Himax Technologies (NASDAQ:HIMX) Q4 2020 Earnings Call

0:00 Hello, ladies and gentlemen. Welcome to the HIMAX Technologies, Inc. Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Mark Schwallenberg from MZ Group. Please go ahead. Welcome, everyone, to HIMAC's fourth 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.

0:46 Eric Lee, Chief IRPR Officer. After the company's prepared remark, we have allocated time for questions in a Q&A session. If you have not yet received a copy of today's results, Please email HIMX at mzgroup.us, access the press release on financial portals, or download a copy from HIMX's website at www.himx.com.tw. Before we begin 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 results or events to differ materially from those described in this conference call include, but are not limited to, general business and economic conditions, the state of the semiconductor industry, market acceptance, and competitiveness of the driver and non-driver products developed by HIMAC.

1:55 Demand for end-use application products, the uncertainty of continued success in technological innovations, as well as other operational and market challenges and other risks described from time to time in the company's SEC filings, including those risks identified in the section entitled Risk Factors in its Form 20F for the year ended December 31, 2019, filed with the SEC in March 2020. except for the company's full year of 2019 financials, which were provided in the company's 20F 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.

2:42 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 Lee. Eric, the floor is yours. Thank you, Mark. Thank you, and thank you, everybody, for joining us. My name is Eric Li, and I am the Chief IRP Officer.

3:31 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 for the first quarter and the full year 2020, followed by the first quarter 2021 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 financial includes share-based compensation and acquisition-related charges. The impact of COVID-19 has persisted globally New lifestyles, social activity, and economic practice are all dynamically evolving.

4:29 One of these inferences is the unexpected, long-lasting, strong demand for electronic devices and components, which is broadening capacity shortages in semiconductor foundries and back-ends. In such a favorable but challenging business environment, we continue to steadily implement prudent execution and deliver strong business performance along the way. We pre-announced preliminary key financial results for the first quarter on January 7 with revenues, gross margin, and EPS all exceeding the guidance issued on November 12, 2020. Today, our reported results for the revenue, gross margin, and EPS are all in line with the pre-announced results.

5:23 Both revenues and the gross margin hit record highs in first quarter of 2020. For the first quarter, we recorded net revenues of $275.8 million, an increase of 14.9% sequentially and an increase of 57.6% compared to the same period last year. The 14.9% sequential increase of revenue exceeded our guidance of an increase of around 10%, quarter over quarter, thanks to strong momentum across all major business segments. TV, monitor, automotive driver ICs, and CMOS image sensor contributed more to the better than guided sales than other segments.

6:20 Gross margin of 31.2% exceeded the prior guidance of around 29% and significantly improved from the 22.3% of the third quarter 2020. ISRS profit per diluted ADS was 19.5 cents exceeding our guidance of around 15 to 16 cents. Strong sales and improved gross margin contributed to the better than expected earning results. Non-IFRS profit per diluted ADS was 19.7 cents, exceeding our guidance of around 15.1 cents to 16.1 cents.

7:12 Revenue from large display drivers was $64.2 million, up 15.2% sequentially and up 11% year-over-year. The sequential growth was driven by a continuous strong demand for IT products, including notebook and monitor, derided from the ongoing remote working and the distant education. TV revenue was up slightly quarter over quarter and outperformed our previous guidance of a mid-single-digit sequential decline due to better home entertainment demand from the stay-at-home economy.

7:58 Large panel driver RIC accounted for 23.3% of total revenues for this quarter compared to 23.2% in the third quarter of 2020 and 33.1% a year ago. Small and medium-sized display drivers continue to grow in the first quarter as guided, with revenue of $177.9 million, up 17.3% sequentially and up 119.4% year-over-year. Smartphone and tablet display TDDIs grew robustly in the first quarter, but was offset by a decline of DDICs.

8:48 For year-over-year perspective, both smartphone and tablet demonstrated extraordinary sales growth, yet growth was constrained by the severe foundry capacity shortage. Small and medium-sized segments accounted for 64.5% of total sales for the quarter, compared to 63.2% in the quarter of 2020 and 46.4% a year ago. Smartphone sales continued growing in the first quarter, with revenue reaching $66.6 million, up 5.1% sequentially and 173.1% year-over-year.

9:38 It represented more than 24% of our total sales in Q4. Our smartphone TTDI sales were up around 10% sequentially and up more than 300% compared to the same period last year. The sequential growth was due to favorable mix of both product and clientele. In consideration of capacity limitation, our strategy is to prioritize our support to those customers with whom we are major supplier or have long-term business relationships. Sales of traditional smartphone DDICs fell by around 10% sequentially and were up around 20% from the same period last year.

10:31 As we have repeatedly indicated, traditional smartphone DDICs are quickly being replaced by TDDI and AMLA. Our capital revenue, one of our top sale contributors throughout 2020, reached $67.4 million for the first quarter, another record high. The Q4 sales grew 25.3% sequentially, and 291.5% year-over-year. The tablet revenue accounted for more than 24% of our total sales in the first quarter, slightly higher than that of smartphone.

11:18 Despite smartphone have a much bigger market size than tablet, sales of our smartphone and the tablet were equally weighted for the first quarter, indicating our favorable capacity of location toward tablet segment of reflection of our leading position in that market. For tablet TTDI, the sequential revenue increased significantly by over 80%. This marked the third consecutive strong quarterly increase since the initial mass production in the first quarter of 2020. It reflects the robust customer demand from the Android tablet market where we are main or sole source of buyers to all leading end customers.

12:12 Improved product mix with increasing shipments in high-end products with active stylus also ascribed to the satisfactory sales growth and help our overall margin improvement. Revenue of traditional discrete driver ICs for tabulate decreased 12.3% sequentially but increased 68.8% year-over-year in the first quarter. Our first quarter driver IC revenue for automotive amounted to $37.5 million up 32.4% sequentially and up 11.9% year-over-year as carmaker resumed production in response to a recovery of global automotive demand from Q3 2020.

13:08 However, we were unable to scale off fast enough to meet this surging demand for all customers due to capacity shortage. Automotive driver IC, accounted for more than 13% of total revenues. During 2021, we expect to further our automotive display driverizing market share from the current level of more than 30%. Jordan will elaborate on this in a few minutes. First quarter revenue from our non-driver business was $33.7 million. up 3.3% sequentially, but down 6.4% year-over-year.

13:59 The sequential increase was mainly a result of increased shipment of TCAM ICs for high frame rate and high resolution displays, as well as CMOS image sensor products with strong demand coming from notebook and web camera applications. However, The increase in sales was offset by a decrease in WAO shipments to an anchor customer. The year-over-year reduction in sales was due to a decrease in WAO shipment. Non-driver products accounted for 12.2% of total revenue as compared to 13.6% in third quarter of 2020 and 20.5% a year ago.

14:54 Growth margin for the first quarter was 31.2%, up 890 basis points sequentially and up 1,060 basis points from the same period last year. The much improved growth margin can be ascribed to two main reasons. and several product mix and industrial capacity shortage. The growth of higher margin products, notably TDI, TCAM and automotive drivers, outpassed that of other product category during the quarter, thereby enhancing our corporate gross margin.

15:39 The leap of gross margin for the first quarter also reflected strong overall demand and the better product pricing on rising material costs across foundry, assembly and testing, all undergoing severe capacity shortage. Not meeting all demands, we were able to allocate the limited capacity to the product with better margins. Our IFRS operating expenses were 43.8 million dollars in the first quarter, down 0.8% from the preceding quarter, but up 17% from a year ago.

16:25 The sequential decrease was caused by negative difference in RSU expenses, offset by increased cash bonus as we reported in the last earnings call. To further reward employees for the better than expected financial results, and higher R&D expenses. The year-over-year increase was a result of increased salary and cash bonus, along with higher R&D expenses. Despite a year-over-year increase in operating expenses, the operating expenses ratio was reduced from 21.4 percent in Q4 2019 to 15.9 percent in Q4 2020. reflecting our careful management over operating expenses.

17:19 Non-IFRS operating expenses for the first quarter were $43.5 million, up 11.8% from the previous quarter and up 18.1% from the same quarter in 2019. Reflecting higher sales and better gross margin, IFRS operating profit was $42.2 million for the first quarter with operating margin of 15.3%, up from 3.9% in prior quarter and up from minus 0.8% in the same period last year.

18:05 First quarter non-IFRS operating profit was $42.5 million, or 15.4% of sales, higher from 14.7 million, or 6.1% of sales last quarter, and up from minus 0.4% from the same period last year. IFI's profit for the first quarter was $34 million, or 19.5 cents per diluted ADS. compared to $8.5 million or 4.9 cents per diluted ADF in previous quarters and $1 million or 0.6 cents per diluted ADF a year ago.

18:55 First quarter non-IFRS profit was $34.2 million or 19.7 cents per diluted ADF compared to non-IFRS profit of $12.6 million or 7.3 cents per diluted ADF last quarter and the non-IFRS profit of $1.5 million or 0.9 cents per diluted ADF for the same period last year. Now, let's have a quick overview on 2020 full-year financial performance. revenue totaled $887.3 million in 2020, a 32.1% growth over 2019.

19:48 In the first half of the year, COVID-19 and the US sanctions on China brought turbulence to the market. However, all business rebounded strongly throughout the second half with fresh demand brought by the new stay-at-home economy. Among all three major product categories, small and medium-sized display drivers posted the highest growth of 67.7 year-over-year in 2020, with sales totaling $515.7 million. Us leading Android tablet brands all adopted our TDDI solutions and Global Smartphone Sales rebounded.

20:35 We saw extraordinary business momentum for both product areas in 2020. Revenue from large panel display drivers totaled $240.8 million in 2020, a mild increase of 1.5 year-over-year. During the pandemic, The surge in IT demand boosted our sales on monitor display drivers up by high teens and notebook display drivers up around 60% respectively. TV sales, however, declined by high single-digit year-over-year due to weakness in global TV market, which was negatively impacted by COVID-19 outbreak.

21:24 Non-driver product sales totaled $130.8 million, an increase of 2.9% year-over-year. The year-over-year increase was mainly from TCOM amidst the growing need for high frame rate and high resolution display and the CIF due to the continuous strong demand in notebook and web camera for work from home and online education. This increase was offset by WLO as a legacy product of an anchor customer gradually decreased. Growth margin in 2020 was 24.9%, up from 20.5% in 2019.

22:13 The year-over-year improvement was mainly due to strong sales in second half and a more favorable product mix. As previously mentioned, robust amendments pushed foundry capacity constraints to a more severe level, which in turn enabled better pricing. IFRS operating expenses were $162.9 million, up $6.6 million, or 4.2%, compared to last year. The increase came from higher expenses in share-based compensation, cash bonus, R&D expenses, as well as salary, but offset by lower traveling fee.

23:03 Notably, the stronger NT dollar against US dollar in 2020 contributed to the around $3.9 million of operating expenses increased because while our accounting was US dollar dominated, we pay the bulk of our employees' salary as well as much of our Taiwan local incurred expenses in NT dollars. However, the operating expense ratio of 2020 was reduced to 18.4% from 23.2% in 2019, indicating our consistent management of operating expenses. IFI's operating income was $57.9 million, in contrast to a loss of $18.3 million from 2019 due to higher sales and higher gross margin.

24:06 For the same reason, IFI's operating income was $64.4 million, an increase of $80.9 million from a loss of $16.3 million in 2019. Our IFI's profit for the year was $47.1 million, or 27.2 cents, versus a loss of $13.6 million, or 7.9 cents per diluted ADF. Now, IFI's profit for 2020 was $52.3 million dollars or 30.2 cents per diluted ABS up 64.4 million dollars year over year from a loss of 12.1 million dollars last year.

25:01 The upswing in income was a result of better sales and higher gross margin along with well managed operating expenses. Turning to the balance sheet. We have $201.4 million of cash, cash equivalents, and other financial assets as December 31, 2020, compared to $112.1 million at the same time last year and $142.9 million a quarter ago. The high cash balance was mainly a result of an operating cash inflow of $67.7 million during the quarter.

25:50 Restrictive cash was $104 million at the end of Q4, the same as the preceding quarter, compared to $164 million a year ago. The restrictive cash was used to guarantee the short-term secured borrowing from the same amount. We had $58.5 million of long-term unsecured loans as of the end of Q4, of which $6 million was current portion. Our year-end inventory of December 31, 2020, were $108.7 million, down from $125.7 million last quarter and $143.8 million a year ago.

26:44 Accounts receivable at the end of December 2020 was $243.6 million, up from $221.1 million last quarter and up from $164.9 million a year ago. DSO was 100 days at the year end. as compared to 90 days a year ago and 99 days at the end of last quarter as highlighted in last earnings call. Given the foundry and the back-end capacity shortage, our inventory level will stay at a relatively low level in the quarters to come.

27:29 Net cash inflow from operating activity for the first quarter was $67.7 million as compared to an inflow of $33.5 million last quarter and an inflow of $23.4 million for the same period last year. Cash inflow from operations in 2020 was $102.6 million as compared to $7.7 million in 2019. First quarter capital expenditures amounted to $0.8 million versus $1.2 million last quarter and $2.7 million a year ago.

28:18 The first quarter CapEx was for R&D-related equipment. Total capital expenditure for the year was $5.8 million, mainly for design tools and R&D-related equipment. In comparison, the capex for 2019 was $45.9 million, of which the vast majority was for the purchase of land, the construction of a new building, and the WLO capacity expansion. As of December 31, 2020, Hymax has 173.8 million ADS outstanding, little changed from last quarter.

29:10 On a fully diluted basis, the total number of ADS outstanding is 174.1 million. Now, turning to our first quarter 2021 guidance. For the first quarter, we expect further revenue growth from the already high level of Q4 2020 in most of our business sectors. Growth margin should see another uptick and could reach another quarter high. For the first quarter, we expect revenue to increase by 5% to 10% sequentially. Growth margin is expected to be 37% to 38%.

30:00 depending on the final product mix. With increase of both revenue and margin, net income should increase substantially in the first quarter. IFRS profit attributable to shareholders is expected to be in the range of 30 to 34 cents per fully diluted ADS. Now IFRS profit attributable to shareholders is expected to be in the range of 30.1 to 34.1 cents per fully diluted ADF. Revenue, gross margin, and EPS will all likely reach quoted highs during this quarter. With that, I will now turn the call over to Jordan. Jordan, the floor is yours.

30:56 Thank you, Eric. As we highlighted before on previous earnings call, capacity shortage appears to be a long-term phenomenon. As we enter the year 2021, the shortage has become even more severe and has extended to back-end facilities that include assembly and testing. As a leading industry player with superior resources and engineering capability to diversify and, in large, the vendor pool, along with long-term business relationships with both foundry and back-end suppliers. We engaged early and have successfully secured more capacity for 2021 as compared to the level of Q4 2020 when we reached the recent peak quarterly shipment.

31:49 In addition, we are also optimizing capacity allocation among our diversified foundry suppliers by making the right products at the right facts with an aim to fully utilize the capacity accessible to us. Among the product areas for which we have secured a meaningful capacity increase is automotive, where the global shortage for semiconductor supply is overwhelming. We expect the total capacity available to us to increase quarter by quarter in 2021 and will continue our efforts in securing further capacity. As far as we can see, the overall semiconductor industry supply will not have any significant increase anytime soon, whereas strong demand is likely to persist longer than expected.

32:48 In such an environment, Hymax is a preferred supplier to work with for our sizeable scale, diversified vendor pool, and extensive product offerings. Our strength in a number of high-margin businesses will also help our ongoing margin improvement efforts. For example, with strong demand for tablets expected to remain, Our being the preferred vendor for major Android names will ensure the high margin contribution continues. Likewise, our leading position in automotive display represents a solid support for our margins as we anticipate a robust sales growth in this high margin business for the coming years.

33:35 Moreover, Gross margin improvement can also come from new non-driver products, notably our high-end timing controller, Wi-Fi, ultra-low power AI, and 3D sensing. Again, gross margin expansion will always be one of our major business goals for this year and beyond. Now, let us start with an update on the large panel driver IC business. For the first quarter, we expect large display drive IC revenue to increase by low teens sequentially. For notebook IC segment, we anticipate another impressive quarter of high growth in Q1, a continuation from previous quarters, increasing substantially from the previous quarter due to the extension of strong demand derived from persisting remote working and e-learning.

34:33 As for Monitor IT sales, on the other hand, we expect a sequential decline in the first quarter due to the capacity shortage as we are unable to meet all the demands. As TV sales through remain strong and TV panel shortage increases, our TV segment looks set to end the first quarter with a better than seasonal momentum of around 10% sequential growth. Recently, we saw customers proceeding with aggressive promotion in high-resolution models that require high-end drivers and TCONs, in anticipation of sustained strong demand for home entertainment during the pandemic.

35:21 However, our display drive IC and TCON shipments are still tapped by supply shortage in foundry and packaging, despite firm demand from customers. Now, let's turn to the small and medium-sized dispatch RYC business. In the first quarter, we see continuous, strong TDDI sales for both smartphone and tablet, with demand still surpassing supply. Foundry capacity remains a major issue that adversely impacts our shipping capability. With smartphone and tablet sharing the same foundry pool, We strategically allocate capacity in favor of tablets, as we are the dominant supplier in the Android tablet market.

36:10 For Q1 tablet sales, we expect another high single-digit sequential growth fueled by consumer demand for home working and remote learning needs, as well as higher TDDI penetration. We expect Q1 smartphone sales to slightly increase by mid-single digit, in which Smartphone TDDI revenue is projected to have consecutive mid-teens growth and smartphone TDDI would continue its declining trend. Tablet was one of our top sales contributors in 2020, thanks largely to the fast-rising TDDI penetration from Android names and the strong demand driven by the stay-at-home economy.

37:00 To further broaden our product offering and solidify our market position, our tablet TDDi has moved toward higher frame rate, higher resolution, and larger screen size solutions. We have also enhanced touch accuracy through our leading active stylus design for better quality handwriting and drawing. As stated before, HIMAX is highly committed to AMOLED technology. Our development started from smartphone and has extended to wearable tablet and automotive. We have some encouraging progress with leading Chinese panel makers and will report in due course. We believe AMOLED driver IC will soon become one of the major growth drivers for our small and medium panel driver IC business in 2021.

37:57 Turning to the automotive sector, the global shortage of semiconductor components has brought great challenges to the world's automotive industry. As most of the world's lockdown periods end, tightening foundry capacity combined with sudden surge in orders due to pent-up demand have left the industry facing an even more severe shortage compared to other sectors. Customers now rely on just-in-time delivery of IC components to preserve production and some reportedly already suspended production for days or even weeks.

38:43 In consideration of unceasing sales demand amidst tight capacity shortage, We worked strategically with panel makers, tier ones, and end customers across different continents and have secured an enlarged volume of foundry capacity while managing swift production adjustment to meet customers' production schedules. By offering supportive logistics, we hope to further our relationships with customers who can in turn help accelerate Our new technology into their new models going forward. Limited by large-scale supply shortages, our automotive ICs segment is expected to deliver a mid-teens sequential increase in the first quarter.

39:40 With electric vehicles quickly emerging as the next big thing, We see the car market embracing new display technologies and shifting towards larger, more sophisticated, and higher performing displays like never before. Already the market leader in automotive display driver business, we foresee further market share gains in the coming years in this fast-growing market. We continue to sustain our competitive position with comprehensive product offering for advanced new features such as TDDI for in-cell touch, local dimming, cascade topology connection, point-to-point high-speed interface bridging functions, and LTDI for large in-cell displays.

40:34 As a reminder, we launched the world's first TDDI design for automotive displays technology. which started shipping in 2019 with meaningful volume anticipated starting 2021. As EV grows in popularity and autonomous driving develops, our technological prowess continues to separate us from peers for the next generation display for automotive. For the first quarter, revenue for the small and medium-sized driverless business is expected to increase by around a high single digit, with demand continuing to surpass supply.

41:24 Capacity shortage again remains a major factor, as our production has been unable to respond quickly enough to the unexpected rapid growth. Now, let me share some of the progress we made on the non-driver IC businesses in the last quarter. First on timing controller, the aggressive promotion by major TV brands that I mentioned earlier will benefit our high-end TCAM business as our AKTV timing controllers as well as display drivers have been widely adopted by multiple leading-end customers. Our T-Con technology not only provides higher resolution, higher frame rate, and better image quality, it can also enable lower power in products where power consumption is critical.

42:17 Already over 5% of our total sales, timing controller products enjoy better margin and ASP than those of display drivers, and we expect this segment to be an extensive long-term growth area. Our TCAN revenue in the first quarter, while limited by capacity shortage in IC packaging, is expected to increase by high teens sequentially. Next is a quick update on WLO. The fourth quarter WLO revenue decline that Eric reported earlier was a result of lower shipment to an anchor customer. However, in the first quarter of 2021, sales are expected to increase substantially thanks to resumed shipments to fulfill the anchor customers' higher demand.

43:12 This sequential shipment increase and a higher capacity utilization in our WOOL factory will positively contribute to our Q1 growth margin. Meanwhile, with our leading nano-imprinting technologies and diffraction are optics design capability. We continue to engage and collaborate with key customers and partners for their next-generation products with focuses on TOF 3D sensing, AR-VR gadgets, biomedical devices, and others. Notably, we are seeing more TOF camera design activities among Android smartphone makers for 3D sensing.

43:57 and are making good progress by offering our leading TOF optical components, including diffractive DOEs, microlens arrays, and diffusers to meet diversified demand from a wide variety of customers slash partners, including VEXO suppliers, TOF sensor vendors, TOF module makers, and smartphone OEMs. Next, let me give you an update on 3D sensing for non-smartphone segment. As mentioned before, we provide customers who wish to design their own structuralized-based 3D sensing solution with our proprietary 3D decoder IC.

44:43 Our 3D decoder can accelerate total image processing for face recognition and offer basic class security authentication. It was already certified by the leading Chinese electronic payment standard with requirements of accurate data decoding, timely operation, and strict privacy. We have started volume shipments in the last quarter with decent order pipeline throughout this year and further new design in sockets on the way. On the other hand, For our structuralized 3D sensing total solution, small volume shipments are expected for business access control and biomedical inspection devices in the first quarter. More designs and engagements are progressing, and we continue to receive numerous inquiries with new ideas of applications that never occurred to us.

45:47 Now switching gears to the YSI Smart Sensing Solution. As I mentioned several times on previous earnings calls, in order for our wide-side technology to maximize market visibility and satisfy demand for emerging applications, two business models are adopted, namely total solution and discrete component. For total solution, we are currently aiming at notebook TV and air conditioner applications and have received positive feedbacks. We expect to start a solid production ramp-up by the end of 2021. We join efforts with our subsidiary EMSA and other algorithm partners. Further engagements are on the way for more applications such as doorbell, door lock, automotive, and various IoT devices for industrial and commercial uses. We are thrilled about the business progress achieved.

46:49 For the other business model where we provide key components, as reported earlier, our WE1 Plus AI processor adopted Google TensorFlow Lite for microcontroller framework and has successfully demonstrated our unrivaled computing capability with ultra-low power. In December 2020, we partnered with SparkFun, an online retail store to distribute Timex W1 Plus Edge AI evaluation board and AOS sensor modules. Developers can now access our technologies easily from smartphone and transform their AI enabling concept which call for actual power and computer vision AI into real products.

47:40 Furthermore, we teamed up with Edge Impulse which provides a leading end-to-end AI developer platform offering intuitive user interface. On each impulse platform with a single button press and within seconds, developers can now generate the latest neural network AI model and export it directly onto the WM Plus evaluation board. The high technical obstacles developers usually face can therefore be dramatically lowered. Together with our partners, we are carrying out a wide range of promotional activities to broaden the wide-sized market reach and establish direct contacts with small AI developers.

48:29 As an illustration, recently, Himex and Edge Impulse jointly hosted a webinar discussing ways to help developers get started with the world's most powerful platform that aims enabling embedded machine learning everywhere at extremely low power consumption. We will continue to aggressively pursue such online marketing campaigns going forward. We believe the wide-side offerings will start contributing to our top and bottom lines later this year. We aim to make it a major contributor to our long-term business growth. Now, turning to our CMOS image sensor business update. We see continuous surge in demands for CMOS image sensors for web camera and notebook as the new norm of virtual conferences shows no signs of receding.

49:23 However, our actual shipment has been badly capped by the foundry capacity available to us. Separately, our industry first 2-in-1 CMOS image sensor that supports RGB mode for video conferencing and ultra-low power AI mode for facial recognition. has penetrated the laptop market for the most stylish super-thin bezel designs. We have shipped small quantities in the fourth quarter and expected to ship more during 2021. Regarding Azure Low-Power Always-On CMOS Immune Sensor, which targets in battery-powered or always-on applications, we are getting promising feedback and design adoptions from customers in various markets, such as car recorders, surveillance, smart electric meters, drones, home appliances, and consumer electronics.

50:23 In Q1, the CIS revenue is expected to be up mid-single digits sequentially, although we still cannot fulfill all the demands due to foundry capacity constraints. For non-driver IC business, we expect revenue to increase by low teens sequentially in the first quarter. That concludes my report for this quarter. Thank you for your interest in Himex. We appreciate your joining today's call and we are now ready to take questions. And are we ready to take questions at this time?

51:14 Yes. Ladies and gentlemen, if you would like to ask a question, please press star, then the number 1 on your telephone keypad. Again, that is star 1. We'll pause for a moment to compile the Q&A roster. And again, that is star 1. Your first question comes from the line of Jerry Hsu with Credit Suisse. Hi, Jordan and Eric. Thank you for taking my question, and congratulations on the good results. I think the first question is surrounding the industry-wide capacity constraint. Can you give us a little bit more color about what is your fulfillment rate right now? and then I think for the next couple of quarters, do you think that the supply constraint can be eased for industry or for Hymex? And how should we think about the pricing environment for the upcoming quarters? Thank you.

52:24 Thank you, Jerry. Honestly, I would rather not give specifics on our so-called fulfilling rate because guess why all our customers will be watching and trying to compare their fulfilling rate against our average. So that is kind of a sensitive topic. But I can tell you it's not very high. Although I have to say, you know, sometimes you wonder whether 100% of those demands are real demands, whether there are customers inflating their demand. I think our view is that The industry-wide capacity shortage is going to last at least till the end of this year.

53:33 Obviously, I'm not an economist and I cannot really predict how the economy is going to evolve. You know, during this year with the pandemic and also the vaccination. So I'm setting that aside and I'm assuming, you know, we're not going to see a very strong rebound during this year. And even with that assumption, I think the capacity constraint is likely to persist for the simple reason that, you know, mature technology simply we are not seeing any meaningful increase in capacity. There are just a ton of new applications queuing up to consume more of those capacities.

54:21 Our display driver IC, which always requires high output voltage and IE, we have to use mature technologies, so we are certainly one of the major users of those capacities. From our driver IC's point of view, certainly we are not seeing any sign of The capacity constraint receded anytime soon, certainly not within this year. Having said that, though, I think, you know, I've kind of touched base briefly on my prepared remarks. I think we are, I can't say we are happy, but I think we are well prepared for the capacity of this year. And for that, I'm comparing our are expected output, meaning capacity available to us, offered to us by our various foundry partners.

55:19 So I'm comparing those numbers on a quarterly basis to the number of last quarter, meaning Q4 of last year when we reached our peak output as we all know. So I'm comparing Our this year's quarterly output, expected quarterly output to the highest output of last year. And even with that comparison, I think we expect to see increases from Q4 last year and we expect to have quarter by quarter increase during this year. And very notably, I want to emphasize You know, our stronghold in particular is in automotive display drive ISC, where we believe we are the world market leader. We have the number one market share.

56:12 And the pressure is the highest, obviously, as a result. But also, that is an area we have secured the most meaningful capacity increase compared to last year. So that's very good news for us, for our customers, including those end customers. who very often has established direct dialogues with us to get a better feel about the capacity increase. And not just that, we believe we have a good roadmap for next year as well, meaning the capacity will continue to increase from that of this year. So I think that is very good news for us. That kind of ensures our continuous revenue growth for this year. And I can say pretty much the same for all other major product areas, only that I can say automotive display IC for HIMAX in particular, we have secured the most meaningful increase of capacity and probably with the highest degree of certainty as well.

57:23 So that's something I wish to highlight. So I'm sorry I didn't exactly answer your question directly, but I hope, you know, I do try to give a good overall color of the capacity situation for Himex right now. Okay, that's great. Thank you. And then in terms of pricing, how should we think about the pricing going forward? And then I think you guided gross margin to improve to 37%, 38%, which is about 6%, 7% point increase. How much of that is coming from ASP increase? It's hard. Well, firstly, it's confidential, and secondly, it's really hard to compare because you have to knock down the cost increase as well.

58:13 I mean, bear in mind, cost also increase rather significantly, as you guys all know. So without giving you a direct number, I can share with you You know, how, you know, why the margin improvement and how the margin outlook is going to be like going forward at least this year, right? So, firstly, capacity constraint, and that certainly means better pricing position for us, right? Meaning we can very often transfer the cost increase to customers and a bit more. and we talk about better product mix as well.

59:03 I want to probably elaborate a little bit on that. What do we mean by better product mix? It actually comes from several perspectives. Firstly, obviously when you are facing shortage, you have a tendency to allocate more of your output to higher margin products. to make more money. That's very obvious. So that's the first most obvious point. And secondly, for a similar reason, we also have a tendency, our customers as well, when our total capacity is capped, we want to produce more higher end products. And that applies to TV, monitor, notebook, smartphone, tablet, automotive, everything. and I think Himex being the industry leader and our customers recognize that. So when our capacity is kept, they want us to focus more on those higher end products while probably leaving those lower end products to some of our lesser competitors. So that typically means better profit and better ASP for us.

1:00:12 And thirdly, a few sectors which is already happening, which happens to enjoy better margin historically, they are outgrowing our other businesses. And that on a weighted average basis certainly enhance our gross margin. So I'm talking about automotive, I drive IC41, that's very obvious. Tablet TDDI and timing controller, higher-end timing controller. Automotive, I think if you ask me across all different industries we are in, I would say the sector with the highest confidence level for growth this year, I would say it will be the automotive, which is set to enjoy a good rebound from the very low of last year.

1:01:13 So that is going to outgrow our other businesses, very likely, and it happens to enjoy the best market among our products. Tablet, TDDI as well. Now, whether tablets will enjoy growth this year is a big question mark. You know, the pandemic and so on, right? I don't know. But I think for us, it's about TDDI penetration into the tablet market. Right, so last year our estimate is TDDi penetration is about 20% last year and this year is set to grow to about 30%. So with the same number of total units for the market, you are talking about 50% growth for TDDi and that benefits us tremendously because we are the dominant TDDi provider for tablets in Android market, especially More of those TDI tablets will start to offer active stylus, which represents even more margin for us.

1:02:16 Now, higher-end timing controller, I'm talking about automotive, notebook, TV, certainly, and gaming monitor, and so on. Again, T-Con is suffering big time from packaging, IC packaging shortage. So for that, again, both customers and us are better off allocating our limited resources to higher end products. So I think for those reasons, I feel pretty good about our gross margin prospect for this year. Longer term, I do want you guys to focus on certain of our non-driver IC products, notably YSI. I think it's really promising. I'm personally extremely excited about the progress we are making.

1:03:16 We have our mass production ready sample out only in last September. and look at the degree of engagement, the activities we already have. I've talked a lot about that in my prepared remarks, so I don't want to repeat that, but it's very exciting. Again, the important thing is we feel the mass production will commence towards the end of this year. and after that I believe it's a very long tail, high edge barrier, high margin, high SP products where we are going to play a very unique role in terms of providing such AI for end devices with ultra low power. So I think that is something I feel very good about enhancing our long term gross margin overall.

1:04:12 So I hope that kind of Thank you, Jordan. Thank you, Jerry. And as a reminder, please limit yourself to asking two questions, then press star 1 again to go back into the queue. Your next question comes from the line of Tristan Guerra with Bayard. Hi, good evening. Just following up on the prior questions about gross margin clearly helped by mix and supply constraint. How should we look at the potential timing of peak?

1:04:57 You know, some companies have talked about Supply coming back in the second half of this calendar year which presumably will alleviate a little bit the constraint. There's also the potential at some point for automotive to slow down given that there is probably some amount of double ordering given the tightness currently in the market. So what I'm trying to get a sense is When do you think, even as supply continues to be constrained, it actually gets less constrained than it is now, and when do you think supply will eventually catch up in automotive, meaning that you're starting to see a little bit of a normalization of supply-demand? Is there a way to assess whether that's something that may happen in the second half of this year, or what timing do you have in mind, potentially?

1:05:56 I think my visibility is different for different product segments, and again, I just want to you know, carry on with my previous answer to Jerry's question, you know, the highest degree of confidence for me would be in automotive sector in which I think there's no sign of receding and in fact, you know, customers backed by their end customers or panel customers backed by T1 which are backed by end customers, you know, they are prepared to place orders, firm orders, non-cancellable orders, You know, way beyond the year end.

1:06:42 And now rather than worry about, you know, double ordering or, you know, demand disappearing, I mean, our worry is more on how do we, you know, how do we make our shipments in order for their production line not to be suspended. It's pretty serious, honestly, pretty serious. You know, they are talking about, you know, because, you know, without one single driver IC, they cannot ship a car because they will have no critical display, right? So for that, I think the visibility is very, very low. And we are actually, you know, we are going through different schemes with different customers and our foundry partners, you know, many of which with contractual arrangements to secure that throughout the ecosystem we know what we are doing and our customers know what they are doing and we can just focus on making more outputs and securing more capacities and making sure their production is not suspended.

1:08:01 So for automotive, I honestly don't worry a bit But it's certainly harder to say. For example, the IT demand. People are talking about the stay-at-home economy and all that. So I don't have a crystal ball. I don't know how that demand is going to evolve with the vaccination and the COVID-19 situation and all that. So what we do is, again, we We follow the customers' production orders extremely closely. And one thing of particular interest is that throughout different sectors, we are now having a much closer business and certainly shipment-related discussions directly with end customers.

1:08:56 You know, typically our direct customers are panel makers, right, who in different industries, various, but they are not the end customers. But now whether it's notebook or TV or automotive or cell phone or otherwise, you know, we have very direct, frequent dialogues with leading customers in their respective sector. and for that our visibility certainly gets improved. And sometimes you see the end customer stepping in to secure capacity and help allocation decisions. For example, certain of our ICs should be shipped to panel maker A rather than panel maker B and so on.

1:09:54 So with that I think I think, again, we don't have a crystal ball. We just have to work very hard and make sure we are as close as possible to the end customers. And through end customers and through our direct customers, we will get to have a good visibility about the backlog, the inventory level, the production status, even the demand status and all that. So we just have to watch very, very closely. But as far as we can tell right now, As far as this first RYC is concerned, we are not seeing any sign of the constraint receding.

1:10:44 Because again, the demand is very strong across different sectors, but there's simply no meaningful capacity increase in the industry. Okay, that's great color. Thanks for that. And then for my follow-up, a few years ago, you obviously had traction with some early but leading AR device providers with very high content. You also talked about, and that was maybe up to a year ago, about opportunities in holographic displays. Given the potential for Apple to launch AR devices by next year, which presumably will trigger a lot of companies to basically have similar devices over time, how do you feel your position? What type of initial engagement do you think you have in both AR and holographic displays, and what's the potential timing?

1:11:50 Thank you for the question, Tristan. A few years back, we talked about that a lot because there were real major customers and real products. Unfortunately, the launch of those products and the business result didn't unfold very well, as we all know, right? and certainly we continue to play a critical role in terms of providing the micro-display and related optics for AR-VR gadgets, in particular AR, which requires see-through feature rather than VR.

1:12:37 With VR, your eyesight is blocked by the image, but with AR, it sees through. So when you see through, our technology is needed. So I can say with a good degree of confidence that if this does happen, if the industry does pick up again, pick up momentum again, we are going to play a role. But I don't want to be overly optimistic about this because I think, to be honest, I still see lots of... both technical and business barriers ahead of us for the AR goggles to become a real affordable and a real fun product for people in general to want to own.

1:13:36 And certainly people are talking about Apple and I don't want to comment on customers one way or the other, certainly not Apple. And so we'll see. But, I mean, certainly you are right if Apple does launch something successfully and then other people will follow, certainly. But again, I can't comment the specifics on any specific customers. But I think I want to give a warning that we are not too optimistic about it being the insider in the marketplace. You know, again, I'm seeing are still barriers, both technically and technically being, you know, how do you lower the price substantially? I mean, the lessons of the previous products are they're just way too expensive, right? It's way beyond anybody's, any usual consumer's affordability.

1:14:31 And they are switching that into industrial use, which means very low value, right? So for a company of our scale, it is, It cannot be something very meaningful. So the challenge is how do you create the kind of image, the size, the color, the power consumption, the processing power and so on. The kind of image that involves not just semiconductor but also about optics. How do you create that kind of image that Average consumer will find attractive and yet you have to really substantially reduce the price. And if you can achieve that, then the next barrier is how do you create enough contents, attractive contents.

1:15:20 So I think, you know, two years, I think it's overly optimistic, to be honest. But again, we remain to be a key player. People do come to us still. You know, we still engaging with customers for projects, but we are just, we don't want to overspend on those, overinvestment, overspend on that sector until we feel we have a good position already and we just have to, you know, hunker down and wait for it to happen. And a lot of things is really beyond our control. We are just the display, micro-display of this provider. We can really cover the whole application and total cost and all that kind of issues.

1:16:09 Great. Well, thanks for the color. Very much appreciated. Thank you, Tristan. Your next question comes from the line of Donnie Ting with Nomera Security. Good evening, CEO and Eric. Congratulations on the result. I think I have two quick questions. So the first one is that I think people are talking about how tight the capacity will be and when will it be likely to be used. But in the reality, for example, if we break it down to like 8-inch or 12-inch capacity by different products, which one you think is most likely to be eased in the future? For example, considering the node migration as well as the capacity expansion lead time, what kind of problems you think that would be most likely to be eased in the future and which one would be the most difficult to be eased? So this is the first question.

1:17:21 Okay, Donny. It's not an easy question. It's a good question, but it's not easy to answer because, I mean, other than automotive, which for Himex, and I guess for the entire industry as well, I'm talking about display drive IC, right? Automotive, other than automotive, which is still strictly exclusively on 8-inch, all others are either totally 12-inch or a combination of 8 plus 12-inch. Now with automotive, when we are moving to TDDI, in which we are the industry lead, a pioneer and leader at the moment, good momentum expected for the next few years, TDDI automotive will be 12-inch as well.

1:18:13 And then 8-inch for automotive, I mentioned earlier, 8-inch is extremely tight, but because of our earlier engagement and earlier both engineering and business preparations, we have been able to secure good capacity increase, although it's 8-inch, which is super tight, as we all understand. And for 12-inch, if you talk about, for 12-inch, for high-mass, and I guess for industry as well, For smartphone and tablet TDD, it's all 12-inch because it requires a lot of logic processing, right? And in certain cases, memory as well.

1:18:58 So you do need the 12-inch more advanced nodes. For a large panel, though, it is a combination of 8-inch and 12-inch. A large panel has to move to 12-inch primarily because of capacity constraint of 8-inch, right? And that has started to take place a few years back. So it's not like industry is starting to do this because of this capacity constraint, no. A few years ago, the whole industry, Himex certainly is one of the pioneers, has been moving very aggressively into 12-inch as a way to alleviate the capacity issue of 8-inch for large display drivers.

1:19:45 But then when we move to 12-inch, we typically represent the most mature process of 12-inch for large panel, for example. So we are talking about 110 nanometer as a mainstream, as an example, while for smartphone and tablet TDDi, it's now moving from 80 nanometer to 55 to 40 nanometer. Certainly, there are technology reasons as well, but it's mainly to enlarge capacity. Now, as we move into different new nodes, we are competing against a new set of other applications, right?

1:20:32 So, for example, you know, AMOLED for smartphone is going to be the next big thing for display driver IC. and more than now, the mainstream mass production is 40 nanometer, but people, us included, are moving to 28. So with 28, we'll be competing with a different set of other applications, right? So I think it's kind of difficult to answer in the sense that we If 28 is extremely tight, which is not the case, I'm just saying as an example, if 28 is extremely tight, they will probably then move our products back to 40 a bit more.

1:21:18 Or vice versa, right? If 40 is super tight, while 28 appears to have more accessible capacity, then people will move more aggressively into 28. You know, driver IC is a big consuming product, capacity consuming product. for semiconductors. So our move does make a difference in terms of the tightness level of different technology nodes. But our move is also reactionary, because when something is very tight, they tend to move elsewhere. But as far as I can see, even 28 right now is very, very tight. So you tell me which node is not tight, right? And people are talking about automotive, you know, MCU, for example, you know, 40 and 50 nanometer logic process. They are so occupied, so occupied by automotive right now. And, you know, I don't blame, I can't really blame them, but, you know, philanthropy people are, they claim they are, you know, giving more priority to those applications. So, so...

1:22:26 80 to 55, 40, and then 28. There's really little sign of loosening, incapacity situation, I mean, in my mind. But certainly, my response may change next quarter. I just have to watch the industry situation very closely. But the benefit of our preparation is that we tend to have products crossing different boundaries, even different technology nodes, just to hedge our bets. So we will be able to move with a certain degree of flexibility.

1:23:22 Just a quick follow-up before I ask the second question. Are you able to quantify how much sales that we have right now is from 8-inch and how much is from 12-inch? I don't have the number in front of me, but certainly 12-inch is much, much larger than 8-inch right now. I mean, again, other than automotive, which is probably still right now about 15% or less of our total revenue, although it's growing, it's outgrowing, it's probably outgrowing the rest. So that is totally 8-inch. And certain portion of large panel, and large panel represents, large panel in total, 30 plus percent of our total sales, right?

1:24:12 And a portion of that is 12-inch. and some other portion is 8-inch. So 8-inch is not relatively small for us. And small panel, they are almost exclusively 12-inch other than automotive, right? I'm talking about tablet and smartphone. And that is, you know, combined more than 50% of our sales already. And then you have timing controller and all others. They are all 12-inch as well. Okay, got it. And second question is on your automotive dispatcher as a business. As you mentioned about that you have secured quite meaningful capacity already. I think from at this time point, I would say it's very impressive because last year lots of automotive semiconductor companies that push out the capacity in the second half last year.

1:25:10 So it looks like amazing decision. at this time point. So could you elaborate more on what kind of trend you are seeing on automotive discharge driver? As you just mentioned about it's migrating to PDDI. Or if you can give us more color on how structural the growth will be or like how much volume it will grow in every car. In terms of the bigger screen size or even combination of different kind of display inside of the car. Thank you. Very good question. Firstly, indeed, in the first half of last year, our customers are actually cutting back their orders and the forecast. And I remember we are row showing and we are going around telling everybody, you know, tier one included, even some end customers across Europe and the US that, you know, don't overdo that because guess what? You know, you're going to be in such shortage that you're going to, you know, kill to get capacity, right?

1:26:21 So, and in fact, during Q1 and Q2 last year, we actually Although our customers are cutting back their forecasts, we didn't really slow down in our inventory preparedness because it was very obvious to us that it is going to run into bad capacity shortage. And it was also during that time that we started to engage our key foundry suppliers for long-term foundry arrangement. And that involves both tech New Process Development, and also porting of certain of our products from FAB A to FAB B to increase our flexibility when the capacity is tight in individual FABs. And certainly also we enter into contractual arrangement to secure our capacity as well.

1:27:22 So I think we are you know thankfully we we make those moves and now we can go around telling our event customers that we are pretty well prepared although we are still suffering from shortage but I think our customers are very pleased to hear that we can actually enlarge our capacity quarter by quarter in a rather meaningful way all the way to next year so I think that is very important at this stage for us and And having said that though, 8-inch capacity is very tight, and it is going to remain very tight. And I don't have the number exactly as far as the display driver IC content consumption per vehicle, how that trend is going to unfold.

1:28:16 But I can share with you, now it is common industry understanding that 8-inch is hopelessly tight. So although we can secure more, and also automotive, unlike large panel or smartphone or tablet, which are more flexible in terms of introducing new capacities when it's needed. For automotive, it's notoriously hard, as we all understand. So rather than fighting to get the Traditional Discrete Driver IC moving into 12-inch and having to deal with the barrier of qualification and so on.

1:29:01 It's almost not worth it. So we are encouraging our customers to speed up their TDDI adoption. And guess what? TDDI is 12-inch. And also, the kind of capacity pool we are targeting for TDDI, again, we have enter into a sort of certain contractual arrangement with our foundry partners. The 12-inch TDDI are primarily, for example, 80 to 55, which are basically occupied by smartphone and tablet, but they are all on track to migrate to 40 and 38, as we all know, right? So, and certainly our Our total demand for automotive for TDDI in terms of total amount is nothing compared to the demand for smartphone or tablet.

1:30:03 So I think we will be pretty safe there in terms of 12-inch TDDI for automotive. So we are pretty well prepared for capacity over there as well. And so that is a big trend. I think a lot of customers and customers included agree with us. So I've seen the whole industry be mobilized to speed up the adoption and qualification for TDDI for automotive. That is one thing. And second thing is the displays inside your cars are larger in size. With EV becoming more and more popular, The passenger space will be more roomy.

1:30:50 When it's more roomy, you do need a larger screen for infotainment. When it's such a large screen, typically you need your screen to be of the capability of free form, meaning it's not a and a stupid solid piece of flat glass, right? So, when it's free form, then in-sale becomes a necessity in order to achieve a reasonable production year rate for displays. And therefore, we are actually, again, we are the industry pioneer in terms of working with our panel makers, partners, selected partners, in introducing, hopefully very soon, the world's first are very large display TDDI for automotive.

1:31:50 And I think it's going to be a very important trend because, again, the display needs to be larger because your passenger room is larger. And when display is larger, then it needs to have free form. And when free form is required, then you need to have in-sale display. And for in-sale display, you need TDDI. But that requires a very special design as opposed to the ordinary small size display. So we are leading the industry in terms of developing that kind of TVDI. So again, we are very happy with the progress. And again, because of all the reasons I mentioned, I think in all likelihood, this penetration of such dark screen display to automotive will also get speeded up.

1:32:42 So of all automotive, I think it's the most exciting business for us. We have an industry leader, we are leading in technology, and we are seeing the high growth potential. And we are now very deeply engaged with tier 1 and end customers. All these are very good signs for us in the long term. So thank you, Tony, for the question. Thank you so much, Jordan. Congratulations again. Thank you. There are no further questions in queue. I will now hand the conference back over to Mr. Jordan Wu for closing remarks. As a final note, Eric Lee, our chief IRPR officer, will maintain investor marketing activities and continue to attend investor conferences.

1:33:32 So we will announce the details as they come about. Thank you and have a nice day. This concludes today's conference call. You may now disconnect.