Himax Technologies, Inc. Reports Third Quarter 2019 Financial Results and Provides Fourth Quarter 2019 Guidance

Company Meets Q3 2019 Revenue, Gross Margin and EPS Guidance Provides Q4 2019 Guidance Revenue to be around Flat Sequentially, Gross Margin to be Slightly Up 
Sequentially, IFRS Loss per Diluted ADS to be around 3.0 to 4.5 Cents, and Non-IFRS Loss per Diluted ADS to be around 2.7 to 4.2 CentsQ3 revenue decreased 3.0% sequentially to $164.3M, in line with the Company’s guidanceProduct sales: large driver ICs, 30.5% of revenue, down 15.6% QoQ; small and medium-sized driver ICs, 46.9% of revenue, down 5.6% QoQ; non-driver products, 22.6% of revenue, up 31.1% QoQQ3 IFRS gross margin was 19.5%, flat sequentiallyQ3 IFRS loss was $7.2M, or 4.2 cents per diluted ADS, down from loss of $5.2M, or 3.0 cents per diluted ADS in Q2 2019Q3 Non-IFRS loss was $6.9M, or 4.0 cents per diluted ADS, down from loss of $4.8M, or 2.8 cents per diluted ADS in Q2 2019Q3 IFRS gross margin declined 390 bps year-over-year largely due to pricing pressure and high material cost in LDDIC and smartphone TDDI segments as well as significantly more shipments of lower end TDDI, offset by higher margin from increased WLO shipments which led to higher capacity utilization2H19 smartphone TDDI growth below Company’s target: New FHD+ TDDI project opportunities did not materialize due to accelerating adoption of AMOLED display adoption and TDDI adoption is shifting more towards mid- to low-end models where the Company has low market share. Furthermore, TDDI pricing pressure fueled by the increased competition negatively impacting its marginsExpects automotive and tablet DDIC sales to grow in Q4Q3 WLO revenue increased substantially due to a pickup in shipments to fulfill an anchor customer’s higher seasonal demand. Expects a slightly lower shipment volume sequentially in the fourth quarter  Company has adjusted structured light-based 3D sensing development to focus on applications for non-smartphone segments; actively pursuing smartphone makers’ ongoing time-of-flight (ToF) 3D sensing projects with ecosystem partners by providing WLO opticsCompany’s strategy is to focus on delivering P&L improvement by executing on the technologies it already developed for both DDIC and non-DDIC areaCompany remains positive on its long-term business outlookTAINAN, Taiwan, Nov. 07, 2019 (GLOBE NEWSWIRE) — Himax Technologies, Inc. (Nasdaq: HIMX) (“Himax” or “Company”), a leading supplier and fabless manufacturer of display drivers and other semiconductor products, announced its financial results for the third quarter ended September 30, 2019.SUMMARY FINANCIALS

“2019 has been a challenging year for Himax. Uncertainty in the global economy continues to overshadow the marketplace, where we are seeing waning demand in all industries that consume display. This, combined with prevailing LCD industry capacity oversupply, has led to severe pricing pressure for panels which inevitably affected the sales and margin of display driver IC across all of our major product segments including TV, smartphone and automotive,” said Mr. Jordan Wu, President and Chief Executive Officer of Himax.“As we look forward, although at this time we have limited visibility, we do not anticipate the business environment to improve in the near term. Our strategy is to focus on delivering P&L improvement by executing on the technologies we already developed for both driver IC and non-driver IC areas,” concluded Mr. Jordan Wu.Third Quarter 2019 Revenue Breakdown by Product Line (USD in millions) (unaudited)2019 Year-to-Date Revenue Breakdown by Product Line (USD in millions) (unaudited)The Company recorded net revenues of $164.3 million, a decrease of 3.0% sequentially and a decrease of 12.8% year-over-year. The sequential decline was mainly due to the anticipated lower sales into TV and smartphone segments. Gross margin was flat sequentially at 19.5%. IFRS loss per diluted ADS was 4.2 cents. Non-IFRS loss per diluted ADS was 4.0 cents.Revenue from large display drivers was $50.1 million, down 15.6% sequentially, and down 24.5% year-over-year. Clouded by panel makers’ ongoing inventory correction driven by weak TV demand and industry-wide oversupply, Himax’s large panel driver ICs continued to experience lower shipments and pricing erosion in the third quarter. Large panel driver ICs accounted for 30.5% of the Company’s total revenues for the quarter, compared to 35.0% in the second quarter of 2019 and 35.2% a year ago.Revenue for small and medium-sized display drivers came in at $77.1 million, down 5.6% sequentially and down 9.2% year-over-year. The segment accounted for 46.9% of total sales for the third quarter, as compared to 48.3% in the second quarter of 2019 and 45.1% a year ago. The sequential revenue decrease was mainly due to lower smartphone TDDI and tablet sales, while automotive segment recorded better-than-expected sales. The year-over-year decline was mainly due to lower automotive and tablet driver IC sales. Automotive sales worldwide declined sharply since Q4 2018 over worries of economic slowdown and trade conflicts.Sales into smartphones were down 7.7% sequentially but up 32.8% year-over-year. The sequential decline was mainly due to lower TDDI shipments. As indicated in the last quarter’s earnings call, the Company’s TDDI sales were challenged by accelerating AMOLED display adoption and rapid ASP erosion caused by increased competition. On a year-over-year basis, Himax’s TDDI shipment doubled as its fulfillment was capped last year by capacity constraint. Sales of the traditional DDICs declined by 1.9% sequentially but increased 6.4% from last year. Display drivers for tablet and other consumer products were down 16.1% sequentially, better than the Company’s guidance of decrease by around 25%, because of customers’ inventory replenishment and more sales into white-box market on the backdrop of a shrinking global tablet market. Year-over-year sales of this segment declined 33.9%.Driver IC revenue for the automotive application was up 6.1% sequentially. It was down 19.7% from the same period last year due to the declining auto shipments for the reasons stated above.Revenues from non-driver businesses were $37.1 million, up 31.1% sequentially and flat year-over-year. Non-driver products accounted for 22.6% of total revenues, as compared to 16.7% in the second quarter of 2019 and 19.7% a year ago. The sequential increase was mainly due to higher WLO and CMOS image sensor shipments, offset by lower timing controller sales.Gross margin for the third quarter was 19.5%, flat sequentially but down 390 basis points from the same period last year. The year-over-year decline can largely be attributed to smartphone TDDI ASP erosion due to increased competition and significantly more shipments of TDDI for the low-end market. Moreover, the Company’s large panel driver IC businesses continued to experience pricing pressure caused by industry-wide TV panel oversupply and high material cost. Nevertheless, the gross margin of the WLO business improved from the same period last year because the increased shipments to an anchor customer have led to higher capacity utilization. Likewise, on sequential basis, the gross margin improvement delivered by more WLO shipments was offset by the slowdown in sales and downward price trends for smartphone TDDI and LDDIC.IFRS operating expenses were $39.7 million in the third quarter, up 2.0% from the preceding quarter but down 8.5% from a year ago. The sequential increase was caused by increased salary expenses. The year-over-year decrease was mainly a result of reduced restricted share units (RSU) as the Company did not issue RSU like it did in the previous years. RSU is part of the Company’s share-based compensation which it usually rewards employees at the end of each September. Non-IFRS operating expenses for the third quarter were $39.3 million, up 2.3% from the previous quarter and up 1.2% from the same quarter 2018.On September 23, 2019, Himax’s compensation committee approved an employee stock option plan of up to 3,000,000 units for the same number of Himax ADSs with exercise price being the fair market value of the grant date. On September 30, 2019, the Company granted 2,226,690 units of stock option to certain employees at an exercise price of $2.27. The remaining 773,310 units of stock option can be granted to employees by September 6, 2022 when the current long-term incentive plan will expire. For the portion which has been granted, the Company expects to recognize stock option related compensation expense of $0.33 million in each of Q4 2019 and Q1 2020, and additional $0.12 million in each of Q2 and Q3 2020.IFRS operating margin for the third quarter was -4.7%, down from 0.4% in the same period last year and down from -3.5% in the prior quarter. The sequential decrease was primarily a result of lower sales and higher operating expenses. The year-over-year decline was a result of lower sales and gross margin, offset by lower operating expenses due to reduced RSU expenses as mentioned earlier.Third quarter non-IFRS operating loss was $7.3 million, or -4.4% of sales, versus non-IFRS operating income of $5.4 million, or 2.9% of sales, for the same period last year and down from -3.2% a quarter ago. The sequential and year-over-year declines were for the same reasons stated above.IFRS loss for the third quarter was $7.2 million, or 4.2 cents per diluted ADS, compared to loss of $5.2 million, or 3.0 cents per diluted ADS, in the previous quarter and IFRS profit of $0.9 million, or 0.5 cents per diluted ADS, a year ago.Third quarter non-IFRS loss was $6.9 million, or 4.0 cents per diluted ADS, compared to non-IFRS loss of $4.8 million, or 2.8 cents per diluted ADS last quarter and non-IFRS profit of $4.5 million, or 2.6 cents per diluted ADS the same period last year.Balance Sheet and Cash FlowHimax had $128.0 million of cash, cash equivalents and other financial assets as of the end of September 2019, compared to $102.9 million at the same time last year and $122.4 million a quarter ago. The cash position increased $5.6 million from last quarter due primarily to operating cash inflow of $24.0 million and additional unsecured borrowings of $13.6 million, offset by a capex of $31.2 million. On top of the cash position, restricted cash was $164.0 million at the end of the quarter, almost the same as the preceding quarter and a year ago. The restricted cash is mainly used to guarantee the secured short-term borrowing for the same amount. The Company had $90.6 million unsecured short-term loan at the end of Q3 versus $77 million a quarter ago.Himax’s inventories as of September 30, 2019 were $167.6 million, down from $188.5 million a quarter ago but up from $145.8 million a year ago. Accounts receivable at the end of September 2019 were $157.3 million, down from $176.2 million last quarter and $187.6 million a year ago. DSO was 86 days at the end of September 2019, as compared to 96 days a year ago and 96 days at the end of the last quarter. As highlighted in the last earnings calls, in response to capacity shortage of foundry and certain packaging material, the Company had to keep the inventory level higher than usual last year. Given the prevailing uncertain market conditions and easing of foundry capacity, the Company has started to control its inventory level since the first quarter of 2019.Net cash inflow from operating activities for the third quarter was $24.0 million as compared to an inflow of $2.2 million for the same period last year and an outflow of $17.7 million last quarter. The QoQ and YoY cash flow change was mainly a result of lower receivables and inventory.Third quarter capital expenditures amounted to $31.2 million, versus $8.2 million a year ago and $5.7 million last quarter. The majority of the third quarter capex, totaling $29.2 million, consisted of $27.5 million payment for land purchase, and ongoing payments for the new building’s construction and WLO capacity expansion. The remaining $2.0 million was the investment in design tools and R&D related equipment for the Company’s traditional IC design business. By the end of Q3, Himax has concluded substantially all the capex payments for the new land, building and 3D sensing project with just $1.6 million left to be made in the fourth quarter.Share Buyback UpdateAs of September 30, 2019, Himax had 172.2 million ADS outstanding, little changed from last quarter. On a fully diluted basis, the total ADS outstanding are 172.6 million.Q4 2019 OutlookAs the Company mentioned last quarter, 2019 has been a challenging year for Himax. Uncertainty in the global economy continues to overshadow the marketplace, where the Company is seeing waning demand in all industries that consume display. This, combined with the prevailing LCD industry capacity oversupply, has led to severe pricing pressure for panels which inevitably affected the sales and margin of display driver IC across all major product segments including TV, smartphone and automotive. As the Company looks forward, although at this time it has limited visibility, the Company does not anticipate the business environment to improve in the near term. The Company’s strategy is to focus on delivering P&L improvement by executing on the technologies it already developed for both driver IC and non-driver IC areas.One of Himax’s major focus areas for business during 2019 has been TDDI for smartphone. This business was negatively impacted by the severe foundry capacity shortage that occurred during 2018 and resulted in the Company’s inability to meet customers’ delivery requirements. Although the capacity constraint was resolved toward the end of 2018, the delay eliminated the Company’s ability to participate in major design-in opportunities that would have driven the business in 2019. While it expects the 2019 smartphone TDDI sales to increase more than 40% against last year, the growth will be below the target the Company set for itself. Even the outlook for smartphone TDDI remain weak in Q4, the Company does anticipate a strong rebound for Q1 2020 and robust growth for 2020.Display Driver IC Market
LDDIC
The current market for television sales is weak, driving an overcapacity of LCD display. As a result, since the Company’s last earnings call in August, many large-panel makers have cut back their production output. The combination of weak TV sales and reduced production output, as well as relatively high upstream material costs, has put pressure on driver IC demand, negatively impacting its results for the third quarter. For the fourth quarter, the Company expects business to remain flat sequentially for its large display driver IC segment. At this time, Himax is seeing continued concern in the industry over display capacity oversupply extending into 2020. Conversely, Himax and some of its major panel customers foresee a potential foundry capacity shortage of 8-inch silicon wafers for display driver ICs. Anticipating the 8-inch foundry capacity constraint, the Company has already prepared to provide 12-inch foundry capacity and backend packaging and testing to cover the potential 8-inch capacity shortfall for large panel driver ICs. The Company is working closely with panel customers as well as its foundry and backend partners to secure production plans for 2020. The Company’s design project coverage is strong across all leading panel makers. This provides Himax with good ongoing opportunities for 2020.SMDDIC
As stated in previous earnings calls, in 2018, limited by capacity constraints, Himax chose to focus its shipments of smartphone TDDI to higher-end FHD+, as opposed to HD+ projects in an effort to yield higher revenue and better margin. As the Company entered 2019, equipped with its newly developed foundry capacity, the Company expected significant TDDI growth from these FHD+ projects during the second half of this year. Unfortunately, the strong growth from FHD+ projects it expected did not materialize due to accelerating adoption of AMOLED displays that, unlike TDDI displays, are able to take advantage of under-display fingerprint sensing technology. Facing the AMOLED competition, TDDI adoption is shifting more towards mid- to low-end models with HD+ resolution. Since the Company chose to focus on FHD+ in 2018, it passed on many HD+ opportunities and started 2019 with very low market share of HD+ solutions. As a result, it has not benefitted from the shift in the HD+ marketplace. The combined result was weaker than expected smartphone TDDI growth during the first nine months of 2019 and a muted outlook for the fourth quarter. That said, the Company expects to record more than 40% growth in this segment for the full-year 2019. Since these missteps Himax has worked hard to raise its visibility in the HD+ market and has already begun HD+ mass production with a top-tier end customer earlier this year. Himax has also expanded the HD+ coverage to further customers. Based on the current pipeline, its Q1 TDDI smartphone shipments will include significant amount of both FHD+ and HD+ products. The Company anticipates a strong rebound for Q1 2020 and robust growth for the whole of 2020. For the fourth quarter, it expects TDDI revenue to decline by more than 30% from the previous quarter.Regarding TDDI for other applications, the Company’s solutions for tablet and automotive continue to make good progress. While it expects only small volume shipments in 2019, both represent better ASP and margin for its TDDI solutions long-term and the tablet products, in particular, are expected to deliver strong volume starting next year.The Company’s traditional discrete driver IC sales into smartphones posted a slight sequential decline for the third quarter, versus its original expectation of a substantial decline, due to a Chinese smartphone maker’s delivery pull-in request. Despite this, it continues to see the traditional discrete driver ICs’ addressable market being quickly replaced by TDDI and AMOLED in smartphone. The Company expects traditional discrete driver ICs for smartphone to decrease substantially in the fourth quarter of 2019.Combining TDDI and discrete drivers, Himax’s Q4 sales into the smartphone market is expected to decrease by around 25% sequentially.A major development Himax is seeing is increasing utilization of the OLED display for smartphone, triggered by the growing AMOLED capacity and the under-display fingerprint technology which is only applicable in the AMOLED display for the time being. Himax has been collaborating closely with leading panel makers across China for AMOLED product development. While the Company does not expect revenue contribution anytime soon, it does believe AMOLED driver ICs will be one of the long-term growth engines for its small panel driver IC business.In the automotive display segment, the slowing economy and rising concern over tariff have caused subdued new car sales across all major markets, particularly in China. However, Himax’s automotive business delivered a modest sequential growth in the third quarter as reported earlier. The Company expects the positive momentum will carry into the fourth quarter, attributable to market share gains of a certain of its customers. Q4 sales for this segment will increase by more than 15% sequentially. Looking forward, the overall automobile display market is forecast to increase from 2020 onward as the number of displays per vehicle continues to rise. While the Company does not expect the same kind of growth that it enjoyed in the past several years due to saturation in the automotive space, it believes that by capturing the demand for display specification upgrades the Company will deliver its automotive sales growth going forward. The market is quickly shifting towards a number of new technologies including higher resolution, in-cell touch, slim border, giant pillar-to-pillar screens, local dimming for higher contrast, and plastic AMOLED for free form design, all of which play to Himax’s advantage in advanced automotive display technologies. Himax is working closely with major automotive panel makers and leading tier-1 vendors over all of the technologies mentioned above.Although the overall markets remain weak, Himax expects the tablet business to increase by around 35% in the fourth quarter mainly due to major earlier design-wins for high-end tablet going into mass production with a number of leading end customers. The design-wins include display driver IC with COF packaging for large-sized tablets with narrow borders and the Company’s world leading in-cell TDDI with active stylus functionality for tablet. Combining tablet and other consumer electronics businesses, the Company expects sales to increase by around 20% sequentially in the fourth quarter. The shipment momentum for these high-end design-wins will carry into next year.For fourth-quarter, revenue for the small and medium-sized driver IC business is expected to be around flat sequentially.Non-Driver Product Categories
WLO
As anticipated, the third quarter WLO revenue increased substantially thanks to a pickup in shipments to fulfill an anchor customer’s higher seasonal demand. The sequential shipment increase has led to higher capacity utilization, also resulting in positive contribution to Himax’s Q3 gross margin. Based on the customer’s shipment forecast, Himax expects a slightly lower shipment volume sequentially in the fourth quarter.3D Sensing
In the smartphone segment, Himax has advanced its WLO optics solution to cover both structured light and time-of-flight (ToF) 3D sensing. Separately, as the Company reported in the last earnings call, its structured light-based 3D sensing total solution business targeting Android smartphone’s front-facing application was unsuccessful. The Company has since adjusted its structured light-based 3D sensing development to focus on applications for non-smartphone segments that require high level of depth accuracy. That the customer in non-smartphone segments almost always requires a total solution for 3D sensing also plays to Himax’s advantage. Looking at ToF-based 3D sensing solution for smartphone where its strategy is to provide WLO optics, Himax is seeing increasing ToF adoption by smartphone makers for rear-side cameras to enable advanced photography, distance/dimension measurement and 3D depth information generation to enable AR. Himax is actively pursuing smartphone makers’ ongoing ToF 3D sensing projects by teaming up with its ecosystem partners.The Company’s non-smartphone engagements have been focused on smart door lock and industrial automation segments. It is collaborating closely with industry-leading facial recognition algorithm and application processor partners to develop new 3D sensing applications for smart door lock and have started design-in projects with certain end customers. The Company is in the process of revamping the solution based on customers’ technical requirements. Separately the Company is working with partners who wish to take advantage of its 3D sensing know-how to automate traditional manufacturing, thereby improving efficiency and reducing cost. Himax’s 3D solution for shoe factory automation production line, announced in August, has gained tractions among footwear OEMs, ODMs and machinery suppliers.Ultra-low power smart sensing
WiseEye is the Company’s AI-based ultra-low power smart sensing solution. The demand for battery-powered smart device with AI intelligent sensing is rapidly growing. The Company’s total solution is built on Emza’s unique AI-based algorithm, on top of Himax’s proprietary computer vision processor and CMOS image sensor, all equipped with ultra-low power design. Currently laptop is the market of focus. Himax WiseEye 2.0 NB solution provides a ‘laptop-ready’ 3-in-1 RGB/IR/AI solution, respecting privacy while enhancing security for notebook users. The prototype the Company announced during Computex 2019 has been well received by leading CPU platform providers and laptop end customers who are now actively evaluating the technology. Himax is expected to demo the mass production version on laptops at the 2020 CES.In addition to providing a total solution for ultra-low power smart sensing, Himax also provides individual parts of the total solution separately to address the market’s different needs. For example, the ultra-low power computer vision processor it developed as part of the WiseEye 2.0 NB solution can also be used for AIoT applications. The WiseEye WE-I Plus, the AI-enabled ASIC platform that the Company recently announced, can support popular machine learning frameworks for the system customer to develop a wide range of video and audio AI applications where power is a strict constraint and on-device memory is limited. Typical applications include smart home applications and surveillance systems.CMOS Image Sensor
CMOS image sensor is another critical part of the WiseEye 2.0 NB solution that the Company just mentioned. To support the lean camera design and high-quality image needed for laptops with thin bezels, Himax has made a 2-in-1 sensor that offers the duo capabilities of high quality HD image capturing and ultra-low-power, low resolution visual sensing in one single sensor, the industry’s first with the innovative design. With this sensor, laptop makers can simplify their next generation product design and save costs by eliminating the need for an additional camera in their effort to offer context awareness for better user experience. In addition, Himax’s sensor has incorporated an RGB-IR design to enable Windows Hello facial recognition. The new CMOS sensor will be available by the end of 2019.For the traditional human vision segments, Himax sees strong demand in notebooks, where Himax is one of the market leaders, and increased shipments for multimedia applications such as car recorders, surveillance, drones, home appliances, and consumer electronics, among others. Additionally, Himax has seen increased shipments and new design-wins in the automotive segment covering before-market solutions such as surround view and rear-view camera.LCOS
Himax continues to focus on AR goggle devices and head-up-displays (HUD) for automotive. The Company’s technology leadership and proven manufacturing expertise has made us a preferred partner for customers in both areas for their ongoing engineering projects. Separately, one of Himax’s customers has recently announced an advanced LiDAR solution that utilizes the Company’s proven LCOS technology and tailor-made manufacturing service. This is another solid evidence of its leadership position in this complex emerging technology. LCOS represents a long-term growth driver for the Company.For non-driver IC business, the Company expects revenue to decrease by around mid-single digits sequentially in the fourth quarter.Fourth Quarter 2019 Guidance
The Company is providing the following financial guidance for the fourth quarter of 2019:HIMAX TECHNOLOGIES THIRD QUARTER 2019 EARNINGS CONFERENCE CALL