Scott Powell - MD, IR Jordan Wu - President and CEO Jackie Chang - CFO.

Jaeson Schmidt - Lake Street Capital Daniel Heyler - Bank of America Merrill Lynch Jay Srivatsa - Chardan Capital Markets Mike Burton - Brean Capital Tom Sepenzis - Northland Capital Markets.

Greetings, and welcome to the Himax Technologies' Second Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to turn the conference over to your host, Mr. Scott Powell, Managing Director Investor Relations with PCG Advisory Group. Thank you, sir. You may begin. .

Thank you, operator. Welcome everyone to Himax’s second quarter 2014 earnings conference call. Joining us from the Company are Mr. Jordan Wu, President and Chief Executive Officer, and Ms. Jackie Chang, Chief Financial 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 call PCG Advisory Group, LLC at 1-646-780-8850, or access the press release on financial portals like Bloomberg, Yahoo or Google or you can download a copy from Himax’s Web site at www.himax.com.tw.

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.

Factors that could cause actual results include, but are not limited to, 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; the uncertainty of continued success in technological innovations; and other operational and market challenges 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, 2013 filed with the SEC as amended.

Except for the Company’s full year 2013 financials which were provided on the Company’s 20-F, filed with the SEC on April 15th, the financial information included in this conference call is unaudited and consolidated, and prepared in accordance with U.S. GAAP.

Such financial information is generated internally and has not been subjected to the same review and scrutiny, including internal auditing procedures and audit by independent auditors 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. At this time, I would now like to turn the call over to Mr. Jordan Wu. Jordan, the floor is yours..

Thank you, Scott and thank you everybody for being with us for today. In today’s earnings call, in addition to reporting our performance in the second quarter, I will also highlight key milestones we achieved through the first seven months of the year.

I will then provide our outlook for the third quarter of 2014 and comment on a few product areas of focus. Our CFO, Jackie Chang, will also provide additional details on our financial performance. Our 2014 second quarter revenues, gross margin, GAAP and non-GAAP earnings per diluted ADS, all met our guidance for the quarter.

For the second quarter, we reported net revenues of $196.4 million with a gross margin of 24.2%. Second quarter GAAP earnings per diluted ADS were $0.14 and non-GAAP earnings per diluted ADS were $0.142.

Our second quarter revenues of $196.4 million represented a 5.1% decrease from the second quarter of 2013 and a 29% sequential increase from the first quarter of this year. Revenues from large panel display drivers were $50.8 million, down 21.1% from a year ago and up 4.5% sequentially.

Large panel driver IC accounted for 25.9% of our total revenues for the second quarter, compared to 31.1% a year ago and 25% in the last quarter. As anticipated, the sequential increase was a result of shipments to both new and existing customers.

Sales for small and medium-sized drivers came in at $107 million, down 3.5% from the same period last year and down 3.5% sequentially. Driver ICs for small and medium-sized applications accounted for 54.5% of total revenues for the second quarter, as compared to 53.6% a year ago and 56.9% in the previous quarter.

Small and medium-sized driver sales continue to account for over half of total revenues. The slight sequential decrease was mainly due to the inventory correction from our key Korean end customer, an issue we have foreseen and reported in our last earnings call.

Revenues from our non-driver businesses were $38.6 million, up 21.6% from the same period last year and up 9.0% sequentially. Non-driver products accounted for 19.6% of total revenues, as compared to 15.3% a year ago and 18.1% in the previous quarter.

For our non-driver business segment, the main contributors included our CMOS image sensor, timing controllers, programmable gamma OP, touch panel controllers, power management ICs and ASIC service.

Our GAAP gross margin for the second quarter of 2014 was 24.2%, a 40 basis point decrease from 24.6% a year earlier, a 50 basis point decrease from 24.7% in the previous quarter.

We guided for a slightly declined gross margin in the last earnings call, anticipating price competition in China’s smartphone market, plus shipment of low-end CMOS image sensor also had some negative impact on gross margin in Q2.

Although we expect more sales from higher end CMOS image sensor and smartphone driver ICs in Q3, pricing remains competitive.

Our GAAP net income for the second quarter was $24.1 million, or $0.14 per diluted ADS, compared to $19.4 million, or $0.112 per diluted ADS for the same period last year, and $15.7 million, or $0.091 cents per diluted ADS in the previous quarter. GAAP net income grew 24.6% year-over-year and up 53.4% from the previous quarter.

The increase was mainly the result of an investment gain of $10.7 million, or $0.05 in the second quarter as we disclosed in April. As many of you have already seen in our PR issued on April 29th, we disposed of an investment in a U.S. display company, which was wholly acquired by a third party.

The initial investment of $4 million, which was made in December 2013, has matured to a total of $12.4 million one-time investment gain. For our disposal agreement, we booked $10.7 million in investment income on the second quarter, and the remaining amount will be accounted for on or around April 2015.

This one-time gain of $10.7 million contributed to $0.05 of GAAP EPS attributable to shareholders for the second quarter. Jackie Chang, our CFO, will now provide more details on our financial results for the quarter and also summarize our first half year financial performance.

After Jackie’s presentation, we will further elaborate on our thoughts on the second quarter results, detail our 2014 outlook and then provide third quarter 2014 guidance.

Jackie?.

Thank you, Jordan. I will now provide additional details for our second quarter financial results. Our GAAP operating expenses were $29 million in Q2 2014, up 6.8% from a year ago and stay around flat to the previous quarter.

Operating expenses increased from the previous year due to higher salary expenses for additional headcount, annual pay raises and certain new product tape-outs during the quarter. GAAP operating income for the second quarter of 2014 was $18.4 million or 9.4% of sales, down 22.4% year-on-year and down 3.5% sequentially.

The year-over-year decline was mainly due to lower sales and higher operating expenses. Non-GAAP net income in the second quarter was $24.5 million, or $0.142 per diluted ADS, representing an increase of 21.9% year-over-year and an increase of 51% sequentially.

Non-GAAP EPS per diluted ADS grew 21.8% from the same period last year and grew 51.1% over the previous quarter. Again, the increase was mainly due to the investment gain of $10.7 million.

Our cash, cash equivalents and marketable securities were $172.9 million at the end of June, up from $147.1 million at the same time last year and up from $139.7 million a quarter ago. On top of the above cash position, restricted cash was $108.4 million at the end of the quarter.

The restricted cash is mainly used to guarantee the Company’s short term loan for the same amount. We continue to maintain a strong balance sheet, and we remind investors that we remain a debt-free company. Inventories as of June 30, 2014 were $166.3 million, up from $142.9 million a year ago and down from $172.3 million as of March 31, 2014.

The lower inventory was a result of increased shipment in the quarter. We expect the inventory level to continue to decline by the end of the third quarter. Accounts receivable at the end of June 2014 were $199 million, as compared to $219.2 million a year ago and $204.5 million last quarter.

Days sales outstanding was 92 days at end of June, 2014, as compared to 104 days a year ago and 95 days at end of the last quarter.

Net cash inflow from operating activities for the second quarter was $22.9 million, as compared to cash outflow of $2.7 million for the second quarter of 2013 and cash inflow of $9.3 million for the first quarter of 2014. The improvement year-over-year was mainly due to lower accounts receivable and improved days sales outstanding.

The sequential increase was mainly the reflection of lower inventories and accounts receivable at the end of this quarter. Net cash inflow from investing activities for the second quarter was $8.5 million, primarily resulting from capital expenditures of $3.8 million and disposal of our investment of $14.7 million.

Capital expenditures in the second quarter were primarily for purchases of in-house testers for R&D and certain equipment for LCOS product line. During the second quarter, we declared our annual cash dividend of $0.27 per ADS, totaling $46 million. The dividends were already paid out in July.

Our dividend is determined primarily by the prior year’s profitability. Our decision to payout 75% of last year’s net profit demonstrates our continued support for our shareholder base and confidence in our long-term profitability. As of June 30, 2014, Himax had 170.5 million ADS outstanding, unchanged from last quarter.

On a fully diluted basis, the total number of ADS outstanding is $172.1 million. I will now turn the floor back to Jordan..

Thank you, Jackie. Our Q2 operational results was not as strong as those of the past years, mostly due to a significant inventory correction of a major Korean end customer, as we reported during our last earnings call.

However, as we enter into the third quarter, we have seen strong growth in all of our product segments, including large panel driver ICs, small and medium driver ICs and non-driver IC businesses. We are also seeing demand from our major Korean end customer rebounding strongly. I will further elaborate on all of the above.

For the third quarter, in our large panel driver IC business, we see driver ICs for TVs being the main growth product in this segment. This will be the first quarter that sales from large panel driver IC enjoy a year-over-year growth since Q4 2012.

The forces behind growth in the large panel driver IC segment include strong sequential demand from Innolux, accelerated growth from the Taiwanese and Korean customers that we recently brought on, Chinese TV panel customers continuously expanding capacity, and more 4K TV displays rolling off production lines at literally all of our large panel customers.

We had anticipated in our last few earnings calls that 4K TV penetration and acceptance would grow strongly this year. We now expect our driver IC shipments for 4K TV to more than double in Q3. We expect this growth trend to continue beyond Q3 2014 and well into 2015.

While the large panel sector remains a competitive and mature market, innovation enables us to continue pursuing new technologies and expanding our customer base. We are happy that our large panel driver business has resumed growth starting this quarter.

We are confident that this marks the beginning of a long-term growth trend which is to last for the next few years. The other main segment in our driver IC business is ICs used in small and medium-sized panels, which are primarily used in smartphones, tablets and for automotive applications.

Q3 sales from smartphones should rebound strongly from those of Q2 mainly as a result of the demand from our Korean end-customer is coming back from last quarter’s unusually low level. We also enjoy strong growth in the Chinese smartphone market, especially in the higher end segments.

Although competition remains intense, HIMAX continues to command a leading share in small and medium-sized driver IC market. We launched a new generation of driver ICs for HD720 resolution, the current mainstream market for higher end smartphones, and have enjoyed numerous design wins in China and elsewhere.

Included in the small and medium-sized panel ICs are also drivers for tablet and automotive displays.

We expect sequential declines for tablets in the third quarter due to slowing demand in China’s white-box market caused by its recent sluggish export to the third world countries and the government’s tightening of liquidity, a measure that is now forcing smaller and weaker players out of the market.

Q3’s slower tablet demand may also be a matter of change of consumer behavior as some consumers are switching to buy smartphones with screen sizes close to those of tablets. We are seeing the demand for driver ICs used in automotive displays continuing its steady growth during the third quarter.

Summing it up, the decline in tablet demand will be more than offset by the strong rebound in the smartphone sector. So the overall small and medium-sized driver segment is expected to enjoy a high-single digit growth compared to the previous quarter. We remain positive on the outlook of this segment for the remainder of this year.

The non-driver businesses remain our most promising product category in terms of growth in the second half of this year and into next year. It is also the key differentiator for us versus many of our competitors.

Quite a few of our non-driver products, especially CMOS image sensors, touch panel controllers and timing controllers are set to grow significantly in Q3. The non-driver business category is expected to grow by close to 20% sequentially in Q3, and we see the momentum continuing well into 2015. I would now highlight some of our non-driver products.

Our CMOS image sensor delivered another strong quarter in Q2, up over 20% sequentially. Our existing 2 megapixel and 5 megapixel CMOS image sensors are producing good sales from select international brands and Chinese white-box customers.

However, we are experiencing some delay in design win process with our customers to replace older generation sensors with new designs. Such delays will have a negative impact on our corporate gross margin. We expect our 8 megapixel sensors to start small volume shipments from Q3.

The 8 megapixel sensor products will contribute to sales growth and better gross margin as they enter mass production. We recently launched our first 13 megapixel sensor, which positions us among a small group of players with such high-end offering.

Additionally, following multi-year design efforts, we now have a competitive CMOS image sensor product line for automotive and surveillance applications, both large, lucrative and fast-growing markets. This is a market with a high-entry barrier where special know-how is required.

Collectively, we expect our CMOS image sensor business to more than double in 2014. Our current strategy for the CMOS image sensor business is to focus on increasing shipments and gaining market share.

The gross margin for this business will improve when we successfully replace certain old generation designs with new ones and the higher end products, initially 8 megapixel, and then 13 megapixel products, comprise a larger portion of our revenue mix.

Looking further ahead, the contribution from sensors for automotives and surveillance applications will further improve the gross margin of this product line. Our touch panel controller product line looks set to enjoy another significant growth in Q3 after it more than doubled in Q2.

We expect our strong growth momentum in touch panel controllers to continue in the second half of 2014 as a result of certain major design-wins across both international and Chinese markets.

On the back of our rapidly growing market share in the traditional touch panel market, we believe our committed development on the new in-cell and on-cell touch panel technologies has placed us in a very competitive position for the future.

The development of both new in-cell and on-cell touch panel technologies are led by TFT-LCD makers and we are in close partnerships with some of the leading players in this very exciting and important future technology. As many of you know, our LCOS business has been very exciting, and also very dynamic.

We continue to work with multiple customers, including some top-notch names on multiple designs simultaneously. Many of these projects involve custom-built designs that are funded by our customers’ development fees.

Now after a lengthy cooperation and research and development period, we are pleased to be able to announce publicly that Himax and Lenovo are also partners for wearable device products. Himax is supplying LCOS micro displays for a variety of Lenovo’s products. Please note that this disclosure has been authorized and approved by Lenovo.

Furthermore, in June we unveiled the Front-Lit LCOS technology, our latest, proprietary and patented LCOS offering. We presented the cutting-edge design for the first time to the public at the SID Display Week Conference in San Diego. The new design represents one of the biggest technology breakthroughs of the head-mounted display industry.

Our proprietary Front-Lit LCOS module enables an ultra-compact and extremely power-efficient optical engine by consolidating two major components of optical engine and integrating them into the micro display module itself.

Presently, we are engaged with multiple tier-one customers in developing head-mounted display products using our Front-Lit LCOS technologies. After testing several competing technologies, these tier-one customers selected Himax’s Front-Lit LCOS due to its superior overall performance.

We believe our LCOS micro display business remains an exciting and significant long-term growth area for Himax.

Last but not least, we have been working with several industry leading partners using our unique and industry-leading wafer level optics or WLO, for the development of three exciting product areas of the future, namely array cameras, certain special purpose sensors and micro display light guides for wearable devices.

Such development sometimes involves the capabilities of our in-house CMOS image sensor, LCOS micro display and video processing algorithm teams. Himax is in a very unique position in these exciting new technology areas in that we are the only player in the marketplace which is able to provide a total solution.

We are excited to be in the forefront of such technological developments, thanks to many years of technological innovation which leads to a unique product portfolio covering the full range of image processing related knowhow.

As you can see, we are accelerating our R&D activities, hoping to capture the exciting business opportunities I mentioned in the past as soon as we can. Operating expenses in the third quarter are expected to increase some 20% year-over-year, mainly as a result of accelerating R&D.

This is in line with the strategy we set forth last year when, during a few of our earnings calls, we indicated that we intended to expand our R&D expenses in 2014, following several years of stable R&D spending.

While this will inevitably affect our short-term bottom line, we believe such R&D investment will generate significant top line and bottom line growth starting next year. Now for our Q3 guidance, we expect the third quarter revenues to grow 10% to 15% sequentially.

Gross margin is expected to be slightly up from the previous quarter depending upon the final product mix. GAAP earnings attributable to shareholders are expected to be in the range of $0.06 to $0.075 per diluted ADS based on 171.8 million fully-diluted ADSs.

Non-GAAP earnings attributable to shareholders are expected to be in the range of $0.102 to $0.117 per diluted ADS based on the same number of ADSs. As we have done in the past, our third quarter GAAP earnings per diluted ADS guidance has taken into account our expected 2014 grant of restricted share units or RSUs to our team at the end of September.

The 2014 RSUs, subject to our Board approval, is now assumed to be valued in the range of $14 million to $15 million, of which approximately 58% will be vested and expensed immediately on September 30th, the grant date.

Excluding this share-based compensation and acquisition-related charges, our third quarter 2014 non-GAAP earnings attributable to shareholders are expected to be between $0.102 to $0.117 per diluted ADS, based on $171.8 million fully-diluted ADSs. Thank you all for your interest in Himax. We appreciate your joining today’s call.

We are now ready to take questions..

Thank you. (Operator Instructions). Our first question comes from the line of Jaeson Schmidt with Lake Street Capital. Please proceed with your question..

I just wanted to see, in the release you indicated that you expect continued growth in revenue and EPS going forward. Wondering what gives you that confidence for beyond Q3.

Is it new platforms, new wins or just overall seasonality?.

Beyond Q3?.

Yes..

We haven’t really provided any guidance beyond Q3. However, I think I can -- and then again we are not providing guidance. But the Q4 situation looks probably -- exception to foreseen situation.

The Q4 guidance looked promising in both our non-driver lager panel and small panel -- large panel as mentioned for PayTV we have new customers and existing customers are going for majority. And the small panel as I mentioned earlier with our higher-end smartphone particularly in Q3 a bit weak but we don’t expect the weak condition to continue.

A long driver has been outgrowing of our driver business we don’t see any reason why we should not see the effect in in Q4. So overall although I am not providing guidance, the Q3 looks pretty promising.

In the next year -- I think I actually indicated earlier that we are spending rather heavily on our R&D this year, primarily for the purpose of getting our [indiscernible] 3D ready and to be able to read the truth if you like for the R&D efforts we have committed to over the last few years, in particular on the non-driver product areas.

So this year in Q4 we expect -- Q3 is already around 30% of our total sales and Q4 as I said earlier should be higher than that. And this year really I think it is -- it should be the first year when you really see strong, steady, continuous growth, the solidifying [ph] of our non-driver businesses. That is the plan.

So we are working very hard to achieve that..

And then just digging into the Lenovo announcement, can you help us kind of get a sense of timeline on when you could see -- start seeing some revenue from Lenovo and with the size of that potential opportunity?.

Unfortunately, we are bound by our NDAs and we are never in a position to comment on our customers’ business. The fact that we made that announcement, we emphasized in our prepared remarks that is actually authorized and approved by Lenovo. And we did that because actually they did announce some of their products early on.

So they kind of say that it’s only fair that they let the world know that the key technology inside actually came from Himax. And beyond the prepared remarks, I'm afraid, I cannot really make further comments..

Thank you. Our next question comes from the line of Daniel Heyler with Bank of America Merrill Lynch. Please proceed with your question..

I have a few quick ones. So I wanted to dig in a little bit to the R&D side. It seems as though you're spending quite a bit this year and you indicated that you anticipate revenue to come to us as early as next year.

So does that R&D number pretty much kind of flat line next year or do you anticipate this is a multi-year R&D situation? And maybe elaborate, I think you had said it was mostly non-driver but correct me if there is also lot of R&D you need to step in the driver businesses line? Thanks..

Absolutely. I made a promise because in fact both non-driver and driver R&D spend, we see certainly about the proportion of the non-driver actually spending outpace panel [ph] driver. As I said earlier, very much in line with our trend as we set up for last year.

If you look at our numbers over the previous few years, you will see we suffered a few years of revenue decline and we rebounded slightly from the year before last year and also last year. And throughout this period, we controlled our R&D spend pretty steadily. Even in all these years and we are suffering from revenue decline.

We decided to keep pace of R&D spending in preparation for tomorrow. However, we didn’t really have the means to expand perfectly. And that’s good for we would like.

Now this year seems the right time in the sense that our driver is going through a pretty stable year and even our large panel drivers which has suffered for quite a few years, that saw a decline, we are now confident that the next five years, we will see a strong rebound. So we remain competitive in small-panel driver business.

So for those non-driver businesses, quite a few areas after a few years of efforts, we have started to reach breakeven, even making some small profit probably this year.

So with the product, the maturity the level of long-term R&D spending to the extent that we feel we should go aggressively this year and it now feels pretty promising but hopefully start to next year we see good result coming from non-driver spending for many years.

You shouldn’t expect the same kind of R&D spending growth compared to this year, you shouldn’t..

With revenue you should always grow, all faced [ph] the defenses..

And this year, the R&D spending outpaced level revenue and that is why we actually renting a big point last year in quite a few of our earnings call.

If you go review those, only people that 2014 will be a year where we do spend heavily because we kind of knew it is likely that R&D spending will outpace total revenue and we don’t want that to be a longest [ph] area but's it's good for the company for long term. So this year…...

Then on the margin side, you've got a number of dynamics here. You’ve been the smaller player in large panel but you’re taking share and momentum is accelerating, I wanted to understand the margin, kind outlook there and also mix improving to there? On the mobile side, you are the leading player and another tight trend come into that market.

So maybe help us -- I know the mix is a big driver, but the competitive dynamics, pretty much stable or should we anticipate, I know the growth is quite solid as well, so that’s obviously encouraging plus capacity type of foundry.

So I just wonder how we should think about margin profile in the large and small driver business because there is quite a number of different moving parts there..

Yes indeed and I'll [indiscernible] everything you mentioned, which is all correct.

We are seeing certainly a large panel in a sense while this we mentioned, it’s a competitive and mature market in a sense it is a steady market because when you move operator to 4K TV and now in kind of development stage, even AK by 4K TV, where we are one of the early players, as you move operator in the competition, it’s becomes much better, than if you’re talking about 4K TV or monitor or notebook.

So as we know 4K TV expanding its share in the marketplace. So I think we’ve been one of the small handle [ph] players they will provide people that segment. I think we are confident large panel driver ICs margin will be traded up in fact because of the percentage switch more towards higher products.

And one of the major entry barriers into this driver market on the higher end is that quite often the customers want you to also provide timing controllers to go with it. And timing controllers with such high resolution requires high speed and the temperature and also solution regarding [ph] for everybody where again, [indiscernible].

So you require more IP preparation. And every large panel player in the world has their own kind of photography interface for their hind-end high-speed interface in business knowhow. So you try to fit into their specific interface to capture their business.

So what I'm trying to say with all that is that actually higher end TV in terms of competition, it is actually better for guide by Himax for a majority reposition. For sales form, if you move up right there to 4G and HD and going forward even high resolution, again the story is similar. Competition is less over there.

But if you go down to the industry and low end, competition is fierce, absolutely fierce.

And we do believe we have always enjoyed these margins for our tablet automotive, medium priced panel business because we have a real market share over there also because the specs there are a lot more diverse, meaning you tend to have less compatible ICs competing against each other, and as a result your price pressure is less intense.

So overall, I have no reason to believe next year that gross margin pressure will be higher than this year. On top of that that we all know 8 inch capacity is very, very tight. So kind of also helps reduce the pressure as well on pricing..

Could elaborate on the capacity, how much you can forward to -- how you deal with this because it really looks as though 8 inch is just not growing really at all next year, or do think 8 inch capacity can expand next year and how much of your -- how business can be moved to 12 inch. I know mobile can.

I'm just wondering whether large panel can move to 12 inch as well. Thanks..

Firstly, we'll [indiscernible] to try to prepare early. So actually way before now, we have started a discussion with our foundry suppliers over the capacity for the year for the whole next year. So we know we have to give them -- prepare to handle the expected growth we have, meaning what to present to them on a growth prospect et cetera, et cetera.

So that is going well. And secondly, we are also expanding our foundry access to Korea which is quick to exit [ph] so far in couple of rare shipments but that is going to have us alleviate the pressure next year. And also with a few kind of second tier foundry maker -- I should not call them second tier. They're used to the idea.

So we put those the [indiscernible] propensity going obsolete with their expensive product line, we had the trend show us the whole entire solution and know how to ensure the production line [indiscernible]. So now we are looking with this one or I should say even two such foundry partners. So that is good to products coming to next year and beyond.

So having said all of that this very moment the Beijing capacity it’s very, very tight. And all we do is we don’t have to, [indiscernible] spend short term abrupt, it might increase from customers, we have no other choice but to involve the foundry partners to find a short term solution..

Thank you. Our next question comes from the line of Jay Srivatsa with Chardan Capital Markets. Please proceed with your question..

Jordan I didn’t hear you talk about Google Glass and where you are with that.

Can you give us an update on where you are in the development and when do you hope to start to see some revenues from that?.

If I had to comment on that, we drive the launch stable -- the commercially [indiscernible] at Google, which I'm not allowed to. So I really don’t comment on that. So because everybody knows about this relationship. It's a one-on-one relationship. So it’s -- for any comment we make, we have to be -- we are not supposed to do that anyway. So I apologize.

It’s just one thing that we cannot make a comment on..

Well, let me ask another way.

Give us a sense on where you are with your capacity of LCOS micro displays you are planning on ramping up early in the year, where you are at with that? Are you continuing to ramp up or have you put that on hold and if it’s still on hold, when do you hope to start to see some pick up in the production there?.

Well, our current capacity, we’ve mentioned, it's 300,000 per month, which is difficult compared to the power shipment of Google Glass or any other shipment of product. And that is now readily available. You can make an order of that size and we can deliver. We consider lead time [ph] without any preparation.

And we are total fit [ph] many times the past but we can easily -- with the existing space, we can easily raise the capacity all the way up to $2 million a month.

Certainly that will require further capital spend but space wise, technology wise, know how wise, just give us further lead time of probably less than six months and we can that for our customers. So with that I think our customers feel comfortable.

So they know they just need to press a button and give us a lead time and book 2 million tenders [ph] a month. It's really ready for the market. And at the moment we also advertise, while we are extremely excited about the long term profit of this product, we caution investors that in the short term it’s a mixed market.

Although it's a mixed market, overall the revenue potential for Himax as a company is huge. For that we have held our positions. So for the time being we think 2 million capacity is quite sufficient and we are in negotiation to acquire a mega piece of land which upon its completion of deal, we will make an announcement of.

So that is hopefully in preparation for cost expansion and also [indiscernible] expansion, where we have a set. So we are all geared up and waiting for the market and our customers to have that done. We repeated again and again, we only excluded our customer's product launch and shipment. So we can only get off [ph] every pair.

I don’t really see capacity will really be an issue for our customers for our consent [ph]..

Okay, last question on the smartphones business. In China, it looks like the average price of the smartphones appears to have dropped to less than $40 now.

Where do you see your own niche there and how do you see competition from Orise and ILi Tech competing in terms of the impact they will have on your ASPs and gross margins going forward?.

I think the two names you mentioned are not really, not necessarily the same league as ours. We are more on -- when you talk about China, there are actually really brand names already and they are kind of second tier brand names. They are primary local Chinese brands or third world country names.

They are online services, the top names, the household names that we are familiar with. But in terms of shipment they are actually very, very significant. Not much risk but some of the household names that we are familiar with. But in China you are talking about the top tier names, guys like Huawei, ZTE, and Lenovo.

And also you’re talking about sort of the second tier names and I’m talking about the primarily both. We're going to shift some to white-box but that is percentage wise. That is a long-life again to all competitors. And to be a key player in that upheld of the market, you have to speed up your high end further offering and we mentioned HD720.

We state our new generation HD720 – developed the third generation in credit, already the third generation HD720 and the major benefit of this product is called [indiscernible] in total consumption, we saw [indiscernible] and so on. So we launch it quite rather immediately. It is pretty popular among the marketplace.

So this is how we maintain our competitive edge. So, the name we mentioned in our competitive threat and in fact -- often they are also the major totals of our pricing pressure but we try to cope with that by moving up with that in terms of product offering and also customer base..

Thank you, our next question comes from the line of Mike Burton with Brean Capital. Please proceed with your question..

Very strong guide for Q3. I wonder if you could follow up on that earlier question about Q4. I realize it’s early for that but do you think that your recovery at Samsung would continue because they are notorious for managing their inventories in Q4.

Are there any particular programs that gives you visibility into that or is there other drivers that’s driving small-medium display business?.

Firstly Samsung is a direct customer. So we should say its end the customer, right? So we ship to Samsung, we --several [indiscernible] which are our direct customer. Having said that, Samsung first provide directly to us.

They are the ones in focus and in today’s situation -- certainly off quarter reported a major impact and as a result we did see a part of the inventory but those inventory, [indiscernible] have been cleared. And if anything, we touched it enough today because they are rebounding very strongly.

And certainly their focus covers up to Q4 and they remain strong but business dynamic I already think I comment too much for customers but [indiscernible], very robust, and we are very happy that we touched enough because it's a good target to have right now..

.

Also you touched on it in your prepared remarks but I’m hoping you talk a little bit about the market for integrated touch and display or TDDI solutions, what are the major hurdles for the pen manufacturers right now and when do you expect TDDI to ramp up? How do you see your design wins right now as you are engaged with your customers versus your competitors? Thanks..

They are totaled -- one is the traditional touch panel approach. We are late comer and we do have a special IP and I think our technology is very competitive.

Our advantage in this market is the fact that we are late comer but throughout -- we issued 35 by targeting brand names, white-box because we believe even with some shipments experienced in white-box so your technology may not be up there for a long time. So we actually targeted -- certain traditional names took our business and we had some success.

Now we have two or three such major and steady customers. That kind of demonstrates to other reports that the Himax technology is very competitive because it's -- if Himax is good for those things, it should be good for other people as well. And we also penetrated into China.

And the last year or two we actually made a report, made an update of our progress there in China. We actually initiated several platform setback, because we sought with the Primax experience, China should be a piece of cake and we are wrong in the sense that the requirement there was actually different. It’s a totally different market.

The performance requirement is not really that high. However, there are certain things that you need to be very aware if in order to quickly consolidate all the middle and small technical problems and allow the customers to ramp immediately.

So we actually wrote our entire count and we said our team to stay there for a quite a long-time, so that they have their experience with those customers.

And so starting from about two quarters ago, we reduced our China design wins and our shipments for other records [ph] and that explains why last quarter we actually doubled our sales compared to last sort of previous quarter. And so that is one thing.

And so in terms of traditional touch panel technology, I think we will continue that growth trend because now we are our -- our awareness level in the marketplace is much better than before and we have -- as a result, we have been able to win more designing projects.

And now in the long-term I think it’s very, very important that we get repair off sale [ph] and in-sale. And we believe on-sale, you will start to see some real volume next year. And in sale hopefully starting from the year after.

And both of the in-sale, the major players, the local touch pen operators were switched from the traditional people using lamination technologies and switch to [indiscernible] players. And we mentioned we can't disclose the names while we are opening with some of the previous names in the marketplace, not necessarily in Taiwan.

Some of them are obviously -- we are very excited about the progress there. [Indiscernible] we have very advancing cell technology where our partners will be together. The product is not closely marketed. But I think that the fact that we are chosen for that high-end product also demonstrate operability in this space.

So we are here for the long term and again we have already come down, we are small compared to leading players but we are moving up very fast and we are --for the future technology I think we have pretty good position right now..

Thank you. Our next question comes from the line of Tom Sepenzis with Northland Capital Markets. Please proceed with your question..

I was just wondering, R&D typically is up in September, just timing of pay bouts [ph] and what not.

Would you expect the December quarter to drop back down like it typically does from a seasonal perspective?.

No, that’s already -- I am afraid I don’t have the -- I think [indiscernible], I don’t have the numbers right in front of me..

Tom, the third quarter operating expenses including the ICU [ph] that we report it but in the script that we just reported but we skipped out ICU [ph] for the third quarter, I think that Q4 operating expense will remain flat through the third quarter. So we're probably not going to see a big increase..

In the first half we did as well good increase in tech costs and also pay raise is in the middle of the year, we mean July 4. This is pretty significant change Q4 than Q3 as we get there..

And I was wondering if you could just give us any more color on the Array Lens opportunity and timing, when you see that maybe hitting the model this year that starts to trickle in or is that the second half of next year.

Any additional color you can give us there would be helpful?.

For WLO, we are not talking free to about rate environment. It’s different from the education. We actually mentioned three net modifications. And in terms of [indiscernible], we have newer partners working from different angles with several different technologies, some of it are very, very big names partners.

So I am pretty confident we should be able to see some volatility next year for this first half, next half. This is new technology.

So we have to prepared of surprises but we are in full speed, but I think to place that year after next year -- we are hoping that this will gradually become kind of -- I wouldn’t call it mainstream but one of the major solutions to represent the traditional camera. I think we are very hopeful for that.

Now what can actually realize a bit earlier, this certain specialty sensor, really special purpose sensor tailor made customers and in some such situations, customers actually need our WLO technology, the lens to go with it. And given the fact that Himax is capable of providing sensor as well.

So to keep it simple, they quite often ask Himax to provide a total solution. And in such cases, we actually not only provide tailor made WLO to them, we also provide the tailor made sensor to them. And in such developments, the revenue potential can actually couple with earlier. Now they are all totally real products.

So I will be a bit reluctant to comment on the volume of it because it’s really up to the consumer acceptance, but we have this further experience, some of the operations are truly amazing and I think we are working with biggest family we can positively [indiscernible]. So we are excited about it.

Probably you know very long term in the previous year, no, the answer is no. And also I would advertise literally everybody come to Himax for this..

Great thank and then lastly the Front-Lit LCOS product that you’ve announced recently is that reflective or transmissive and how does it compare in terms of brightness and cost to an OLED competitor?.

It’s reflective but it is to be used primarily for see through displays. However, the display is fairly reflective. We beat OLED big time in brightness. We’re talking -- for these other needs versus early 2000. So beat that big time. That is the major advantage.

And primarily it goes with power consumption because somehow you feel, I don’t need to beat that price. So what do you do? You lower the power of your LED. And also a major advantage there is size and most importantly, it enables -- I think let me just spend a couple of minutes to elaborate a bit on this.

The reason why we see this technology upgrade as critical is because it is in a position to change the lens capability for the entire industry. Now the industry is suffering from a very difficult multiparty integration on the entire manufacturing and simply of the operating engine.

And by this technology, the optical side is substantially -- the complexity of optical size is substantially reduced for the simple [ph] design and the result more optical pulses can easy participate in this again and Himax being the type of display, I think we will be a witness by doing that.

So we are not only providing a better performance panel, better cost panel. We are also lowering the bar of entrance for our optical engine partners which certainly will be welcomed by end-users, the brand names because now more pure houses can offer them. So I think that is the major significance of this product offering..

Thank you. Our next question comes from the line of [indiscernible] with Janus Capital. Please proceed with your question..

I have two questions. The first question is actually on your R&D expenses. I want to dig a little bit deeper in terms of intension of the spend. Is the money going more into improving your current line of your products or two to actually to go into new areas that is not currently being offered.

So maybe share with us some color on that?.

Both, we are in almost always in shortage of power when it comes to our LED products. Too many customers are coming us to develop projects. Sometimes we are reluctant to be to be. So [indiscernible]. So we have to up our headcounts on to drive R&D, but we do spend heavily on the driver business which includes two kind of areas.

One is existing products and the other one is kind of future products such as AIRCOM and WLO. And with AIRCOM and WLO, bear in mind we've in-house sets that we argue repetition is the key know how and key technology differentiator there. To maintain that and also to do -- to conduct the R&D activities within on track certainly costs money.

So we’ve covered everything, even the R&D outstanding increase..

Okay.

So in terms what you said about future product, we probably wouldn’t see new future product other than WLO and LCOS right?.

That’s correct..

Okay. And my second question is on LCOS. I remember the last conference call, you mentioned that you have 20 customers, LCOS customers that experience failures of prototyping.

Has the number changed? That’s part one and number two it's -- we have now seen -- from your partnership with Lenovo, but we expect more such partnership to come in the near term..

I don’t know how we define your near term, but firstly yes, the numbers increase steadily. Initially we focus small very different but now we are expanding to smaller left out areas [ph] with unique small [indiscernible] to utilize [indiscernible] displays for certain special application. So we have quite a few of such customers.

So our customer business expanded here. And I mentioned earlier, the reason why we felt we're obligated to announce Lenovo is because they announced their products themselves a while ago. So it’s fair. So I think if there are such similar situations, in particular in last statement we’ll certainly lot to do the same subject to our customers agreement.

In the past we’re working with capital customers. I hope people know, realize is this is included in this and some of them are [indiscernible]..

Right, okay.

But in general -- so if you can speak generally, do you think 2015 will be a year where we should start to see a lot more commercialization launches of Glass type device, or do you think it’s more probably 2016?.

Firstly it is really subject to our customers launch plan and firstly I may not know the details. They may not give me all the details.

And secondly, even if we do, we’re not supposed to comment and certainly I think it is fair to say that the industry as a total is still learning, trying to find the right figure, trying to bring the hardware and software into the shape and private costs everything.

So I think the industry has still got lot to learn and I know for sure certain of our companies are very keen to bring the launch but other than that I really can't comment on the specifics. I can tell you for certainly that many of them are spending heavily and more heavily than other, right now on this product.

How they’re going to launch, what they're going to launch, I really can’t comment..

Thank you. Our next question comes from the line of Daniel Hiller with Bank of America. Sorry, it seems that we have no further questions at this time I’d like to turn the floor back over to Mr. Wu for closing comments..

Thank you everybody for taking the time to join today’s call. As a final note, Jackie, our CFO, will attend investor conferences in September. We'll announce the details as they come about. So please contact our IR department and/or Scott Powell if you are interested in meeting with us in person. Thank you again and have a nice day..

This concludes today’s teleconference. You may disconnect your lines at time. Thank you for your participation and have a wonderful day..