Himax Technologies, Inc. (NASDAQ:HIMX), a leading supplier of display drivers and other semiconductor products, has reported a solid performance for the second quarter of 2024, surpassing expectations with a significant increase in revenue and a profit per diluted ADS that hit the top end of the company's guidance range. Despite the positive outcome, the company anticipates a revenue decline in the next quarter but remains optimistic about long-term growth prospects, particularly in the automotive IC sector.
Key Takeaways
- Himax Technologies' Q2 2024 revenue rose to $239.6 million, a 15.5% increase sequentially, with a gross margin of 32%.
- Profit per diluted ADS reached 16.9 cents, aligned with the higher end of guidance.
- The company predicts a 12% to 17% revenue decline in Q3, with a gross margin around 30%.
- A profit of 1.5 to 4.5 cents per diluted ADS is projected for Q3.
- Himax plans to allocate $14.2 million for employee bonuses in Q3.
- Investments in FOCI and Obsidian Sensors aim to enhance the company's cloud AI and thermal imaging sensor market presence.
- The company is expanding its OLED business, with mass production of its on-cell touch controller set for 2025.
Company Outlook
- Himax expects a decline in Q3 revenue due to macroeconomic uncertainty and reduced demand in the automotive market.
- The company remains positive about the long-term growth of the automotive IC business and is expanding into the automotive OLED panel market.
- Himax is focusing on profitability, reducing operating expenses, and enhancing operational resilience.
Bearish Highlights
- The automotive market in China is underperforming, leading to scaled-back IC procurement for Q3.
- Large display driver ICs are expected to see a double-digit sequential revenue decrease in Q3.
- Small and medium-size display driver IC sales are anticipated to decline in the low teens sequentially.
- Tablet sales are expected to decline.
Bullish Highlights
- Notebook IC sales are expected to increase.
- Smartphone IC sales are projected to have a decent double-digit increase.
- Himax is making strategic investments in FOCI and Obsidian Sensors to strengthen its market position.
- The company's WiseEye Ultralow Power AI Sensing Solution is gaining traction in the smart security industry.
Misses
- There's a market drawdown affecting the production timeline for smartphone OLED, pushing it to the next year.
- Tcon sales are expected to decline in Q3, although the automotive Tcon business anticipates decent growth.
Q&A Highlights
- CEO Jordan Wu addressed the impact of Chinese market fluctuations and customer pessimism for the second half of the year.
- Wu expressed confidence in Himax's technology edge over Chinese competition in the automotive IC market.
- The company's CTO discussed the potential of replacing metal wire with fiber optics to tackle the challenges of power consumption and heat dissipation in HPC and GPU ICs.
Himax Technologies is navigating through a complex market environment with strategic investments and product advancements. While the company faces near-term challenges, particularly in the Chinese market, its leadership remains confident in their technology and long-term strategy. As Himax continues to innovate and adapt, investors and industry watchers will be closely monitoring its progress in the competitive semiconductor landscape.
InvestingPro Insights
Himax Technologies, Inc. (HIMX) has recently demonstrated resilience despite a challenging market, with its second quarter of 2024 results showcasing a robust performance. To provide a deeper understanding of the company's financial health and market position, here are some curated insights based on real-time data from InvestingPro and InvestingPro Tips.
InvestingPro Data highlights that HIMX has a market capitalization of approximately $1.02 billion, indicating a significant presence in the semiconductor industry. The company's P/E ratio stands at 28.14, which adjusts to 21.33 when considering the last twelve months as of Q1 2024. This suggests that investors may be expecting future growth or that the company's earnings are of high quality. Additionally, the revenue for the last twelve months as of Q1 2024 is reported at $908.77 million, although it has experienced a decline of 12% during this period.
An InvestingPro Tip points out that the stock is currently in oversold territory according to the RSI, which could indicate a potential rebound opportunity for investors. Another tip highlights that analysts predict the company will be profitable this year, aligning with the positive earnings report for Q2 2024 mentioned in the article.
For investors seeking a more comprehensive analysis, there are additional InvestingPro Tips available on the platform, including insights on stock volatility, valuation multiples, and the stock's performance over the last month and five years. To explore these further, one can visit https://www.investing.com/pro/HIMX.
In conclusion, while Himax Technologies anticipates a revenue decline in the upcoming quarter, the company's profitability and strategic investments in areas like the automotive IC sector and OLED technology suggest a focus on long-term growth. As Himax adapts to market conditions, these InvestingPro Insights may serve as valuable information for investors considering the company's potential.
Full transcript - Himax Technologies Inc (HIMX) Q2 2024:
Operator: Hello, ladies and gentlemen, welcome to the Himax Technologies Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. And later we will conduct a Q&A session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Mr. Eric Li Chief IR/PR Officer at Himax. Eric, please proceed.
Eric Li: Welcome everyone to the Himax [Audio Distortion]. My name is Eric Li, Chief IR/PR Officer at Himax. Joining me today are Jordan Wu, President and Chief Executive Officer, Jessica Pan, Chief Financial Officer. After the Company’s prepared comments, we have allocated time for questions in the Q&A session. If you have not yet received a copy of today’s results release, please email HIMX@mzgroup.us, or hx_ir@himax.com.tw access the press release on financial portals or download a copy from Himax’s website at www.himax.com.tw. Before we begin the formal remarks, I’d like to remind everyone that some of the statements in the 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. A list of risk factors can be found in the Company's SEC filings, Form 20-F for the year ended December 31, 2023 in the section entitled "Risk Factors", as may be amended. Except for the Company’s full year of 2023 financials, which were provided in the Company’s 20-F and filed with the SEC on April 2, 2024, 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. On today’s call, I will first review the Himax consolidated financial performance for the second quarter 2024, followed by our third quarter outlook. Jordan will then give an update on the status of our business, after which we will take questions. You can submit your questions online through the webcast or by phone. We will review our financials on an IFRS basis. We are delighted to announce that Q2 revenues surpassed the guidance by gross margin and profits were in line with the guidance range issued on May 9th 2024 despite the prevailing economic headwinds. The better than effective financial results primary stems from resumed order momentum across most of our product lines. Second quarter revenues registered $239.6 million, an increase of 15.5% sequentially, exceeding our guidance range of an 8% to 13% increase. Gross margin came in at 32%, in line with our guidance range of 31.5% to 33.5%, up from 29.3% of the previous quarter and 21.7% same period last year. The sequential growth was driven by cost improvements and a favorable product mix, along with increased sales in the automotive IC and Tcon product lines, both of which have higher than corporate average gross margins. The substantial improvement in gross margin from the same period last year was primarily due to one-time early termination expense paid to foundry partners, which eliminated minimum fulfillment requirement constraints and high wafer costs set during the severe industry capacity shortage. Consequently, our new wafer starts are no longer bound by these restrictive terms. Additionally, we can now leverage diverse foundry sources for optimal operational efficiency and a significantly improved cost structure, thereby maintaining our products’ competitiveness. Q2 profit per diluted ADS was 16.9 cents, at the top end of the guidance range of $0.13 to $0.17. Revenue from large display drivers came in at $39 million, reflecting a sequential increase of 24.7%. The increase was predominantly driven by customer restocking in TV and monitor ICs after several quarters of muted demand, as well as increased orders in preparation for shopping festivals. Both TV and monitor ICs sales posted substantial double-digit increases quarter-over-quarter. In contrast, Q2 notebook IC sales declined slightly following a strong restocking in the previous quarter. Sales of large panel driver ICs accounted for 16.3% of total revenues for the quarter, compared to 15.1% last quarter and 19.3% a year ago. Small and medium-sized display driver revenue reached $158.8 million, marking a sequential increase of 10.1% and surpassing our guidance due to stronger-than-anticipated sales in the TDDI products for automotive, smartphone and tablet. In Q2, automotive driver sales, encompassing both traditional DDIC and TDDI, increased by a decent high-teens sequentially and more than 50% year-over-year. Despite expectations of weakening electric vehicle demand, both automotive DDIC and TDDI sales experienced sequential growth in Q2, thanks to the our robust design-win pipeline in TDDI and customers’ continuous restocking momentum in DDIC since end of Q1. Our automotive business, comprising drivers, Tcon, and OLED sales, remained the largest revenue contributor in the second quarter, representing over 47% of total sales. Meanwhile, Q2 tablet IC sales slightly increased sequentially, surpassing guidance of a decline, fueled by leading customers' new model ramp-ups. Conversely, smartphone driver sales declined as expected during a subdued festival season characterized by sluggish demand. The small and medium-sized driver IC segment accounted for 66.3% of total sales for the quarter, compared to 69.5% in the previous quarter and 63.9% a year ago. Second quarter revenues from its non-driver business reached $41.8 million, up 30.6% from the previous quarter, due to a resurgence in orders for our Tcon products for TV, monitor, automotive, as well as OLED tablet. Our automotive local dimming Tcon, where we dominate the market, has been swiftly adopted by major panel makers, Tier 1 suppliers, and car manufacturers worldwide, boasting well over one hundred design-win projects with only a small number of design awards having commenced mass production. This momentum is further fueled by the rapid expansion of project awards across continents, positioning us for strong growth, mirroring the success we has achieved in automotive TDDI. Tcon business represented over 10% of our total sales in the second quarter. Non-driver products accounted for 17.4% of total revenues, as compared to 15.4% in the previous quarter and 16.8% a year ago. Second quarter operating expenses were $47.3 million, a decrease of 6.7% from the previous quarter and a decline of 11.1% from a year ago. The sequential decrease was primarily driven by decreases in tape-out expenses. The year-over-year decrease was primarily due to reduced tape-out expenses and a decline in the annual bonuses for the amortized tranches of the previous years’ bonuses. Amid ongoing macroeconomic challenges, we are strictly enforcing budget and expense controls to manage these conditions. Second quarter operating income was $29.3 million or 12.2% of sales, compared to minus 0.9% of sales for the same period last year and 4.8% of sales last quarter. Both the sequential and year-over-year increases were primarily due to higher sales and an improved gross margin. Second-quarter after-tax profit was $29.6 million, or 16.9 cents per diluted ADS, compared to $12.5 million, or 7.1 cents per diluted ADS last quarter, and $0.9 million, or 0.5 cents in the same period last year. The after-tax profit for the first half was $42.1 million, or 24.1 cents per diluted ADS, a significant increase from $15.8 million, or 9.1 cents for the same period last year. Turning to the balance sheet. We had $253.8 million of cash, cash equivalents and other financial assets at the end of June 2024, compared to $277.4 million a quarter ago and $219.5 million at the same time last year. The sequential decrease in cash balance was primarily due to customer refunds for their deposits made during the industry-wide capacity shortage, along with a strategic investment of approximately $16 million in FOCI through private placement. The cash balance reduction was partially offset by an operating cash inflow of $26.9 million during the quarter. Compared to the operating cash inflow of $56.7 million in Q1, the sequential decrease was mainly attributable to reduced sales over the preceding two quarters, leading to lower receivables. Additionally, the increase in accounts payable in Q2 was a result of higher Q1 wafer orders, as we anticipated larger shipment volumes in Q2. Other significant operating cash outflows in Q2 included annual income tax payments. Looking ahead to Q3, we anticipate a decline in cash, cash equivalents, and other financial assets, primarily due to a payment of $50.7 million for annual dividends to shareholders. We also expect to distribute a total of approximately $30.7 million for employee bonus awards at the end of this quarter, which includes around $11.3 million for the immediately vested portion of this year’s awards, with the actual amount subject to the final Board decision, and $19.4 million for vested awards granted over the past three years. Our product inventories as of June 30, 2024 were $203.7 million, similar to $201.9 million last quarter, indicating a well-managed and balanced inventory level. Accounts receivable at the end of June 2024 was $242.4 million, up from $212.3 million last quarter and $239 million a year ago. DSO was 99 days at the quarter end, as compared to 93 days last quarter and 90 days a year ago. Second quarter capital expenditures were $4.6 million, versus $2.7 million last quarter and $2.9 million a year ago. The second quarter CapEx was mainly for R&D related equipment and in-house tester for the our IC design business. As of June 30, 2024, Himax had 174.7 million ADS outstanding, unchanged from last quarter. On a fully diluted basis, the total number of ADS outstanding for the second quarter was 175.1 million. Now turning to our third quarter 2024 guidance. We expect third quarter revenue to decrease 12% to 17% sequentially, gross margin is expected to be around 30%, depending on final product mix. The third quarter profit attributable to shareholders is estimated to be in the range of 1.5 cents to 4.5 cents per diluted ADS. As we’ve done historically, we will grant employees annual bonus, including RSUs and cash awards, on or around September 30 this year. The third quarter guidance for profit per diluted ADS has taken into account the expected 2024 annual bonus, which, subject to Board approval, is now assumed to be around $12.5 million, out of which $11.3 million will be vested and expensed immediately on the grant date. As a reminder, the total annual bonus amount and the immediately vested portion are our current best estimates only and the actual amounts could vary materially depending on, among other things, our Q4 profit and the final Board decision for the total bonus amount and its vesting scheme. As is the case for previous years, we expect the annual bonus grant in 2024 to lead to higher third quarter operating expenses, compared to the other quarters of the year. In comparison, the annual bonus for 2023 and 2022 were $10.4 million and $39.6 million respectively, of which $9.7 million and $18.5 million vested immediately. In providing our Q3 financial guidance, the Q3 expense related to employee bonus is estimated to be $14.2 million, comprised of $11.3 million, the immediately vested portion of this year’s bonus as stated above and $2.9 million, the amortized portion of the previous years’ unvested bonuses. For the sake of completeness, employee bonus expense in each of the last three quarters was also around $2.9 million. I would now turn the call over to Jordan to discuss our Q3 outlook. Jordan, the floor is yours.
Jordan Wu: Thank you, Eric. Given the prevailing macroeconomic uncertainty, end customers remain conservative causing panel makers to take a cautious stance and strictly control production to maintain low inventory levels. This is adversely impacting IC demand, leading to our conservative third quarter forecast. During the second quarter in the automotive market, car makers initially anticipated a sales boost due to promotional activities and government subsidies especially in China. Consequently, we saw a major uptick in the second quarter IC sales along with the aggressive discount campaigns of car makers. However, these intense campaigns did not generate the anticipated sales growth and may have even triggered consumers to hesitate in purchasing new cars, leading to disappointing car sales in China for the second quarter and resulting in excessive inventories throughout the supply chain. As a result, our panel customers have begun to scale back their IC procurement in Q3 to manage inventory levels. In comparison, the automotive makers in Europe and the U.S. have remained relatively stable since last year, without experiencing the dramatic fluctuations seen in China. As the leader of the automotive display ICs, we serve a diverse range of brands worldwide, with sales evenly distributed across all major markets. However, since China is the world’s largest automotive market, commanding over 30% of the global sales, fluctuations in China do have a substantial impact on our business. Moving forward, we will navigate the current challenging business environment through close collaborations with panel makers and Tier 1 suppliers, meticulously managing our wafer starts and closely monitoring customer demands. The automotive IC business is Himax’s largest revenue contributor, accounting for over 47% of our total revenues in Q2, significantly higher than our peers. Despite the recent challenges, we remain optimistic about our automotive IC business and are committed to the long-term innovation and development of our automotive products. The automotive display market remains on solid footing with a positive growth trajectory driven by versatile innovations and technology advancements. Advanced and fancier displays are increasingly becoming a major selling point for car makers, driving the automotive display market towards a megatrend of expanding quantities, sizes, and sophistication. As the leading player in the automotive IC market, Himax is well-positioned to be the key beneficiary of the trend. We command a 40% global market share in traditional automotive DDIC and hold an even larger share in both the automotive TDDI and local dimming Tcon markets. In addition to offering the most comprehensive range of automotive IC products for LCD panels, we are actively expanding into the automotive OLED panel market, forming strategic partnerships with major TV panel makers in Korea, China and Japan to develop comprehensive solutions encompassing DDIC, Tcon, and touch controller ICs. This proactive approach positions us to navigate industry shifts and capitalize on the anticipated wide-spread adoption of OLED displays in the high-end vehicles, further solidifying our market leadership. During the quarter, we announced two substantial strategic investments. First, in an effort to strengthen the long-term partnership with FOCI, we as a strategic investor, acquired a 5.3% equity stake through private placement. The partnership integrates Himax’s Wafer Level Optics, WLO expertise and FOCI's optical fiber know-how to create innovative, world-leading Linear-drive Pluggable Optics or LPO and Co-Packaged Optics or CPO solutions for advanced Multi-Chip Modules required for the fast-growing cloud AI and high-speed computing markets. This collaboration not only highlights the application versatility of the WLO technology and Himax’s market leadership but also underscores the significant potential of our WLO in advancing LPO/CPO technology, which is vital for the advancements of cloud AI and high-speed computing. Separately, we invested in the U.S.-based Obsidian Sensors, whose revolutionary high-resolution thermal imaging sensors meet the growing demand of thermal imaging across various industries, including automotive, security, surveillance, drones, and military. This investment broadens our portfolio of imaging sensors, which, when meshed with our ultralow power WiseEye AI, enable enhanced sensor fusion possibilities for endpoint AI applications. The Obsidian investment positions us at the forefront of machine vision AI applications, delivering high effectiveness, particularly in harsh environments and in completely dark scenarios. As we look ahead, our focus remains on enhancing profitability, strengthening operational resilience, and improving adaptability to the evolving market. We continues to optimize the our cost structure and reinforce our supplier diversification strategies for foundries as well as back-end packaging and testing. At the same time, we remain committed to stringent expense control, set to further reduce operating expenses compared to last year. For reference, we achieved a 4% year-over-year reduction in operating expenses in 2023. With that, I would now begin with an update on the large panel driver IC business. In Q3 we anticipate a double-digit sequential revenue decrease for large display driver ICs, primarily due to subdued monitor and TV IC sales, set to decline double-digit and single digit respectively, following substantial order replenishment in preparation for shopping festivals in the previous quarter. Procurements from our leading panel customers have become more conservative due to sluggish market conditions driven by worse-than-expected shopping festival sales. However, notebook IC sales are poised for a decent increase, bolstered by robust order replenishment from the our leading panel customers. Looking ahead in the notebook sector, we have made a strategic effort to position the ourselves to capitalize on the anticipated rising demands for two new market areas, namely LCD displays equipped with touch features and OLED displays, both expected to enjoy decent penetration in premium notebook and the upcoming AI PC markets. Leveraging our industry leadership in TDDI solutions for tablet market, we are working closely with LCD panel customers in the development of in-cell TDDI and new generation Tcon solutions for LCD displays. Concurrently, we have made significant strides in OLED technology for notebook in strategic partnerships with leading panel manufacturers in Korea and China, developing state-of-the-art touch controllers, DDICs and Tcon solutions. Some of the projects above, including in-cell TDDI for mainstream LCD notebooks and Tcon and DDIC for OLED notebooks, are slated for mass production in the second half of this year with leading panel makers. And we are optimistic that the notebook segment will act as a strong growth catalyst for Himax as we moves into 2025. Turning to the small and medium size display driver IC business. We anticipate third quarter revenue is to decline low-teens sequentially. Impacted by our customers’ destocking measures, especially for the Chinese market, as I just mentioned. Automotive revenue in Q3 is expected to decrease high-teens sequentially, following high-teens growth of both DDIC and TDDI in Q2. That being said, through the first 9 months of the year, our automotive driver IC sales are still set to grow mid-teens year-over-year, driven by continued expansion of TDDI adoption across all major end customers. We have secured over 450 TDDI design win projects, with only approximately 30% currently in mass production, indicating significant growth potential going forward. Meanwhile, a trend is emerging where more customers are opting for Himax’s TDDI or LTDI, along with our local dimming Tcon, as their standard development platform for creating new automotive displays of various sizes. This growing adoption of more of our automotive IC offerings also signifies an increase in content value for Himax on a per-panel basis. Himax is widely recognized as the leader in the automotive display IC market, offering the industry's broadest range of products, from traditional DDIC and TDDI to advanced technologies such as local dimming Tcon, LTDI, and OLED. We are committed to continuously enhancing our product portfolio to meet customers’ diverse and evolving needs. Our newly introduced TDDI incorporating local dimming Tcon in one chip exemplifies this commitment to providing customers with more options, as the new solution is ideal for smaller panels that usually require only 1 to 2 ICs for cost considerations, while still equipped with advanced touch and local dimming features. Turning to smartphone IC sales, we expect a decent double-digit increase sequentially, thanks to new product launches by key customers during the quarter. In contrast to the positive outlook in smartphone business, Q3 tablet sales are projected to decline sequentially, as our end customers prolong their replacement cycles in response to challenging economic conditions. Next for an update on our OLED business. For the automotive OLED market we have formed strategic alliances with leading panel manufacturers in Korea, China and Japan. Leveraging our leadership in automotive LCD technology and OLED design expertise, these partnerships further strengthen our presence in the market. We offer a comprehensive suite of OLED solutions for automotive, including DDIC, Tcon, and on-cell touch controllers, ensuring complete coverage of customer requirements. Notably, our meticulously engineered OLED on-cell touch controllers set a new standard, boasting an industry-leading touch signal-to-noise ratio of over 45 dB, greatly enhancing sensitivity. This allows automotive displays to maintain proper functionality under challenging conditions, such as glove-wearing and wet finger operations. We are pleased to share that our OLED on-cell touch controller for automotive has entered mass production this quarter. With additional projects set for mass production soon, we anticipate sales of our OLED on-cell touch controller to further bolster our revenues starting 2025. Beyond the automotive sector, we have made notable advances in the tablet and notebook sectors with top OLED panel manufacturers in Korea and China. Our comprehensive OLED product offerings, encompassing DDIC, Tcon, and touch controllers, have led to several new projects that are on track to enter mass production later in the year. Regarding smartphone OLED, the current market drawdown of our customers has prompted us to revise our production timeline to next year. Despite these challenges, we are actively collaborating with customers in Korea and China and have several verification and partnership projects currently in progress. I would like to now turn to our Non-Driver IC business update. First for an update on our Tcon business, we anticipate a double-digit sequential decline in Q3 Tcon sales as customers pulled forward their inventory purchases during the prior quarter, particularly for monitor application. However, our automotive Tcon business is expected to achieve a decent double-digit growth in Q3, despite the current headwinds in the automotive market, fueled by the shipment of new projects from previously secured design-wins. Since only a small portion of the secured design-wins are currently in mass production, we anticipate significant growth potential for our automotive Tcon business in the coming years. While ongoing weak macroeconomic conditions continue to subdued demand in consumer electronics, some of our newly developed Tcon ICs for OLED tablets and ePaper displays are starting to show promising results. In the Tablet segment, we rae expanding our product lineup and strengthening our position in the high-value-added OLED market, building on our early success in the tablet OLED market. For the rapidly growing ePaper market, we recently made a joint announcement with E Ink, the global leader in ePaper market, to unveil T2000, a state-of-the-art, next-generation color ePaper Tcon. ePaper stands out for its energy efficiency, consuming power only during screen updates. Leveraging Himax’s decades of expertise in image display processing and Tcon design, the T2000 Tcon accelerates screen updates for a better viewing experience while greatly reducing power consumption of the ePaper display. Additionally, the T2000 features an exclusive handwriting processing accelerator, enabling seamless, nearly lag-free handwriting while boosting prompt display responsiveness on ePaper displays without requiring a SoC. It also enables richer and more vibrant colors, enhancing the display’s visual appeal across a broad spectrum of E Ink’s color ePaper platforms. The collaboration opens new possibilities for color ePaper applications in eReaders, ePaper, digital signages, and more. Switching gears to the WiseEye Ultralow Power AI Sensing Solution, a cutting-edge endpoint AI integration featuring industry-leading ultralow power AI processors, always-on CMOS image sensors, and advanced CNN-based AI algorithm. In the fast-changing AI landscape, WiseEye AI technology stands out for its expertise in on-device tinyML microcontroller solutions, characterized by remarkably low power consumption, operating at just single-digit milliwatts, making it possible to add AI functionalities to battery-powered endpoint devices. Our WiseEye technology is creating new opportunities for companies such as DESMAN, China’s leading high-end smart door lock vendor, who introduced the world’s first smart door locks with 24/7 sentry monitoring and real-time event recording with the fancy AI features achieved while still maintaining over six months of battery operation. Our collaboration with DESMAN has sparked increased interests from other door lock vendors across various continents to develop innovative value-added AI features such as parcel recognition, smart anti-pinch protection and biometric access. Notably, some of our customers are currently evaluating our newly introduced WiseEye PalmVein solution which offers effortless, keyless and highly secure biometric access for entry control. WiseEye PalmVein is part of our WiseEye AI module business, integrating Himax WiseEye2 AI processor, AoS CMOS image sensor, and our proprietary palm vein authentication algorithm. We see growing traction and extensive engineering activities for this contactless biometric authentication solution that can authenticate an individual's identity in under 100 milliseconds while consuming just a few milliwatts of power. This represents a significant breakthrough in security technology by enabling biometric authentication in battery-powered devices. With outstanding accuracy and robust liveness check capabilities, palm vein authentication significantly reduces the risk of duplication or spoofing compared to conventional fingerprint or face recognition, making it an ideal choice for indoor security, login authentication, and other access control applications. WiseEye PalmVein upholds robust security standards while offering best-in-class power efficiency, making it the only solution suitable for battery-powered devices. We are collaborating with vendors across various sectors globally, including door lock, access control, notebook and automotive. While just launched at the beginning of the year, WiseEye PalmVein has already been successfully adopted by a U.S. customer for smart security and is set to commence mass production starting the end of this year. We believe WiseEye PalmVein will profoundly impact the security industry and unlock new opportunities for battery-powered devices across various use cases. To broaden WiseEye AI’s market reach and shorten customer development cycles, we also provide seamlessly integrated plug-and-play WiseEye Modules and no-code/low-code AI development platforms, featuring diverse context-aware AI algorithms that customers can reprogram or fine-tune with minimal effort for real-world use cases. Our recent announcement with NVIDIA (NASDAQ:NVDA) TAO exemplifies this approach whereby our WiseEye Module customers targeting AI deployment on resource-constrained endpoint devices can easily optimize and quantize our deep learning models with pretrained enterprise-ready AI models and tools offered by NVIDIA. This facilitates rapid democratization of endpoint AI applications using cost-effective, production-ready AI modules for various use cases. Additionally, in response to growing AI-driven demand towards machine-vision across various environments, we recently made a strategic investment in Obsidian Sensors, a San Diego based company renowned for its revolutionary, high-resolution, low-cost thermal sensors, offering unmatched versatility by detecting heat differences even in complete darkness, measuring temperature, and identifying distant objects. This investment expands our image sensor portfolio beyond optical sensors to include thermal sensors, a valuable complement to our product suite which is now widened to cover harsh sensing conditions such as heavy fog or complete darkness. Moreover, this strategic investment promises synergy of the two companies with our WiseEye AI aggregating data from both optical and thermal imaging sensors for a truly holistic view of the environment beyond human vision. In addition, we are engaged in ongoing engineering collaborations that leverage Himax’s IC design resources and know-how. We believe by integrating the strength of Himax and Obsidian, we can seize new opportunities in the expanding sensor and AI markets across industrial, defense, security, consumer electronics, and automotive sectors. As an illustration, the U.S. National Highway Traffic Safety Administration issued a new rule in April 2024, mandating that Automatic Emergency Braking or AEB including Pedestrian AEB or PAEB, be implemented starting in 2029. This regulation aims to significantly reduce rear-end and pedestrian crashes. Similar rules are increasingly being mandated by regulatory authorities worldwide. The novel ADAS and AEB systems, integrated with Obsidian’s thermal sensors, provides clear vision in low-light and adverse weather conditions such as fog, smoke, rain, and snow. This ensures better driving safety and security, underscoring the trend and significant potential demand for thermal imaging sensors. Last on WLO. During the second quarter, we made a strategic investment in FOCI, a Taiwan-based global leader for silicon photonics connector, through a $16 million private placement, resulting in a 5.3% equity stake. This collaboration highlights the immense potential of our WLO technology for LPO/CPO, which are crucial for further advancing high-speed AI and HPC technologies. Our partnership integrates FOCI's proprietary LPO/CPO connector technology with Himax's nano-scale Wafer Level Optics know-how to create an industry-leading optical transmission solution catered for the most advanced multi-chip modules, which demand enhanced bandwidth, improved data rate, minimized signal loss, reduced latency, and lower energy consumption, all for accommodating future-generation needs of Generative AI and HPC. Currently, in close collaboration with world leading AI semiconductor players and foundry partner, we are working closely with FOCI on LPO/CPO development for products that meet customers’ near-term production goals. LPO/CPO technology is crucial for furthering Generative AI and HPC and will continue to evolve rapidly to meet the explosive demand in these areas. We are committed to advancing the technology with FOCI, ensuring our solutions stay at the cutting edge and align with the multi-year roadmaps of our AI chip and foundry partners/customers. We believe this will generate new, long-lasting revenue streams for Himax. Wait for further updates as they become available. As FOCI is a company listed on the Taipei Exchange, the stock price and resulting “fair value” reflected on our books change each day. These fluctuations have been, and will continue to be recognized by way of changes in owners’ equity as a balance sheet item, not affecting our profit and loss. As an illustration, based on the close of FOCI’s stock price as of the end of June 2024, we made a “gain” of $9.6 million on our $16 million FOCI investment. However, the said “gain” was not recorded as an investment profit in ourQ2 financial statements and instead was booked as an increase in owners’ equity. Likewise, upon disposal, the resulting investment gain or loss will also be recognized as a change of equity, through retained earnings, thus not affecting our profit and loss at the time of the disposal either. The accounting method the we chose reflects our long-term commitment to the FOCI investment. With over a decade of experience in WLO, Himax has developed diverse designs across a broad spectrum, including 3D sensing, AR/VR devices, biomedical inspection, and optical communication, just to name a few. These technologies have been widely adopted by some of the world's most prominent tech companies, with cumulative shipments reaching more than 600 million units. We anticipate WLO playing an even more decisive role in the next-generation optical technology landscape, thanks to its versatile, high-precision, lightweight and small form factor characteristics that are not feasible with alternative technologies. In addition to the progress made in LPO/CPO, we are seeing an increase in engineering projects with globally recognized leaders who are leveraging our WLO expertise for their upcoming AR/VR devices, underscoring the widespread recognition of our technology. For non-driver IC businesses, we expect revenue to decline high-teens sequentially in the third quarter. And that concludes my report for this quarter. Thank you for your interest in Himax. We appreciate you joining today’s call and are now ready to take questions.
Operator: Thanks very much, Jordan. [Operator Instructions] The first one to ask questions Donnie Teng, Nomura. Go ahead please.
Donnie Teng: Thank you, Jordan for taking my question. My first question is regarding to the automotive business, so, I think we have started to see some positive signs back in April and I remember we were pretty positive back in June and even entering into July, the guidance looks like to be a little bit disappointed and you just mentioned about customers adjusting the inventories quickly. Just wondering when exactly you are seeing the kind of weakness from the customers and also because in the mid of July there has been the news in China that Chinese government asking EV companies to check their localization rate in terms of the component and IC procurement. So wondering if there's any issue there whether we will be, likely hired by the Chinese EV makers or it's not the case? Thank you.
Jordan Wu: Thank you, Donnie. You are right in that we are more focused on the last quarter where we had spoke that then the price in OLED and I think the reason behind is I already explained the in detail in my prepared remarks, i.e., the fluctuation in Chinese market is the metrics are causing the difference in our view. And as it turns out our customers won’t be optimistic for the second half look enter into Q2 and they were apparently forced to too many too much IC inventory. And now they are going through the destocking process and also we also mentioned in our prepared remarks that the US and European markets are relatively stable compared with China. Now if you look at the Q3 prospect and also if we look further into Q4, so the OLED consumer in Q2 and the destocking in Q3 kind of explains our strategy position in our outlook. Now, the root question is how it is going to go going forward and I think certainly, for longer term, like next year, we remain still pretty positive about the outlook, which I will probably cover in a few minutes. Now more importantly, what is remains early Q4 and I'll tell you the truth our internal forecasts which were the results of collective forecasts coming from various customers globally including our parameters in Q1 and Tier 1s. Q4 as of today, the position remains pretty positive with actually a decent double-digit growth compared to Q3. However, we actually toning down our Q4 - prospects right now given the very recent I'm talking about last week also the global turmoil in financial markets, which might impact the consumer confidence in their major big ticket spending such as new costs. So, we are uncertain and we are given the short period of time because the major financial turmoil across the global financial market really occurred only last week. So there is no time for us to get feedback from our customers and I suspect there is no time for our customers to get with the impact rises from the market. So we are like taking a with a free attitude, but in effect as of today, our outlook for Q4 are based on our forecast book is still pretty positive. And when the sentiment turns, I will say probably beginning of this quarter only very recently. But we see steady kind of a slight pull back of customers for forecast all of week-by-week, slightly but steadily and that is certainly another a very promising sign. Now, on your concern of China localization where we have seen – we have made announcements and set targets to further localize their IC supply for China’s automotive sectors. But as far as we are concerned, in our IC which is our automotive IC, which is display ICs. We - I wouldn't say that would not be a threat because any competition is a threat. But I think our leading edge is now so significant that I can see any impact of Chinese competition in terms or in the foreseeable future and compared to consumer electronics, as we are very aware of automotive ICs are much harder to replace and to go through a much lengthier ecosystem and are made along the various requirement high expenses of 50 and other requirements. So Chinese organizations certainly does not play any role in our focus of this outlook for Q3 or going forward into Q4, i.e. in fact next year if anything we believe our market share especially for those new technologies such as PD/PI, promote any Tcons all actually starting in the next year. We are likely to see some ramping – further ramping. I think if anything we believe quite committed our market share on automotive or display ICs will further rise from this year’s levels and there is no reason for us to believe next year’s automotive market will continue to be very bearish. I mean, I think it’s too early for us to form a very strategy for next year. But there is no utilization of signs that people’s cost – spending on cars will necessarily decrease given the fact that the economy is going through some shuttles but I think governments authorities and defense of different countries are likely to take measures to encourage consumption and put their GDPs And car – head us to be a major item in the government wants to push that immediately. So I think, again, I am not providing a solid outlook for I just want to say there's no reason for us to believe next year will be a bad year for automotive market. I hope that answers your question.
Donnie Teng: Great. Thank you, Jordan. And my second question is regarding to CPO. So could you maybe elaborate more on what sort of timeline for the CPO products? And when should we really start to see some more volume contributions. And how confident you are it’s like to ramp up this business in the mid to long term? Thank you.
Jordan Wu: Preset timeline, I am probably NBA my partner and customers. So I am sorry I cannot give you very specific date or timetable, but I can tell you what we are working on right now the design is targeted for mass production. It is not it is certainly not a RP concept, or an R&D project it’s not actually well processed stage, I mean certainly we see that before – years before. But we are in process stage and we are now pushed towards mass production and then that what I can tell you is in fact, we expect to see some small but very early result hopefully by the end of this year but that’s minimal. But next year, if everything goes as planned, there will be steady ramping. And the confidence level mid to long term, I would say is very confident. I think we all know about this hunger for more positive power because of generative AI right? And we are we all very aware of the issues there. The changes to further increase your bandwidth, your processing power, the presence and speed and but there are all kind of issues including our power consumption, heat dissipation and all that right? And I would say, CTO is a relatively low cost and relatively easy, I am not saying it’s easy by triggered and easy to fix to all this issues and also cost wise, as well. Because, right now, if you analyze the multi-sensor HPC ICs or GPU ICs they are very big positive power. But they are automatic right now is actually the transmission we see outside. The transmission of the ICs, the IC can process without power, or data, high bandwidth, super high bandwidth, very broad than you feel it, the bandwidth is expanding or it is expected to expand exponentially over the next few years. Now with advantage and it is going to – that they expect it is going to be processed. However, the real bottleneck right now is their transmission to capability, their transmission bandwidth which is limited because now they are relying on metal wire to do the transmission and we all know is there is no secret to reveal products you turn into replace your megawatt with fiber optics and that’s effective what we are trying to achieve, right? Now we are trying to help to develop. And so if you can essentially you replace your metal wire with fiber optics right away you push your bandwidth by a huge lep and thereby also a major material to reduce your power consumption and just the thermal wealth will become much less. And you increase your data accuracy, et cetera, et cetera. So, I would say, everybody in the ecosystem is very keen to making sure that this happens ASAP. And quietly – because as I’ve mentioned, right it's a relatively cheap and easy fix to their solutions. So I don’t see any reason why distribution already adopted across the board to cover as many of the IC as possible. Now I've only talking about ICs with demand very high bandwidth, right, which demand very high bandwidth. And our goal, our role is to building on the foundation of today to continue to help expand the transmission bandwidth right? And we have a roadmap together with partners, our customers to really pretty dramatically expanding transmission bandwidth very substantially, I'm talking about my – by multiple times over the next few years. And some of these projects are already in experimental stage in the earliest experimental stage or more mature tech it’s been on experimental stage. Although I am talking fairly is that the third generation of production will greatly expand the transmission bandwidth of those ICs already with further solutions expected to be available. In rather, short time span with multiple times improvement in our transmission bandwidth. So I think this is a really exciting opportunity for us for WLO. I mean, it’s a surprise when we realized long time ago that our connections be utilized to take all this for this issue but as we dig further and further, we realize this is actually a very, very perfect solution and a very perfect fix for the data transmission bandwidth issue that is now faced by this AI technology advancement. Any further questions from Donnie or others?
Donnie Teng: No, thank you, Jordan. Very helpful.
Jordan Wu: Thank you.
Operator: [Operator Instructions]
Jordan Wu: As a final note, Eric Li, our Chief IR/PR Officer will maintain this monthly activities and continue to attend investor conferences. We will announce the details as they come about. Thank you and have a nice day.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.