Himax Technologies (HIMX) Reports In-Line Q2 EPS; Guides Q3 Below Expectations

Himax Technologies (NASDAQ: HIMX) reported Q2 EPS of $0.05, in-line with the analyst estimate of $0.05. Revenue for the quarter came in at $169.2 million versus the consensus estimate of $172.57 million.

"We are pleased to report that our 2015 second quarter revenue, gross margin, GAAP and non-GAAP earnings per diluted ADS all met at the high end or exceeded our guidance for the quarter," stated Mr. Jordan Wu, President and Chief Executive Officer of Himax. "During our first quarter 2015 earnings call, we mentioned the industry's low visibility, especially in China's smartphone market. Yet, we were able to arrive at top end of our revenue guidance and beat EPS guidance because our driver IC business came in better than expected across all applications. We were pleased to see a snapback during the second quarter from our Chinese branded smartphone end customers. TV, as projected, was another bright spot among our driver IC products."

Mr. Wu concluded: "Recent instability in the Euro zone and unease in the Chinese stock market have added concern, however we believe these macroeconomic factors will be a temporary setback. As a diversified company, we are committed to our growth strategy and have continued to add new customers, advance through new design-wins, and introduce new technologies such as TDDI and AMOLED driver IC. Lastly, we are making significant progress in our non-driver business and look forward to providing updates as we reach inflection points for both LCOS and WLO."

Business Updates

Himax started 2015 with a sluggish first quarter and a soft forecast for the rest of the year as a result of weak overall market demands, especially those from China. The recent economic instability in the Euro zone and turmoil in the Chinese stock markets have added uncertainty to the demands of consumer electronics in the second half. More specifically, weaker demands have led to the softening of panel prices and lower capacity utilization of panel manufacturers. Consequently, Himax anticipates its gross margin will decline during the third quarter. Himax continues to evolve and remains confident about new growth opportunities ahead. Several developments should provide a strong contribution to future quarters such as adding new customers, new design-wins, introducing new TDDI products for smartphones, market share gains for large panel driver ICs, and significant advancements in the non-driver businesses. Furthermore, Himax believes that its LCOS and WLO businesses will hit an inflection point during the second half of the year and will update shareholders accordingly.

In Himax's large panel driver IC business, after two strong quarters of shipment in TV application, the Company is starting to experience shipment slowdowns in TV along with continuous softness in notebooks and monitors. Hence, the Company will see sequential decline by low teens in this segment in the third quarter. However, Himax believes 3Q weakness is a temporary setback. As the Company has repeatedly stated, 2015 will be a year for its large panel driver IC business to post year-over-year growth amid poor market conditions. Himax is still gearing up its engineering collaboration and design-in activities with Chinese panel customers, who, despite low market sentiment, are still adding new capacity after years of continuous expansion. The new capacity in China represents further growth opportunities for Himax with projected shipment growth and market share gains throughout the rest of 2015 and beyond. On top of that, sales of 4K TVs are tracking better now than the beginning of the year as Chinese panel customers are embracing the 4K TV market with mid-to-low end models that should stimulate purchase interests. Thus, the Company remains positive on the outlook of its large panel driver IC business this year and also going forward.

The other segment in the Company's driver business are ICs used in small and medium-sized panels for applications including smartphones, tablets and automotive. Himax highlighted in its previous earnings call that it was cautious in its second quarter outlook; however, the Company experienced a snapback in Chinese customers' smartphone demand due to certain brand end customers' market share gains through new model launches, and change in their marketing strategy and sales channels as mentioned earlier. It therefore exited the second quarter with smartphone sales tracking better than the Company expected. Despite the muted market demand, panel resolution will continue to get upgraded. Himax is positive that resolution above HD720, especially FHD, will accelerate from the third quarter and go on for the rest of the year. Its QHD driver IC shipment also started at the end of the second quarter, following the design win with a brand customer as reported in the previous earnings call. Meanwhile, for FHD and beyond, the preferred technology would be LTPS TFT-LCD since it allows higher pixel density and more circuit integration with less power consumption. Himax is pleased to see more and more Chinese panel makers, following Korean and Japanese players, entered mass production for high resolution panels at their new LTPS facilities aggressively. Such progress means more business opportunities for the next few years for Himax as the Company has longstanding and solid business relationships with the Chinese panel makers. Himax believes FHD and QHD will account for a growing percentage of its smartphone driver IC revenue starting this quarter.

Himax discussed on its last call two other areas that the Company believes will fuel the next growth drive in its small and medium driver IC business, namely AMOLED driver IC and TDDI technology, which integrates driver IC and touch panel controller IC into one.

On the AMOLED driver IC front, Himax continues to collaborate closely with multiple panel customers in Korea and China, some of which are likely to see meaningful volume late this year. There are few competitors in this marketplace and the Company is well positioned, having been previously engaged by numerous existing and new AMOLED panel makers in their new panel developments. It is worth mentioning that major Chinese panel makers have announced the building of new AMOLED projects, and Himax believes it is in a good position to be a major beneficiary. The Company looks forward to working with its customers as the market for this technology expands.

For driver ICs used in tablets, following three consecutive quarters of decline, the market stabilized in the second quarter and, as previously indicated, may improve in the second half of the year. The Company's observations remain that the trend for the panels in the mainstream tablet market will be upgraded to 10" and above with higher resolutions, from the once popular sizes of 7" to 9". This is a favorable trend to the driver IC demand. However, its contribution to Himax's sales will not be significant until 2016.

Among driver ICs used in small and medium-sized panels, the best-performing category in 2015 is for automotive applications. Himax has successfully engaged key panel manufacturers and module houses for long-term partnerships and secured leading market share in this segment. Himax anticipates second half sales to grow by high teens compared to the first half, which will also lead to high-teens growth year-over-year. Himax's ICs are well recognized by numerous tier 1 automobile brands globally, thus it is well positioned to take advantage of this growing market which honors its long product life cycle, stable pricing, and higher gross margins when compared with rest of the segments in small and medium panel driver ICs.

Compared to the previous quarter, the Company's small and medium-sized driver segment will decline low single digit in the quarter sequentially.

For the past few years, the non-driver business segment has been Himax's most exciting growth engine. New product development continues to evolve and gain traction, and the Company remains positive on the long-term growth prospect of its non-driver businesses.

Himax's touch panel controller product line declined sequentially in the second quarter as it has foreseen in the previous earnings call. As the Company enters the third quarter, several of its on-cell design-wins will start mass production at multiple major end customers. On top of that, it is also excited about the technological advances and product development progress in the latest pure in-cell technology, where Himax is one of the pioneers in offering one-chip solutions integrating driver IC and touch panel controller, or TDDI. Driven by leading TFT-LCD makers, the industry is moving towards pure in-cell panels, which remains set to start mass production in the second half of this year. Himax is in partnerships with essentially all of the leading panel manufacturers, module houses, and OEMs in pure in-cell touch for joint technological development, and feel there is a strong market for these products ahead with fewer competitors.

Himax's CMOS image sensors experienced a slow first half since 4G smartphone adoption in China remained weak. The lack of smartphone replacement demand hurt the shipments of its high end product offerings. Entering the third quarter, the Company is pleased to report that it has secured several new customers in the second half mass production pipeline with its 8-megapixel and 13-megapixel sensors.

Regarding the Company's LCOS business, Himax continues to collaborate with industry heavy weights by providing tailor made designs for their head mounted devices, and the Company remains enthusiastic about the projects in the pipeline. As stated, Himax's LCOS and WLO businesses will hit an inflection point this year as it is gearing up for increasing pilot production shipments now, with expected volume ramping thereafter. The Company already secured a piece of land which is 5 hectares in size and is conveniently located nearby its headquarter building in Tainan, Taiwan. Himax has started planning for the construction of a new manufacturing/office facility with first phase investment of approximately $40 million in order to meet customers' desired output. The first phase construction will occupy just around 20% of the newly secured land, leaving plenty of space for future expansion. The investment will be financed through the Company's internal resources and existing bank facilities, if needed. While Himax remains debt free as mentioned earlier, it does enjoy great support from banks that have provided the Company with plenty of unutilized facilities. Once started, the construction is expected to be completed in 12-18 months. This progress is sooner than the Company thought when it last reported. Himax will report further details in due course.

Furthermore, Himax continues to partner with numerous industry leading players using its industry-dominant wafer level optics, or WLO, for the development of three technologies of the future, namely array cameras, special purpose sensors, and microdisplay wave-guides for head-mounted displays. As its top-tier customers begin to mass produce products embedding these new technologies, Himax, being in the heart of that supply chain, should benefit significantly. However, the Company would like to remind investors that it believes, like HMD, while WLO can enable cutting edge products, such products are early stage in nature. Himax, along with its partners, are pioneers in these technologies and are committed to bringing them into commercialization.

Overall, the Company expects its non-driver segment to decline mid single digit sequentially in the third quarter.

Guidance:

Himax Technologies sees Q3 2015 EPS of $0.01-$0.02, versus the consensus of $0.08. Expects revenue to be down 5 to 9 percent as compared to the second quarter of 2015.

For earnings history and earnings-related data on Himax Technologies (HIMX) click here.

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