Himax Technologies (HIMX) Tops Q2 EPS by 2c; Offers Business Update, Q3 Outlook

August 11, 2016 6:46 AM EDT
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Himax Technologies (NASDAQ: HIMX) reported Q2 EPS of $0.12, $0.02 better than the analyst estimate of $0.10. Revenue for the quarter came in at $201.1 million versus the consensus estimate of $198.61 million.

Business Updates

The increasing momentum of the Company’s large panel driver IC sales will continue to come from China and the world’s accelerating 4K TV adoption. Himax’s smartphone driver IC business has rebounded well this year, reflecting its leading position in Chinese smartphone market where the Company’s end brand customers are performing strongly, and better demand are stimulated by rising 4G adoption. Leveraging on its technology leader and early mover advantage in AMOLED driver and pure in-cell TDDI technology, Himax is well positioned to benefit from increasing adoption of AMOLED and pure in-cell displays. For non-driver products, the true highlight of the year will be LCOS microdisplay and WLO products, which are integral parts of the eco-system for the booming AR sector. During the first three quarters of the year, LCOS and WLO combined will grow more than ten times through accelerating shipment to the Company’s existing AR customers. Himax is also making good progress in new territories such as IoT and machine vision with its CIS and WLO products, evidenced by more design-ins and engagements with leading consumer electronic brands and a leading international smartphone chipset maker. Overall, the Company is seeing strong momentum across its major product lines and feels very good about the growth prospect of 2016 and beyond.

For reasons mentioned earlier, the Company’s large panel driver IC sales and market share have further increased this year. The Company expects its large panel IC revenue to grow by double digit sequentially and more than 50% year-over-year. In addition to benefiting from its leading market share in China and in 4K TV, Himax is also leading the charge in new technology areas such as 8K TV by working with its Chinese and Korean panel customers.

The other segment in Himax’s driver business is ICs used in small and medium-sized panels for applications including smartphones, tablets and automotive. Demand for driver ICs for smartphone has remained strong but the Company’s sales in this area will likely be around flat sequentially in Q3, as the Company can hardly make enough delivery for the surging rush orders of late from Chinese and Korean end customers. However, it will still grow around 20% year-over-year. The Company also continues to see resolution upgrade in the second half of the year, which should help mitigate some gross margin pressure for the product segment. On AMOLED, demand has taken off as smartphone brand customers increasingly adopt AMOLED panels in their premium models. This trend has attracted more panel makers to ramp up their investments in AMOLED manufacturing and accelerate their timetable for the development and mass production of AMOLED panels. Himax has been collaborating closely with multiple panel customers across Korea, China and Japan for AMOLED product development and is seeing more design-ins especially with key Chinese and Japanese panel customers and smartphone makers. Such progress reaffirms its technology leadership. Himax believes that AMOLED driver IC will kick off a new growth cycle for its small panel driver IC business starting 2017.

Automotive has been the best-performing category among driver ICs used in small and medium-sized panels in recent years. The Company expects the category’s Q3 revenue to grow double digit sequentially and more than 30% year-over-year. The strong growth will likely continue into the next few years. Its confidence comes from the fact that higher resolution and larger panels are becoming mainstream for automotive applications. With numerous top automobile brands having been its indirect end customers, the Company is well positioned to take advantage of this fast growing market. Further, Himax’s driver ICs used in tablets resumed growth in the first half and will continue to produce noteworthy growth in the second half of the year, driven by the strength of high-resolution displays of 10” and above. Overall, the Company expects small and medium-sized driver IC segment in the third quarter to be up by high-single-digit sequentially.

For the past few years, the non-driver business segment has been the Company’s most exciting growth area and a differentiator for Himax. New product developments continue to evolve and gain traction, and the Company remains positive on the long-term growth prospect of its non-driver businesses.

The Company expects high-single-digit growth in its non-driver products for the third quarter. Sales of timing controller, touch panel controller, ASIC chip, wafer level optics and LCOS microdisplay will deliver strong growth this quarter, partially offset by lower sales of the CMOS image sensors.

Numerous on-cell design wins from leading Chinese smartphone names have led to growing sales of the Company’s touch panel controller in Q2 and it expects the growth to further accelerate throughout the rest of 2016. Himax is also one of the pioneers in offering TDDI solutions and are in partnerships with essentially all of the display makers in the state-of-art pure in-cell touch panel for joint technological development. The volume shipment record from a leading Chinese smartphone customer validates the Company’s leading pioneer position. The Company is adding more design-wins and will start shipping in mass production of its TDDI solutions to additional Chinese and Korean smartphone customers and panel makers in the second half of 2016. Along with AMOLED DDIC, TDDI is another major growth engine for its small panel business starting from 2017.

The recent staggering success of Pokémon Go has provided a looking glass into the future trajectory of the AR technology and given one early answer for why and how you’d want it to. Since its launch just over a month ago, the AR game has taken the digital world by storm with already more than 100 million app downloads and 20 million active users. Thanks to the viral popularity of Pokémon Go, AR is now getting the attention and consumer validation that the Company, at Himax, has always known to be possible. While the Company must give credit where it is due, the AR technology used by Pokémon Go today is still quite primitive. Compared to the AR/MR technologies being developed by Himax’s customers and partners, Pokémon Go pales in comparison in terms of how AR can bring alive the consumer experience to interact directly with the physical environment with more sophisticated holographic imagery, 3D sensing and real-time surroundings detection. If you have not seen demonstration of AR devices already, its holographic imagery will actually appear on your desk, your chair or walking next to you on the street. Moreover, the world of AR is much more than just gaming. It represents a next generation computing platform. Future versions of the technology will cover both commercial and consumer uses and will be much more sophisticated and produce an endless stream of uses. These could include daily computing in a virtual office, social networking, teleconferencing, etc. Due to the eye-opening effect of Pokémon Go, those who thought AR required several more years to gain traction are changing their models as the game, almost overnight, elevated AR to mass-market and added 10's of billions of dollars to its market potential in the next few years. A new and lucrative marketing tool on top of AR software and applications are being created that will catapult AR device development and intensify further investment in the sector. The Company believes the path Pokémon Go started will prompt an AR industry that most didn’t think possible before.

Having invested in related technologies for over 15 years, Himax is uniquely positioned as the provider of choice for microdisplay and related optics, both critical enablers to the AR device. AR is projected by many market research firms to be grabbing a lion’s share in the addressable market of AR/VR product segment. With little competition, the Company continues to work with 30+ new and existing customers for various AR devices, many of which you have seen news from lately. The Company’s design engagements now cover leading companies in a wide variety of industries such as gaming, search, mobile, social media, military, automotive, wearable, and toy. Many of the Company’s customers have committed huge amounts of R&D and capital to capture the rapidly expanding future of this game changing product category.

Himax expects revenues and shipments of its LCOS and WLO will continue to accelerate during the second half of 2016. Further new launches of AR products from more customers, as well as increasing shipment of existing customers, could greatly lift the Company’s sales of these two product areas during 2017. With little new capital investment, the Company will be able to substantially enlarge its output to meet additional demands through de-bottlenecking and continuous yield improvement. Looking beyond 2017, however, the Company will need further capacity for its LCOS and WLO products to address the strong demand anticipated out of the busy design-in activities that it is having right now.

The Company is pleased to report that it has just kick-started its expansion plan for next generation LCOS and WLO production lines. Backed upon its customers' demands and feedbacks, the expansion plan includes a major increase of new capacity based upon state-of-the-art processes largely developed from within. The new production lines will not only offer far better cost and product quality for mass production, it is also a major technology advancement for very high end products of the future. The total investment is now budgeted to be $80 to $100 million for monthly capacities of 3,000 12” wafer input for LCOS and 6,000 8” equivalent mother glass input for WLO. The actually output volume can vary widely, depending on the size of the chips. For LCOS, a 12” wafer can yield between 80 and 1,500 chips on the Company’s existing product designs, while for WLO, an 8” mother glass can produce as many as thousands of chips or as few as less than ten. The scheduled mass production is end of 2017 to early 2018. The new capacity will be located at a newly acquired land adjacent to its headquarters in Tainan which is 5 hectares in size, some 1.6 times the size of its current headquarters. The investment will be financed through the Company’s internal resources and existing bank facilities. The current plan only uses around 20% of the land; the Company will therefore still have plenty of room for future expansion. It has also reserved sufficient space in the building for customers’ future consignment needs. Part of its existing WLO equipment is purchased by Himax’s customer and consigned to the Company.

To sum up, the next generation expansion will substantially enlarge Himax’s existing capacity and lift its technology to another level, thereby further strengthening the Company’s leadership position in the AR sector worldwide. The Company believes this is just the beginning of a long term growth story.

Of note about LCOS and WLO, they enjoy better margin compared to the Company’s corporate average. The margin will be further lifted with new designs from a more diversified customer base and, in particular, the commencement of the new fabs’ mass production. Himax expects the expansion project will enjoy a phenomenal return on investment in the years to come.

For VR applications, the Company has been developing customized driver chips for next generation OLED panels with two top-notch VR players. Additionally, it has started to engage with certain VR customers to develop their AR devices. Himax expects mass production to start in late 2016 to early 2017.

Himax continues to make good progress in two new smart sensor areas which it announced earlier by collaborating with certain heavyweight partners, including leading consumer electronics brands and a leading international smartphone chipset maker. By pairing a DOE integrated WLO laser diode collimator with a near infrared (NIR) CIS, the Company is offering the most effective total solution for 3D sensing and detection in the smallest form factor which can be easily integrated into next generation smartphones, AR/VR devices and consumer electronics. Similarly, the ultra-low-power QVGA CMOS image sensor can also be bundled with the Company’s WLO module to support super low power computer vision to enable new applications across mobile devices, consumer electronics, surveillance, drones, IoT and artificial intelligence. The Company will report the business developments in these new territories in due course. Regarding other CIS products, Himax maintains a leading position in laptop application and will increase shipments for multimedia applications.

GUIDANCE:

Himax Technologies sees Q3 2016 EPS of $0.10-$0.12, versus the consensus of $0.10.

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



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