Greg Falesnik - Managing Director, MZ North America Jordan Wu - President and CEO Jackie Chang - CFO.

Tristan Gerra - Robert W. Baird Mike Burton - Brean Capital Jaeson Schmidt - Lake Street Capital Suji Desilva - Roth Capital Charlie Chan - Morgan Stanley Donnie Teng - Nomura.

Good day, ladies and gentlemen and welcome to the Himax Technologies Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call maybe recorded.

I would now like to introduce your host of today's conference, Greg Falesnik, Managing Director with MZ North America. Sir, you may begin..

Thank you, operator. Welcome everyone to Himax’s third quarter 2016 earnings 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’ve allocated time for questions in a Q&A session.

If you have not yet received a copy of today’s release, please email greg.falesnik@mzgroup.us or access the press release on financial portals, or download a copy from Himax’s website at himax.com.tw.

Before we begin the formal comments, I would 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 risk and uncertainties that could cause actual results to events to differ materially from those described in the conference call.

Factors that could cause actual results to differ include, but are not limited to, general business and economic conditions, the state of the semiconductor industry, market acceptance and competitiveness of the driver and non-driver products developed by Himax, demand for end-use application products, the uncertainty of continued success in technological innovations, as well as other operational 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, 2015 filed with the SEC in April 2016.

Except for the company’s full year of 2015 financials, which were provided in the company’s 20-F and filed with the SEC on April 13, 2016, the financial information included in this conference call is unaudited and consolidated, and prepared in accordance with U.S. GAAP 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 subjects our annual consolidated financial statements, and may vary materially from the audited consolidated financial information for the same period.

The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. I will now turn the call over to Mr. Wu. Jordan, the floor is yours..

Thank you, Greg. And thank you, everybody for being with us for our earnings call on which we will detail results from the third quarter 2016 and provide our fourth quarter 2016 guidance and outlook. Our CFO Jackie Chang will give further specifics on our financial performance after my overview.

We are pleased to begin by saying that our revenues, gross margin and EPS for the quarter were inline with our reiteration of guidance on September 29. For the quarter, we reported net revenues of $218.1 million, at high end of our guidance with a gross margin of 25.6%.

Third quarter GAAP revenues per diluted ADS came in at $0.079 and non-GAAP earnings per diluted ADS were $0.0124 also meeting the higher end or exceeding our guidance. The third quarter revenues of $218.1 million represented an 8.5% sequential increase and 31.7% increase year-over-year.

Both the sequential and year-over-year growth was due mostly continue growth momentum across all major product lines, driven by large panel driver IC sales, benefited from our leading market share in China and in 4K TV. Our better than expected smartphone driver IC sales and accelerated AR/VR related business from our leading US customer.

Revenues from large panel display drivers was $72 million, up .6.8% sequentially and up 42.6% from a year ago. Large penalty spread drive IC accounted for 33% of our total revenues for the third quarter, compared to 33.6% in last quarter and 30.5% a year ago.

As opposed to original guidance of double-digit sequential growth, our large panel driver business grew just mid-single-digit due to a certain customer’s short-noticed shipment adjustment of its monitor products. Without the last minute change, we could have achieved double-digit sequential growth that we guided.

Despite the lower than expected sales mentioned above, our large panel products actually enjoyed more than 40% year-over-year growth, thanks to strong demands from Chinese and panel customers during the quarter. In China, our driver IC business for large panel grew more than 70% year-over-year during the quarter.

In comparison, worldwide large-size TFT-LCD panel shipments declined around 6% in the same period. It is especially worth highlighting that our engineering collaboration and design activities with large panel customers across China, Taiwan and Korea all remain robust and we expect these trends to continue into the next year.

Revenue for small and medium-sized drivers came in at $99.3 million, up 9.6% sequentially and up 17.8% year-over-year. Driver ICs for small and medium-sized applications accounted for 45.5% of total sales for the third quarter, as compared to 45% in the previous quarter and 50.9% a year ago.

Sales into smartphones came in better than guided to achieve low-single-digit growth sequentially and up more than 20% year-over-year, as we fulfilled some of the surging rush orders of late from Chinese end customers through securing additional capacity from our supply partners.

The strong rebound of our smartphone driver IC business this year came from our long-standing leading market share in China where our end brand customers are performing strongly.

Automotive and tablet applications were also contributors to the segment and continued solid momentum, growing double-digit during the third quarter both sequentially and year-over-year. Revenues from non-driver businesses were $46.8 million, up 9% sequentially and up 52.1% from the same period last year.

Non-driver products accounted for 25.1% of the total revenues, as compared to 21.4% in the previous quarter and 18.6% a year ago. The sequential growth was led by the LCOS and WLO shipments for AR applications. Other product lines such as timing controller, touch panel controller and ASIC also enjoyed sequential growth.

The performance of LCOS and WLO increased several folds year-over-year, thanks to shipments to our major AR customer. The year-over-year growth was partially offset by the decline of programmable gamma OP, power management IC, and CMOS image sensors. We expect, however, the LCOS and WLO shipments to slow down starting fourth quarter 2016.

We remain positive on the long-term prospect of these two product lines, judging by the numerous customers we have engaged, many of which the world’s biggest tech names, and the busy engineering activities going on with such customers right now. I will elaborate further a bit later.

Our GAAP gross margin for the third quarter was 25.6%, down 50 basis points from 26.1% in the previous quarter and up 380 basis points from the same period last year.

We have been able to maintain a relatively strong margin this year mainly thanks to a more favorable product mix in small and medium-sized driver ICs, increased LCOS and WLO shipments and certain engineering fees from AR/VR related new project engagements. Gross margin improvement remains one of our business focuses.

In summary, we are pleased the overall performance of the third quarter 2016. Jackie Chang will now provide more details on our financial results. After Jackie's presentation we will discuss about the fourth quarter guidance and insight on our business, markets and strategies going forward.

Jackie?.

Thank you, Jordan. I will now provide additional details of our third quarter financial results. GAAP operating expenses were $40.4 million in the third quarter of 2016, up 32.2% from the preceding quarter and up 4.9% from a year ago.

The significant sequential increase was caused by the $9.2 million 2016 RSU grant we have traditionally expensed in the third quarter, which was considered in our guidance.

As an annual practice, we reward employees with an annual bonus at the end of September each year which always leads to a substantial increase in the third quarter GAAP operating expenses compared to the other quarters of the year.

This year, the annual bonus compensation including Restricted Share Units, or RSUs, and cash payouts totaled $12 million, out of which $9.2 million was vested immediately and expensed in the third quarter. The remainder will be vested equally at the first, second and third anniversaries of the grant date.

Excluding the RSU charge, our third quarter operating expenses were $31.2 million, up 2% from the previous quarter and down 8.2% from the same quarter 2015 GAAP operating margin for the third quarter of 2016 was 7%, up from negative 1.5% for the same period last year and down from 10.9% a quarter ago.

The GAAP operating income decreased 30.2% sequentially, but increased 721.5% year-over-year. The sequential decline was mainly a result of the higher RSU expense to compensate the team for with a much improved profitability of the year.

Third quarter non-GAAP operating income, which excludes share-based compensation and acquisition-related charges was $25.1 million, or 11.5% of sales, up from 1.6% from the same period last year and up from 11.1% a quarter ago. The non-GAAP operating income increased 12.1% sequentially and 835.7% from the same quarter 2015.

Our GAAP net income for the third quarter was $13.6 million, or $0.079 per diluted ADS, compared to $19.8 million, or $0.0115 per diluted ADS, in the previous quarter and GAAP net loss of $2.3 million, or $0.014 per diluted ADS, a year ago.

GAAP net income increased 683.1% year-over-year due to higher revenue and much improved gross margin, but declined 31.3% from the previous quarter due to the $9.2 million 2016 RSU charge in the third quarter. Non-GAAP net income actually increased 5.7% sequentially.

Third quarter non-GAAP net income was $21.3 million, or $0.0124 per diluted ADS, compared to $20.2 million last quarter and $1.7 million the same period last year. Non-GAAP EPS exceeded our $0.10 to $0.12 guided range.

Turning to our balance sheet, we had $153.4 million of cash, cash equivalents and marketable securities as of the end of September 2016, compared to $126 million at the same time last year and $179.3 million a quarter ago. We made a cash RSU payment of $9.2 million and a dividend of $22.3 million during the quarter.

On top of the above cash position, restricted cash was $138 million at the end of the quarter, same as the preceding quarter. The restricted cash is mainly used to guarantee the Company’s short-term loan for the same amount. Himax continues to maintain a very strong balance sheet and remains a debt-free company.

Our inventories as of September 30, 2016 were $169.4 million, down from $177.7 million a year ago and down from $186.7 million a quarter ago. The lower inventory was a result of increased shipments in the quarter.

Accounts receivable at the end of September 2016 were $208.4 million as compared to $168 million a year ago and $187.9 million last quarter. Day sales outstanding was 95 days at the end of September 2016, as compared to 89 days a year ago and 90 days at end of the last quarter.

Net cash inflow from operating activities for the third quarter was $2.9 million as compared to an inflow of $14.1 million for the same period last year and an inflow of $13.1 million last quarter. The year-over-year decrease was a result of higher receivables although net profit actually increased.

The sequential decrease in cash flow was mainly due to increased receivables from higher sales and a decrease in accounts payable as more payments made at the end of the quarter. We expect a significant operating cash inflow in the fourth quarter and for the full year.

Capital expenditures were $1.9 million in the third quarter of 2016 versus $2.6 million a year ago and $1.7 million last quarter. The capital expenditure in the third quarter consisted mainly of purchases of R&D related equipment As of September 30, 2016, Himax had 172 million ADS outstanding, little changed from last quarter.

On a fully diluted basis, the total ADS outstanding are 172.4 million. I will now turn the floor back to Jordan..

Thank you, Jackie. We delivered solid results to achieve both top and bottom line growth during the first three quarters of the year, as our driver and non-driver business segments both performed strongly.

We have increased market share in our core driver IC business this year and continue to solidify its leading position through technology advancement and customer engagement.

With the most comprehensive product portfolio in the industry, we were further capitalize on our strong position in display drivers to lead the market in major new technology trends, including higher display resolution, AMOLED and in-cell TDDI.

Equally important, Himax has many unique technologies and solutions for AR, VR and IoT applications with exciting long-term growth potential. For our LCOS micro display and WLO products, which are integral parts of the eco-system for the booming AR sector, we continue to increase new project engagements with many heavyweight customers worldwide.

We remain committed to our long-term strategy to diversify our product and customer base with innovative technologies. With that, I will now provide our fourth guidance, followed by a more detailed outlook. The fourth is typically a low season for the semiconductor.

For the fourth quarter 2016 we expect revenue to be down 4% to 9% sequentially.\ Gross margin is expected to be slightly down sequentially, depending on our final product mix. GAAP earnings attributable to shareholders are expected to be in the range of 8.5 to $0.11 per diluted ADS based on 172.4 million outstanding ADS.

Now GAAP earnings attributable to shareholders are expected to be in the range of 8.7 to $0.0112 per diluted ADS based on the same number of ADS. In providing the above earnings guidance, we have a 14% income tax rate of 2016 calculated based on exchange rate of NTD 31.5 against the US, which is also the exchange rate as of the beginning of November.

Now let me provide with some details behind our guidance and trends that we see developing in our businesses. Our large panel driver IC business has grown from Chinese panel customers’ rapid capacity ramping and rising 4K TV penetration this year.

For the fourth quarter, we anticipate our large panel driver IC revenue to increase high single digit year-over-year, but to decline mid single digit sequentially due to one single customer’s inventory adjustment. Despite the temporary demand slowdown, our leading position in this segment remains intact.

Our large panel customers are increasingly demanding a total solution from IC vendors in addition to their constant request for better IC solutions to support their high-end and high-resolution products.

On top of our unique offerings of technology solutions for advanced features required of high end TVs, our capability to provide a total solution covering driver ICs, timing controllers and PMICs especially positions us very well in the 4K and 8K display markets.

For example, to handle the massive amount of video data, 8K TVs require higher speed interface, advanced driving and video processing technologies, as well as highly integrated timing controllers with sophisticated functions.

We believe our technology strength and total solution capability are significant differentiators against our competitors and will further solidify our leading position as the industry migrates to 8K TVs.

We are one of the pioneers in product development of 8K TVs with our Chinese and Korean panel customers and are already shipping small volume to a leading Korean panel maker. The other segment within its driver business is ICs used in small and medium-sized panels for applications including smartphones, tablets and automotives.

While the market demands remain strong, fourth quarter sales for smartphones are likely to decline mid single digit sequentially due to the foundry capacity constraints. However, the sales of smartphone DDICs will still grow close to 30% year-over-year, driven by Chinese end brand customers’ strong shipment growth this year.

On the AMOLED front, we are collaborating closely with leading panel makers across China for AMOLED product development. This positions us well for the coming growth of new AMOLED panel shipment expected from these customers starting late 2017.

We have seen wider adoption of AMOLED panels, now almost exclusively supplied by Samsung, for smartphone brand customers’ flagship models. This trend has prompted all leading Chinese panel makers to ramp up their investments in AMOLED manufacturing and accelerate their timetable for the mass production of AMOLED panels.

We believe AMLOED driver ICs will be one of the critical growth engines for our small panel driver IC business starting the end of 2017. Among driver ICs used in small and medium-sized panels, the most noteworthy category in recent years is automotive applications.

We expect continued solid momentum in Q4 with revenues expected to grow double-digit sequentially and close to 50% year-over-year.

With numerous tier 1 automobile brands as its indirect end customers, we have successfully engaged all key panel manufacturers and module houses worldwide for long-term partnerships and commands a leading market share in this segment.

To address the growing demand of larger automotive displays with higher resolution and built-in on-cell or in-cell touch screen feature, we continue to develop advanced solutions to enable new automotive display applications and provide our customers with the most comprehensive solutions in the industry.

As such, we anticipate the strong growth will likely continue into the next few years. Driver ICs used in tablets will continue to grow double-digit in the fourth quarter, following the third quarter’s strong momentum, thanks to shipments for several leading brand customers in the US and Korea and the holiday season impact.

Overall, we expect the small and medium-sized driver IC segment to increase sequentially by low single digit in the fourth quarter. For the last few years, the non-driver business segment has been our most exciting growth area and a differentiator for Himax. New product developments continue to evolve and gain traction.

While we are more positive than ever on the long-term growth prospect of its non-driver businesses, we anticipate near-term headwinds with about 20% sequential decline in our non-driver revenues for the fourth quarter.

Sales of timing controllers and CMOS image sensors will deliver strong growth in the fourth quarter, but those of WLO and LCOS micro displays and, to a lesser extent, touch panel controllers and ASIC chips will decline sequentially. I will now highlight some of the non-drier product lines.

First, our touch panel controller product line we have seen significant traction in customer adoption and design wins of our on-cell solutions. Notably, a leading Chinese smartphone maker is featuring our solution in its newly-launched flagship tablet.

More importantly, we are one of the pioneers in offering TDDI solutions and are in partnerships with essentially all of the display makers of state-of-the-art pure in-cell touch panels for joint technological development.

We are seeing the use of in-cell display with TDDI rapidly becoming the preferred choice for smartphone brand customers’ next generation mid-to-high end models. Also, the increasing adoption of AMOLED panels has pushed TFT-LCD panel makers to turn to pure in-cell TDDI panel development for thinner display designs.

On top of the very busy design-in activities for TDDI solutions with Korean, Chinese and Taiwanese panel customers, we also aggressively developing new products and strengthening its team to expand our product portfolio and get itself ready for the anticipated strong growth in this segment.

TDDI will be a major growth engine for our small panel business starting early 2017, which will also boost our corporate gross margin over time. I will turn to the LCOS and WLO product lines. Our LCOS and WLO businesses have grown strongly through the first nine months of 2016 mainly due to shipments to one of its leading AR device customers.

We were recently informed by the AR customer to reduce future shipment of the current generation device to a minimum, and instead, to focus on the joint-development of future generation devices. We therefore expect our LCOS and WLO sales to decline in the fourth quarter, as well as over the next few quarters in 2017.

We are not particularly worried about the short-term headwind as the said major customer is more committed than ever in the long-term development of the AR product concept, which is viewed as a new computing platform and that Himax remains a critical partner to the customer in its AR efforts.

Equally important, while the revenues from LCOS and WLO may subside over the next few quarters, they will come from a much more diversified customer base.

Quite a few of our other customers are expected to bring their AR products to the market starting next year, although we still doesn’t expect large volumes from the very early generation products of these customers.

Not only we see more diversified revenue stream from multiple customers, our list of customers continues to expand and it now covers some of the world’s biggest tech names. Such customers usually come to us for tailored solutions and pay for such developments. This is clear evidence for our undisputed leadership position in the industry.

Having invested in related technologies for over 15 years, we are uniquely positioned as the provider of choice for micro display and related optics, both of which are critical enablers to AR devices.

With little competition inside, we are currently working with over 30 customers on various current and future generation AR devices using LCOS micro display and/or WLO. Our increasing design engagements cover not only leading companies mentioned above, but also niche AR players which bring in innovative product ideas.

In addition to many AR devices under development, our WLO technology is also being adopted to enable new things such as 3D scanning, which can in turn be used in a very wide variety of industries such as consumer, industrial, IoT, AI, medical, automotive and even military. Some customers even come to us with novel bio-medical product ideas.

Our customer base for this business is extremely diversified, covering literally all of the most well-known tech names throughout the world, many of them leading end brand players or semiconductor platform solution providers.

Himax is one of the very few players in the market with WLO technology and the one possessing the most proven mass production track record with expertise ranging from design and high yield production to cost and quality controls. We are very happy with our current development progress in this area.

With respect to the expansion plan for our next generation LCOS and WLO production lines, we are please to report that we proceeding in line with our schedule. We plans to complete it around the end of 2017 or early 2018.

The new production lines will enable higher end product design and offer far better product quality for mass production of its next generation LCOS and WLO product lines that we expect will lead the industry in the future generation of related products.

This investment will be financed through our internal resources and existing bank facilities, if needed.

We continue to make great progress with our new smart sensor areas by collaborating with certain heavyweight partners, including a major e-commerce customer, leading consumer electronics brands and a heavyweight international smartphone chipset maker.

By pairing a DOE integrated WLO laser diode collimator with a near infrared CIS, we are offering the most effective total solution for 3D sensing and detection in the smallest form factor, which enables easy integration into next generation smartphones, AR/VR devices and consumer electronics.

Similarly, our ultra-low-power QVGA CMOS image sensor can also be bundled with our WLO lens to support super low power computer vision to enable new applications across mobile devices, consumer electronics, surveillance, drones, IoT and artificial intelligence. We reported this progress in these new territories in due course.

Regarding other CIS products, we remain a leading position in laptop applications and will increase shipments for multimedia applications such as surveillance, drones, home appliances, consumer electronics, et cetera. And that concludes our non-driver business discussion. Thank you for interest in Himax. We are now ready to take questions..

[Operator Instructions] Our first question comes from the line of Tom Sepenzis with Northland. Your line is open..

Hi. Thank you for taking my question. The first question I just would like to get a further update [ph] and when do you think that’s going to [indiscernible] company. One of your competitors are seeing [ph] growth already.

So I know that you were one of the first to offer [ph], but it sounds like maybe you haven’t seen significant wins yet, so that’s what led to actual revenue and EPS growth and that something that comes next year?.

Tom, you were a little bit on and off, and I am guessing you were referring to TDDI product, am I right?.

Yes, sorry.

I was just asking, it seems like TDDI is going to start for you, whereas one of your biggest competitors here in the US is seeing an incredibly strong ramp right now in TDDI, so I am just wondering if you feel like you've gotten behind there and you could catch up?.

Yes. It’s a good question. And thank you for raising the question.

We have mentioned in our prepared remarks that while we have made some shipments already, but they are not really less significant compared to the US competitor that you mentioned right now, and as we mentioned, starting from Q1 next year, we expect to see volume [ph] shipments, and I believe our ramping for our TDDI products will be very fast quarter after quarter next year, and in a few quarters’ time, it will be a major contributor to our revenue and profit.

Now, as far as why we are so-called behind compared to that US competitor of ours, I think that company comes with primarily touch panel controller background.

Historically, when touch panel is discreet from display, it is the end device maker such as a smartphone maker, people like Huawei or Xiaomi choosing the touch panel controller who are sourcing panels from panel makers, which in turn particularly are driver IC provider, guys such ourselves.

So, we have sufficiently been serving our panel makers via our US competitor because of our nature of being a touch panel controller provider. They are serving the end device makers. Now, the touch panel and display panel are now being merged into one to form in-cell.

An in-cell will be provided by our traditional customer base, which is TFT-LCD makers. However, it is only in the very beginning stage right now. Take as example – I mean for example, one of our biggest Chinese customers, they are now using their Gen 6 to produce in-cell panels.

They do have a plan to move into Gen 8.5, which is in design phase, but it’s not in mass production yet. We are – meaning what I am trying to say is that you are going to see next year more panel customers with even bigger capacity coming to the market with TDDI offerings.

So what you are seeing right now, while the momentum, the growth momentum is really impressive and exciting, it is only the beginning of this very big long-term growth we believe for TDDI. So our panel makers, who are already very used to driver IC technology, you know because of their longstanding panel business.

However, to adopt to a touch panel controller technology into as part of their product is totally new to them. So, in their very early stage IC vendor selection, they tend to select people with very longstanding touch panel controller background to minimize their technical risk for TDDI or for their in-cell products.

People like us, driver IC markets, with the capability of also providing touch panel controller, i.e. TDDI, are then brought in as the alternative backup source in the very beginning stage of the ramp.

We, I guess along with many of our panel maker customers, believe eventually and I believe in not too distant future will surpass the volume of the early movers because of our longstanding relationship and technology, development, you know, experience, and business relationship with panel makers, which is really on turf, and on top of that you know those IC vendors coming with touch panel controller background, typically they only offer small panel TDDI, they don’t have larger panels driver IC pieces, where saw panel maker customers – our relationship with them is comprehensive and widespread.

In our TVs, coming to TV to cell phone, from driver to timing controllers to product management IC and so on and so forth. So I think the width and depth of relationship of touch panel makers to people like us is nothing to compare with people who traditionally do touch panel controller.

Now if I compare our peers, meaning traditionally pure driver IC vendors now trying to get into TDDI, I think we are far ahead compared to our peers in terms of our touch panel IC expertise and track record.

So, we are, if you like, compared to touch panel, we certainly are a new comer compared to those traditionally in touch panel players, but but amongst driver IC vendors, we are far ahead. So we are very unique in our position in terms of being able to combine driver IC and touch panel solution to TDDI.

Although for the reasons I mentioned, for our risk mitigation, our customers are indeed in a very early stage of production. They tend to select people with touch panel controller background.

However, I think with a very comprehensive joint development engagement we have with panel makers, we are rather confident we can from behind and surpass our competitors hopefully starting next year..

Great. Thank you very much. I will get back in queue..

Thank you, Tom..

Thank you. Our next question comes from the line of Tristan Gerra with Robert W. Baird. Your line is open..

Hi, there. It looks like on the basis of your commentary that you expect continued shortages in small panel that you see continued the strong demand in the China smartphone supply chain.

Any color that could provide in terms of how that ramp is shaping up relative to real and demand and what type of seasonality and/or potential inventory correction we could sometime in the first of half of next year?.

Thank you, Justin. As you know, our end device customer base are primarily Chinese or let me put it the other way, way, not Apple right. Not Apple, every non-Apple player is our customer. And I think Chinese players in particular are now really leading the pack when it come to growth in smartphones.

I think, throughout the entirety of this year and certainly the momentum is expected to continue through next year as well. So we really benefit from this, and our –certainly, we enjoy very leading market share with end brands such as Vivo, Oppo, Huawei, and Xiaomi, and La TV, and so on and so forth.

So we really benefit from their very strong shipments. And as I mentioned, we are still in shortage unfortunately, it’s been that way for about two quarters now, and that certainly is -- the good side of it is evidence of a very compressive design phase.

We are seeing the sell through to be healthy for driver ICs, and we are even hearing from customers that -- some optimistic customers are telling me at least first half of next year, no worries; more conservative ones, first quarter, no worries. That is not to say second half will have a problem, but certainly we don’t have visibility that long.

But that is – this is what literally all of my customers are telling me, I mean, right now it’s in shortage right, so people are fighting to get new allocation. But I think for the industry, supply/demand situation remains healthy.

It’s certainly towards the end of next year when Apple may have another major launch, then it certainly will be a major variable that we cannot predict. But as far as we can see, the leading Chinese brand in particular are enjoing the very strong momentum, and we benefit as a result..

Okay. That’s very useful.

And a quick second question, there is some industry forecast that predicts a fairly nice ramp in 3D scanning and smartphones starting next year notably as smartphone OEM try to bring new features, could you – you’ve spoken about that technology on the call, could you elaborate a little bit on how us seal your position in that segment for the competition and are your engagements limited to just one leading smartphone makers or do you have additional engagement in smartphone for 3D scanning and what's the potential timing of one? Thank you..

Thank you. Interesting, I haven’t seen the report myself, certainly very please to hear that, so thank you for sharing. We -- actually we’ve got the whole bunch of customers waiting for our 3D scanning solution to materialize, and our partner right now is the heavy weight TV chipset maker, right now.

So it’s a joint development partnership under which the heavy weight TV smartphone chipset maker together with us will co promote a total solution including AP and a total 3D scanning solution to the customer with the 3D scanning solution and the AP, the connection already being take care of by the two of us, the partnership.

So in short, we are now really targeting specific individual smartphone customer as such. We are working together with the platform maker. The beauty of this is that once the solution is ready, it can be adopted by many.

And in fact, through our still rather limited joint promotion efforts, we are seeing overwhelming interest from smartphone makers, so we are not really so much – not much worried about the end customer interest, so it is really us, the change is on us, our sales and partner.

Now the way we split the work, right, they provide the AP and we provide the entire what we call 3D scanning or a structural [ph] projector module, by which what I am saying is as we mentioned, a projector with a laser, beaming laser light, emittable light through optics – with a pattern, emittable pattern which hits surroundings and bounce back and captured by a CMOS image sensor which is the focus on higher bandwidth.

So that you compare the out coming pattern of the laser light and the incoming pattern being captured, and you kind of compared the change of the pattern or the distortion of the pattern, and with algorithm you can figure our wht the 3D surrounding is like on a real time basis, so this is what the solution is about.

So what we at Himax provide is the projector sales including the laser which certainly we oursource from other people and the entire optics manufactured by our WLO, design manufactured by ourselves, and the related alignment, which is very, very tricky and difficult to handle.

The light is very, very ultraprecisely in between the optics and the laser. So that is the projector part.

In fact as part of the projector solution, we also provide a laser driver IC, which as you know has been our bread and butter, so why not – and then we also provide the sensor part, the capture inside with state of the art sensor which is very good at the required bandwidth of AR.

So, we then outsource the thing to CMOS Image Sensors modular houses to make a [indiscernible] projector module, right so this is how you are going to see the 3D scanning.

Now the 3D scanning technology is not new at all, its been around, but its never been adopted by consumer electronics primarily because; number one, it’s a form factor, so we are the only one in the world I believe as far as we can see who can really squeeze everything I just mentioned into a size with a with a form factor for smartphone which is critically important.

And secondly, certainly it is the cost and then the power consumption. So again based on our discussion with our chipset partner and also our – based on our limited promotion feedback, we feel rather positive about the product concept.

Now, we are likely to have hopefully a major and official launch in the beginning of the year, next year, and mass production hopefully by the second half of next year.

And the beauty of our technology is that we offer – we are going to offer a roadmap for high resolution, better power consumption, and better cost, and also indoors and outdoors availability and so on and so forth. So there is going to be an ongoing roadmap to carry the industry forward.

So we are very excited about this and many people -- people are hungry to see a smartphone having new features that is not – that consumers really want and like, and I think this is one of the few things that many cell phone makers are telling us that this can be one of the thing.

So, some of them are already engaging – their internal resources and outside app developers to figure out applications for such 3D scanning technology. I have actually tried with many of my friends and suppliers and customers, a real time 3D scanning photo, just scanned my face myself for example by 3D.

So the data actually is 3D and it appears on your 2D screen that’s very, very 3D. And because the data is 3D, you can actually export the data into your 3D printer and make a print out of my figure head in 3D, right. So this is one of the applications this can really enable. With 3D amazing resolution as well..

That’s very useful. Thank you..

And our next question comes from the line of Mike Burton with Brean Capital. Your line is open..

Hi, and thanks for letting me ask the question. I just had a question on the gross margin guidance, guiding down sequentially year over year. Sorry if I missed this, but can you talk through some of that? The revenues are definitely up.

Is it mostly just mix? Am I to assume then AR/VR is actually down sequentially or just kind of walk through some of the puts or takes on the gross margin line..

I think you have answered the question already yourself. It is the mix plus AR/VR down, and the mix I would say excluding the AR/VR is similar. The level is similar, the gross margin number will be similar..

Yes, but we do see gross margin for smartphone actually improving QoQ because of a high end resolution requirement for the DDIC. That’s where we are under the capacity constraints, but as we continue to ship more, we shall continue to improve gross margin..

But too bad as I mentioned in my prepared remarks, we are limited by capacity, and that happens to involve some of our high resolution products, otherwise the margin would have been better, but that’s just the capacity constraint. .

Okay and then looking at the OpEx, that was down year over year in September.

Are we expecting kind of similar going forward into December and just how we should think about it going into next year?.

I think you should not expect dramatic up or down of OpEx next year versus this year, and this year’s OpEx is slightly down so far I mean excluding share based compensation, right. Excluding RSU – I mean including RSU certainly this is up compared to last year because RSU we paid out a lot more this year than last.

So, excluding that on a non-GAAP basis, I think it is a combination – I mean it is not planned that way, let me just put it that way, right it happened that way. But the efficiency in [indiscernible] depreciation in tools and stuff, right. So, actually we continue to add [indiscernible] our headcount and we certainly continued to add salary this year.

So if you look at the salary expense per se, and the headcount actually both increased year over year. However, I think our market in 2D expense has been down compared to the last year, not that we are trying to reduce our R&D rather it is just against a combination of better efficiency, and it just happened that way here.

So, you shouldn’t expect next year’s OpEx to be down from this year, nor should we expect next year’s OpEx to be up meaningfully from this year either..

Okay Thanks..

Our next question from the line of Jaeson Schmidt with Lake Street Capital. Your line is open..

Thanks for taking my questions. Just a really quick one.

How much in NRE fees did you recognize in Q3 and kind of how should we think about that revenue stream going forward?.

Jaeson, we actually didn’t really disclose it, but it is probably in the neighborhood of $15 million to $20 million this year in 2016, and as we continue to add customer in the joint development of AR project and also WLO projects for consumer electronics and chipset platform for smartphone, etc., We would expect NRE to actually increase in 2017..

I think I will elaborate on that Jaeson. NRE for us is a lot more significant in terms of -- for our long-term business compared to what is showed in the P&L for that particular year.

If you look at our traditional driver IC or timing controller power management IC, all such business, we do just from time to time some NREs, but they are very rare to be very honest, because this is a more commoditized market, and we do offer our standard path to many customers, so no customer would want to pay NRE for anything.

So, when we say NRE, our NRE revenues started to increase probably starting from about last year, and this year certainly rather significantly, and you can expect to have – to see good NRE income in the next few years, because of those very unique products, unique technology areas that I mentioned, you know WLO, LCOS, AR/VR are going for 3D scanning and stuff like this, right.

NRE is not going to make you reach, but it is very important in the sense that firstly, it potentially reduces our burden rate while we are cultivating a new technology and secondly, it shows the customer’s commitment, i.e., I don’t like to see a engineers, our team being engaged by a customer because they are engineers, I also fancy about their technology and then two crucial engineers working – very happy and together and try to do something fancy.

No, I want to make sure my customers’ engineering team are fully authorized in there to pay – fully authorized by their management and they have to pay rather – a meaningful amount to engage us for a product. That shows a lot of other customers’ commitment. So, and then typically NRE would be in the range of few million dollars at minimal.

Certainly, there could be some small jobs and we charge a few hundred thousand dollars maybe. But a typical project can easily cost you a few million dollars and also for these technology areas we mentioned, AR/VR, LCOS, WLO, 3D scanning and all these.

They are so new, so they are not like smartphone which is very very standardized already in the industry. So, in such areas different customers come to us with their different spec thinking. Their spec requirement are different, they are – even their application is very different.

So, quite often we don’t even sort of – their application before they came to us. I just mentioned in my prepared remarks. There is a very exciting biomedical application that I really – that is really that blew me out. I didn’t imagine people could use other real technology to do stuff like that.

And for such things certainly we charge them an NRE because technology is unknown to us and we need to make sure the customer is committed and then quiet likely we are making something really better for them and exclusively for them, right, so it is only fair, but by having an NRE typically it indicates that in mass production, the growth margin is good because it means there is no competition and we are always the sole source and it is very very likely it involves a very unique product of our customers meaning we are already adding value and more and more, we are moving from being a component supplier to a solution provider.

The sear light projector that no I just mentioned is a very good example. It involves multiple areas of our technology including an algorithm, meaning, if you take out stuff, it is no longer a hardware component. It is really a solution which can enable re-application already.

So customers love that, in particular when it comes to ILT, you don’t have bulky, huge, gigantic volumes of smartphones, but you need to provide them solutions. You add value, you have small volume customers but with every customer you can make pretty decent profit out of. So NRE is very meaningful to us..

Okay, that is helpful. Thank you..

Thank you and our next question comes from the line of Suji Desilva with Roth Capital. Your line is open..

Hi Jordan. Hi Jackie. So, on the large panel segment you had some good year over year growth. I am wondering you said in the prepared remarks that you expect similar growth in the 2017 timeframe.

I am wondering, is there sufficient customer share gain opportunity or share gain opportunity for you to continue the grow at these rates in the large panel market?.

Certainly, we can continue to grow whether at the same rate that I cannot comment one or the other. We can continue to grow at least over the next few years because quite simply our customers are still building fabs, big time. And with such new customers typically in China, they are number one when there is – that is not tangent, right.

So, for example, you are talking about BOE, another Gen 8.5 by Q1 next year. SKC also in China due to next year and BOE, I believe, later next year or early the year after the [change pad] will be coming on stream as well. And there is another new fab Generation 8.5 from Innolux and the CSOT, I can’t recall the detailed timing but somewhere next year.

I think if there will be another 8.5 and Pender as well, another 8.5. yes, there we go Pender is what they call Gen 8.6 mass production commencement 3Q 2018. CSOT Gen 11 mid 2019, Innolux Gen 8.6 Q1 to Q2 next year. SKC I mentioned Gen 8.6 Q3 next year and finally BOE Gen 8.5 Q2 next year and Gen 10 Q1 the year after Q1 2018.

So, whole bunch of new fabs and all these are our customers. With many of them we are either number one or number two IC vendor. So, we continue to be quite confident and then because of these new fabs coming on-stream our design activity with such customers are very very busy right now. One last thing I want to mention.

Last but not least, I mentioned in my prepared remarks, one of our really major advantage is the fact that we can offer driver IC, or timing controller or power management IC, OP and a whole bunch of other things that we can answer all their IC – all kind of – IC issues.

So, they are probably just one other player in the industry that can offer the same thing. So that is really a major advantage..

Very helpful color. Thank you..

Our next question comes from the line of Charlie Chan with Morgan Stanley. Your line is open..

Hi, Jordan. Hi, Jackie. And I feel sorry that your customer delayed the project, but I believe that your position will pay out. So my first question is really on your MO led driver IC business because you mentioned that contribution will start from 2017 and they seem to be from Chinese customers.

So can I confirm that your opportunity with Korean customer already gone? May I confirm that?.

I think – I cannot say it’s gone, because we do have approaching engagement with them and we actually passed qualification. So initially out of business issues but we did then really take that project into our real volume production.

And later in the day I think I suspect – I think the top management strategy from that Korean customer is that they are seeing competition, of course the completion from Chinese they are new aligns.

So I think the Korean wants to outsource it little as possible to outsiders to keep the entry barrier areas as high as possible and forward selling as possible. I think that’s what they are thinking.

So we are seeing much as we saw, we are probably one of the better ones, but with all non-group company, non-group IC vendors their attitude has turned very, very conservative of late. So I wouldn’t say it’s terminated, it’s gone, I mean anything is possible in business. But I will be honest that is far we seeing right now..

Okay. Understood.

Okay and my follow up question is that you mentioned that your LCOS and WLO revenue would be small in coming quarters and so your big customer give you any commitments or will pay you some compensation? Because I remember that in a previous quarter you had spent some CapEx and hired some labors for the new capacity so how would you compensate all those, can I assume margin would decline coming quarters?.

Thank you, Charlie for asking the question. Number one yes, will be compensated for the loss of volume. Although, obviously I cannot comment on details and I will say I really appreciate the customers being very responsible and very fair in the risk.

And also I think the customer has been generous and fair primarily because we are seen as a long-term strategic partner to their long-term effort of AR. So this is really just a very, very, very beginning.

So I want people to know that they and a whole bunch of my other customers some of them biggest names take work, they are more committed than ever, they are spending more R&D money into this and we are seeing more VCs, put in more money into such AR efforts. So don’t be put down by this short headwind, that what I want to really highlight.

So I mentioned in my prepared remarks that we not worried and we very honest about this, we are not worried. Now having said that though, I just want again clarify of all the movers that would decline in Q4 which we have mentioned and which has been built into our guidance and we've also said the next few quarters the volume will be minimum.

Now I just mentioned this is their first generation, very first generation product, the idea has always been to test the market and I also I mentioned the customer is not stopping the door.

On the contrary, they are building up their investment and development efforts, leveraging on the experience and lessons we have all learned from this first generation product.

Equally important, is of course you have not seen, players who are not already out of the service, players who are developing it under the water, obviously they are also walking on their respected first generation product, right.

So – and literally everybody is working with us and literally everybody is paying us the development fees for such efforts, as I just mentioned in my previous question. So some of them were technically our product to mass production next year.

But judging by the previous experience I don’t want to hold your expectation too high for next year, our first generation product volumes out of such customers and there is somebody really hit a jackpot and not somebody that is consumer, some are really loved, I don't know, but I -- you know, we at Himax, we don’t hold extremely high hopes for the volume of next year, although you are going to see more diversified customer base with small customers trying to test their first generation product with the market.

Expansion, I mentioned already we are proceeding with expansion as planned and you are going to wonder if the customer volume is going to be down, while you are still expanded, I think I have already more than provided answer because I – much more customers come in on the stream and I am taking their development fees.

And many of them are giving us some of indications of volume.

So if I give it some haircut and I assume not every single customer is going be successful, even if I make the most conservative assumption that only a limited number of customers will have limited success in their first generation products, even if [indiscernible] under this conservative scenario, our current capacity is far from enough.

And I simply cannot wait until I am in total shortage to stop building because the building takes more than a year.

And – but the good news is once we start mass production, its always high volume production, a source of dealer combination and equally important for IO cost we mentioned it’s going 12 inch waver, it is going to be really state-of-the-art and it will enable high end panel with super high resolution which is going to lift the industry to another level.

So many of our customers are keeping very high hopes for the 12 inch. So we are already seeing very little competition inside. And with our 8-12 inch fab coming on February even more so.

So I guess in conclusion I just want to mention because these are really so important for us, I don’t want people to be understand that a) product is probably over and Himax is going to suffer because of this wide customers with a short term headwind. So excuse me for a lengthy question, so I think we are pioneer.

We appreciate the fact that being pioneer doesn’t necessarily guarantee you are going to be ultimate winner and that is why we are now really trying very hard to have the widest customer coverage, getting NRE charged from them, so that to reduce our burn, really learn from the design and mass production experience to solidify our leadership and finally we are even though we already ahead, we want to be even more ahead by launching our 12 inch.

So, I really believe judging by how the industry is taking place right now it is going to take up soon and by the time it takes off we want to make sure we will be the winner. So thank you for….

Yes. So fair enough, I look forward to your future success. Thanks..

Thank you..

Thank you and our next question comes from the line of Donnie Teng with Nomura. Your line is open..

Hi CEO, CFO. Thank you for taking my question. Thank you for taking my question. My first question is regarding to your large driver IC business. Recently the foundry companies such as UMC and Vanguard all see better sales momentum on large driver in the fourth quarter, while you and Novatech are all seeing weaker large driver sales.

So I just wonder if you have seen that large driver demand will rebound in the first quarter next year, or you just preview the inventory when you have a relatively low inventory level by end of last quarter?.

Donnie, I am not sure I will agree with you on the volume of whether it is TSMC or Vanguard on driver IC per se on Q4. I mean fair enough, they are very full and they are doing okay in Q4, but I don’t believe that comes from driver IC. TSMC driver IC exposure is already….

Sorry, I mean UMC..

…but even in UMC – you just mentioned Novatech and us right. These two happened to be major customers of UMC. So, I just don’t see – I haven’t seen their detail when they call or something, but as far as I know, UMC is a very important strategic partner of ours. I don’t think they will be like increasing their driver shipment in Q4.

In Vanguard, I think their booming business right now comes from things like power management IC, the finger print and so on, not necessarily driver. And I think we also have power chips which is really the source of the capacity constraint. So power chip is totally full.

And we are overall large panel and small panel combined we are – I think we are their biggest customer and unfortunately we are in shortage. So, I am also not sure I would agree Q1 traditionally is always a low season. You have Chinese New Year and all of that. So, we expect Q1 to be a low season. This year should not be an exception.

Although, we are not providing Q1 guidance..

So can we say that this due to a tight capacity, so maybe we need to book some capacity in that sense, is that correct?.

And that is -- in last panel driver IC in particular it is an area of very unique competitive advantage. We are not fighting over capacity which many others over such players as UMC or Vanguard. They are not and that – panel driver IC, it is for us -- it is primarily power chip.

By the way power chip where we say they have a shortage is referred to higher end smartphone is not the large panel. The large panel is okay. We are their only customer in large panel and their capacity and our demand we are all very well planned. We are in advance.

So, large panel and also our customer’s transparency, you know visibility is also better for large panel as well for us. So, from our customer to us to people like power chip, I think large panels is where our IC capacity normally is much better planned. We have another large panel foundry vendor Macronix, or MXIC. Again we are now in the 8 inch.

We are their sole customer for large panel driver IC. We actually co-developed that process for them, so they really can’t work with other people.

So, this tool if you like forms our core of the supply for large panel and with these two we are sole customer, we have a constructional relationship to assure as such and as a result, that is actually one of the reasons why our customers love us for large panel driver IC vendor because they are seeing our supply to be very reliable and steady..

Thank you, and my last question regarding to a quick follow-up on TDDI.

So may I ask what kind of a resolution of TDDI you can provide initially in 2017? Is that more like a WQHD or 4HD or HD720?.

It is more – is currently primarily 4HD and also a bit low in HD720. We can do higher end as well, but we don’t believe when you move too high end right now panel makers here already is going to be a serious challenge.

So, if a panel maker is not going to make good profit, what is the point? So eventually this will move up to quadruple HD and so on, very high resolution. But right now our major competitor they are shipping is primarily HD720.

We believe next year you will be primarily 4HD because HD720 will then be start to consider like mid to lower end with in sale, which is still a bit more expensive. You want very thin design, very good form factor, so 4HD is the right product category to be in..

Okay, got it. Thank you so much..

Thank you. And I am showing no further question at this time. I'd like to turn the call back to management for closing remarks. Thank you. And as a final note, Jackie Chang, our CFO will again maintain investment marketing activities and attend to future investor conferences. We were [indiscernible] as they come about.

So please contact our IR department and/or Greg Falesnik if you are interested in speaking with the management. Thank you. And have a nice day..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. And you may all disconnect. Everyone have a wonderful day..