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Edited Transcript of HIMX earnings conference call or presentation 10-May-18 12:00pm GMT

Thomson Reuters StreetEvents

Q1 2018 Himax Technologies Inc Earnings Call

Taipei May 14, 2018 (Thomson StreetEvents) -- Edited Transcript of Himax Technologies Inc earnings conference call or presentation Thursday, May 10, 2018 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Greg Falesnik

* Jacqueline Chang

Himax Technologies, Inc. - CFO

* Jordan Wu

Himax Technologies, Inc. - Founder, CEO, President & Director

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Conference Call Participants

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* Andrew Paul Uerkwitz

Oppenheimer & Co. Inc., Research Division - Executive Director and Senior Analyst

* Auguste Philip Richard

Northland Capital Markets, Research Division - MD & Senior Research Analyst

* Charlie Chan

Morgan Stanley, Research Division - Technology Analyst

* Jaeson Allen Min Schmidt

Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst

* Jerry Su

Crédit Suisse AG, Research Division - Director

* Sujeeva Desilva

Roth Capital Partners, LLC, Research Division - Senior Research Analyst

* Tristan Gerra

Robert W. Baird & Co. Incorporated, Research Division - MD and Senior Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Himax Technologies, Inc. First Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to turn the call over to Greg Falesnik. You may begin.

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Greg Falesnik, [2]

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Thank you, operator. Welcome, everyone to Himax's First Quarter 2018 Earnings Call. Joining us from the company are Mr. Jordan Wu, President and Chief Executive Officer; and Ms. Jackie Chang, Chief Financial Officer. After the company's prepared comments, we've allocated time for questions in a Q&A session. If you have not yet received a copy of today's results release, please e-mail greg.falesnik@mzgroup.us or access the press release on financial portals or download a copy from Himax's website at www.himax.com.tw.

Before we begin the formal remarks, I'd like to remind everyone that some of the statements in this conference call, including statements regarding expected future financial results and industry growth, are forward-looking statements that involve a number of risks and uncertainties that could cause actual events or results to differ materially from those described in this conference call.

Factors that could cause actual events or results to differ materially from those described in this conference call include, but are not limited to, general business and economic conditions, the state of the semiconductor industry, market acceptance and competitiveness of the driver and non-driver products developed by Himax, demand for end-use application products, the uncertainty of continued success in technological innovations as well as other operational and market challenges and other risks described from time-to-time in the company's SEC filings, including those risks identified in the section entitled Risk Factors in its Form 20-F for the year ended December 31, 2017 filed with the SEC in March 2018.

Except for the company's full year of 2017 financials, which were provided in the company's 20-F and filed with the SEC on March 28, 2018. The financial information included in this conference call is unaudited and consolidated and prepared in accordance with IFRS accounting. Such financial information is generated internally and has not been subjected to the same review and scrutiny, including internal auditing procedures and external audits by an independent auditor to which we subject our annual consolidated financial statements, and may vary materially from the audited consolidated financial information for the same period.

The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

I will now turn the call over to Ms. Jackie Chang. The floor is yours.

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Jacqueline Chang, Himax Technologies, Inc. - CFO [3]

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Thank you, Greg, and thank you everybody for joining us. Our outline for today's call is, first, review of the Himax consolidated financial performance for the quarter followed by the second quarter 2018 outlook. Jordan will then provide 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 mentioned in the last earnings call, that beginning January 1, 2018, we will adopt International Financial Reporting Standards, IFRS to prepare our consolidated financial statements. We don't expect the transition from U.S. GAAP to IFRS to have any significant impact on our financial results. To illustrate the difference, we prepared a comparison table under both U.S. GAAP and IFRS using 2017 numbers. The comparison table is included in our first quarter 2018 earnings press release.

Our first quarter 2018 revenues came in at a high end of our guidance, while gross margin and IFRS loss per diluted ADS were both better than guidance. For the first quarter, we reported net revenues of $162.9 million, a decrease of 10.1% sequentially, and an increase of 4.9% year-over-year. Gross margin was 22.5%, 50 basis points higher than guidance. IFRS loss per diluted ADS was $0.016, better than the guidance range of $0.02 to $0.03.

Revenue from large display drivers was $59.3 million, up 1.6% sequentially and up 0.1% year-over-year. Large panel driver ICs, accounted for 36.4% of our total revenues for the first quarter, compared to 32.3% in the fourth quarter of 2017 and 38.2% a year ago.

The first quarter is traditionally the bottom of the year, because it has fewer working days due to Chinese New Year. Against seasonality, our large panel driver IC business grew low-single-digit sequentially, driven by increasing 4K TV penetration, and Chinese panel customers' ramping of new LCD fabs.

Revenue for small and medium-sized display drivers came in at $71.7 million, down 11.8% sequentially and up 7.6% year-over-year, due to seasonality and the overall weak smartphone market. The product segment accounted for 44% of total sales for the first quarter, as compared to 44.9% in the fourth quarter of 2017 and 42.9% a year ago. Sales into smartphones were down 23% sequentially and declined 5.4% year-over-year. Our TDDI shipment in Q1 was still hindered by customers' high inventory despite our numerous design wins for HD+ and FHD+ projects with top tier customers. However, we expect the shipment of our TDDI chips to accelerate starting the second quarter, but the volume would be somewhat offset by foundry capacity constraint that the industry is facing right now. Jordan will elaborate on this a bit later.

Our small and medium-sized driver IC sales for automotive application recorded another historical quarter. Revenue, against seasonality, went up 1% sequentially, and close to 40% year-over-year. The quarterly revenue is now close to $25 million, reaching almost 20% of the total driver IC revenues. Driver IC sales for tablets were down 9.2% sequentially but up 2.4% year-over-year due to weak overall market demand in this product segment.

Revenues from our non-driver businesses were $31.9 million, down 23.2% sequentially, but up 8.5% versus last year. Non-driver products accounted for 19.6% of total revenues as compared to 22.8% in the last quarter and 18.9% a year ago. The sequential decline was mainly due to lower than expected WLO shipment, offset by higher NRE income. The year-over-year increase was driven mainly by the WLO product shipment to a leading customer and to a lesser extent, rising sales of timing controllers, CMOS image sensors and NRE income. We expect WLO shipment to increase in the second quarter and rebound strongly in the second half. Jordan will elaborate on this a bit later.

Our IFRS gross margin for the first quarter was 22.5%, down 210 basis points from the last quarter and down 60 basis points from the same period last year. The sequential margin decline was due mainly to the reduced order from our WLO anchor customer, resulting in higher depreciation and overhead charges on a per unit basis.

Our IFRS operating expenses were $39.8 million in the first quarter, down 1.1% from the preceding quarter but up 16.1% from a year ago. The significant year-over-year increase was primarily the result of rising R&D expenses in the area of 3D sensing, WLO, TDDI, and high-end TV as well as annual merit increase. In addition, NT dollar appreciation against the U.S. dollar caused our salary expense to increase around $1.2 million, as we pay the bulk of our employee salaries in NT dollars.

IFRS operating margin for the first quarter was minus 2%, down from 1% for the same period last year and 2.4% in the previous quarter. The sequential decline was a result of lower sales and lower gross margin. The year-over-year decrease was caused by lower gross margin and higher expenses.

First quarter non-IFRS operating loss was $2.9 million or minus 1.8% of sales, down from 1.3% for the same period last year and down from 2.6% a quarter ago. Again, the sequential decline was a result of lower sales and lower gross margin. The year-over-year decrease was caused by a lower gross margin and higher expenses.

IFRS loss for the first quarter was $2.8 million or $0.016 per diluted ADS, compared to profit of $23.5 million or $0.136 per diluted ADS in the previous quarter and profit of $1.2 million or $0.07 per diluted ADS a year ago. The sequential decline was a result of lower sales and lower gross margin. An investment gain of $20.7 million in the last quarter for disposal of a direct investment in September 2017 also caused the first quarter profit to decline. The year-over-year decrease was caused by higher expenses.

First quarter non-IFRS loss was $2.6 million or $0.015 per diluted ADS, compared to non-IFRS profit of $23.8 million, or $0.138 per diluted ADS last quarter and non-IFRS profit of $1.6 million or $0.01 in the same period last year.

Turning to our balance sheet. We had $151.9 million of cash, cash equivalents and other financial assets as of the end of March 2018, compared to $199.5 million at the same time last year and $148.9 million a quarter ago. On top of the above cash position, restricted cash was $147 million at the end of the quarter, unchanged from $147 million in the preceding quarter, and up from $107.4 million a year ago. The restricted cash is mainly used to guarantee the Company's short-term borrowings for the same amount. We continue to maintain a very strong balance sheet and remain a debt-free company.

Our inventories as of March 31, 2018, were $148 million, down from $148.3 million a year ago and up from $135.2 million a quarter ago. Accounts receivable at the end of March 2018, were $166.6 million as compared to $169.1 million a year ago and $188.8 million last quarter. Day sales outstanding was 92 days at the end of March, 2018, as compared to 98 days a year ago and 101 days at end of the last quarter.

Net cash inflow from operating activities for the first quarter was $2.3 million as compared to an inflow of $5.5 million for the same period last year and an inflow of $8.3 million for the last quarter. The decrease in operating cash flow is mainly due to lower net profit.

Capital expenditures were $18.6 million in the first quarter of 2018 versus $2 million a year ago and $15.5 million in the last quarter. The first quarter's capital expenditure consisted mainly of ongoing payments for the new building's construction, WLO capacity expansion and installation of active alignment equipment to support our 3D sensing business. Other CapEx, primarily for the investment of design tools and R&D related equipment for our traditional IC design business, is around $1 million during the quarter.

As of March 31, 2018, Himax had 172.1 million ADS outstanding, unchanged from last quarter. On a fully diluted basis, the total ADS outstanding are 172.5 million. For the second quarter of 2018, we expect revenue to increase around 9% to 14% sequentially, representing a double-digit year-over-year growth. Gross margin is expected to be around 23%, depending on our final product mix. IFRS earnings attributable to shareholders are expected to be in the range of $0.00 to $0.01 per diluted ADS, based on 172.5 million outstanding ADSs.

I will now turn the call over to Jordan.

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Jordan Wu, Himax Technologies, Inc. - Founder, CEO, President & Director [4]

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Thank you, Jackie. We expect a solid rebound in the second quarter overall and sequential growth across all three major product categories. With that, let me now give you some insight behind our guidance and trends that we see developing in our businesses.

Our large display driver IC business recorded low single-digit growth in the first quarter against seasonality due mainly to our Chinese panel makers' capacity expansion and the market's increasing 4K TV demands. As many of our panel customers continue to ramp new fabs and run the existing capacity at high utilization, we would likely see continued growth in the second quarter, on the back of the first quarter's strong performance.

We remain the market leader in the large panel driver IC business in China and will be a major beneficiary from China's ongoing capacity expansion. In the last earnings call, I highlighted that the whole industry is going through a capacity shortage of 8-inch foundry where the vast majority of large panel driver ICs are fabricated. We were not able to fulfill some orders due to tight foundry capacity during the first quarter. While the capacity shortage continued into the second quarter, when we still cannot fulfill all the orders, we have successfully added a 12-inch fab into the pool of our foundry capacity to ease the shortage issue. We expect to make small volume shipments for TV related driver IC products from this fab starting in the second quarter. However, the ultimate ramping schedule will depend on how fast our panel customers can go through their customer qualification, something all our major customers are working very hard on.

With the 2020 Tokyo Olympics approaching, TV makers are rushing to develop super high-end products with 8K resolution. I'm pleased to report that our team has recently secured another 8K TV design win for a major panel maker and expect more to come in the next few quarters. We expect low-single-digit sequential revenue growth for large display driver ICs, a double-digit growth year-over-year.

Turning to the small and medium display driver IC business, despite the first quarter decline in smartphone display driver IC sales due to soft market demand and seasonality, we do see smartphone makers starting to replenish inventory in the second quarter in preparation for the launch of new phones, which will benefit our second quarter business. Overall, we are expecting a strong sequential growth for our smartphone business and our HD+ and FHD+ TDDI shipment are set to ramp up in Q2 as we indicated.

TDDI represents a new source of revenue for Himax with higher ASP and better margin than the traditional driver IC, hence we expect the acceleration of TDDI shipment would lead to improvement of our small and medium panel driver IC product mix and contribute to our overall sales growth in 2018.

Moreover, our new generation FHD+ TDDI with chip on film or COF package has secured design wins from leading Chinese smartphone brands with mass production expected in the latter half of this year. TDDI with COF package for LCD displays can enable super-slim bezel design for premium smartphone models at a much lower cost than having similar form factor using OLED displays. Similar to the situation in the large display driver IC, the TDDI market is also facing a foundry capacity shortage issue. While trying to get as much capacity as we can from the existing foundries, we are working very hard to source and qualify additional foundry capacity for our TDDI ICs.

As to automotive segment, we continue to have new projects going into mass production, which were design-wins of the prior years. In the first quarter, sales into automotive sector have accounted for more than 15% of our total revenues, and we achieved a very significant milestone to gain the world's first TDDI design-win for automotive application, with mass production target of late 2019 to 2020. Q2 revenue in this segment is set to grow around 20% sequentially, and around 50% year-over-year. We have engaged all of the major automotive panel manufacturers worldwide for long-term partnerships and secured many of their key projects pipelined for the next few years.

Going into the second quarter, due to customers' new launches of smartphones, increasing TDDI shipment and the fast-growing automotive display driver sales, we expect small and medium-sized driver IC revenue to be up around 20% both sequentially and year-over-year.

The non-driver IC business segment has been our most exciting growth area and a differentiator for Himax in the past few years.

Now, let me share some of the progress we've made in the last quarter as well as our views on future growth opportunities.

As I reported previously, our 3D sensing total solution is primarily targeting the android-based smartphone at present. Nowadays, new smartphone designs feature edge-to-edge displays, removing home button and minimizing border area to provide better viewing experience. Along with the new design, 3 new approaches of biometric authentication for phone unlock and online payment are emerging to replace the traditional home button with capacitive fingerprint technology. These 3 new solutions for the android smartphones are: structured light 3D sensing and active stereoscopic camera or ASC 3D sensing, both for facial recognition as well as under-display optical sensor for fingerprint authentication.

Naturally, all of the 3 solutions have advantages and challenges. We think all 3 can fulfill different demands and can therefore co-exist in the marketplace. Structured light 3D sensing offers outstanding depth precision, but the cost is the highest for its complex projector design and manufacturing. ASC is a lower cost alternative to structured light 3D for its relatively simple projector and the fact that it is built on the existing dual camera ecosystem. It is, however, constrained by more limited depth precision. Under-display fingerprint, with a similar cost to the ASC solution, is the closest alternative to the prevailing capacitive type fingerprint, which is already familiar to the consumer. However, under-display fingerprint is limited to a single function of authentication without the possibility for other applications such as gesture sensing, photo enhancement or AR, as can be achieved by the 2 3D sensing approaches. Himax enjoys a unique position in that we offer critical technologies in all of the 3 solutions and are already a key player by forming different collaboration partnerships for each of the 3 alternatives. They represent immense revenue opportunities with much higher ASP and gross margin versus our mainstream display driver IC business. Now let me give you updates for each of the 3 solutions.

Firstly on structured light 3D sensing, SLiM our structured light based 3D sensing total solution, which we announced jointly with Qualcomm last August, brings together Qualcomm's industry leading 3D algorithm with Himax's cutting-edge design and manufacturing capabilities in optics and NIR sensors as well as our unique know-how in 3D sensing system integration. The majority of the key technologies inside the SLiM solution is developed and supplied by Himax ourselves. These critical technologies include, on the projector end, DOE and collimator utilizing our world leading WLO technology, a tailor-made laser driver IC, and high-precision active alignment for the projector assembly. And on the receiver end, a high efficiency near-infrared CMOS image sensor. Last but not least, Himax has developed an ASIC by incorporating Qualcomm's algorithm for 3D depth decoding. The fact that all of these critical elements are developing in-house, puts us in a uniquely leading position. It represents a very high barrier of entry for any potential competition and has much higher ASP and better profit margin for us.

The Qualcomm/Himax solution is by far the highest quality 3D sensing total solution available for the android market right now. It has the industry's best performance in all of 3D depth accuracy, indoor/outdoor sensitivity, power consumption and dimension. It has passed the toughest eye safety standards with a proprietary glass broken detection mechanism to safeguard the user from any potential harm. We are pleased to report that the Himax SLiM solution is now ready for mass production. We have delivered production ready samples to select smartphone makers, as well as their preferred facial recognition and secure online payment ecosystem partners for their development into end product, typically flagship or premium models. As each smartphone maker's design and requirements are somewhat different, such developments are taking longer than we anticipated. We are now targeting the end of the year for shipment to customers for their smartphones' sales in the first quarter of next year.

Right now, Himax SLiM solution is only available on Qualcomm Snapdragon premium mobile platforms. Equipped with ASIC for 3D depth decoding that Himax has developed, we can extend the solution to more mid- to high-end platforms. This initiative will make the SLiM solution more affordable for smartphone makers as the price differential among different application processor platforms can be very significant. With 3D depth decoding handled by the ASIC, the smartphone's AP can be freed up for other applications and lower-end platforms with less computing power can be adopted for structured light 3D sensing.

In the last earnings call, we unveiled our plan for a lower cost 3D sensing solution with ASC technology targeting more mass market are smartphone models for facial recognition. We are pleased to report that the joint development with an industry leading AP platform player is well under way. The collaboration leverages our WLO and DOE expertise, as well as active alignment manufacturing know-how and high sensitivity NIR sensors. Our target is to have ASC 3D sensing solution ready for mass production by the end of this year. Given the cost benefit, it has attracted a lot of interest from potential smartphone customers. While a low cost compared to structure light 3D, ASC will still represent a much higher ASP and better gross margin potential for us.

We believe the 3D sensing adoption on android smartphone in 2018 will be limited, but foresee the market demands will increase substantially starting 2019. With our leading technologies, proven manufacturing expertise, new solution roadmap and alliance with leading AP providers, we believe we are well-positioned to be the partner of choice for android smartphone makers in their 3D sensing projects.

Now, I would like to talk about optical fingerprint an emerging opportunity for Himax. We have been working with an industry-leading fingerprint solution provider to develop an under-display optical fingerprint product in the last 2 years, targeting smartphones using OLED displays. A number of design-in projects are already ongoing and we expect more to come. Combining the leading fingerprint solution design of our partner and a low-power CMOS image sensor with superior sensitivity, which we fully customized for this purpose, this optical fingerprint solution is able to deliver outstanding performance even under extreme conditions such as ultra-low light or direct bright sunlight, or when the finger is very cold or dry. Similar to 3D sensing, optical fingerprint is new and complex with a high barrier of entry. Again, the CMOS image sensor used in the solution will have a much higher ASP and better margin than our traditional display driver IC products.

Now, some update on WLO. In the last earnings call, we reported that our WLO anchor customer had lowered its volume for the first quarter. After the earnings call, the customer made a further order reduction. The much reduced shipment negatively impacted our Q1 gross margin, as lower utilization of our WLO fab led to much higher equipment depreciation and factory overhead on a per unit basis. Judging by the customer's forecast, we are optimistic that the shipment for the second quarter will rise from that of the first quarter and we expect the volume to be significantly higher in the second half. Meanwhile, we're very encouraged by the progress of our new R&D projects with the said customer for their future generation products centering around our exceptional design know-how and mass production expertise in WLO technology.

Next on our capital expenditure. We announced the increase of the Phase I capital expenditure budget from $80 million to $105 million in the last earnings call. The Phase I is being executed as scheduled. Since February, we have been moving in equipment and some manufacturing related staff to the new building and started tuning the manufacturing process and conducting production trial run for our 3D sensing solutions. We've already achieved pretty satisfactory production yields in the internal pilot production. Of the $105 million budget, $33 million has been paid out in 2017 and another $17.5 million in the first quarter of 2018. The payment for the remaining $54.5 million is to be made throughout the rest of 2018.

As we mentioned in the previous earnings calls, the CapEx budget for Phase 1 will be funded through our internal resources and banking facilities, if so needed.

Now, onto our CMOS image sensor business update. We continue to make great progress with our 2 machine vision sensor product lines, namely, near infrared or NIR sensor and Always-on-Sensor. NIR sensor is a critical part of our SLiM and ASC 3D sensing solutions. Our NIR sensors' overall performance, measured primarily by way of quantum efficiency, is far ahead of those of our peers for 3D sensing. On the AoS product line, we announced the full acquisition of Emza in March. With the acquisition, Himax is now uniquely positioned to provide ultra-low power imaging sensing solutions, complete with Himax industry leading super low power CIS design and Emza's unique AI-based computer vision algorithm. This will also help Himax enter into markets beyond consumer electronics, such as connected homes, smart buildings and security.

For the traditional human vision segments, we see strong demands in laptops and increasing shipments for multimedia applications such as car recorders, surveillance, drones, home appliances, and consumer electronics, among others.

I will now give you an update on the LCOS business, where our main focus areas are AR goggle devices and head-up-display for automotives. While AR will take a few years to fully realize its market potential, we have seen many companies, be the top names multinationals or new startups, invest heavily to develop the ecosystem -- applications, software, operating system, system electronics and optics. We continue to have active engineering activities with several Tier-1 tech names with ambition to bring next-generation smart glasses to the market. In addition, we continue to make great progress in developing high-end head-up displays for automotives. We and our partners together have secured a few design wins. Timing for such revenue contribution would be 2019 the earliest. We believe LCOS represents a significant long-term growth opportunity for us.

For non-driver IC business, we expect a low-single-digit revenue growth sequentially in the second quarter, and around 10% growth year-over-year.

That concludes my report for this quarter. Thank you for your interest in Himax. We appreciate your joining today's call. And we are now ready to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Gus Richard of Northland.

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Auguste Philip Richard, Northland Capital Markets, Research Division - MD & Senior Research Analyst [2]

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I was just wondering if you could provide a little more color on the revenue from the structured light product in the fourth quarter. Is that multiple OEM's preproduction? Just any color you can provide would be helpful.

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Jordan Wu, Himax Technologies, Inc. - Founder, CEO, President & Director [3]

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In the fourth quarter? You mean this year?

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Auguste Philip Richard, Northland Capital Markets, Research Division - MD & Senior Research Analyst [4]

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This year, correct. I believe you said in your prepared remarks that we would start to see revenue in the fourth quarter and I was just wondering if you can provide a little more color around that.

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Jordan Wu, Himax Technologies, Inc. - Founder, CEO, President & Director [5]

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I'm afraid it is obviously too early to provide the so-called guidance on the revenue potential for the fourth quarter or even next year. I think we have said that there will be limited adoption in 2018. The thing is the development, especially on the software side to finalize everything, including the most important online payment -- secure online payment is, as I said earlier, is more challenging than we anticipated. But we think-- I mean, our job -- Himax's job is primarily to provide the total solution hardware, which we said earlier, we believe, is mass production ready. I think the thing is, we need to get the hardware ready before the -- our ecosystem partners and our customers can do the next steps, including, among others, porting to the various AP platforms and facial recognition and finally, secure online payment to get a certification. So we said earlier that we expect from the existing design-in customers their mass production timetable will be Q1 next year . Given the lead time required, there is a good potential that we will start the mass shipments to such customers towards the end of the year. I think it is fair to say that the projection is a bit difficult to make right now, because I mentioned earlier, there are 3 approaches of next-generation biometric authentication to replace the existing capacitive fingerprint. Right. The thing is, the customers right now are evaluating all 3 -- many leading customers are what we are seeing. So we actually took into certain customers from all 3 approaches, and they are -- well, they are -- some of them are having real projects for all the 3 technologies right now. They are, in the meantime, evaluating the pros and cons of each approach and trying to determine which technology should be placed, which model at which time. And that makes our so-called projection -- early projection a bit more difficult than usual. But I think -- so I'm afraid to say that we are reluctant to give indication for the revenue potential for Q4, but if everything goes as planned, we do expect explosive growth for next year. As far as the relative weighting of the 3 technologies, 3 approaches and which customer and which model will adopt which technology, I think it's all being developed right now, and so while we have very strong confidence that the -- all the 3 will have tremendous growth and certainly mass production in next year. But -- and also, we have commented that we will be at least production ready towards the end of this year, but as far as the short term Q4 revenue potential is concerned, I think we are reluctant to make indication at this stage.

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Auguste Philip Richard, Northland Capital Markets, Research Division - MD & Senior Research Analyst [6]

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That was very helpful. And then just in terms of your capacity constraints, could you sort of give a little bit more color on the qualification process, and when your customers will -- or the bulk of your customers will be able to or enough of your customers will be able to qualify the new 12-inch fabs to alleviate your constraints?

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Jordan Wu, Himax Technologies, Inc. - Founder, CEO, President & Director [7]

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Yes. We mentioned 2 areas of capacity constraints in my prepared remarks namely the large display driver IC and TDDI solutions. First, the large display driver IC traditionally because of technology reasons, large display driver IC has been fabricated in 8-inch fab, not just for Himax -- I think it's a common phenomenon across the whole industry, because 8-inch fabs give you the right cost and technology combination. Now, unfortunately, 8-inch fab, in terms of capacity worldwide is extremely tight. So -- and that is why we have successfully developed -- actually we started the development well over a year ago, foreseeing the capacity shortage, so we have started making small shipments for large panel display driver IC in the new China-based foundry, which is 12-inch. We have fully qualified ourselves, and I think all of our major customers have also qualified our processes. However, the key is not for us, and not even for customers, to qualify the process. The key is for the customers' end customer, i.e. TV makers, to qualify for the change of foundries. And that can take time. However, I say in my prepared remarks that all our customers are working extremely hard to try to make that happen ASAP, because everybody realizes the capacity for 8-inch is very tight, and there is no -- we are not seeing -- nobody is seeing the end of the tunnel, right? And I think the end customers also realize that, so I think -- I certainly hope it will go as smoothly as I have indicated right now, and I have no reason to believe why it will not, but in my official answer, I still have to say the end customer's qualification is the key. Although, in terms of 12-inch or last display driver IC, the good news is we and our direct customers have all the confidence -- actually the year is very good and consistency is very good, we have seen no issue whatsoever in terms of our technology and the ramping for the 12-inch new fab. As far as TDDI is concerned, TDDI for us and the rest of industry is fabricated primarily in 12-inch. However, it just happens that in the more mature technology of 12-inch in this particular case, 80 nanometers, every key player of TDDI in the marketplace is fighting to get capacity from the same 1 single foundry provider which makes the situation very tough. And for us, we are fast developing, or should I say porting our products into another foundry, which has offered plenty of 80- to 90-nanometer of capacity for us. So we are doing the porting, we are trying to keep the product intact, while porting the process to a new foundry. That is the first approach we are doing. And the second approach we are working on is to make certain new new designs into 55-nanometer process in a couple of foundry partners. The first approach will take -- certainly take a shorter time to achieve, and we believe in Q3 we should be able to start mass production. Again, like large panel. Probably more so in this case, end customers, meaning the smartphone makers are eager to see our success in such porting. So we've got a few top tier customers already lined up getting our even early samples and giving us high priorities in terms of qualification and suggestion into replacing our existing new products. 55-nanometer, new design will take slightly longer, I would say it would be the story of first half of next year. So TDDI, we are assuming our porting is -- go smoothly than in Q3, because Q4 -- Q2 will be the beginning of commencement of mass production. Q4, we should see good growth, meaning to a certain extent, to a more limited extent constraint of these new foundry capacities -- foundry partners capacity.

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Operator [8]

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(Operator Instructions) Our next question comes from Tristan Gerra of Baird.

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Tristan Gerra, Robert W. Baird & Co. Incorporated, Research Division - MD and Senior Research Analyst [9]

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Just expanding a little bit on the foundry capacity shortage issue. Are you able to quantify the magnitude of the revenue impact for Q1, Q2 and the rest of the year? And also, does that provide a mix improvement opportunity as maybe you can emphasize some higher-margin products in the process while you're being constrained?

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Jordan Wu, Himax Technologies, Inc. - Founder, CEO, President & Director [10]

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Firstly, on the foundry constraint. We have outstanding shortage, meaning, let's say, take the end of this quarter as an example. Right? The customers are wishing us to make delivery, and we are unable to, meaning we have to postpone the delivery schedule. I think if you look at the total volume, it could be in the range of 10 to 20 million ICs easily, which compares to 100 million-plus quarterly shipment is certainly quite significant. I'm sorry, Tristan, what is your second question again?

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Tristan Gerra, Robert W. Baird & Co. Incorporated, Research Division - MD and Senior Research Analyst [11]

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And so thanks for quantifying the impact in Q1. Is the impact expected to remain in the same range of which you just mentioned for Q2 and for the second half? And is there any opportunity for mix improvement as you are unable to ship some products?

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Jordan Wu, Himax Technologies, Inc. - Founder, CEO, President & Director [12]

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I think in our guidance for Q2, the assumption behind the guidance is also around the same amount of shortage that we are assuming. I said earlier, I'm hoping that the large panel -- given that we are more than ready to switch to a new 12-inch foundry, in fact, because a 12-inch is brand-new fab. The yield is even higher than our using the 8-inch foundries. And the customers realize that, but the thing is, again, they have to go through the end customer's qualification. So again, I'm optimistic in the sense that end customers are realize -- are also realizing the issue. However, a caveat to my response is that TV market and large-panel display market overall is not -- the demand is not growing strongly. In fact, the demand is relatively soft. So that is certainly a negative factor in terms of end customers qualification urgency for qualification. However, I think people understand this is a long-term issue, it's something the industry overall has to deal with. So whether you deal with this later or earlier, one way or the other you have to sort it out. So I think -- again, I'm optimistic and I'm seeing customers being very serious about getting the qualification completed but on our end we are fully ready. So it's probably harder for me to predict the second half, but I have no reason to be pessimistic, because customers are eager and we just have go to through the procedure customer by customer.

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Tristan Gerra, Robert W. Baird & Co. Incorporated, Research Division - MD and Senior Research Analyst [13]

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Okay. That's very useful. And then just a quick follow-up. If you could provide an update on the OLED capacity [ramp] at BOE, the timing for when you expect that to become meaningful? And also, are you seeing any cannibalization in this recovering phase of the China's market for OLED screen supplied by Samsung?

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Operator [14]

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Our next question comes from Jaeson Schmidt from Lake Street Capital.

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Jordan Wu, Himax Technologies, Inc. - Founder, CEO, President & Director [15]

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Sorry, operator, I haven't responded to the question. On OLED, we are still making designs with -- you mentioned BOE, right? BOE has started some early production. I don't want to comment too much on the customer's activity, including their volume yield rates, but the BOE has repeatedly indicated to us that Himax overall is their strategic partner and they do want us to get into the sector, which is very important for them long-term, although in the short term, certainly there will be quite a bit of learning curve to go through for our customer. And BOE is certainly among, if not the most, aggressive OLED player in China. And BOE has all the commitment and all the government support to develop OLED. So if you look at their plan, and if even their plan is only partially executed, I think the impact to Samsung and -- or LG, for that matter, will be rather significant, I would say. But certainly, it's early to say, right, because they are only (inaudible) the first fab. But they do have -- I even lost my counts, they have multiple fabs in progress or being planned, which are approved by the government or supported by the government or even have the funding secured. But I think as far as the final timing is concerned, for them to really ramp those fabs or in some other cases start constructing those fabs, I think they will still look at the market. Certainly the first fab success will be important for them. Does that answer your question?

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Operator [16]

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Our next question comes from Jaeson Schmidt of Lake Street Capital Markets.

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Jaeson Allen Min Schmidt, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [17]

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Jordan, wondering if you could comment on how we should be thinking about the mix in 2019, between structured light 3D and stereoscopic 3D? And relatedly, if you've seen any change from your customer standpoint on which solution there is more interest in?

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Jordan Wu, Himax Technologies, Inc. - Founder, CEO, President & Director [18]

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The -- if you ask me the -- this is a qualified question, Jason. I'm sorry for that, but I'm trying give the best highlight -- the best insight I have right now, but my answer can change next quarter as the market develops. The way I look at it right now, I mean, we started by talking to customers about structured light, because that was the, from Himax's point of view, it was the first to get ready and also that was the technology offered by Apple. Initially, customers were enthusiastic because Apple was launching the phone and all that. But as time goes by, first, the Apple's phone sales probably was not as exciting as most people are anticipating in the first place. And the reality is that structured light is quite expensive. And over time, because all these reasons, we are promoting additional 2 technologies to our customers, because we have to serve their interest, and bear in mind, Apple is the only one in the world who can offer phones of such high price and with such high profit margin. So many customers, other than probably their premium models, they really cannot afford structured light, to be honest, and we actually say that from the outset, from the very beginning. So when we started promoting ASC or stereotype 3D, we got a lot of excitement from the customers because of the cost issue. Now the readiness of -- on the hardware side, the readiness of stereo 3D is slightly behind that of structured light, however, we then realize -- actually, there is a major advantage to its timetable in the sense that the dual camera for our TV for picture taking, DOE camera is already quite mature up to probably 3 years of smartphone adoption. So the whole ecosystem, manufacturing, the algorithm, everything else is already pretty mature, unlike structured light, which we have to build from scratch. So actually while we are slightly behind ourselves in terms of hardware readiness for stereotype 3D compared to structured light, our ecosystem partner is actually more ready for stereotype 3D compared to structured light. So net-net, the end result is that we are seeing roughly the same time we are indicating for both Q4, mass production or mass production ready. So give or take, I would say that we hope, I mean, or the way we see it right now, the mass production will take place probably around the same time or probably 1 quarter one from the other. As far as volume is concerned in terms of number of units, I will certainly put my bet today on stereotype 3D, because it has the cost advantage, and the android smartphone market cost is everything. However, our revenue potential per unit between the 2 is about 1:2 to 1:3. So that makes the answer slightly difficult for me. So I think we just have to keep giving you updates. In this release, they're just a bit too early, but I have tried to give you as much highlights as I can already.

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Jaeson Allen Min Schmidt, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [19]

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No. That makes sense. And then as a follow-up, wondering how we should be thinking about your ASP at your largest WLO customer. For future generation platforms, do you expect to be able to maintain your ASP as is?

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Jordan Wu, Himax Technologies, Inc. - Founder, CEO, President & Director [20]

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I really cannot comment on specific ASPs, but it's -- I can give you a broad idea, which is for the existing products is way below $1. Our future -- in certain of our future R&D projects we are working on together, I mean, obviously, I cannot give more specifics other than that. The ASP can be many, many times higher, because the design is a lot more complex, and the build material equipment requirements are a lot higher. So I think if you like, we are moving up the ladder quickly and by a great deal. And our anchor customer has demonstrated they are confident and trust us by really allocating some of their most important, most critical and, yet, more challenging projects to us. So again, I cannot give you specific numbers, but future products, upon commencement of mass production, the ASP could be many, many times higher than the existing one. It will certainly be by way of unit of dollars rather than cents.

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Operator [21]

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Our next question comes from Suji Desilva of Roth Capital.

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Sujeeva Desilva, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [22]

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On 3D sensing, the 3 different alternatives there, can you talk more specific around the content opportunity per phone or ASP have reached the differential, just to understand how they stack up cost wise and content wise for you?

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Jordan Wu, Himax Technologies, Inc. - Founder, CEO, President & Director [23]

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Ballpark, I am talking about total solution -- hardware -- total hardware solution, right, excluding the applications. Total hardware solution, ballpark, structured light is more than $20. As far as our stereo 3D is concerned, it's $10 plus -- $10-plus likewise for fingerprint for under display fingerprints, probably slightly lower by about the same. The content is different, however, for Himax. Our content proportion is the highest in structured light because of the fact that we are the total solution integrator and we actually produce from in-house quite a bit of the contents inside. We're only outsourcing stuff like laser, filter, lens and certainly the whole module assembly and so on. For stereotype 3D, the assembly of the whole module is relatively simple compared to structured light, and that is why I think it is to our best interest that we try to outsource as much as we can to specialized camera module vendors. So -- and also, they're particularly a lot more simplified, compared to structured light. However, rather than having one sensor for structured light approach, here you have 2 sensors. So in the sensor on Apple-to-Apple basis, we have double the revenue potential for stereotype compared to structured light. However, all the rest is smaller. So I will say, for structured light, our content percentage in the whole total solution is probably 60% plus; for stereo 3D, probably around half with the lower ASP, and for underglass fingerprint, are slightly less than half. whereby we provide basically a sensor, which is quite a large sensor, because your finger has a pretty big area, right, your thumb has a pretty big area. And the fingerprint sensor, I mean, the CMOS image sensor for optical fingerprint has a very, very large pixel size, and it has 2 -- the total size has to be big enough to cover your finger. So the ie size is quite big so the ASP is quite significant. A few dollars, I can't recall the details, but our content percentage is close to half of the whole thing.

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Sujeeva Desilva, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [24]

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Okay. Great. That's very helpful color. And then specifically on the underglass fingerprint, how many customers do you expect might be adopting that technology in late '18 or early '19 timeframe? Just trying to understand how many [lead] customers you're working with on that?

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Jordan Wu, Himax Technologies, Inc. - Founder, CEO, President & Director [25]

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Quite a number of customers are talking to us or actually working with this. However, they are -- I mean, for example, one is still doing feasibility study. They are still trying to decide whether -- it's one of 3, which approach for which product. So I think we are talking to all top-tier Android customers. As far as -- and then -- we are just not talking to them, we're actually working with them. We are re-engineering stuff. As far as effectively how many and how many of them -- with how many projects were going to mass production this year or early next year, it's too early to say. But I can tell you that the collaboration or design-in activities are very good. But whether there is a actual design win activity, I really can't say. I think it's slightly early. Probably by next quarter update I can probably give you better insights.

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Operator [26]

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Our next question comes from Charlie Chan of Morgan Stanley.

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Charlie Chan, Morgan Stanley, Research Division - Technology Analyst [27]

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So my first question is regarding your 3D sensing application. It seems like the key bottleneck is customers' qualification on their mobile payments. But do you think the 3D sensing can also happen in rear-side of 3D sensing, because for rear-side, maybe it's not for mobile payment, but for AR gaming or e-commerce? Do you plan to go ahead to develop rear-side 3D sensing? This is #1. And also, besides that smartphone, do you see any adoption for your 3D sensing solution in other consumer electronics? This is my first question.

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Jordan Wu, Himax Technologies, Inc. - Founder, CEO, President & Director [28]

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On the so-called rear-side or main camera side, actually that -- we worked together with Qualcomm for more than 5 years and that was actually our initial target, and we did have early prototype product for that. However, we put that aside because, for the obvious reason, everybody is switching focus into front side and with specific application of face unlock and online payments. I do believe eventually the main camera side with 3D sensing capability will be popular. Because of potential in very fun applications such as AR, however, I think the trouble is everybody has got a great idea but when you want to put an idea into action, into a real product, exactly what is the application, what is the key application that will convince consumers to pay. I think it will still take some time for the market to develop, to think about develop. So I see almost all my customers asking the same question and they're all working very hard and they're all scratching their heads. What exactly is going to be the killer application for the main camera because it seems so natural and obvious, but until we see that becoming concrete, and ideas are put into real projects, I think we can't say for sure, but as far as our hardware technology is concerned, we see no problem at all. We just have to -- I mean, certainly, there are engineering work to be done but we think it is the natural thing to do eventually. As far as smartphone is concerned, I think also it is quite obvious we are already in discussion -- in some cases, still in discussion with certain customers for IoT applications, home or business application, home applications and certainly goggle applications although the market size is quite small right now, and most interestingly to me, is automotive applications. People are bringing extremely interesting ideas to us right now. However, we are quite limited by our resources. And smartphone being smartphone, the size is just so big and attractive. So we feel it is the right thing to do that at least for now, we devote our resources to smartphone and make it happen and make it a success before we start to get into other applications. Because, I mean, in theory, we can tailor our solution to customer's needs. However, it all takes some engineering work, right? So we have to be careful in terms of our resource allocation. What is your second question, Charlie?

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Charlie Chan, Morgan Stanley, Research Division - Technology Analyst [29]

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Okay. So my second question is regarding your gross margin trend on the LCD driver IC business, because your foundry customers, now they are raising their wafer price to pass through the raw wafter cost, right. So what does it mean to your gross margin trend in the coming quarters?

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Jordan Wu, Himax Technologies, Inc. - Founder, CEO, President & Director [30]

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I think for now, we believe we can fully pass on the additional costs to our customers. And that is the ongoing discussion we have with our customers. To a lesser extent, starting from Q2 but certainly more generally from Q3. So I have seen no issue because the whole industry is suffering from a shortage so our customers realize it is only reasonable that we pass the additional costs on to them.

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Operator [31]

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Our next question comes from Jerry Su of Credit Suisse.

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Jerry Su, Crédit Suisse AG, Research Division - Director [32]

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The first question is on the active stereoscoping 3D camera. I think you mentioned working with some partner. Can you quantify it's only one plus one or you have opportunities to go into multiple in the platforms for this solution?

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Jordan Wu, Himax Technologies, Inc. - Founder, CEO, President & Director [33]

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We are working more closely with a partner who intends to offer multiple platforms of theirs, AP platform of theirs for ASC, and we are -- I believe we are their exclusive partner, they are only using our solution for that purpose. And we are actually -- we don't exclude talking to other AP platform customers, and there are also what I call stereo camera algorithm boutique houses who have good software capabilities from algorithm to applications. And they are such houses coming to us asking for collaboration for us to provide the total solution for hardware as well. So there could be such opportunity as well. But certainly right now, the priority is given to a world-leading a world leading AP platform provider. But there will be multiple platforms.

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Jerry Su, Crédit Suisse AG, Research Division - Director [34]

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Okay. And then the second question on the -- I think you have started shipping some components starting from last year for one of the major smartphone makers. I was just wondering on the Android side, do you have any opportunities? What are you seeing right now, for shipping, wafe-level-optics, DOE or other components into a platform? Apart from total solution you have already mentioned?

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Jordan Wu, Himax Technologies, Inc. - Founder, CEO, President & Director [35]

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Yes, we mentioned in our earlier earnings calls that for our structured light total solution, our intention is to provide total solution. However, when it comes to a very select leading smartphone names who has their in-house capability for total system or module integration, then we certainly don't rule out providing individual components to them -- most typically projector. And they are indeed such process going on at the moment, both for structured light and also for ASC. And actually it is very active project going on at the moment. But again, such customers are very selective.

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Operator [36]

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(Operator Instructions) Our next question comes from Andrew Uerkwitz with Oppenheimer.

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Andrew Paul Uerkwitz, Oppenheimer & Co. Inc., Research Division - Executive Director and Senior Analyst [37]

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I just got 2 quick ones. In the comments in the beginning, you didn't mention a Phase II CapEx plan and on the previous 2 calls you talked about having more detail -- I believe right around this time so I was just curious what the plan there was?

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Jordan Wu, Himax Technologies, Inc. - Founder, CEO, President & Director [38]

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We have decided to put that on hold for the time being because I said earlier, the development in particular software into end product is taking longer than we anticipated, so it is only natural that we defer our Phase II.

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Andrew Paul Uerkwitz, Oppenheimer & Co. Inc., Research Division - Executive Director and Senior Analyst [39]

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Got it. And then --

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Jordan Wu, Himax Technologies, Inc. - Founder, CEO, President & Director [40]

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Where we announced -- when we in our early -- in our early announcement, we focused primarily on structured light, but the way we are seeing it right now, although, again, I want to emphasize we'll get a lot better clarity 1 quarter or 2 quarters from now. Another capacity for us in WLO is shared and active alignment as well is shared, in between ASC type and structured light type, right? And I also indicated earlier that the way I see it right now, in terms of volume potential, ASC can be even bigger than structured light. So when this happens, there is certainly a very, very high likelihood we have to rush our phase II probably but before that clarity is clear, it's better for us we are deferring our Phase II. Sorry. Your second question?

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Andrew Paul Uerkwitz, Oppenheimer & Co. Inc., Research Division - Executive Director and Senior Analyst [41]

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Got it. No. Yes, that's super helpful. And then on the second question, when you think about the TDDI ramp, how do you think your share will shape up throughout the end of the year, and then how cannibalistic is it with your traditional small panel DDIC business?

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Jordan Wu, Himax Technologies, Inc. - Founder, CEO, President & Director [42]

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We all know smartphone, the whole market in terms of number of units is maturing, right? It's actually not growing anymore. So what additional demand for TDDI means elimination of demand for traditional driver IC. That's a hard fact. Our TDDI -- we mentioned volume wise -- we mentioned our effort to try to eliminate the capacity constraint and by adding new foundry capacity and hopefully, starting from Q3 and Q1 mass production. If that goes smoothly, then there is no reason to believe that we could not be able to hit our target of about 10 million units per quarter in either Q4 this year or early next year. But certainly, the ASP for 3D is much higher, a few times higher compared to traditional driver IC.

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Operator [43]

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There are no further questions. I'd like to turn the call back over to Mr. Jordan Wu for any closing remarks.

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Jordan Wu, Himax Technologies, Inc. - Founder, CEO, President & Director [44]

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As a final note, Jackie, our CFO, will maintain investor marketing activities and she will continue to attend investor conferences. We will announce the details as they come about. Thank you, and have a nice day.

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Operator [45]

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Ladies and gentlemen, that does conclude our presentation, and you may now disconnect. Everyone, have a great day.