Himax Technologies (HIMX) Reports In-Line Q3 EPS; Issues Business Update

Himax Technologies (NASDAQ: HIMX) reported Q3 EPS of $0.01, in-line with the analyst estimate of $0.01. Revenue for the quarter came in at $165.6 million versus the consensus estimate of $156.79 million.

Business Updates

The past three quarters have been marked by macro uncertainties and soft demand across consumer electronics in general. Amidst the unfavorable market environment, Himax continues to solidify its leading position through technology advancement and customer engagement. In the meantime, the Company is still working closely with top tier partners in developing products which are exploring new frontiers of technologies. Himax stands out from its peers because of such innovative and forward looking activities. The Company's confidence in growth opportunities are further reaffirmed by the progress of its core business, such as TDDI products for smartphones and tablets, and market share gains for large panel driver ICs. Himax's LCOS and WLO businesses, while still in small volume, entered pilot production with a top tier customer in the third quarter. Equally important for LCOS and WLO, the Company is pleased to see quite a few new project engagements with exciting potentials during the quarter, some of which involve applications other than head mounted display (HMD).

In Himax's large panel driver sector, the Company is pleased to report that, after a slow third quarter, driver ICs for TV will regain momentum in Q4 as a result of increasing shipments to Chinese panel customers, who have been continually ramping capacity during the year and bringing more on line. It is especially worth mentioning that Himax's engineering collaboration and design-in activities with Chinese panel customers remain robust despite the soft sentiment and the Company is encouraged that there will be additional two to four Gen 8.5 and one Gen 10.5 Chinese panel fabs ready for mass production from now till 2018. This new capacity will translate into future growth opportunities for Himax. On top of strong projections for TV, the Company is also seeing sequential growth for driver ICs for NB and monitor thanks to recovering demand. Thus, it expects to see double-digit growth in large panel DDIC in the fourth quarter. The large panel driver IC will remain one of the key growth areas for Himax's business 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. Fourth quarter sales for smartphones are likely to decrease from Himax's primary Korean end customer. However, the Company expects the sales for smartphones from its Chinese customers to grow modestly in the fourth quarter 2015 as they launch new models. As highlighted in the previous earnings call, Himax was positive that the resolutions would trend above HD720, especially to FHD, from the third quarter. This has successfully played out and the Company expects the trend to continue in the fourth quarter and beyond. As a testament to this trend, Himax is glad to see key design-wins in the pipeline.

For driver ICs used in tablets, demands have stabilized after declining for quite a few quarters and those for 10" and above have been on the rise in China. This is a favorable trend and the momentum should carry through 2016.

Among driver ICs used in small and medium-sized panels, the best-performing category in 2015 is automotive applications. Himax remains confident that it should see year-over-year growth for this segment since more and more panels are going into automobiles as navigation systems, central displays, and smart rear-view mirrors. Himax has comprehensive coverage of all panel makers in automotive sector across Japan, Korea, China and Taiwan, and have successfully secured many of their key projects pipelined for the next few years.

Despite these positive trends, they are mostly 2016 stories. Looking at the fourth quarter, the market conditions remain lukewarm although Himax is starting to see signs of recovery. The Company's small and medium-sized driver segment looks to decline by high single digit in the quarter sequentially.

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

Himax's touch panel controller product line grew sequentially since several of its on-cell design-wins entered mass production at multiple major end customers. The Company believes on-cell shipments will continue to grow beyond 2015. On top of that, Himax is also excited about its technological advances and product development progress in the latest pure in-cell technology. 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 poised to start production this quarter in small volume. Himax is seeing a growing number of end product customers showing high interest in TDDI as a spec for high end devices. Since itis in partnerships with essentially all of the leading panel manufacturers in pure in-cell touch for joint technological development, Himax feels there is a strong market for the Company going forward with less competition. Himax believes it will contribute more significantly beyond 2H16.

Though a leader in the driver IC space, the Company is still a new comer in the high end CMOS image sensor business. Himax launched 8MP and 13MP in 2014 but missed the market opportunity due to a lack of some of the new product features for high end phones, notably Phase Detection Auto Focus (PDAF) that enables fast auto focus when taking pictures or recording videos. PDAF was first adopted in iPhone6 and has since become a popular feather for new designs of high end smartphones. The Company is catching up fast. Himax believes it will be one of the few players capable of providing PDAF-equipped CMOS image sensors in the very near future. The Company will report in due course.

During the past few months, Himax has received concerns from investors about its LCOS and WLO businesses and how things are evolving given the Company defined the 2H of 2015 as an inflection point, and yet there are no significant volume results to date. The Company would like to reiterate its confidence and commitment to these businesses. On the horizon of new technologies, Himax sees augmented reality (AR) as one of few disruptive technologies on radar screens of its brand customers and consumers. Having invested in the technologies for over 15 years, the Company is uniquely positioned as the provider of choice for microdisplay and related optics to enable AR. LCOS microdisplay and a highly customized optical system are to account for one of the parts with the highest value in the bill-of-material (BOM) of any AR products. In addition to HMD, Himax's LCOS also enables next generation, full color heads-up displays (HUD) for automotives. Separately, the Company's WLO has been adopted to be microdisplay wave-guides for HMD by some customers. It can also be used in completely different applications, such as array cameras and special purpose sensors.

The Company's LCOS and WLO businesses hit an inflection point in September with pilot production shipment made to a major customer. The Company continues to plan its expansion based on indications from its customers. Himax would like to remind investors that its success is tied to its customers'. The Company will only enjoy mass volume when its customers successfully commercialize this new product concept.

While still in nascent stages, HMD, especially those for AR application, look set to become a valuable enterprise and business tool with consumer adoption to follow a few years later. From where the Company stands, Himax is witness to accelerating activity in the AR space along with significant investment activity across leading semiconductor companies and end product players. Looking back on the past 15 years, Himax has invested more than $100 million in LCOS and WLO technologies, close to $15 million this year alone. Himax has been careful in these investments as the Company understands it can't risk sacrificing short term profits too much despite its long term optimism. The Company's commitment and vision have led to a solid and unrivaled top notch customer portfolio.

Overall, Himax expects its non-driver segment to decline by mid single digits sequentially in the fourth quarter.

Fourth Quarter 2015 Guidance

The Company is providing the following financial guidance for the fourth quarter of 2015:

As of November 9th, 2015, the NTD stood at 32.66 against the USD, significantly depreciated from the 30.86 at the end of June. This would lead to approximately $5.4 million more income tax charge for Himax than otherwise for 2015 full year. As it has already made approximately $3.7 million, or 2.2 cents per diluted ADS, of adjustment in the third quarter, the Company has included another $1.7 million, or 1.0 cents per diluted ADS, of additional income tax charge in the fourth quarter guidance, assuming that the exchange rate at the end year stands at exactly the same level as that of today. Obviously, the final outcome will depend on the actual exchange rate at the end of the year.

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

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