Greg Falesnik - IR Jackie Chang - CFO Jordan Wu - President and CEO.

Tom Sepenzis - Northland Capital Markets Tristan Gerra - Baird Jaeson Schmidt - Lake Street Charlie Chan - Morgan Stanley Jerry Su - Credit Suisse.

Good day, ladies and gentlemen and welcome to the Himax Technologies fourth quarter 2017 earnings conference call. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to turn the conference over to Greg Falesnik, Managing Director of MZ North America. Please go ahead. .

Thank you, operator. Welcome everyone to Himax's Fourth Quarter 2017 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 results release, please e-mail greg.falesnik@mzgroup.us or access the press release on financial portals or download a copy from Himax's website at www.himax.com.tw.

Before we begin the formal remarks, I'd like to remind everyone that some of the statements in this conference call, including statements regarding expected future financial results and the 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 events or results to differ materially from those described in this conference call 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 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 2016, filed with the SEC in April 2017.

Except for the company's full year 2016 financials, which were provided in the company's 20-F and filed with the SEC on April 12, 2017, 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 subject our annual consolidated financial statements and may vary materially from the audited consolidated financial information for the same period.

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

Thank you, Greg and thank you everyone for joining us. Our outline for today's call is first, I will review Himax's consolidated financial performance for the quarter and full-year 2017 on both GAAP and non-GAAP basis. The non-GAAP financials exclude share-based compensation and acquisition-related charges.

I will conclude with the first quarter 2018 outlook. Jordan will then provide an update on the status of our business, after which we will take questions. Our 2017 fourth quarter revenues gross margin GAAP and non-GAAP earnings per diluted ADS all were met our guidance.

For the fourth quarter, we reported net revenue of $181.1 million, a decrease of 8.1% sequentially and a decrease of 11% year-over-year. Gross margin was 24.6%, down 0.9% sequentially. GAAP earnings per diluted ADS were $0.137, compared to the guidance range of $0.13 to $0.15.

Non-GAAP earnings per diluted ADS were $0.138 cents, compared to the guidance range of $0.132 cents to $0.152 cents. Revenue from large display drivers was $58.4 million, up 6.3% sequentially but down 13.7% year-over-year.

Large panel driver ICs accounted for 32.3% of our total revenues for the fourth quarter, compared to 27.9% in the third quarter of 2017 and 33.3% a year ago. Our large panel driver business grew mid-single-digit sequentially, in line with guidance, driven by ramping of new LCD fabs in China and strong TV demand ahead of the Chinese New Year holidays.

The year-over-year decline was caused by phase-out of certain customers’ old models and the misses in certain customers’ new design-in projects as we reported in previous earnings calls. We have overcome the engineering hiccup and business has started to be back on track since the third quarter.

We’re pleased with our current engineering collaborations and 4K TV design-in activities in the pipeline. Such activities will lead to further rebound in future sales. Revenue for small and medium-sized display drivers came in at $81.3 million, down 6.8% sequentially and down 18.5% year-over-year.

The product segment accounted for 44.9% of total sales for the fourth quarter, as compared to 44.2% in the third quarter of 2017 and 49.0% a year ago. As opposed to original guidance of flattish sequential growth, our small and medium-sized panel driver business declined mid-single digit because of lower-than expected smartphone driver IC sales.

Sales into smartphones were down 11.5% sequentially and declined more than 35% year-over-year. The less than satisfactory result in the fourth quarter was caused mainly by weak sentiment in the China market of new products fail to attract consumers and therefore OEMs turn cautious in building inventory.

In addition, our sales were affected by the shrinking addressable market for pure KTI CD driver IC a significant portion of which is being replaced by TBDI AMOLED technologies as we indicated in previous earnings call. The good news is that our TBDI solutions have started shipping in the fourth quarter, Jordan will elaborate on this a bit later.

Our small medium size drive IC revenue for automotive application went up more than 10% sequentially and more than 25% year-over-year. The quarterly revenue now reached close to 25 million, a historical high and accounting for over 15% of the total driver IC revenue.

Driver IC sales for tablets were down 17.2% sequentially a decline in 24.7% year-over-year due to weak overall market demand in this product segment. Revenues from our non-driver businesses were 41.4 million, down 24.7% sequentially but up 14.8% versus last year.

Non-driver product accounted for 22.8% of total revenues as compared to 27.9% in the third quarter of 2017 and 17.7% a year ago. The sequential decline was due primarily to certain one-off customer reimbursement related to our AR cargos business in the preceding quarter.

Excluding the one-off reimbursements which totaled 13.3 million, the sequential decrease will have been less than 1% as compared to the original guidance of 10% growth. Lower than expected WO shipment in our NRE income contributed to the sequential sales decline.

The year-over-year increase was driven mainly by WO product shipment to a leading customer and to letter extent increase sales of pending controllers and CMOS English sensors.

The revenue increase was offset by the discontinuation of ELCOS and WO shipment to one of our major AR devices customers who decided to end the products production as we reported before.

We remain positive on the growth prospects of our WO and ELCOS private lines judging by the expanding customer list that covers some of the world tech names and BES engineering activities going on with such customer right now. Jordan will elaborate on this a bit later.

Our GAAP gross margin for the fourth quarter was 24.6% down 90 basis points from 25.5% in the third quarter of 2017 but up 550 basis points from 19.1% for the same period last year. The sequential margin decline was due mainly to certain one-off customer reimbursement in Q3 as I mentioned earlier.

Excluding above mentioned one-off reimbursements in the third quarter which knocked down $5.7 million in gross profit. Our fourth quarter gross margin will have been an increase of 30 basis points versus the third quarter. The year-over-year increase was due to additional inventory write-down totaling $12 million in the fourth quarter of 2016.

Excluding the additional inventory write-down, the gross margin for the fourth quarter of 2016 will have been 25%. Our GAAP operating expenses were $40.5 million in the fourth quarter, down 13.9% from the preceding quarter, but up 26.2% from a year ago.

The significant year-over-year increase was primarily the result of rising R&D expenses in the areas of 3D sensing, WLO, TDDI, and high-end TV as well as the annual merit increase. In addition, NT dollar appreciation against the U.S.

dollar caused our salary expense to increase around $1.0 million as we paid the bulk of our employee salaries in NT dollars. The sequential expense decrease was primarily the result of the difference in RSU charge.

In accordance with our protocol, we grant annual RSUs to our staff at the end of September each year, which, given all other things equal, leads to higher third quarter GAAP operating expenses compared to the other quarters of the year. The fourth quarter RSU expense was only $0.1 million, while it was $6.5 million in the third quarter.

Excluding the RSU expense, operating expenses decreased 0.4% from the third quarter and increased 26.7% year-over-year. GAAP operating margin for the fourth quarter was 2.3%, down from 3.4% for the same period last year and up from 1.7% in the previous quarter. The GAAP operating income increased 21.3% sequentially and decreased 39.9% year-over-year.

The sequential increase was primarily a result of lower RSU expense, offset by the one-time reimbursement from our AR customer in the third quarter. The year-over-year decline was, however, a result of higher operating expenses and lower sales, offset by the one-time inventory write-down in the previous year.

Fourth quarter non-GAAP operating income was $4.5 million, or 2.5% of sales, down from 3.6% for the same period last year and down from 5.2% a quarter ago. The non-GAAP operating income decreased 55.9% sequentially and 38.7% from the same quarter in 2016.

GAAP net income for the fourth quarter was $23.5 million, or 13.7 cents per diluted ADS, compared to $3.7 million, or 2.1 cents per diluted ADS, in the previous quarter and $4.4 million, or 2.6 cents per diluted ADS, a year ago.

The increase was mainly the result of an investment gain of $20.7 million in the fourth quarter as we disposed of a direct investment in September. The transaction was already closed in Q4.

Excluding this one-time gain, GAAP net income for the fourth quarter was $2.8 million, or 1.6 cents per diluted ADS, a decrease of 36.6% year-over-year and 23.6% from the previous quarter. The sequential decline was caused by the non-recurrence of the one-time reimbursement from our AR customer in the third quarter as discussed earlier.

Fourth quarter non-GAAP net income was $23.8 million, or 13.8 cents per diluted ADS, compared to $9.0 million, or 5.2 cents per diluted ADS, in the previous quarter and $4.8 million, or 2.8 cents per diluted ADS, a year ago. Again, the increase was mainly due to the investment gain of $20.7 million in the quarter.

Let’s now have a quick overview of the 2017 full-year financial performance. Revenues totaled $685.2 million in 2017 representing 14.7% decrease over 2016. Revenues from large panel display drivers increased 17.6% year-over-year representing 32.8% of our total revenue as compared to 34% in 2016.

Our large panel driver sales totaled $224.8 million for the year. Small and medium sized driver sales decreased 17.3% year-over-year representing 44.5% of our total revenues as compared to 46% in 2016. Non-driver products decreased 3.6% year-over-year representing 22.7% of our total sales as compared to 20% a year ago.

We like to highlight that our WLO business inflection in the middle of the year, or we become measurement to an anchor customer. Gross margin in 2017 was 24.4%, a 20-basis point increase from 24.2% in 2016. GAAP operating expense were 158.9 million, up 23.8 million or 17.6% compared to last year.

The increase was primarily the result of rising R&D expenses in the areas of 3D sensing, WLO, TDDI and high-end TV as well as the annual merit increases in additional headcount. In addition, NT dollar appreciation against the U.S. dollar caused our salary expense to increase around $3.7 million.

2017 GAAP operating income of 8.2 million represented and 86.2% decrease versus 2016 were lower sales and higher operating expenses. Our GAAP net income for the year was 28 million, or $0.152 per diluted ADS a decline of 45.1% from last year. Non-GAAP net income for 2017 was 34.3 million or $0.199 per diluted ADS down 42.7% year-over-year.

Turning to our balance sheet, we had 148.9 million of cash, cash equivalents and marketable securities as of the end of December 2017, compared to 194.6 million at the same time last year and 151.6 million a quarter ago.

In addition to the cash position, restricted cash was 147 million at the end of the quarter, little changed from 147.2 million in the preceding quarter and up from 138.2 million a year ago. The restricted cash is mainly used to guarantee the company’s short-term loan for the same amount.

We continue to maintain a very strong balance sheet and operate as a debt-free company. Our year-end inventories were 135.2 million, up from 134.1 million a quarter ago, but down from 149.7 million at the same time last year.

Accounts receivable at the end of December 2017 were 187.6 million as compared to 191 million a year ago and 181.7 million last quarter. Days sales outstanding was 100 days, as compared to 87 days a year ago and 98 days at end of the last quarter.

Net cash inflow from operating activities for the fourth quarter was 8.3 million as compared to an inflow of 47.2 million for the same period last year and an outflow of 16.9 million last quarter. Cash inflow from operations in 2017 was $29.4 million as compared to $84.7 million in 2016.

The decrease in operating cash flow is mainly due to lower net profit. Capital expenditures were on track with the plan at $15.7 million in the fourth quarter of 2017, versus $2.2 million a year ago and $10.2 million last quarter.

The fourth quarter CapEx consisted mainly of ongoing payments for the new building’s construction, WLO capacity expansion for certain anchor customer, and another WLO capacity expansion and installation of active alignment capacity to support our 3D sensing business.

Total capital expenditure for the year was $39.8 million versus $7.9 million a year ago. As of December 31, 2017, Himax had 172.1 million ADS outstanding, unchanged from last quarter. On a fully diluted basis, the total ADS outstanding are 172.5 million.

Beginning January 1, 2018, we adopted International Financial Reporting Standards issued by the International Accounting Standard Board to prepare our consolidated financial statements. We don’t expect the transition from U.S. GAAP to IFRS to have any significant impact on our financial results.

The first quarter is traditionally the bottom of the year in terms of sales because it has fewer working days due to Chinese Lunar New Year. We expect the first quarter revenue to decrease around 9% to 14% sequentially, representing a low to mid-single-digit year-over-year growth.

Gross margin is expected to be around 22% depending on our final product mix. The decline in gross margin is mainly caused by anticipated WLO shipments declines in Q1 2018. GAAP loss attributable to shareholders are expected to be in the range of 2 cents to 3 cents per diluted ADS based on 172.5 million outstanding ADS.

I will now turn the call over to Jordan..

Thank you, Jackie. We delivered much improved results in the second half versus the first half last year.

Looking into 2018, our major growth engines will be, for large panel segment, China panel makers’ increase in capacity, for small panel segment, in-cell TDDI for smartphone and driver ICs for automotive applications, and last but not the least for non-driver areas, increasing WLO revenue, and commencement of 3D sensing total solution shipment.

3D sensing will be our biggest long-term growth engine and, for this year, a major contributor to both revenues and profit, consequently creating a more favorable product mix for Himax starting the second half of the year. With that now let me give you some insights behind our guidance and trends that we see developing in our business.

Our large display driver IC business experienced a strong growth momentum in the second half of 2017 as 4K TV penetration was still on the rise globally and China continued to ramp brand new advanced generation LCD fabs.

In fact, BOE has just launched the world’s first Gen 10.5 fab a few weeks ago, while CEC-CHOT’s Gen 8.6 fab and CECPanda’s Gen 8.6+ fab will also go into operation this year. Being a market leader in large display driver IC business, we will benefit from such capacity expansion.

However, the whole market is currently facing a capacity shortage of 8” foundry where vast majority of large panel driver ICs are fabricated. While the growth of our large panel driver business may be limited by the tight 8” foundry capacity during this year, we are starting the early ramp of a newly built 12” fab in China.

Adding the 12” fab into the pool of our foundry capacity will greatly alleviate the shortage issue of our customers. However, the ultimate ramping schedule will depend on how fast our customers can go through their customer qualification, something all its major customers are working very hard on.

For the first quarter, we expect a low-single-digit sequential revenue growth for large display driver ICs. With the 2020 Tokyo Olympics approaching, the ecosystem for super-high-resolution TV is being established, hoping to catch the business opportunity arising from the 8K program broadcast at the event.

At this year’s CES, major TV manufacturers have unveiled their 8K TV with Himax solutions inside. We will continue working with major panel makers for the development of next generation 8K TVs. Turning to the small and medium display driver business.

Our first quarter sales for smartphone are likely to decline by approximately 30% sequentially on product transition, weak market demand and seasonality. We have numerous TDDI design-wins for HD+ and FHD+ projects with top tier names, yet shipment has been hindered by the weak overall smartphone market sentiment.

In spite of the short-term headwinds, the Company we are confident that our TDDI solutions and display driver IC business will accelerate starting the second quarter as smartphone makers begin to replenish inventory for their new product launches in the second half.

On the high side, its new generation FHD+ TDDI with COF or chip on film package is in design-in stage with a number of leading Chinese smartphone brands and panel makers. TDDI with COF package can enable super slim bezel design for premium smartphone models. We expect small volume shipment in the first half with accelerating volume in the second half.

Our driver IC business is also expanding into new areas such as smart home assistant segment. Such activities will help future rebound in sales momentum. On AMOLED product line, the Company we have been collaborating closely with leading panel makers across China for product development.

We believe AMOLED driver ICs will be one of the long-term growth engines for its small panel driver IC business. As to automotive application, we continue to have further design-wins from prior years going into mass production this year. We expect Q1 revenue to grow around 10% sequentially and more than 50% year-over-year.

We have engaged all of the major automotive panel manufacturers worldwide for long-term partnerships and secured many of their key projects pipelined for the next few years. Going into the first quarter, due to seasonality and overall weak smartphone market, we expect small and medium-sized driver IC revenue to be down around 10% sequentially.

Now let me share some of the business progress on our non-driver IC businesses. First, I will touch on our 3D sensing total solution. At present, our total market is primarily the Android based smartphone.

SLiM, our total – our structure light-based 3D sensing total solutions which we announced jointly with Qualcomm last August, brings together Qualcomm’s industry leading 3D algorithm with Himax’s cutting-edge design and manufacturing capabilities in optics and NIR sensors as well as our unique know-how in 3D sensing system integration.

The majority of the key technologies inside the SLiM total solution is developed and supplied by Himax ourselves.

These critical technologies include, on the projector end, DOE and collimator utilizing our world leading WLO technology, a tailor-made laser driver IC, and high precision active alignment for the projector assembly; and on the receiver end, a high efficiency near-infrared CMOS image sensor.

Last but not least, Himax also developed an ASIC by incorporating Qualcomm’s algorithm for 3D depth map generation. The fact that all of these critical components are developed in-house puts us in a unique leading position. It represents a very high barrier of entry for any potential competition and a much higher ASP and profit margin for us.

The Qualcomm/Himax solution is by far the highest quality 3D sensing total solution available for the Android market right now. It has the industry’s best performance in all of the dimension, 3D depth accuracy, indoor/outdoor sensitivity and power consumption.

It passes the toughest eye safety standards with a proprietary glass broken detection mechanism to safeguard the user from any potential harm. Furthermore, we have the only solution to offer face recognition for secure online payment, a must-have feature for high end smartphones of the future.

We are working with multiple tier-1 smartphone makers, aiming to launch 3D sensing on their premium smartphones starting the first half of 2018. Our SLiM solution will be ready for mass production and shipment by the end of the first quarter, 2018 with an initial capacity of 2 million units per month, following some waiting period.

The initial capacity is part of our Phase I expansion of $80 million. We have already achieved pretty satisfactory production yields in our internal pilot production.

Given that SLiM is a highly integrated solution with ASPs much higher than those of individual components, by the time we started making shipment, it will be a major growth contributor to our top and bottom lines.

In an attempt to accelerate the adoption of 3D sensing for Android phones, in addition to SLiM, we’re also working on stereoscopic type 3D sensing as a lower costs alternative.

Unlike SLiM which utilizes structure light to generate 3D, stereoscopic type uses two cameras to replicate 3D vision in nature, augmented by coded light for image depth enhancement.

Both types of solutions offered by Himax operate on active NIR light source with high sensitivity NIR sensors, thus working very well even under extreme brightness or total darkness. For 3D sensing purposes, structure light approach offers better depth precision than stereoscopic type but the cost is also higher.

By introducing stereoscopic 3D sensing, we aim to bring down the cost of 3D sensing so that it can be afforded by mass market smartphone models. We are pleased to report that development of stereoscopic 3D sensing total solution for face recognition and 3D features has been under way.

We are aiming to be mass production and shipment ready by [indiscernible] of this year. Similar to our experience in SLiM, we are working with some of the most prominent ecosystem partners in developing our stereoscopic 3D total solution.

We are very update progress in due course or low costs compared to structure light their stereoscopic 3D was still represent a much higher ASP and better gross margin potential for us.

Last but not least and this year CES many of our customers and partners demonstrated 3D sensing applications in IoT or promoted AR/VR and robotic related products with Himax SLiM inside and received very positive feedback. As I mentioned before, 3D sensing can have a broad range of applications that go beyond smartphone.

We are very excited about the growth prospects it represents and believes 3D sensing will be our biggest long-term growth engine. In the last earnings call, we reported that it we have started mass shipment of a highly customized WLO product to an anchor customer during the third quarter.

The production has been going well as we deliver consistent product quality, production ramp and high yields. Shipment volume to the customer for the fourth quarter accelerated sequentially. However, lower volume in the first quarter of 2018 is expected as per the customer’s demand forecast.

The much-reduced shipment were negatively the impact our Q1 gross margin as lower utilization will lead to much higher equipment depreciation and factory overhead on a per unit basis.

Despite the short-term order adjustment, we expect strong rebound in the second half and are more optimistic than ever about the partnership and growth opportunities we had with the customer.

The R&D projects with the said customer for their future generation products centers around our exceptional design know-how and mass production expertise in WLO technology for optical devices.

Now another major update for WLO business, we recently announced the acquisition of certain advanced nano 3D masters manufacturing assets and related intellectual property and business.

The advanced nano 3D manufacturing masters are primarily used in imprinting or stamping replication process to fabricate devices such as DOE, diffuser, collimator lens and micro lens array. This acquisition demonstrates our commitment and confidence in the long-term growth prospects for WLO and 3D sensing businesses.

Now let me give you an update on the construction of the new building, one of the major CapEx projects for 2017. I’m pleased to report that the construction has been completed on schedule.

The new building, located near our current headquarters, will house additional 8-inch glass WLO capacity and the new active alignment equipment needed for our SLiM 3D sensing solutions. It will also provide extra office space. We’ve started moving in equipment in the past few weeks. Next, our CapEx – capital expenditure.

Let me start with a recap of our current CapEx plan. We announced a CapEx plan of $80 million during 2017, which is on top of our regular CapEx, an unprecedented move in our history, given our fabless nature.

We call this the Phase I capital expenditure, which includes the construction of a new building, an increase of our WLO capacity for the anchor customer I just mentioned and an initial monthly capacity of 2 million units for our SLiM solution. We are now increasing the Phase I budget from $80 million to $105 million.

The addition of $25 million is primarily for enhanced manufacturing automation and CIM infrastructure to achieve higher product yields and better production efficiency, an extra land of 1 hectare and more clean room and office space for future expansion.

Some of these items are not necessarily required immediately, but we decided it is far more economical ----now the future. The Phase I is being executed as scheduled. Of the $105 million budget, $33 million has been paid out in 2017 with the remaining $72 million to be paid in 2018.

We believe a Phase II CapEx will soon be required for additional capacity. The Phase II capacity will still be located in the same new building, using some of the clean rooms and office spaces built during the Phase I. In fact, the new building has sufficient room to house capacity much in excess of the Phase I and Phase II combined.

We’re still gathering customers’ input and finalizing technical details and will formally announce the Phase II expansion as soon as the plan is finalized. As we mentioned in the previous earnings calls, the CapEx budget for both phases of expansion will be funded through our internal resources and banking facilities, if so needed.

Now onto our CMOS Image Sensor business update. We continue to make great progress with our two-machine vision sensor product lines, namely, near infrared or NIR sensor and Always-on-Sensor or something we call AoS. Our NIR sensor is a critical part in our SLiM total solution.

Our NIR sensors’ overall performance, measured primarily by way of quantum efficiency, is far ahead of those of our peers for 3D sensing. We currently offer low noise HD, or 1 megapixel, and 5.5-megapixel NIR sensors and are planning to add more to further enrich our product portfolio.

We’re developing the next generation NIR sensors with quantum efficiency further elevated to the next level. On the AoS product line, we announced the launch of the WiseEye IoT sensors together with Emza and DSP Group, both Isreal-based, in early January.

It is the industry’s first ultra-low power, always-on, fully trainable, AI based machine-vision intelligent visual sensor, adding human presence awareness for consumer appliances and industrial IoT applications.

Emza demonstrated the WiseEye IoT sensors at this year's CES and successfully generated high interest from key market players, including smart buildings and security OEMs and makers of home assistants and home appliances. We expect to kick off some joint product development projects with heavy weight industry leaders in the second half of the year.

Himax now owns 45.1% equity in Emza with an option to acquire the remaining 54.9% and all outstanding options. For the traditional human vision segments, we see strong demands in laptops and increasing shipments for multimedia applications such as car recorders, surveillance, drones, home appliances, and consumer electronics, among others.

I will now give you an update on the LCOS business, one of our main focus areas are AR goggle devices and head-up-displays for automotive and motorcycles. While AR will take a few years to fully realize its market potential, the wealth of announcements at CES 2018 say a lot about the industry's current momentum.

Many companies, be the top name multinationals or new start-ups, are investing heavily to develop the ecosystem applications, software, operating system, system electronics, and optics. With all these investments, we believe the AR goggle market will be back in an accelerating mode again.

In addition to AR goggle applications, we are pleased to report that we continue to make great progress in developing high-end head-up display for automotives. We and our partners together have secured a few design wins with certain big names. Timing and major revenue contribution would be 2019 the earliest.

Our technology leadership in this space has little competition. LCOS represents a significant long-term growth opportunity for us. For non-driver business, we expect sequential revenue decline of around 20% in the first quarter. However, it will still be an increase of close to mid-teens from the same period last year.

In summary, we have seen seasonality and soft smartphone market demand, which will lead to sequential revenue decline in the first quarter. However, the revenue of all three major product categories were increased from the same period last year.

We also expect our gross margin to be under pressure in the first quarter cost by anticipating WLO shipment reduction as per the customers demand forecast. Nevertheless, we believe shipments of TDIC and WOs were favorite in the second half of 2018.

We also expect significant business growth in our 3D sensing business to contribute to post at our bottom-line as early as the second half of this year. That concludes my report for this quarter. Thank you for your interest in Himax, we appreciate you joining today’s call and now we’re ready to take question. .

Thank you. [Operator instructions]. And our first quarter comes from Tom Sepenzis of Northland Capital Markets. Your line is now open. .

Hi and thank you for taking my question. I was wondering if you can give us a little bit more color on the new stereoscopic 3D product in terms of ASP and security.

Will this be usable for payments specifically things like Alipay?.

Thank you, Tom.

The ASP, I think the total solution combined, well firstly I should say I’m assuming the algorithm of the process will be embedded in the AP processor to save cost, okay so with that assumption I am talking about a [fewer cents the optic the license and the entire optics] [ph] The target price for the whole thing I think somewhere around less than $10 I would say.

Although further details on COP were down. As far as the secured network is concerned it's actually a challenging issue. Our goal is to enable secure payment under certain conditions, that’s not without limited payment amount.

Here the of the payment should be state, I think it is still too early to say something we’re still discussing with Alipay and our other partners about.

but the goal is to still enable Alipay, but probably with certain restrictions because the accuracy level of stereotype 3D is still not as good after all but we believe that should be sufficient for most of smartphone users demands. I am talking about small non-payments. .

Good, thank you and then what stops others from creating a similar 3D solution to challenge you here?.

I will not comment on specific competitors or alternatives, I think the way we see the market is developing right now some of the players announcing such solutions I think from point of view is premature. For example, some with solutions with only RGB life capability meaning it will be ruled out for smartphone altogether.

Smartphone business and that all, some we feel are the 3D sensitivity is not good enough, some are focusing primarily on their algorithm IC, I mean there is ASIC require. Our approach, our strategy similar to socialize solution is for small home market to work primarily with SoC players. Right now, we are working with major ones.

I cannot disclose further details. But that’s the difference of our strategy. So, our strategy, we believe even the low-cost requirement and also the fact that all major APs have been pretty experienced in handling your dual camera. Clear algorithm is quite similar to require for active stereo 3D.

So, we feel to save cost and also to take note of the fact that the serial type camera, dual camera has been quite mature in algorithm. So, we should take advantage of the activities that are acquired produce only the optics and sensor solution. So that is our strategy and approach and that’s something we are executing enough. .

And our next question comes from Tristan Gerra of Baird. Your line is now open. .

Could you give us a sense of what we should expect in Q2, understanding that you’re not guiding for that quarter yet.

But in terms of a rebounding in the China's supply chain and whether we should expect further sequential decline [indiscernible] shipments in Q2?.

2Q pretty smartphone, right now, I think in the pipeline inventory level it’s pretty high, not just of 8x9 panels also 6x9 panels [indiscernible] customers are now release, so into [indiscernible] promoting the new 8x9 design.

But I believe for more indications Q1 will be period to digest such inventories, hopefully Q2 will rebound and based on our projection for smartphone Q2 shift rebound by more than 20%, but it's still very early. So, don’t take this on guidance yet. On WLO, I mean for sure Q2 will rebound.

But as far as how much issue will rebound, I should say it will rebound nicely. As to how much effecting we are still discovering with the customer for their final answer. .

And is it fair to assume that the inflection point to TDDI business is related to the rebound whenever the China's [indiscernible] market rebounds and what type of volume should we anticipate at that point?.

I think you should expect rebound quarter-after-quarter [indiscernible] and certainly I mentioned in my prepared remarks, but our shipment in Q1 is in [indiscernible] by the fact that customers are still digesting their all inventories which we are not [indiscernible].

And Q2 hopefully as I said earlier, hopefully the situation will improve, but I just want to emphasize that our design top line with leading names and customers and panel makers, is pretty good actually. So, I think you should expect quarter after quarter of increase starting from the second quarter.

In the second half, our target is to ship a maximum amount of 10 million units and I think it’s fair to say that if we can achieve that this will become a very stable business for us going forward. And now, our focus right now is still on HD+ and full HD+ TDDI solutions. We’re not going to get back to 6x9 solutions..

Thank you. And our next question comes from Jaeson Schmidt of Lake Street. Your line is now open..

Hey, guys, thanks for taking my questions.

Just first of all, wondering if you guys expect any 3D sensing revenue from [indiscernible] OEMs in Q1?.

In Q1, you talk about 3D sensing, right?.

Correct..

Our 3D total solution, right?.

Yeah..

Okay. There will be some more revenues, but not very significant, although we do sell some at the premium to the much potential price, but it's not significant..

Okay.

And then as a follow-up, wondering if you still expect a capacity of 5 million to 6 million units per month for your SLiM by year-end?.

I think so. I do think so. Although we stated that we have to watch very closely, right. I just mentioned, we are working now and we will hopefully soon introduce, formally introduce stereoscopic type 3D. It’s something new and the two are going to complete [indiscernible] for all these reasons.

So, a slight concern, our belief is that starting from premium model front facing 3D solution, then on to the world facing 3D solution and thereafter, platform solutions, okay.

And I explained earlier in our previous calls that our uniqueness – one of our uniqueness is that we do provide a total solution --- all components and how to optimize that and how to fluctuate those in and out.

So that gives us a very unique position in the future tailor-made solutions for customers, if they need they may be want to -- in their unique use cases and they may also even bring in their other algorithms.

We can accommodate all that and in fact, I just mentioned in our CES demos, we are getting quite a few of such inquiries although, our focus today needless to say is still smartphone, we have to bring up smartphone ASAP.

So, if you combine all this together I think 5 million long-term is certainly 4 million, 5 million long-term is very, very possible. Now with that said with that said, our CapEx will be different from active 3D against structural [ph], is efficient [indiscernible] and VOE.

We also need to make pretty heavy investment in active environment to align the optics later. With a lot more seem to be slight telescopic type 3D. The active alignment is probably not anything and also in many cases probably we try to pave the way even the polymetal as only leaving the POE.

So, if you compare the so-called capacity, apples-to-apples basis the CapEx will be different. I think it's still will be different for us as well. Now I think it's still too early to tell exactly how much volume we can expect for each, but capacity expansion for stereoscopic type 3D. I just mentioned we expect to be mass production ready in Q4.

So, I think certain CapEx for that s reason primarily on the VOO, without active alignment. I think you can expect that later in the year. Exactly how much capacity and how much CapEx dollar amount we feel we are not prepared, although we are working very hard to finalize the plan, but have not prepared to announce it yet. .

Thank you. And our next question comes from [indiscernible] of Roth Capital. You line is now open..

Hi Jordan, Hi Jacky.

On the stereoscopic solution Jordan, is the competitive landscape is somewhat different from this SLiM product or is it still a similar competitive landscape for you?.

I think eventually I suspect you will probably be more like probably firstly the potential aspect. The reason why this is lower cost is because it doesn’t have the complicated projector that is required rather in social life you have sensor for the receiving end, in stereoscopic 3D you have two sensors.

So, you imagine in terms of the value of the whole solution, sensor company has more incentives to get than the projector company because projector is minimized, sensor actually needs two times the sensor value. So first of all, I think that we’ve probably encouraged sensor companies to try to get.

Right now, what we are seeing is, they are only part of ecosystem only but they are now leading the charge. My suspicion is they will probably try to play a bigger role in active stereotype 3D. However, what we are seeing is that for most people anyway, they let the 3D algorithm and at the active element of the total solution.

Meaning if you look at the RGB sensor today it is passive, what I mean by passive, it will provide a sensor and the environment provides a light. In the 3D sensing type even for active stereo type, it requires active light meaning you do need to have laser primarily or probably for the very low-end even LED.

But you need a light source and the light source needs to be probably [indiscernible] to enhance the 3D effects. So, you need to combine the light source with [indiscernible] knowhow and combine that and optimize that with the sensor solution. I think that is probably the stuff that the sensors companies feel lack.

And finally, as I said earlier, we are seeing some companies coming from algorithm background trying to be into the gap. And I think what they typically -- many of the first companies actually come to Himax trying to get off the optics sensors.

So, I think the algorithm, of course meaning they trying to put the algorithm in ASIC, as I said earlier to lower the costs probably the better idea that the algorithm is handled by AP. So, in that case, in a way they are competition to the AP platform providers, while we try to be partners of them. So, I think this are the difference.

Although, I think it’s still too early for me to make a whole prediction. .

And then switching to WLO customer here, in 2018 progression would it involve more placements of content per device, would it be more devices.

Is that one of the tailwinds you’d have as the WLO product ramps for the customer?.

I think we are getting into more there different kind of components and different devices. Although obviously I am not supposed to comment too much of the customers activities.

But I think, I reported in the prepared remarks, that we are more excited than ever, because in the past, we handle them one thing for them now, we are handling multiple things for them simultaneously all R&D stage, development stage. .

And our next question comes from Charlie Chan of Morgan Stanley. Your line is now open. .

So, my first question is regarding your foundry supply. I know you’re moving to 12-inch fab in China. But can you explain why, you reduce other fab for example Taiwan or Korea to fix that shortage issue.

And also given roadway for products hike, do we expect your margin cash to decrease because of the shortage?.

The age of all globally is very, very tight. Because I’ll start even that MOSFET which is very, very low value now is very good price for foundry guys and that alone, stuff like fingerprint sensors and power management ICs now are even more and more heavily used in smartphones.

So probably 8-inch capacities that there is no new supply and we are competing against new things and many of them seeing quality and the can actually afford better price than us. And also, I think foundry makers sufficiently have been probably too heavily dependent on driver IC business and actually they want to diversify.

So, I think we are working with 8-inch almost funder guys across Taiwan and Korea. We actually use multiple foundries for multiple suppliers in both countries and so that is point 1. Point 2 is that the 12-inch fab, the new is located actually in [indiscernible] province.

It's actually located right exactly as I said site, it’s the measurement which is in place of our major customers. So, I think logistically and also in terms of development support it is actually quite beneficial for us.

Now we will be able to get pretty decent price support from the 12-inch fad and lastly you talk about whether you know because of the tight foundry supply our margin gets squeezed. I think in some cases we do face pricing pressure from our foundry partners. But we are also in discussion with our customers for certain price increase.

So, all this are being discussed, so I think overall, we don’t expect our margin to be eroded as a direct result of the 8-inch foundry type of business. What we are more worried is about customers qualification of our foundry because for TVs and in this case, we’re talking primarily about the last panel, and last panel is primarily about TV.

So, in TV our customers do need to go through their customers qualification. Now everybody, the end users included, understand the severity of the foundry tightness. So, I think it is not like people don’t want to do it but they do have to go through the procedure which is almost a hassle.

So I said in our prepared remarks that our customers all being very hard on the qualification and as far as we are concerned, we have successfully qualified the new 12-inch foundry and the customer has accepted our result and we will actually, we are starting to rent some volume but whether the volume will really rent big enough to totally alleviate our problems and when that will happen I think it’s probably yet to be further reported..

Okay, thank you. So, my next question is, your full year outlook. I know you can already quantify the [indiscernible] gross will be, but I think the key growth driver which is the [indiscernible] can you give us some sense about the potential revenue contribution or the revenue mix from the anchor customers versus those entry [ph] customers.

Can you give us some breakdown?.

For the whole year, again, it’s too early business too dynamic.

But I think market is [cellphone] [ph] stable, I think it’s fair to say that [cellphone] [ph] market will be stable trade market overall will be stable in terms of demand and supply balance, some are slightly above oversupply because of China’s expansion, but we will actually be -- we will actually benefit from China’s expansion because we have a major market share in China.

So, in large panel in particular, I think China expansion will benefit us. Although it may cause a little bit of slight oversupply for the whole large panel business. And in small panel, I think we have to count TDDI and I commented on TDDI already, automotive and stuff will continue to grow. The big variable will be on driver, harder to predict.

One thing we are certain WLO will increase because last year we only had half a year of operation, this year will be whole year, although Q1 was very, very low, Q1 was slow, but I mentioned earlier, second half is expected to be strong, followed by a rebound of second quarter as well.

So, for the full-year basis, I think WLO will be pretty safe, will have major growth from last year. And last but not least, it’s big variable which is 3D sensing, we said, the [indiscernible] will start to ramp in the second half.

I think it's something we’re discussing with our customer almost every day, right, exactly how much and how and I think to be fair, they are still trying to test the water of face recognition, face ID, secure payment, online payment and all of that, right.

So, I would say they will start with premium model, coupled with Qualcomm’s 845 Snapdragon and 845. Thereafter, we tried to penetrate to Qualcomm’s 600 series and there will be such an overlap between Social Eye [ph] and stereoscopic type 3D, right.

So, we’ll see about that, but I think this year particularly is very, very difficult for us for full-year protection, even if there was 3D stereo is, we say Q4 mass production, grading and some customers are actually very anxious, so much protection as early as possible, but we’ll see about that, still long way to go..

Thank you. [Operator Instructions] And our next question comes from Jerry Su of Credit Suisse. Your line is now open..

Probably the first question, I just want to follow-up on what Charlie has asked, about the 3D sensing, I think if you look at the full-year contribution and then potentially your customer is ramping up more models with this 3D and then enjoy opportunity.

So, if we look at the non-driver business for the second half of this year, do you think this non-driver right now is about 20% plus or minus of the total sales, can this percentage for the increase or maybe become the largest segment for your business into the second half of this year?.

Second half I don’t know, but I think next year very likely you’ll be second half as I said, solidly staged, you know how much customer want to ramp in their premium model and so how the consumers were responsible, I think it’s really too early to tell.

What all we can do is get ourselves ready but I think with structural [ph] and we have a role mix next year there will be new products launched and then you have stereoscopic 3D which is more at this small cost friendly and all these factors combine.

I think I have a fair degree of confidence that next year 3D sensing will be the biggest piece of our business. And I think I just want to mention, advertise one thing, if you look at I know there are certain alternatives structuralized 3D sensing available in the market and we keep saying that our solution is far better.

I think it is very, very important for you guys to understand this because if you look from all measures, whether its performance, it is [indiscernible] it is the features, you know it is support the AP platform even IP protection. You know all of them we are in all every single measure, we are superior and probably superior right far.

So, I think again 3D sensing, we believe is a very long-term negative, many things will require 3D sensing not just smartphone, not just for Face ID, face recognition to unlock your face. There will be many other things AR and main camera and so on.

So, we are here for a long time so what we are most concerned about is how we are and how are our solution compared to others and I think it is -- I have full confidence in saying that our solution is indeed far better than any of the potential competition in all measures of comparison.

And I think that will put us in a very unique position in the long-term. In fact, some of the biggest tech names in the world are already coming to us for non-smartphone acquisitions.

So, or job is to start the right this year and hopefully make some profit, without profit invest into further expansion and expand the portfolio to provide further coverage for 3D sensing. But I think we are here for a long period of 3D sensing that’s for sure..

Okay, thank you. And just to clarify when you say that the second half this year, you are not sure if 3D can become the largest segment, does this include optics and also may be the other non-driver business. .

No, we are not called the available optics. .

But that’s for sure a 3D total solution?.

Yes, it is 3D sensing total solution, And as I said, Himax design-ins the customers have -- may have already indicated their intended volume, but this is really the pilot production, right, the customer will be pioneering the effort, and how we have to adjust our strategy and product and performance and whatever to answer to customers demand, I think you all yet to be seen.

So, I think to predict the volume for second half will be too early. However, there’s no reason for us to believe that in the second half we cannot start mass production because our solution is ready, the customers I think are ready and, we just have to see about that..

Thank you. And that concludes our question-and-answer session for today. I would like to turn the conference back over to management for any closing remarks..

Okay. Thank you for your questions and as a final note, Jackie, our CFO will maintain investor marketing activities and continue to attend investor conferences. So, we will announce the details as they come about. Thank you and have a nice day and happy Chinese New Year. Thank you..

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