over the last past year is expected to abate in 2020. This is not only because the new high frame rate products enjoy a higher ASP, but also due to the industry-wide tightening of foundry capacity for TDDI. As a reminder, during 2018, the Himax TDDI pieces was negatively impacted by a severe foundry capacity shortage that resulted in our inability to meet customers' delivery requirements. Although the capacity constraint was resolved towards the end of 2019, the delay limited our ability to participate in major design-in opportunities that would have driven the business in 2019.

 The actions we took in 2018-2019 to develop and enable an additional qualified foundry partner ahead of our peers, combined with our superior technology and customer collaboration, now uniquely position Himax to benefit from a tightening of overall TDDI foundry capacity in 2020.

 We are well prepared to meet TDDI production demands and continue to move forward with plans to enable additional capacity this year to capitalize on the strong opportunities for smartphone TDDI, as well as other TDDI applications, such as tablet, in 2020. I will elaborate a bit later.

 As expected, our traditional discrete driver IC sales into smartphones posted a sequential decline for the fourth quarter. This was primarily due to the traditional discrete driver ICs addressable smartphone market is quickly being replaced by TDDI and AMOLED.

 As discussed previously, a major development we are seeing in the marketplace is increased utilization of the OLED, display for smartphone. This is due to expanded AMOLED capacity as well as increased demand for under-display fingerprint technology that is only available in AMOLED display for the time being.

 We are encouraged by the progress we have made, collaborating closely with leading panel makers across China for AMOLED product development. We believe AMOLED driver ICs will soon become one of the major growth engines for our small panel driver IC business.

 In the Automotive Display segment, the number of displays per vehicle continues to rise as the overall automotive display market is set to increase from 2020 onward, despite that the global car sales are forecast to decline again this year.

 More importantly, for Himax, the market is quickly shifting towards a number of new technologies, including higher resolution, in-cell touch, slim border, giant pillar-to-pillar screen, local dimming for higher contrast, and plastic AMOLED for free-form design, all of which are contributing to an increase in market size and demand for automotive display driver ICs.

 Himax commands more than 30% of the global automotive display driver IC market and is the primary partner for most of the world's automotive panel makers to enable the new technologies above.

 It is worth mentioning that Himax is also the dominant automotive TDDI technology provider, working as a sole supplier on numerous TDDI design-in projects across different leading panel makers. While we expect only small volume shipments in 2020, we anticipate meaningful volume of automotive TDDI as we move into 2021.

 Turning to the tablet and consumer electronics business. We expect the tablet business to be a major growth area for Himax during 2020 with significant volume of tablet TDDI shipments starting from Q1. The strong momentum will accelerate into Q2 and throughout 2020. The business growth will be driven primarily by leading non-iOS brands' rapid adoption of the newly developed in-cell TDDI solutions. In-cell TDDI is quickly becoming mainstream for tablets due to its lower cost and a simplified supply chain as well as faster and easier integration for display manufacturers.

 At a same time, customer demand is expected to accelerate for these cheaper, slimmer, lighter and more stylish tablets. Himax is the primary partner for all non-iOS tablet in-cell TDDI products right now and we are already making shipments of our new in-cell TDDI products for tablet to a number of leading end customers, some of which include active stylus.

 Additionally, we continued shipping our traditional display driver IC with CoF packaging for larger-sized tablets with slim bezel design to a leading Chinese brand customer and expect the momentum for these high-end designs to accelerate throughout 2020.

 For the first quarter, revenue for the small and medium-sized driver IC business is expected to increase by around 10% to 20% sequentially.

 Now let me share some of the progress we made on the non-driver IC businesses in the last quarter. First, on our WLO business. The fourth quarter shipments were very strong, up by over 20% compared to the same period last year, despite a modest decline from the previous quarter. The momentum led to higher capacity utilization and together with an improved production yield helped enhance corporate gross margin for the quarter. According to our customer's shipment forecast, we expect another strong quarter, with Q1's shipment volume to double compared with the same period last year, although the [Q1] (corrected by company after the call) shipment volume is expected to decline slightly from that of the last quarter. We continue to make progress with our ongoing R&D projects for next-generation products centered around our exceptional design know-how and mass production expertise in WLO technology.

 Next is an update on the 3D sensing business.

 In the smartphone segment, we have advanced our WLO optics solution to cover both structured light and time-of-flight or ToF 3D sensing. We have seen increasing ToF adoption by smartphone makers for world-facing cameras to enable advanced photography, distance/dimension measurement and 3D depth information generation for AR.

 In the past few months, we've been actively working with an industry-leading ToF 3D camera vendor to develop a new and advanced ToF solution, targeting Android smartphones. Leveraging on our WLO technology, we have made great progress providing the partner with spot projector for their reference design, which will be ready for leading Android smartphone makers evaluation as soon as Q1 2020.

 Our non-smartphone 3D sensing engagements have focused on smart door lock and industrial automotive segments where we provide structured light-based 3D sensing total solution.

 We've been collaborating closely mainly with two types of partners: those with industry-leading expertise in facial recognition algorithm and those offering application processes with strong AI capability.

 We have started design projects with several smart door lock end customers. Separately, as we previously mentioned, we are working with partners who wish to take advantage of our 3D sensing know-how to achieve efficiency improvement and cost reduction in traditional manufacturing.

 One market opportunity we are pursuing is shoe factory automation. I'm pleased to report that prototypes of 3D sensing enabled automatic robotic cementing system are available right now for both production optimization testing.

 Next, on WiseEye, our AI-based ultra-low power smart sensing solution. The demand for battery power smart device with AI intelligent sensing is rapidly growing.

 Our total solution is built on Emza's unique AI-based algorithm on top of Himax's proprietary computer vision processor and CMOS image sensor or equipped with ultra-low power design.

 Currently, a laptop is the market of focus. Himax WiseEye 2.0 NB solution, provides 'a laptop-ready' 3-in-1 RGB/IR/AI solution. We're expecting privacy while enhancing security for noble users.

 At the CES 2020, the number of notebook OEMs and ODMs demonstrated our WiseEye NB solution in the next-generation premium notebooks with positive feedback.

 In addition to notebook, we have also made progress in the display and IoT markets. Innolux, one of the world's leading manufacturers of TFT-LCD displays has integrated the Himax-Emza WiseEye solution into displays to enable consumer privacy protection in real time.

 Also, Chicony, one of the leading ODMs in the world, and Emza jointly announced a reference design of the world's first battery-powered human sensing solution for IoT in December 2019. Both Innolux and Chicony showcased their products at the CES.

 Previously, we mentioned that in addition to total solution, Himax is also able to offer an ultra-low power smart sensing on the basis of individual parts, so as to address the market's different needs and maximizes potential opportunities for Himax. I will elaborate on this in a CMOS image sensor discussion below.

 On CMOS image sensor business update. CMOS image sensor is another critical part of the WiseEye 2.0 NB solution. To support the lean camera design and high-quality image needed for thin bezel laptops, we have made a 2-in-1 sensor that offers the duo capabilities of high-quality HD image capturing and ultra-low power, low resolution visual sensing in one single sensor, the industry's first with the first innovative design.

 With this sensor, laptop makers can simplify their next-generation product design and save costs by eliminating the need for an additional camera to provide context awareness for better user experience. Our sensor has also incorporated an RGB-IR design to enable Windows Hello facial recognition. This 2-in-1 CMOS sensor is currently available for partners/customers.

 In addition, we recently announced the commercial availability of the industry-first, ultra-low power and low latency, backside-illuminated CMOS image sensor solution with autonomous modes of operations for always-on, intelligent video sensing applications such as human presence detection and tracking, gaze detection, behavioral analysis and pose estimation for growing markets, such as smart home, smart building, healthcare, smartphone and AR/VR devices.

 We are collaborating with leading partners within the ecosystem to reduce time to market for intelligent edge vision solutions. Notably, we are working closely with Google and have become the reference design for its world-leading TensorFlow Lite AI framework, targeting low-power edge devices.

 For the traditional human vision segments, we see strong demands in notebooks where we are one of the market leaders and have experienced increased shipments for multimedia applications such as car recorders, surveillance, drones, home appliances and consumer electronics among others.

 Additionally, we have seen increased shipments and new design wins in the automotive segment covering before-market solutions, such as surround view and rear-view cameras.

 Lastly, on LCOS. We continue to focus on AR goggle devices and head up display or HUDs for automotive. Many of our industry-leading customers have demonstrated their state-of-the-art products, including holographic HUD, AR glasses and LiDAR system, with Himax LCOS technology inside at the 2020 CES with positive market feedbacks.

 Our technology leadership and proven manufacturing expertise have made us the preferred partner for customers in these emerging markets and their ongoing engineering projects in AR goggles and HUD for automotive applications.

 For non-driver IC business, we expect revenue to decrease by single-digit sequentially in the first quarter. Aside from the WOL sales, which are expected to be down slightly, the CMOS image sensor sales for multimedia markets have been affected by the coronavirus incident as the operations of many of the customers here are still not back in order. That concludes my report for this quarter. Thank you for your interest in Himax. We appreciate joining today's call and are now ready to take questions.

Questions and Answers
Operator   [1]
 (Operator Instructions). Our first question comes from Jaeson Schmidt with Lake Street.

 Jaeson Allen Min Schmidt,  Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst   [2]
 I just want to start on the TDDI business. It sounds like you're seeing some nice traction, given some pricing tailwinds this year. But outside of that, do you think some of the strength is really being driven by overall market growth or share gains as well?

 Jordan Wu,  Himax Technologies, Inc. - Founder, CEO, President & Director   [3]
 Definitely, it is driven primarily by our share gains and the market momentum. Certainly, 5G is going to help. And certainly, that, together with the current -- the issue of capacity constraint are also in unique position for having a mature and sizable and ready-to-offer capacity that all these factors combined, I think, is going to add to our strong momentum expected for this year opportunity end.

 Jaeson Allen Min Schmidt,  Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst   [4]
 Okay. That's helpful. And then just curious if you could comment your thoughts on what channel inventory looks like in the Chinese smartphone market?

 Jordan Wu,  Himax Technologies, Inc. - Founder, CEO, President & Director   [5]
 It's a tricky question. You're talking about smartphone, right? Am I correct?

 Jaeson Allen Min Schmidt,  Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst   [6]

 Jordan Wu,  Himax Technologies, Inc. - Founder, CEO, President & Director   [7]
 Okay. Okay, it's a tricky issue because the coronavirus situation, I think it's making things pretty blurry for us for the time being. Although I think things will get clarified soon. Having said that, though, I mean, the situation is indeed evolving.

 I think I would like to probably further elaborate on your question. I think I mentioned earlier in my prepared remarks that we have taken into account overall, let me rephrase it. We have discounted already the impact coming out of the virus into our guidance, right? And so what we've seen, we have counted in our guidance. And on top of that, we have further widened our guidance on the low end just in case because, as I said earlier, it's still evolving. And so you asked me, so effectively how much impact the coronavirus is going to have on our Q1 results. I would say, around 10% or even more of our all sales. And that is primarily coming from small panel, in particular, smartphone. And so the smartphone TDDI impact. Now I'm sure you're all -- you are going to wonder why smartphone and why not glass panel?

 I think long story short, it is primarily because as many of you know, the larger the panel size, the less likely the panel makers are going to outsource their module assembly to third parties and vice versa. So in the case of TV, it is highly unlikely. Actually, it is -- we have not seen that at all that panel makers are outsourcing their module assembly to outsiders. i.e. panel makers are making their modules themselves. And smartphone happens to be the smallest in size in display. So it is the most likely that the module assembly is outsourced to third parties. Some of them are actually designated by end customers.

 Now it is the marginal side of the operations, which purchased our ICs, the front end side. So right now, what we're seeing is that a lot of small players specialty module assembly houses who are primarily focusing on smartphone for the reasons I mentioned earlier. They are business because they are smaller in size, their business is not entirely in order, right? They are -- some of them, even the boss, all the employees are being effected of the office because of all these constraints created by the various situation. And also, it is a lot more likely to -- for such smaller module houses to react quickly to any other changes because IC for small panel size accounts for a larger percentage of the low cost. So they are very sensitive to inventory costs. While a large panel, especially very large TVs, IT accounts for a very small portion of the cost, so there's a concern over there is that they need to make sure that ICs are secured. Otherwise, if they continue to produce sale, which they are doing right now, regardless of the various situation. There will be a fewer shortage when they are ready to ship. So that's the kind of explains why the smartphone is the most severely impacted. And again, I think after discounting about 10% or even more of the impact that we saw over the last 2 weeks also out of the coronavirus situation. We are giving the guidance. And on top of that, we're also widening our lower-end just to accomplish for that certainty. Having said that, though, we believe this is short term situation, although, I don't have a crystal ball, so I don't know how long this so called short-term is going to last. But I -- we believe the market is still there. The 5G is still going to take off. And the smartphone, again given our good pipeline, our capacity, our foundry capacity advantage, our design win, et cetera, et cetera. I think, most likely, we are going to see explosive growth in (inaudible), too. So that is already on top of how we indicated around 10% to 20% sequential increase for Q1 expected. That is I think I extended answer to your question, Jaeson.

 Jaeson Allen Min Schmidt,  Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst   [8]
 No. That's very helpful. I appreciate that color. And then just last 1 for me, and I'll jump back in the queue. You expecting some pretty nice gross margin net expansion here in Q1 -- sorry, 22% at the midpoint of guidance. Should we assume that, that is the low watermark for the year? Do you still expect gross margin to expand as we progress throughout 2020?

 Jordan Wu,  Himax Technologies, Inc. - Founder, CEO, President & Director   [9]
 I certainly believe so. We expect in 2020, the gross margin to further improve because both smartphone, small size and all the last size from the capacity are both facing constraint. I mentioned again and again earlier in my prepared remarks. So that is going to provide a good price support.

 And also, specifically, for example, TDDI new products, we're going to ensure better ASP, non drivers such as (inaudible), for example, where actually, it's -- we could say the penetration is low for 8K TV, but we do have a major major market position, EBIT really going to take off, right? So again, that is high ASP and high margin. So other loan driver products as well are going to enjoy whether as a SPL margin. So I think we have a strong level of confidence that 2019 gross margins is ordinarily well. And we certainly expect a good rebound from that in 2020.

Operator   [10]
 (Operator Instructions). Our next question comes from Suji Desilva with Roth Capital.

 Sujeeva Desilva,  Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst   [11]
 Congratulations for progress here. The TDDI market, it seems like it's a tight supply and firm pricing. How many quarters do you think that situation can persist before a pricing competition resumes competitively?

 Jordan Wu,  Himax Technologies, Inc. - Founder, CEO, President & Director   [12]
 Well, I think right now, what we're seeing is the customers and customers included very anxious about capacity access. So unlike, this is a very, very different situation from none of us here. So I mean, fair enough, we got this virus situation. But I think overall, again, we believe the total market size are not going to -- there could be some small haircuts, although TDDI this year was continuing to grow within the year. So we don't think -- we think TDDI share of market is going to further grow this year, and that is going to make the situation tightening situation. A real issue for both our direct customers and end customers. So I think in this year.

 Sujeeva Desilva,  Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst   [13]
 Okay. That's helpful, Jordan. And then the large panel, clearly, the China panel makers are gaining some share from [great]. Can you get a sense of how much of the market is transitioning over? And then how much is Himax's share go to China panel makers?

 Jordan Wu,  Himax Technologies, Inc. - Founder, CEO, President & Director   [14]
 We -- for a large display driver pieces, vast majority of our I think effect share breakdown right now. I mean, I would say, probably more than happy to say about driver IC for large panel is coming from Chinese customers. And by the way, we are -- I think we are pretty -- we are #1 or equal #1 in China with a pretty decent market share.

 And in terms of how much China is going to get from the Korean restructuring. I guess, it's harder to predict this year, even though I don't think I can give you, I can share some insights from 2019 against 2018. If you look at the cost output -- cost area output distribution, in 2018, Korea had about 32%, while China had 35% right? So it's 32% against 35% in 2018. While in 2019, the margin already widened to 28% against 43% or 44%. And I think the gap is expected to continue to widen further for 2019. So I think it is safe to say that in 2019, China is going to comment half or more than half of the global gross output for large panel. So that's pretty significant.

 Sujeeva Desilva,  Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst   [15]
 Yes. So quite a move. Okay, great. And then my last question is on non-driver and WLO, if your lead customer here. Is there an opportunity for content gain, given competitive capacity challenges or is that something where that's still expected to be phased out over time?

 Jordan Wu,  Himax Technologies, Inc. - Founder, CEO, President & Director   [16]
 I think I cannot elaborate too much on this, given the obvious reason, I can only say that right now, we are providing to our anchor customer. We are the sole source. And also, we are working on further projects. Some of them maybe will be bigger in size compared to current project. And I cannot indicate precisely, exactly when the new project is going to sum up cost rationale. I think I just have to keep updating you guys in due course.

Operator   [17]
 And I'm not showing any further questions at this time.

 Jordan Wu,  Himax Technologies, Inc. - Founder, CEO, President & Director   [18]
 Any more questions from the floor? Without more questions, as a final note, Jackie, our CFO, will maintain investor marketing activities and continue to attend investor conferences. We'll announce the details as they caught up. Thank you, and have a nice day.

Operator   [19]
 Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

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