Himax Technologies, Inc.
Q3 2021 Earnings Call Transcript

Published: 4 Nov 2021

[Operator:]

Hello, ladies and gentlemen, welcome to the Himax Technologies, Incorporated Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Mark Schwalenberg from MZ Group.

[Mark Schwalenberg:]

Welcome everyone to Himax’s Third Quarter 2021 Earnings Call. Joining us from the Company are Mr. Jordan Wu, President and Chief Executive Officer, Ms. Jessica Pan, Chief Financial Officer and Mr. Eric Li, Chief IR/PR Officer. After the Company’s prepared comments, we have allocated time for questions in a Q&A session. If you have not yet received a copy of today’s results release, please email [e-mail], access the press release on financial portals or download a copy from Himax’s website at www.himax.com.tw. Unless otherwise specified, we will discuss our financial results based on non-IFRS measures. You can find the related reconciliation to IFRS on our website. 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. The factors include, but are not limited to, the effect of the COVID-19 pandemic on the Company’s business; general business and economic conditions and the state of the semiconductor industry; market acceptance and competitiveness of the driver and non-driver products developed by the Company; demand for end-use applications products; reliance on a small group of principal customers; the uncertainty of continued success in technological innovations; our ability to develop and protect our intellectual property; pricing pressures including declines in average selling prices; changes in customer order patterns; changes in estimated full year effective tax rate; shortage in supply of key components; changes in environmental laws and regulations; changes in export license regulated by Export Administration Regulations EAR, exchange rate fluctuations; regulatory approvals for further investments in our subsidiaries; our ability to collect accounts receivable and manage inventory 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, 2020 filed with the SEC, as may be amended. Except for the Company’s full year of 2020 financials, which were provided in the Company’s 20-F and filed with the SEC on March 31, 2021, 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 Mr. Eric Li. Eric, the floor is yours.

[Eric Li:]

Thank you Mark and thank you everybody for joining us. My name is Eric Li and I am the Chief IR/PR Officer. Joining me are Jordan Wu, our CEO, and Jessica Pan, our CFO. On today’s call, I will first review Himax consolidated financial performance for the third quarter 2021, followed by the fourth quarter 2021 outlook. Jordan will then give an update on the status of our business, after which we will take questions. Our third quarter revenues met the guidance issued on August 5, high gross margin and the EPS were both at the upper range of the guidance. Revenue growth margin and the EPS again, all reached all time highs in the third quarter of 2021. For the third quarter, we recorded net revenues of $420.9 million, an increase of 15.2% sequentially, and an increase of 75.4% compared to the same period last year. The sequential increase was at the middle range of the guidance of an increase of around 13% to 17% quarter-over-quarter. The 61.7% gross margin has the upper range of the guidance of 50.5% to 52% was an increase from the already high level of 47.5% for the second quarter 2021. Non-IFRS profit per diluted ADS was $79.5. At the upper end of the estimates of $0.75 to $0.8. IFRS profit per diluted ADS was $0.68 toward the upper range of the guidance of $0.63 to $0.69 cents. Revenue from large display driver was $117.6 million in Q3, up 37.6% sequentially, and more than doubled year-over-year, with sales growing through all three major product area, namely TV, monitor, and notebook. Both monitor and notebook IC revenues delivered impressive growth of around 60% sequentially. That's a result of persisting IT demand derived from remote working in the distance schooling. TV revenue was up over 20% sequentially, mainly due to strong shipments of high end TV products, including those four awards leading in customer despite a dip in worldwide TV shipment during the quarter. Large panel drive IC accounted for 27.9% of total revenues for this quarter compared to 23.4% in the second quarter of 2021 and 23.2% a year ago. Small and intermediate size is the driver sole resilient sales with revenue of $252.3 million, up 9.4% sequentially and up 66.4% year-over-year. Automotive segment continued strong growth momentum and delivered more than 30% sequential increase in Q3. Our automotive segment has repeatedly been the fastest growing sector among the small and medium sized display drivers segment. Temporary sales demonstrated another consecutive sequential increase up low teens quarter-over-quarter. Higher smartphone sales posted single digit sequential decline, reflecting our capacity or location decision favoring tablets over smartphone. Small and medium sized driver IT segment accounted for 59.9% of total sales for this quarter compared to 63.1% in previous quarter and the 63.2% a year ago. The third quarter smartphone sales reached $77.1 million as mentioned earlier, down single digit sequentially, but up more than 20% compared to the same period last year. The smartphone segment represented around 18% of our total sales in Q3. Even with lower sales, our smartphone TDDI sales were still capped by severe capacity constraints. Highlighted many times before our smartphone and the tablet TDDI shared the same process pool. We continued with our strategy to favor tablet TDDI shipment over smartphone. Because we are the prefer men or sole source vendor for major now iOS tablet names. Sales of traditional smartphone display driver grew strongly in Q3 as expected, due to seasonal demand from key customers. Nevertheless, the traditional smartphone DDICs are quickly being replaced by TDDI and AMOLED. Our tablet revenue made another record high in third quarter reaching $94.3 million in sales that grew low teens sequentially and were up more than 75% year-over-year. Our tablet sales continued to grow with a serrated TDDI Penetration among leading non-iOS names where we continue to enjoy leading market share. Our position is particularly strong in high end area, such as active stylus design, high frame rate and the bigger size tablet. It's worth highlighting that shipment of TDDI with active stylus feature, already represented over 30% of tablet TDDI sales in Q3. Yet, our shipments were still limited by ongoing industry wide capacity shortage. Revenue of traditional discrete driver ICs for tablets was up single digit sequentially in third quarter while its market continued to be quickly eroded by TDDI. Capital revenue in this quarter represented the highest sales proportion of all product lines and accounted for more than 22% total sales. Our third quarter driver IC revenue for automotive amounted to $71.6 million, up 34.3% sequentially and up more than 150 year-over-year attributable to our market share gains in an expanding market as panels inside a car continued to grow in both quantity and the size. Automotive driver IT business accounted for around 17% of total revenues in the quarter. As a reminder, automotive driver ICs enjoy higher gross margins and higher revenue contribution from automotive can bolster our corporate gross margin. We expect to see robust and sustainable growth in this area for the coming quarters. Jordan will elaborate on this in a few minutes. Third quarter revenue from our non-driver business was $51 million up mid single digit sequentially and up more than 50% year-over-year. Tcon business registered meetings sequential growth and was up more than 140% year-over-year, driven by a high value added per area such as 4k, 8k TV, gaming monitor and the low power notebook. Non-driver for that in Q3 accounted for 12.2% of total revenue as compared to with 13.5% in the second quarter of 2021 and the 13.6% a year ago. Non-IFRS gross margin for the third quarter was 51.7% up 4.2 percentage points from 47.5% of the previous quarter and greatly increased from 22.4% of the same period last year. IFRS gross margin was 51.5% for the quarter. The sequential increase was mainly a reflection of the tight foundry capacity, which resulted in a more favorable IC pricing in the product mix. Our non-IFRS operating expenses for the third quarter were $44.5 million, up 13.1% from the previous quarter and 14.2% from a year ago, mainly because of increase the salary in the R&D expenses. IFRS operating expenses were $68.5 million in the third quarter, up 73.1% from the preceding quarter and up 55.1% from a year ago. The difference is mainly due to the annual bonus compensation we award employees at the end of September each year. This year, the annual bonus compensation, including RSU and the cash payout was in line with the guidance we mentioned on last earnings call that totaled $74.7 million, out of which $24.8 million was immediately invested in the third quarter. The remainder will be equally invested in the first, second and third anniversary of the grand day. Reflecting the highest sales and the better gross margin non-IFRS operating income was $173.4 million, or 41.2% of sales versus 36.8% of sales in the last quarter. Again, both income and operating margins reached historical highs. Non-IFRS after tax profit was $138.9 million or $79.5 per diluted ADS a new record high and up significantly from $109.1 million or $62.4 per diluted ADS of the last quarter. Turning to the balance sheet we have $250.8 million of cash, cash equivalents and other financial assets as of September 30, 2021, compared to $142.9 million at the same time last year and the $270.4 million a quarter ago. The lower cash balance was derived mainly from $47.4 million payments of cash dividends and the payments made for the purpose of securing long term foundry capacity somewhat offset by payments received from the customers for the purpose of securing their long term chip supply. The third quarter saw a strong operating cash inflow of $60.5 million compared to $33.5 million at the same time last year, but lower than $85.2 million a quarter ago for the same reason stated above. Restricted cash was $156.8 million at the end of Q3 compared to $112.1 million a quarter ago and $104 million a year ago. The restricted cash what many used to guarantee the short term secure borrowings for the same amount. We had $54 million of long term unsecured loan as of Q3 of $6 million what current potion. Our quarter end inventory was worth $160.9 million up from $134.2 million last quarter and offline $125.7 million a year ago. Amid tight foundry capacity, where demand still far outpaces supply we continue to pursue an aggressive inventory buildup strategies. The vast majority of our inventory position now is composed of work in progress goods while finished goods are probably shipped as soon as they are ready. Accounts receivable at the end of September 2021 was $400.9 million up from $329 million last quarter and up from $221.1 million a year ago, due to higher sales. DSO was 100 days at the quarter end, that's compared to 99 days a year ago and 88 days at the end of last quarter. Third quarter capital expenditures were $2.1 million versus $1.4 million last quarter and the $1.2 million a year ago. The third quarter CapEx was mainly for R&D related equipment for our IC design business. As of September 30, 2021 Himax had 174.3 meaning ADS outstanding little changed from last quarter. On the fully diluted basis, the total amount of ADS outstanding was 174.7 million. Now turning to our fourth quarter 2021 guidance. For the fourth quarter, we expect further revenue growth from the already high level of Q3, 2021. We expect revenues to increase by 4% to 8% sequentially. Now IFRS gross margin is expected to be around 50% depending all on the final product mix. Now IFRS profit attributable to shareholder is expected to be in range of $78 to $0.83 per fully diluted ADS. IFRS profit attributable to shareholders is estimated to be in the range of $74.5 to $79.5 per fully diluted ADS. I would now like to turn the call over to Jordan. Jordan the floor is yours.

[Jordan Wu:]

Thank you, Eric. At this moment, we still feel the pressure and stringent, amid stringent overcapacity shortage in the material process knows who we are mainly anchored. For the semiconductor industry continues to push towards advanced process nodes for applications such as 5G and SPC that the demand high processing power. This is implementations of this application also boost the demand for various companionships such as PMIC, CIS and display driver that all share similar material process pause. In addition, major increases overconsumption also come from a few fast growing new areas such as AI, IoT and EV which also require mature process now. As we have highlighted many times, the industry has lacked measure mature process capacity investment in years and the explosive demand from the applications has led to significant capacity shortage. The dispatcher industry has been among the most impacted by the severe foundry shortage since the beginning of last year. And its supply demand imbalance was exacerbated by the surge in demands of some applications triggered by the pandemic. We believe the supply demand imbalance will continue into 2022. As such, we have made a long term strategic decision to enter into multiyear contractual supply agreements with our foundry partners covering a wide range of product lines, including last display drivers, tablet and smartphone TDDI, automotive, and even all the drivers to safeguard the capacity needed for short term and long term business. Naturally, in entering into supply agreements our strategies to work some applications, notably automotive and OLED are more aggressive than others. Backed by solid supply agreements, the automotive sector is on track to become our single largest revenue contributor starting 2022. And we'll be able to solidify our leading position by further widening the gap with our competitors. Meanwhile, we also seek out similar contractual arrangements with many panel houses, and certainly in end customers, whereby customers make pre-payments or deposits to us to secure their long term supplies. All of these contractual arrangements are made following meticulous calculations of in-depth supply demand projections among parties, and typically cover the quantity deemed necessary to sustain the party's businesses. They help alleviate the capacity pressure and are poised to boost collective organic growth of our customers, country partners and ourselves for the next few years. Looking ahead to 2022 backed by secured capacity arrangements, the financial capacity available to us is set to increase compared to this year, especially for automotive segment covering both traditional display drivers and TDDI where the overall shortage across the industry is expected to be the most severe. Revenue wise, we are particularly upbeat about the growth prospects of a few high margin product areas. The most notable of this is the automotive sector where the robust demand for traditional drivers IC expect by strong capacity support, while TDDI which we pioneered in must production is on track to grow exponentially from this quarter onwards. Moreover, non-driver products, especially our high end AI solution, the new addition to our revenue stream are slated for vigorous growth in the next few years. The strength in these high margin businesses will provide a solid support for our corporate margin. Again, gross margin expansion will continue to be one of our major business goals. We expect a more diversified and balanced portfolio across sectors and are confident to deliver both top and bottom line growth into 2022. We start now let us start with an update on the last panel driver IC trovati business. For the fourth quarter display driver IC revenue is projected to increase by high single digit sequentially. The buoyant market growth we experienced for notebook and monitor is expected to extend into Q4. We spotted 20% sequential sales increase in both sectors. Conversely, a few more TV drivers sales are expected to drop slightly due mainly to softer and market demand. While we face partial market softness, we are armed with a diversified and comprehensive product offering covering TV monitor and notebooks which allow us to take swift actions together with our customers and suppliers to redirect the production towards where market demands is strong. Looking in 2022 backed by tight strategic relationships with some of the leading end customers in TV, monitor and notebook markets our project design coverage across all markets with all major panel makers remains strong with a prevailing shortage expected to continue, especially given that much of the global loss where the room for capacity expansion is extremely limited. We remain positive on the prospect of our last dispatch of our business. The consumer market continues to grow this appetite towards advanced displays, researching adoption of high end features, such as slim border design, higher refresh rate, higher spec ratio, curve, view displays, and low power all which implies much more IC use per device. This advanced feature adopt more sophisticated IC designs and consume more web area which lower the chip quality output on a per wafer basis. On the other hand, it increases the content value in terms of dollar per waiver sales. We continue to lead in these areas with decent market share, providing one stop shopping for clients who need to revise these advanced Tcons or total solution. Now let's turn to the small and medium sized display of IC business. In the fourth quarter, revenue is expected to increase by low teens sequentially and more than 50% year-over-year. Sales of smartphone is set to grow by high sequentially more than 30% year-over-year. As for the tablet segment, we expect sales to be flat sequentially after successive quarterly growth driven by the steady rise of TDDI penetration. The Q4 automotive driver business, again, is poised to grow by double digit sequentially and more than doubled year-over-year, despite the adverse impact on global automotive production caused by chip shortage. However, our growth is hindered by short supplying capacity that prevents us from meeting all customer demands. In the fourth quarter, we expect smartphone automotive driver sales to be about equal in revenue contribution with automotive sales outgrowing the other two segments. Now, let's have a quick review on each of the three major product segments within the small and medium size display for IC business. First smartphones driver IC business, in Q4 we expect our smart multimedia sales to increase double digit sequentially, despite the outbreak of data variant continuing to weigh heavily on world wide smartphone market, especially in the southern Asia area. Our supply for smartphone is still limited by the total capacity accessible to us where we can only support shipments through selected lens. Looking ahead at our smart home TDDI layout, we are either taking new design developments, supporting higher frame rate, adjusting bezel and higher resolution features. Successful engagements with some key customers have been achieved in Q4, with small customers indicating their interest for their next launches. Traditional drivers for smartphone running at relatively low volume are expected to decline for the first quarter due many to TDDI replacement. Next on tablet IC business, we maintained our leadership position in a temporary segment, particularly in advanced TDDI sector where we have more than 60% global share in the non-iOS tablet TDDI market. In the fourth quarter, we expect sales activity of tablet TDDI to be up low teens, a continuation from the solid and high base in Q3. Our TDDI is supported for the feature upgrades for customers next generation products covering higher frame rate, super high resolution, larger than 11 inches display and better precision active sliders running on different operating systems. What's more our TDDI solution for the next, for the fast expansion educational market has been successfully and widely adopted by leading Chinese players. Revenue of traditional DDIC for tablet is expected to decline double digit sequentially resulting from replacement by TDDI as we've mentioned repeatedly and also severe capacity constraint. Turning to the automotive sector; the highest growth area among the display driver business. In Q4, our automotive IC sales are expected to grow double digit sequentially on the drops worldwide key component shortage and serious port congestion that is hurting automotive sales always. Looking ahead, the increase in the number, size and sophistication of displays inside the VE drop is evolving at a rapid rate all indicating much more IC demand per vehicle. Before seeing the growing automotive display demand, we enter in two long term arrangements with strategic foundry partner back in early 2020 and secured a major increase in capacity for not only this year, but also next few years. That together with our strong customer engagements enables our robust shipment and sales growth amidst the prevailing IC shortage. Car interiors are increasingly catering to more stylish, interactive and freeform displays with ever improving image quality made possible with panels equipped with advanced technologies such as TDDI and local dimming. In sales TDDI for the automotive whereas small volume will continue to increase in penetration and adoption on the sensor information display, rear seat infotainment display. Himax is the front runner who kick started the industry's first automotive TDDI mass production back in 2019 followed by automotive TDDI which also went to mass production in Q3 this year. Right now, we are dominating in the new TDDI designs with multiple to end customers, panel makers as well as car manufacturers across the continents. TDDI printer driver IC vendors much higher counter value on a per panel basis provides better profit margin that represents a high barrier of entry for late comers. We are glad to report that accounting for a small portion of our automotive business for now, we shipped over a million automotive TDDI chips within the third quarter alone making a major milestone for our commodity of the business. As automotive TDDI is being adopted and put into mass production rapidly as we speak, we anticipate more aggressive shipping momentum to carry over into Q4 and throughout 2022. We believe TDDI automotive will soon become a major growth engine for small and medium sized panel IC devices. We mentioned in the last earnings call that we were also leading the industry with the first launch of the cutting edge of TDDI or like the glass displayed touch and driver integration solution. This technology incorporates sophisticated multi chip system design is essential for very large sized, slim and curved automotive displays. We are glad to report that the introduction of the technology was met with enthusiastic responses from several OEMs and panel makers. Combining all this leading technology with strong company support that we have secured with our foundry partners, we expect our commodity display IC business to enjoy exceptional growth going forward. Next for an update on AMOLED. Himax remains committed to all the technology where we continue to commit R&D effort on not only driver IC but also smartphones, wearable tablet, automotive areas in partnerships with major Chinese and Korean panel makers. In the fourth quarter, we aim to successfully rollout production for the flexible multi-driver in Tcon automotive application in collaboration with BOE Electronics subsidiary of BOE, the world's largest TFT LCD player. In view of series constraints on all the display driver capacity in the next few years we have also secured meaningful capacity for smartphone OLED drivers. Now, let me share some of the progress we made on the non-driver IC businesses. Let's start from the timing controller sector. We anticipate two more Tcon sales to decrease by mid teens sequentially as a result of weaker demand in TV and Chrome book notebook sectors after multiple quarters of strong shipments. While it is limited by accessible foundry capacity, we are optimistic about the long term growth prospects of the Tcon business where we continue to engage customers with high end including 4k/8k TV, gaming monitor and low power notebook. Looking ahead, we are particularly excited about the potential for automotive Tcon where our cutting edge local team in Tcon has won numerous projects awards and penetrated into new car model launches of OEMs and tier one car makers. We believe Tcon segment will be one of the driving forces of our non-driver IC businesses moving forward. Next on WLO update, the first quarter WLO revenue is expected to decline substantially as a result of lower shipments to anchor customer. Moving forward, we will continue to support the shipment for the customers’ legacy products. Nevertheless, the WLO technology continues to play an important role in shaping next generation optical applications. Our exceptional optical design knowledge together with our production proven nano imprinting capabilities and must be eventually experience allows us to deliver high quality solutions to meet the requirements of the future generation optical applications across automotive, consumer, industrial and medical applications. Next to our 3D sensing business. Himax's proprietary 3D decoder IC that provides accurate 3D perception data processing and low power operation with rigorous data security protection plays a vital role in areas such as secure payments and personal identification use indoor lock industrial access control applications has been broadly adopted in leading the payment ecosystems in China since this initial pan mass production in the second half of 2020. For new design SOC is on the way, which will need to grow involved in study next year with accelerated adoption of our 3D total solution in various fields, such as manufacturing automation, medical inspection, automotive owner recommendation, intelligence service robot, and much more. Now, I'd like to turn to our Wi-Fi smart engine solution. To maximize market visibility and explore potential applications we continue to push forward with two Wi-Fi business models name the total solution and discrete component. First an update on Wi-Fi total solution. Our Wi-Fi total solution incorporates Himax ultra low power CMOS image sensor, our proprietary AI processor, and CNN based AI algorithm. It is designed for a wide range of ultra low power use cases in consumer electronics to modernize legacy endpoint devices which lead AI capability which also power computer vision AI. Equipped with AI capability, Wi-Fi is capable of processing data locally on the device with just metadata output, while avoiding the need to transport massive data to the cloud thereby improving response time, saving bandwidth and power and last but not least, enhancing data security. We are pleased to polls that the design wins with a top TNM for a mainstream application that we indicated earlier, is on track to enter into mass production in Q4. Equally important, the number of awarded projects is growing quickly covering a broad range of applications, including notebook, home appliances, utility meter, automotive, battery powered surveillance camera, panoramic video conferencing and medical just to name a few. Some applications are already slated for mass production at the end of this year. In addition to consumer electronics players who aim to add AI capability to their products within just one year since we started sampling our Wi-Fi solution has also drawn much attention from car cloud service providers who look for secure and low power edge AI devices to help collect big data for their cloud based services. We are excited by the potential opportunities presented by the edge to cloud platform collaboration, opening up new market frontiers for us in areas such as smart cities, smart office, health care, agriculture, retail and factory automation. We anticipate more design win awards than growing modern shipments starting next year. Our Wi-Fi key component business model, we continue to leverage our key partners to amplify our offering and encourage adoption of our ultra low power solution in AI communities, which also has shown appetites for ultra low power smart AI sensing. Being the official partner of prominent AI platforms, such as Google TensorFlow for microgen controllers, Microsoft Azure, ARM, AI partner program and tinyML Foundation, we get to enjoy the enormous network of these ecosystems and their numerous participants. We continue to receive inquiries from large corporations and individual developers alike with hundreds of evaluation boards and development kits have been purchased online and distributed across the globe. Additionally, we continue our marketing efforts through joint webinars and other online activities with several well-known platform partners such as HD Impulse, Dish Key and SparkFun. We are confident that voice Wi-Fi will be one of our major growth drivers for non driver segments looking ahead into 2022 and much beyond. For non-driver IC business we stay ready to decrease single digits sequentially in the first quarter. 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.

[Operator:]

Thank you. At this time we would like to take any questions you might have for us today. Our first question comes from the line of Tristan Gerra from Baird. Your line is open.

[Tristan Gerra:]

Hi, and good evening. My first question is looking at the weakness that you described in notebooks and TVs that's impacting your Tcon business does that mean that we're closer to supply demand balance than what you had expected just a quarter ago? I know that you're putting the supplier agreements in place and you expect the tightness, in 2022. But is it fair to assume that notably, the weakness in notebooks that seems more sustainable than TVs which have stabilized suggests that maybe the whole industry gets to supply demand bands earlier than previously expected? Any feedback there would be useful.

[Operator:]

This is operator. Mr. Tristan Gerra, the presenters will come back to us in one moment.

[Tristan Gerra:]

I'm not sure if you've got a question on that or maybe the question we need to disconnect.

[Jordan Wu:]

We got disconnected. But we didn't get any of the questions. And we actually waited in the queue for operator for quite a while. But anyway, we are back.

[Tristan Gerra:]

Can you hear me now?

[Jordan Wu:]

Yes. Loud and clear.

[Tristan Gerra:]

Great. I thought my question maybe led everybody to disconnect. So my question is that given the weakness in notebooks and TVs, that's driving you to project your Tcon business to be down mid single digits in the quarter, is that something particularly if the weakness in notebooks is sustainable throughout the year on like TVs where the business seems to be stabilizing. Is ongoing weakness in the notebook at some point accelerating the point where you get back to supply demand imbalance balance? I know you've mentioned on the call that you're putting supply agreements in place and expect 22 to remain supply constrained, but again, if we see sustained weakness notably in notebooks does that mean supply demand balance comes earlier than you previously expected? Any feedback would be useful here.

[Jordan Wu:]

So particularly on notebook. So you ask, do you want me to comment primarily on notebook rather than the overall market situation or supply demand balance, is that right?

[Tristan Gerra:]

Supply demand actually overall. So, in other words if you have one of here and market that continues to be weak, does that mean that your overall business gets back in supply demand balance earlier than you previously expected?

[Jordan Wu:]

Actually, we actually rather bullish on our overall display drive IC business for next year. And that includes driver IC and Tcon. And now, I mean, surely everybody understands nowadays as we speak, the market is going through some softness particularly in low and small size TV segments, but in general TV market remains soft. However, on the higher end, the demand is more persistent while we are seeing pretty solid demand coming from IC sectors both monitor and notebook. But, most importantly, if you look at our projection for next year, we are actually as I said, we are very upbeat about the prospect of large display sectors, including all the three areas notebook, monitor and TV. While we are not particularly certain about the prospect of the market overall demand, our forecast is only as good as anyone's, but I think our optimism on our strengths going into next year has a lot of things that are particularly to Himax and also, there are also fixes that particular to display IC drivers. Again, the large display market may go soft or maybe it will stay strong, I don't know over next year, but one very important factor for display drive IC many people neglect is the fact that overall the market is shifting towards higher end features and higher resolutions and that is going to change the dynamics of the IV process i.e. display drive IC, consumption are essential. So the need to repeat so larger size higher frame rate, higher range in general, whether it's local TV or monitor, acquire the number of units or panels shipping may remain the same. Or it actually is only in direct relationship with the panel area of the class area consumed. But the goal to high resolution, higher frame rate, better features that tend to enlarge the overconsumption of our display IC driver a lot. Now I will give you one or two very specific examples so you will get a very clear idea what I'm talking about. If I take for example, 4k TV 60 Hertz against full HD also 60 Hertz by going from full HD to 4k, you actually with the same panel, you actually double your number of units of driver IC needed with each piece of IC actually area size slightly larger for 4k TV compared with HD. Now if you take the same 4k TV, but you upgraded from 60 Hertz to 120 hertz while the number of IC remain the same the base size of each IC, the base size actually will enlarge by almost 50% by going from 60 Hertz to 120 Hertz. So what I'm trying to say is the overall trend towards beneficial higher performance TV, notebook and monitor actually is going to provide a very, very strong support for display driver IC demand. Regardless of the strength or weakness of the large display panel business and that is point number one. Point number two, based on our internal analysis which is derived out of extensive interviews and discussions with all foundry makers across the world who had a largely spiritual IC, so based on our interviews with surveyors, we actually protect some decline of the collective, projected collective large display driver IC output next year because they are relocating, they are waiver. So that we are projecting our display driver IC with output may actually a little bit of decline next year gets this, right. But seeing this right. So seeing the two factors one the large display IC actually the waiver consumption is going to increase regardless of the market and two, total waiver output may actually decrease. So since two factors combined, we actually, rather aggressive this year and we managed to successfully secure the increase of our waiver capacity next year by actually adding a new very important new foundry partner to our lineup. So we believe our assessable foundry capacity for large display driver IC may actually increase by double digit next year So last but not least, I think throughout this shortage and whatnot, we have been collaborating a lot closely with selected leading end customers. I am talking about the leading end customer for TV and for monitor and for notebook respectively, right. So we enter into direct agreements and we started direct collaboration with them. And that's actually also not only secure our business for the coming years. It also enables us to when the market shifts demand shifting from one sector to another, we can actually react a lot more quickly compared to before. So all these factors combined I apologize this is a very long answer. But all these factors combined, I think we actually, a bit about prospect for next year of high double digit, high double digit growth potentially, for both the display driver and Tcon.

[Tristan Gerra:]

Great, thanks for the detailed answer. That's actually very useful. Just my follow up question will be, do you expect your capacity which you said is going to be up to double digit next year to increase higher than the competition, which means that you will be able to gain market share as a result? And then the second part of the question is, is the discrepancy between your Tcon business and the driver IC business really driven by the higher screen resolution and higher frame rates that you just described? Is that really the key reason for you predicting Tcon will be down in Q4 but driver IC would be up? And then finally, any comment about the China power shortages and impact on the TV panel production?

[Jordan Wu:]

Okay. First of capacity, I think based on analysis, the answer is yes. We believe we are going to have some increase of capacity next year compared to this year while the industry may actually suffer from some decrease of overall output. So the two factors together certainly, I think we are likely to outpace our competitors in market share, hopefully next year. And the second question is Tcon I think the fact that we have one quarter of some dip in Tcon and increasing driver IC shipments I think may only be a reflection of timing controllers, certain customers have in inventory adjustment, bear in mind timing controller typically are not purchased directly from panoramic makers rather they are from their both manufacturers, both OEM, ODM manufacturers. So there could be timing wise some mismatch, but in the long term, I think we believe our Tcon market share will rise next year faster than display driver because historical display driver IC market share is slightly higher than Tcon. Now with the tightness we and our customers, I think we are both better off having our solutions shipped to customers on a bundle basis. Meaning, there much of them are bundled our Tcon market share, we get the approach to be more like driver IC and again, historical driver IC market share is higher than Tcon. Your last question is about China power shortage. We haven't really seen a direct impact on us. Not yet anyway, so touchwood. And I mean, the reason is very simple panel industries consider strategically important for the Chinese government. So they actually take measures to ensure that there's no power disconnection with the panel makers. And they also in turn, asking customers to look up to their key suppliers. So again, so far, we haven't seen any impact whether there will be long term repercussions coming all the way to us I don't know yet. But we haven't really I've seen or heard customers talking already about this yet.

[Operator:]

Thank you. We have our next question from the line of Jerry Sue with Credit Suisse. Please go ahead.

[Jerry Sue:]

Thanks for taking my question. First question, I want to get some more color about your gross margin outlook in the first quarter and perhaps into 2022, especially debt equals margin guidance of around 50% seems like it's down to one to two percentage points from the third quarter. So can you comment a little bit on that the reason behind it? And how should we think about the gross margin into first quarter next year, or perhaps 2022?

[Jordan Wu:]

Thank you, Jerry. Yes we guide it for a slight dip in gross margin Q4 against Q3. Bear in mind, we have been going through financial capacity tightness and therefore we are taking up a lot of the foundry companies, price hikes over the quarters. And so, the way we keep or we maintain or sustain or even improve our gross margin is to transfer the additional costs to our customers. So your question is really about whether we will be able to continue to transfer such additional cost to our customers. In Q4, if you look at the numbers, in simple mathematics, we are still able to transfer the cost. We are just not adding further our markup to the increase on top of the cost increase to our customer. That's also because it's quite simple. Our revenue will increase a bit and if we transfer the cost because there's a gap, because there's a gross profit. So if you transfer 1% to 2% exactly the cost into your customers then naturally by definition, your gross margin will come down slightly. So that's exactly what happened. So if you look at the numbers we indicated for Q4, it basically shows that we are transferring just about all of our cost increases to our customers who can still take the cost increase apparently, that's why we are giving the guidance. Now for next year, next year is too long and too early for us to comment right now, given the of the industry. However, I think there's no reason for us to be pessimistic about the prospect. I'm comparing, I am talking about whether we can stay, continue to stay such similar or such or similar high levels of course. Again, our comment will be we are not pessimistic for a few reasons. One, I mean for highly process yes overall major companies shortage studies on track to loss very much into the fall of next year or the year after given the fact that there is simply no meaningful addition to the industry's capacity pool for highly. And secondly particularly for Himax I talked about automotive business of trying to outgrow the rental business both displays driver IC, and very important TDDI which really will be a major year of increase next year. So the automotive represent better SP and better margin, and it's actually long term sustainable margins well. It tends to fluctuate a lot less compared to consumer electronics. So that is one factor and so I say in our prepared remarks that we believe automotive as a standalone sector will become the single largest revenue contributor next year. So make sure our commitments. And also they are more high end products which are set to outgrow the rest of our businesses, including timing controller and very interesting Wi-Fi, which will be the first year of production also starting from almost zero this year. So that certainly is additional growth area and that is high margin area as well. So all these together on top of the fact that throughout this tightness period, I think we have quite successfully managed to reposition ourselves so that we are now a lot more high end centric. We are a lot more focused on the end customers. And I think all these factors combined and then our capacity will be limited meaning we are giving away lower margin business, low end business. So hopefully, product mix wise, we'll be able to defend our gross margin quite well next year.

[Jerry Sue:]

And just one follow up question. I think in the prepared remarks you also mentioned only a little bit about the and also the cost, I was just wondering for I think for a lot of companies, they've been talking about, just wondering from Himax historical track record on the AR/VR cargo, especially one of the tech giants invested in your subsidiary. How should we think about Metaverse, how is Himax postioned in the Metaverse world in the next couple of years? Thank you.

[Jordan Wu:]

Honestly, I think quite well. But I think overall middle way, I guess, these days, people are focusing primarily on VR goggles. And then certainly AR goggles as well. And our position is quite well primary . Now, admittedly, our exposure to VR is less than that to AR. And AR I mean it's most heterogeneous product, although it's a lot more excited to be successful. So, I think the industry, the whole industry is still fighting through the battles of conquering the engineering barriers, trying to deliver something that consumers will go like, wow. So I think we are still going through that. In fact our WLO in particular, we have projects, covering 3D sensing for VR devices and with entry in for AR devices. And I mean, obviously, I cannot disclose details and specific thing customer names, but you're talking about some if not all of the biggest names in the tech world. They are working very closely with us. However, I don't think much will materialize in next year. I'll be very honest about this and that is why we decided given the limited time and space, we decided not to mention much about it in our prepared remarks. And likewise for AR costs, bear in mind is only applicable for AR and AR costs we are focusing on a lot of other things because we are working very hard with a few events for AR goggles. So we also understand the technical challenges. And so that's why we actually put a lot of costs effort into other areas such as SUV for automotive, which are making good progress. However, given the nature of automotive, the real mass production with three of them will be still years away. And in telecommunication WSS switch device areas such as this, but yes AR goggles we remain active player, but we feel it is, we also understand there's a lot of hype, short term hype recently, but we feel they may actually be some time to go before they really materialize.

[Jerry Sue:]

So this is something that we should do on a computer monitor in the next couple of years?

[Jordan Wu:]

Yes, yes.

[Operator:]

Thank you. Our next question is from the line of John Lopez with Vertical. Please go ahead.

[John Lopez:]

Hi, good evening. Can you guys hear me right?

[Jordan Wu:]

Yes.

[John Lopez:]

Fantastic. Thanks so much. I have two questions. I guess the first one, just thinking about the near term dynamics, I guess maybe I want to ask it this way. If we look at several of your panel customers, they're guiding their panel shipments and/or areas shipments to decline in Q4 versus Q3. If we look at your largest display peer, display driver peer, they seem to be guiding their revenues to decline in Q4 versus Q3. And there is kind of a whole bunch of weakness happening in the smartphone segment again, sort of materializing Q3 and extending into Q4, you're getting your sales to increase in Q4, and you're getting your smartphone sales to increase more than your total sales. I'm wondering if you can just help us tease apart maybe what some of the differences are in your outlook versus that dataset.

[Jordan Wu:]

Well again, two folds. One is compared to the panel industry and the other one is compared to our peers. Compared to the panel industry, I think I've pretty much covered that in my response to the first question where our display driver demand to not necessarily go in proportion to the panel output or the gross area consumption for the reason I just mentioned. With feature upgrades, resolution upgrades, they tend to increase in some cases materially for the display driver waiver consumption, while the gross area consumption may actually stay the same or even decline. So that I think that is the comparison to the customers to go to the customer side. Now as for the competition it's harder for me to comment. I think what I can say is that as I said, we are giving up the love on the lower end business because of two reasons really China local competition, China local competition, they are subsidized, but they can only focus on low end. They don't get really well recognized by the international end customers. And then they're very price aggressive and they're subsidized. So we tend to throughout the foundry capacity tightness we actually before then we have started to shift with 32 in customers new project design in line, our bidding will be very conservative in those lower end for the areas where we are, we focus only primarily on high end. That is one thing. So there's a major product mix shift for us this year compared to last year, the year after and then next year will be more so. So we are very much on for example for TV typically the very easy definition for higher against lower would be media interface for low end and point to point interface for high end. And if you look at our product mix right now compared to just a couple of years ago, there is a major, major shift for less P2P interface. And now, with P2P interface, we are shifting a lot more towards what we call USID interface which is the multi end. So that crossed up mixed I think is a major difference and now, the higher market demand is a lot more resilient compared to low end but I think that is one thing. And the second thing is that across TV and monitoring notebook, we have selected carefully and partnered closely, tightly with typically the number one in customers. And so we enter into direct agreements with them. We have a lot of technical, not just technical, but business collaboration. And that also put our demand to be a lot more defensive to industry downturn. So I can only talk about sales and we've proven again and again and again that our core guidance has been very robust and reliable and I certainly hope and no reason to believe to be different this quarter. So our guidance comes from directly from outlook.

[Operator:]

Thank you. Our next question comes from the line of Donnie Teng with Nomura Security. Please go ahead.

[Donnie Teng:]

Thank you, Jordan and Eric for taking my question. I only have two simple questions. So first one is related to your large display driver IC guidance in fourth quarter. So it looks like a little bit better than your peers. So just curious if our large display driver IC sales exposure to TV was lower than IC panels or we gained some market share temporarily in the fourth quarter. So that's my first question. And secondly is regarding to our Wi-Fi total solution. Because I remember in early this year, we mentioned about that we are relatively positive from the progress and could be some potential PCOEM customers in fourth quarter this year. So just wondering if you could give us some more update on this and if we have any volume shipment already for PCOEM customers. Thank you.

[Operator:]

Excuse me Mr. Donnie Teng. This is operator we will have Mr. Jordan Wu and Eric Li with you in one minute. Please stand by. Excuse me this is operator. I apologize but there will be a slight delay in today’s conference. Please hold and the conference will resume shortly. Thank You for your patience. Please remain on the line. Your conference will resume shortly.

[Donnie Teng:]

Yes Eric, can you hear me?

[Eric Li:]

Yes, we can hear you.

[Donnie Teng:]

Okay, just two simple questions. The first one is your large display driver IC guidance looks like to be a little bit better than our peers. So just wondering that if you originally have bigger sales exposure to IT panels or the TV panels or you temporarily gain market share in the fourth quarter, that's my first question. And second question is regarding to our Wi-Fi total solution. So previously, we seemed like more positive from our progress with PCOEM customers by the end of this year. So just wondering if you could give us some idea if we have entered into like volume production for our PCOEM customers in this quarter. Thank you.

[Jordan Wu:]

The first question could we have higher exposure for IT and notebook compared to TV. I don't have the answer right in front of me right now. I know we have a very solid notebook. No, sorry, monitor, especially high end monitor like AMOLED monitor market share, and our notebook market share is rising. And then again, I emphasize we are collaborating directly within customer, leading customers. I think all these factors help. For TV again, we are really moving away from media videos products, high end products and focusing not just on high end products but really focusing a lot on some of the leading end customers products. So whether in how they compare with our peers and in which peer tis hard for me to comment and fiddle with particularly more exposure on this sector than the other. I'm not sure about that. And for Wi-Fi we have said in a few quarters already that we have had major design wins with the leading end customer for a mainstream application. We never really said is PC or whether it's OEM or otherwise. But yes, we are on track to start mass production n Q4 and that's why we have always indicated and certainly Q4, you will not be throughout the whole quarter. So will be the commencement of mass production. But we've got a pretty solid focus for three or four for the whole next year. And I think given that it's really a new theme for the whole world and it's a brand new product for us we only studied for something only about a year ago, I think we are extremely pleased with the progress and that in addition to that, we also have with smaller volume quite a number of different applications we some customers also on track for mass production also studying this quarter as well. So let's see here, you will see some revenue contribution from Tcon, but you will still be no single digit revenue contribution, but hopefully, you will grow you will outgrow up overall business for a very long time and certainly this is, we are confident this will be low high margin business.

[Operator:]

Thank you. There are no further questions at this time. I will turn the call back over to Mr. Jordan Wu.

[Jordan Wu:]

We apologize for the hiccups, but luckily we managed to finish just at the market open. So as a final note, Eric, we are maintaining the marketing activities and continue to attend investor conferences. So we will know the details as they come about. Thank you, and have a nice day.

[Operator:]

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.