Hello, ladies and gentlemen. Welcome to the Himax Technologies Incorporated Fourth Quarter 2020 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. As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Mark Schwalenberg from MZ Group. Please go ahead..

Welcome everyone to Himax's fourth quarter 2020 earnings call. Joining us from the company today are Mr. Jordan Wu, President and Chief Executive Officer; Ms. Jessica Pan, Chief Financial Officer; and Mr. Eric Li, Chief IR/PR Officer. After the company's prepared remarks, we have allocated time for questions in a Q&A session.

If you have not yet received a copy of today's results, please e-mail HIMX@mzgroup.us. Access the press release on financial portals or download a copy from Himax's website at www.himax.com.tw.

Before we begin formal remarks, I'd like to remind everyone that some of the statements in this conference call, including statements regarding expected future financial results and industry growth are forward-looking statements that involve a number of risks and uncertainties that could cause actual events or results to differ materially from those described in this conference call.

Factors that could cause actual results or events to differ materially from these 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 and 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 and its Form 20-F for the year ended December 31, 2019 filed with the SEC in March 2020.

Except for the company's full year of 2019 financials, which were provided in the company's 20-F and filed with the SEC on March 25, 2020, the financial information included in this conference call is unaudited and consolidated and prepared in accordance with IFRS accounting.

Such financial information is generated internally and has not been subjected to the same review and scrutiny, including internal auditing procedures and external audits by an independent auditor, to which we subject our annual consolidated financial statements and may vary materially from the audited consolidated financial information for the same period.

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

favorable product mix and industry capacity shortage. The growth of higher margin products, notably tablet TDDI, Tcon and automotive drivers, outpaced that of other product categories during the quarter, thereby enhancing our corporate gross margin.

The leap of gross margin for the fourth quarter also reflected strong overall demands and better product pricing on rising material costs across foundry, assembly and testing, all undergoing severe capacity shortage. Not meeting all demands, we were able to allocate the limited capacity to the products with better margins.

Our IFRS operating expenses were $43.8 million in the fourth quarter, down 0.8% from the preceding quarter, but up 17% from a year ago.

The sequential decrease was caused by negative difference in RSU expenses, offset by increased cash bonus, as we reported in the last earnings call, to further reward employees for the better-than-expected financial results, and higher R&D expenses.

The year-over-year increase was a result of increased salary and cash bonus along with higher R&D expenses. Despite a year-over-year increase in operating expenses, the operating expense ratio was reduced from 21.4% in Q4 2019 to 15.9% in Q4 2020, reflecting our careful management over operating expenses.

Non-IFRS operating expenses for the fourth quarter were $43.5 million, up 11.8% from the previous quarter and up 18.1% from the same quarter in 2019.

Reflecting higher sales and better gross margin, IFRS operating profit was $42.2 million for the fourth quarter with operating margin of 15.3%, up from 3.9% in prior quarter and up from minus 0.8% in the same period last year.

Fourth quarter non-IFRS operating profit was $42.5 million, or 15.4% of sales, higher from $14.7 million, or 6.1% of sales last quarter and up from minus 0.4% from the same period last year.

IFRS profit for the fourth quarter was $34 million, or $0.195 per diluted ADS, compared to $8.5 million, or $0.049 per diluted ADS in previous quarter and $1 million, or $0.006 per diluted ADS, a year ago.

Fourth quarter non-IFRS profit was $34.2 million, or $0.197 per diluted ADS, compared to non-IFRS profit of $12.6 million, or $0.073 per diluted ADS last quarter and non-IFRS profit of $1.5 million, or $0.009 per diluted ADS for the same period last year. Now, let's have a quick overview on 2020 full year financial performance.

Revenue totaled $887.3 million in 2020, a 32.1% growth over 2019. In the first half of the year, COVID-19 and U.S. sanctions on China brought turbulence to the market. However, our business rebounded strongly throughout the second half with fresh demands brought by the new stay-at-home economy.

Among our 3 major product categories, small- and medium-sized display drivers posted the highest growth of 67.7% year-over-year in 2020 with sales totaling $515.7 million. As leading Android tablet brands all adopted our TDDI solutions and global smartphone sales rebounded, we saw extraordinary business momentum for both product areas in 2020.

Revenue from large panel display drivers totaled $240.8 million in 2020, a mild increase of 1.5% year-over-year. During the pandemic, the surge in IT demand boosted our sales of monitor display drivers up by high teens and notebook display drivers up around 60% respectively.

TV sales, however, declined by high-single-digit year-over-year due to weakness in global TV market which was negatively impacted by COVID-19 outbreak. Non-driver product sales totaled $130.8 million, an increase of 2.9% year-over-year.

The year-over-year increase was mainly from Tcon amidst the growing need for high frame rate and high-resolution displays, and CIS due to the continuous strong demand in notebook and web camera for work-from-home and online education. This increase was offset by WLO, as the legacy product of an anchor customer gradually decreased.

Gross margin in 2020 was 24.9%, up from 20.5% in 2019. The year-over-year improvement was mainly due to strong sales in the second half and a more favorable product mix. As previously mentioned, robust demand pushed foundry capacity constraints to a more severe level which in turn enabled better pricing.

IFRS operating expenses were $162.9 million, up $6.6 million, or 4.2%, compared to last year. The increase came from higher expenses in share-based compensation, cash bonus, R&D expenses as well as salary, but offset by lower travelling fees. Notably, the stronger NT dollar against the U.S.

dollar in 2020 contributed to around $3.9 million of operating expenses increase because, while our accounting was U.S. dollar denominated, we paid the bulk of our employee salaries as well as much of our Taiwan locally incurred expenses in NT dollar.

However, the operating expense ratio of 2020 was reduced to 18.4% from 23.2% in 2019, indicating our consistent management of operating expenses. IFRS operating income was $57.9 million, in contrast to a loss of $18.3 million from 2019, due to higher sales and higher gross margin.

For the same reason non-IFRS operating income was [$64.4 million] [sic] $64.6 million, an increase of $80.9 million from a loss of $16.3 million in 2019. Our IFRS profit for the year was $47.1 million, or $0.272, versus a loss of $13.6 million or $0.079 per diluted ADS.

Non-IFRS profit for 2020 was $52.3 million, or $0.302 per diluted ADS, up $64.4 million year-over-year from a loss of $12.1 million last year. The upswing in income was a result of better sales and higher gross margin along with well-managed operating expenses. Turning to the balance sheet.

We had $201.4 million of cash, cash equivalents and other financial assets as of December 31, 2020, compared to $112.1 million at the same time last year and $142.9 million a quarter ago. The higher cash balance was mainly a result of an operating cash inflow of $67.7 million during the quarter.

Restricted cash was $104 million at the end of Q4, the same as the preceding quarter, compared to $164 million a year ago. The restricted cash was used to guarantee the short-term secured borrowings for the same amount. We had $58.5 million of long-term unsecured loans as of the end of Q4, of which $6 million was current portion.

Our year-end inventories as of December 31, 2020 were $108.7 million, down from $125.7 million last quarter and $143.8 million a year ago. Accounts receivable at the end of December 2020 was $243.6 million, up from $221.1 million last quarter and up from $164.9 million a year ago.

DSO was 100 days at the year end, as compared to 90 days a year ago and 99 days at the end of the last quarter. As highlighted in the last earnings calls, given the foundry and backend capacity shortage, our inventory level will stay at a relative low level in the quarters to come.

Net cash inflow from operating activities for the fourth quarter was $67.7 million as compared to an inflow of $33.5 million last quarter and an inflow of $23.4 million for the same period last year. Cash inflow from operations in 2020 was $102.6 million as compared to $7.7 million in 2019.

Fourth quarter capital expenditures amounted to $0.8 million, versus $1.2 million last quarter and $2.7 million a year ago. The fourth quarter CapEx was for R&D related equipment. Total capital expenditure for the year was $5.8 million, mainly for design tools and R&D related equipment.

In comparison, the CapEx for 2019 was $45.9 million, of which the vast majority was for the purchase of land, the construction of a new building and WLO capacity expansion. As of December 31, 2020, Himax had 173.8 million ADS outstanding, little changed from last quarter. On a fully diluted basis, the total number of ADS outstanding is 174.1 million.

Now turning to our first quarter 2021 guidance. For the first quarter, we expect further revenue growth from the already high level of Q4 2020 in most of our business sectors. Gross margin shall see another uptick and could reach another quarterly high. For the first quarter, we expect revenue to increase by 5% to 10% sequentially.

Gross margin is expected to be 37% to 38% depending on the final product mix. With increase of both revenue and margin, net income shall increase substantially in the first quarter. IFRS profit attributable to shareholders is expected to be in the range of around $0.30 to $0.34 per fully diluted ADS.

Non-IFRS profit attributable to shareholders is expected to be in the range of $0.301 to $0.341 per fully diluted ADS. Revenues, gross margin and EPS will all likely reach quarterly highs during this quarter. With that, I will now turn the call over to Jordan. Jordan, the floor is yours..

total solution and discrete component. For total solution, we are currently aiming at notebook, TV and air conditioner applications, and have received positive feedbacks. We expect to start a solid production ramp-up by the end of 2021.

With joint efforts with our subsidiary EMZA and other algorithm partners, further engagements are on the way for more applications such as doorbell, door-lock, automotive and various IoT devices for industrial and commercial uses. We are thrilled about the business progress achieved.

For the other business model, where we provide key components, as reported earlier, our WE-I Plus AI processor adopted Google TensorFlow Lite for Microcontrollers framework and has successfully demonstrated our unrivaled computing capability with ultralow power.

In December 2020, we partnered with SparkFun, an online retail store, to distribute Himax WE-I Plus Edge AI evaluation board and AoS sensor modules. Developers can now access our technologies easily from SparkFun and transform their AI-enabling concept, which call for ultralow power and computer vision AI into real products.

Furthermore, we teamed up with Edge Impulse, who provides a leading end-to-end AI developer platform, offering intuitive user interface. On Edge Impulse platform, with a single button press and within seconds, developers can now generate the latest neural network AI model and export it directly onto the WE-I Plus evaluation board.

The high technical obstacles developers usually face can therefore be dramatically lowered. Together with our partners, we are carrying out the wide range of promotional activities to broaden WiseEye's market reach and establish direct contacts with more AI developers.

As an illustration, recently Himax and Edge Impulse jointly hosted a webinar discussing ways to help developers get started with the world's most powerful platform that aims enabling embedded machine learning everywhere at extremely low-power consumption. We will continue to aggressively pursue such online marketing campaigns going forward.

We believe the WiseEye offerings will start contributing to our top and bottom lines later this year. We aim to make it a major contributor to our long-term business growth. Now, turning to our CMOS image sensor business update.

We see continuous surging demand for CMOS image sensors for web camera and notebook as the new norm of virtual conferences shows no signs of receding. However, our actual shipment has been badly capped by the foundry capacity available to us.

Separately, our industry-first 2-in-1 CMOS image sensor that supports RGB mode for video conferencing and ultralow power AI mode for facial recognition has penetrated the laptop market for the most stylish super-slim bezel designs. We have shipped small quantity in the fourth quarter and expect to ship more during 2021.

Regarding ultralow power always-on CMOS image sensor which targets in-battery powered or always-on applications, we are getting promising feedback and design adoptions from customers in various markets, such as car recorders, surveillance, smart electric meters, drones, home appliances and consumer electronics.

In Q1, the CIS revenue is expected to be up mid-single-digit sequentially, although we still cannot fulfill all the demand due to foundry capacity constraint. For non-driver IC business, we expect revenues to increase by low teens sequentially in the first quarter. That concludes my report for this quarter. Thank you for your interest in Himax.

We appreciate you joining today's call. And we are now ready to take questions..

And are we ready to take questions at this time?.

Yes..

[Operator Instructions] Your first question comes from the line of Jerry Su with Credit Suisse..

Hi, Jordan and Eric. Thank you for taking my question and congratulations on the good results. I think the first question is surrounding the industry-wide capacity constraint.

Can you give us a little bit more color about what is your fulfillment rate right now? And then, I think for - in the next couple of quarters, do you think that the supply constraint can be eased for industry or for Himax? And how should we think about the pricing environment for the upcoming quarters? Thank you..

Thank you, Jerry. Honestly, I rather not give specifics on our so-called fulfill rate, because I guess our customers will be watching and trying to compare their fulfilling rate against our average. So that is kind of a sensitive topic. But I can tell you, it's not very high.

Although I have to say, sometimes you wonder if whether 100% of those demands are real demands, whether they are customers inflating their demands because of the shortage, right? And so, I mean, obviously, we try to screen them out. We try to support those demands with solid foundation. But we certainly have some doubts about some of the demands.

As far as whether the situation will ease during the year, I think our view is that the industry-wide capacity shortage is going to last at least till the end of this year. Obviously, I'm not an economist, and I cannot really predict how the economy is going to evolve. During this year, with the pandemic and also the vaccination.

So I'm putting that, I'm setting that aside, and I'm assuming we're not going to see a very strong rebound during this year.

And even with that assumption, I think the capacity constraint is likely to persist for the simple reason that mature technology simply we are not seeing any meaningful increase in capacity, while there are just a ton of new applications queuing up to consume more of those capacities.

And we are - I mean, our display driver IC, which always requires high output voltage, and i.e., we have to use mature technology. So, we are certainly one of the major users of those capacity and from our driver ICs' point of view, certainly we are not seeing any sign of the capacity constraint receded anytime soon, certainly not within this year.

Having said that though, I think I have kind of touched base briefly on my prepared remarks. I think we are - I can say we are happy, but I think we are well prepared for the capacity of this year. And for that, I'm comparing our expected output, meaning capacity available to us, over to us, right, by our - the various foundry partners.

So I'm comparing those numbers on quarterly basis to the number of last quarter, meaning Q4 of last year, when we reached our peak output, as we all know, right? So I'm comparing our - this year's quarterly output, expecting quarterly output to the highest output of last year.

And even with the comparison, I think we expect to see increases from Q4 last year and we expect to have quarter-by-quarter increase during this year. And very notably, I want to emphasize our stronghold, in particular, is in automotive display driver IC, where we believe we are the world market leader.

We have the number one market share and the pressure is the highest, obviously as a result. But also that is an area we have secured the most meaningful capacity increase compared to last year.

So that's very good news for us, for our customers, including low-end customers, who very often has established direct dialogues with us, to get a better feel about the capacity increase. And not just that, we believe we have a good roadmap for next year as well, meaning the capacity you have continue to increase from that of this year.

So I think that is very good news for us. That kind of ensures our continuous revenue growth for this year. And I can say pretty much the same for all other major product areas.

Only that I can say, automotive display IC for Himax in particular, we have secured the most meaningful increase on capacity, and probably with the highest degree of certainty as well. So that's something I wish to highlight. So I'm sorry, I didn't exactly answer your question directly.

But I hope I do try to give a good overall situation color of the capacity situation for Himax right now..

Okay, that's great. Thank you. And then, in terms of pricing, how should we think about the pricing going forward? And then, I think you guided gross margin to improve to 37%, 38%, which is about 6, 7 percentage point increase.

How much of that is coming from ASP increase?.

It's hard - well, firstly, it's confidential. And secondly, it's really hard to compare, because you have to knock down the cost increase as well. I mean, bear in mind cost overall increase rather significantly, as you guys all know.

So, without tracing directly, without giving you directly this number, I can share with you, how - why the margin improvement and how the margin outlook is going to be like going forward at least this year, right? So, firstly, in capacity constraint and that certainly means better pricing position for us, right? Meaning, we can very often transfer the cost increase to customers and a bit more.

And, we talk about better product mix as well. And I want to probably elaborate a little bit on that, what do we mean by better product mix. It actually comes from several perspectives.

Firstly, obviously, when you're facing shortage, you have a tendency to allocate more of your output to higher margin products to make more money, right, that's very obvious. So that's the first most obvious point.

And secondly, for similar reason, we also have a tendency, our customers as well, when our total capacity is capped, we want to produce more higher-end products. And that applies to TV, monitor, notebook, smartphone, tablet, automotive, everything, right? And I think, I mean, Himax been the industry leader and our customer recognize that.

So when our capacity is capped, they want us to focus more on those higher-end products, while they're probably leaving those low-end products to some of our lesser competitors. So that typically means better profit and better ASP for us. And thirdly, a few sectors which is already happening, which happens to enjoy better margin historically.

They are growing our other businesses. And that on a weighted average - certainly, on weighted average basis, certainly, enhance our gross margin. So I'm talking about automotive, driver IC for one, that's very obvious, tablet TDDI and timing controller, higher-end timing controller.

And automotive, I think there is - if you ask me across all different industries we are in, I will say, the sector with the highest confidence level for growth this year, I would say, it'll be the automotive, which is said to enjoy a good rebound from the very low of last year. So that is going to outgrow our other businesses, very likely.

And it happens to enjoy the best margin from our products. Tablet TDDI as well. Now, tablet, for the tablet we enjoy growth this year is a big question mark, the pandemic and so on, right? I don't know. But I think, for us, it's about TDDI penetration to tablet market, right? So last year, our estimate is TDDI penetration is about 20% last year.

And this year it's said to grow to about 30%.

So with the same number of total units for the market you're talking about 50% growth for TDDI and that benefits us tremendously, because we are the dominant TDDI provider for tablets in Android market, especially more of those TDDI tablets will start to offer active stylus, which is to represent even more margin for us, right? Now higher-end timing controller, I'm talking about automotive, notebook, TV, certainly - and, gaming monitor and so on, right.

Again, Tcon is suffering big time from IC packaging shortage. So, for that, again, both customers and us are better off allocating our limited resources to higher-end products. Right, so I think for those reasons, I feel pretty good about our gross margin prospect for this year.

Longer term, I do warn you guys to focus on our - certain of our non-driver-IC-products, notably WiseEye, I think is really promising. I'm personally extremely excited about the progress we are making. We have our mass-production-ready sample out only in last September.

And look at the engagement, the degree of engagement, the activities we already have. I have talked a lot about that in my prepared remarks. So I don't want to repeat that. But it's very exciting, so again, the important thing is we feel the mass production will commence towards the end of this year.

And after that, I believe is a very long tail, low high-energy barrier, high margin high ASP products, where we are going to play a very unique role in terms of providing such AI for devices with ultralow power. So I think that is something I feel very good about enhancing our long-term gross margin overall.

So I hope that kind of addresses your questions pretty thoroughly..

Yes. Okay. Thank you. Thank you, Jordan..

Thank you, Jerry..

[Operator Instructions] Your next question comes from the line of Tristan Gerra with Baird..

Hi, good evening. Just following up on the prior questions about gross margin, clearly helped by mix and the supply constraint, how should we look at the potential timing of peak? Some companies have talked about supply coming back in the second half of this calendar year, which presumably would alleviate a little bit the constraint.

There's also the potential at some point for automotive to slow down, given that there is probably some amount of double ordering, given that the tightness currently in the market. So when I'm trying to get a sense is, when do you think even as supply continues to be constrained? It actually gets less constrained than it is now.

And when do you think supply will eventually catch up in automotive, meaning that you're starting to see a bit of a normalization of supply demand? Is there a way to assess whether that's something that may happen in the second half of this year? Or what timing do you have in mind potentially?.

I think, my visibility is different for different product segments.

And again, I just want to carry on with my previous answer to Jerry's question, the highest degree of confidence for me, will be automotive sector, in which I think there's no sign of receding, and in fact, customers back by the end customers, or panel customers back by tier-1s, which are picked by end customers.

They are prepared to place orders from orders, non-cancelable orders way beyond the year end. And now, rather than worry about double ordering, or demand disappearing. I mean, our worry is more on how do we make our shipments in order for the production line not to be suspended. It's pretty serious, honestly, pretty serious.

We are talking about - because we don't want single driver IC that cannot ship a cup, because they will have no critical display, right. So for that, I think the visibility is very, very low.

And we actually are - we are going through different schemes with different customers and our foundry partners, many of which are with contractual arrangements to secure that throughout the ecosystem.

We know what we are doing in our customers, what they're doing and we can just focus on making more outputs and securing more capacities and making sure their production is not suspended.

So for automotive, I honestly, I don't worry a bit, but it's certainly harder to say, for example, the IT demand, people are talking about the stay-at-home economy and all that right. So I don't have a crystal ball, I don't know, how that demand is going to evolve with the vaccination and the COVID-19 situation and all that.

So what we do is, again, we follow the customer's production orders extremely closely. And one thing, our particular interest is that throughout different sectors, we are now having a much closer business and certainly shipment related discussions directly with end customer.

Typically our direct customers are panel makers, right, who in different industry various but they are not the end customers.

But now, there is notebook or TV or automotive or cell phone or otherwise, we have very direct frequent dialogues with leading end customers in their respective sector, and for that our visibility certainly gets improved, right. And sometimes you'll see the end customer stepping in to secure capacity and, self-education decisions.

For example, certain of our ICs should be shipped to panel maker A rather than panel maker B, and so on, right. So we start - I think, again, we don't have a crystal ball, we just have to work very hard and make sure we are as close as possible to the end customers.

And through end customers and through our direct customers, we will get to have a visibility about the backlog, the inventory level, the production status, even the demand status and all that, right. So we just have to watch very, very closely. But as far as we can tell right now, at this display driver IC is concerned. They're 3D.

We've not seen any signs of the constraint receded. Because, again, I mean the demand is very strong across different sectors, but there's simply no meaningful capacity increase in the industry..

Okay. That's great color. Thanks for that. And then from a follow-up, a few years ago, you obviously had traction with some early but leading AR device and providers with very high content.

You also talked about, and that was maybe up to a year ago about opportunities in holographic displays, given the potential for Apple to launch AR devices by next year, which presumably would trigger, a lot of companies to basically have similar devices over time.

How do you feel your position? What type of initial engagement you think you have in both AR and holographic displays? And what's the potential timing and that's leveraging on both [wider on lens] [ph] technology and also your LCOS technology?.

Well, thank you for the question, Tristan. A few years back, we talk about that a lot, because there were real major customers and real products. And unfortunately, the launch of those products and the business results is unfolding very well, as we all know, right.

And certainly, we continue to play a critical role in terms of providing the micro-display and related optics for AR/VR gadgets, in particular AR, which requires these true feature rather than VR. With VR, your eyesight is blocked by the image, but we say ICs through. So when you see through our technology is needed.

So I can say with a good degree of confidence that if this happened in the industry does pick up again - pick up momentum, again, we are going to play a role.

But I don't want to be overly optimistic about this, because I think to be honest, I still see lots of both technical and business barriers ahead of us, for the AR goggles to become a real affordable and a real form product for people, in general to want to own.

And certainly people are talking about Apple and I don't want to comment our customers whenever the other says in Apple. And so we'll see, but, I mean, certainly you are right, if Apple does launch something successfully, and then other people will follow certainly. But again, I can't comment in the specifics on any specific customers.

But I think I want to give a warning that we are not too optimistic about it being the insider in the marketplace. Again, I've seen steel barriers both technically and technically been how to lower the price substantially. I mean, the lessons of the previous products are, they're just way too expensive, right.

It's a way beyond anybody's - any usual consumer's affordability. And they are switching then that into industrial use, which means very low volume price. So for a company a large scale, it is not something, it cannot be something very meaningful, right.

So the challenge is, how do you create the kind of image the size, the color, the power consumption, the processing power and so on, right, the kind of image that involves not just a metadata, but also a lot about optics.

How do you create that kind of image that average consumer will find attractive, and yet you have to 3D substantially reduce the price? And if you can achieve that, then the next barrier is how do you create enough content, attractive content. So I think - 2 years, I think is overly optimistic, to be honest.

But again, we remain to be a key player, people do come to us feel, we still engaging with customers for our projects. But we are just - we don't want to overspend on those - over investment and overspend on that sector until we feel we have a good relationship already and we just have to hand it down and wait for it to happen.

And a lot of things is really beyond our control, we are just the display, panel display, and optics provider. We can't really cover the whole application and total costs and all that kind of issues..

Great. Well, thanks for the color. Very much appreciate it..

Thank you, Tristan..

Your next question comes from the line of Donnie Teng with Nomura Securities..

Hello, good evening, CEO and Eric. Congratulations on the results. I think I have 2 quick questions. So the first one is that I think people are talking about how tight the capacity will be, and when will it be likely to be used.

But in the reality, for example, if we break it down to like 8-inch or 12-inch capacity by different products, which one you think is most likely to be used in the future? For example, it's considering the node migration, as well as the capacity expansion return, what kind of products you think that will be most likely to be used in the future and which one will be the most difficult to be used? So this is the first question..

Okay, Donnie. It's not an easy question. It's a good question.

But it's not easy to answer, because I mean, other than automotive which will have makes, and I guess, for the entire industry as well, I'm talking about display driver IC, right, and automotive, which is still strictly exclusively on age for those are either totally 12-inch or combination of 8 plus 12 inches.

Now, with automotive, we are moving into TDDI, in which we are the industry lead pioneer leader at the moment, good momentum expected for the next few years. TDDI automotive will be 12-inch as well. So now, so if we - and then 8-inch for automotive, I mentioned earlier.

8-inch is surely tight, but because of our earlier engagement earlier, both engineering and business preparations, we have been able to secure good capacity increase, although is 8-inch, which is super tight. So we all understand. And for 12-inch, if you talk about a 12-inch for Himax, I guess for industry as well.

For smartphone and tablet TDDI, it's all 12-inch, because you required a lot of logic processes, right. And in certain cases memory as well. So you do need the 12-inch more advanced nodes.

For large panel, though, it is a combination of 8-inch and 12 inch, and large panel has to move to 12-inch primarily, because of capacity constraint of 8-inch, right, and that has started to take place a few years back. So it's not like industry is starting to do this because of this capacity constraints now.

A few years ago, the whole industry, Himax certainly is one of the pioneers has been moving very aggressively into 12-inch as a way to alleviate the capacity issue of 8-inch for large display drivers. So, then when we move to 12-inch, we typically represent the most mature process of 12-inch for large panel, right, for example.

So we are talking about 110-nanometer, as a mainstream, as an example, for smartphone and tablet TDDI is now moving from 80-nanometer to 55 to 40 nanometers. Certainly there are technology reasons as well, but it's mainly to enlarge capacity. Now, as we move into different new nodes, we are competing against a new set of other applications, right.

So for example, AMOLED for smartphone is going to be the next big thing for our display driver IC, AMOLED is now the mainstream and the mass production is 40-nanometer. But people has included are moving to 28. So with 28, where we're competing with a different set of other applications, right.

So I think is kind of difficult to answer in a sense that we - if 28 is extremely tight, which is not the case, I've just seen, as an example, if 28 is extremely tight. They were probably then move on for the spectrum for be a bit more or vice versa, right.

If 40 is super tight, while 28 appears to have more accessible capacity, then people move more aggressively into 28. Driver IC is a big consuming product - capacity consuming product for semiconductors. So our move does make a difference in terms of the tightness level of different technology knows.

But are both, it's also reactionary, because when somebody is very tight, where they tend to move as well, right. So I think it's - but as far as I can see, I mean, even 28 right now is very, very tight.

So you tell me which node is not tight, right? And people are talking about automotive, and see you for example, 40 or 50 nanometer logic process, they are so occupied, so occupied by automotive right now. And, I don't blame - I can't really blame them, but why don't you people out, they claim they are given more priority to those applications.

So, 80 to 55, 40 and then 28, the 3 little sign of loosening in capacity situation, I mean, in my mind, But certainly, I mean, my comment, my response may change next quarter, I just have to watch the industry situation very closely.

But the benefit of our preparation is that we tend to have products crossing different boundaries, even different geometries, different technology knows, just to hedge our bets, right. So we will be able to move with certain degree of visibility..

So, just a quick follow-up, before I asked the second question.

Are we able to quantify how much sales that we have right now is from 8-inch and how much is from 12-inch?.

I don't have the number in front of me, but certainly our 12-inch is much, much larger than 8-inch right now. I mean, again, other than automotive, which is probably still right now about 15% or less of our total revenue, although is outgrowing - is probably outgrowing the rest. So, that is totally 8-inch, and southern portion of large panel.

And large panel represents - large panel in total 30% plus of our total sales, right. And a portion of that is 12-inch. And some other portion is 8-inch. So 8-inch is now relatively small for us. And, small panel they are almost exclusively 12-inch other than automotive, right. I'm talking about tablet and smartphone.

And that is combined more than 50% of our sales already and then you have timing controller and all others. They are all 12-inch as well..

Okay. Got it. And second question is on automotive display driver business. As you mentioned, about that, you have secured quite a meaningful capacity already. I think from - at this time point, I would say it's very impressive, because last year large order automotive then conducted companies that pushed all the capacity in the second half last year.

So it looks like making a decision at this time point.

So could you elaborate more on what kind of trends you are seeing on automotive display driver IC? As you just mentioned the value is migrating to TDDI or if you can give us more color on how structural the growth will be or like how much volume you will grow in every call in terms of the bigger screen size or even a combination of different kind of display inside of the car? Thank you..

Very good question. Firstly, indeed, in the first half of last year, our customers are actually cutting back their orders and forecast. And I remember, we are all showing, and we are going around telling everybody, our tier 1, including even some end-customers, across Europe and U.S.

that don't overdo that, because, guess what, you're going to be in such shortage that you're going to kill to get capacity, right.

So - and, in fact, during Q1, Q2 last year, we actually are, although our customers are cutting back their forecasts, we didn't really slow down in our inventory preparedness, because it was very obvious to us that it is going to run into bad capacity shortage.

And it was also during that time that we started to engage our key foundry supplier for long-term foundry arrangement. And that involves both new process developments, and also porting of certain of our products from fab A to fab B to increase our visibility, when the capacity is tied in individual fabs.

And certainly also we enter into contractual arrangement to secure our capacity as well. So, I think we are - thankfully, we make those moves, and now we can go around telling our, even end-customers that we are pretty well prepared.

Although we are still suffering from shortage, but I think our customers are very pleased to hear that we can actually enlarge our capacity quarter by quarter in a rather meaningful way all the way to next year. So, I think that is very important at this stage for us.

And having said that though, our 8-inch capacity is very tight, and it is going to remain very tight. And I don't have the number exactly as far as the display driver IC content consumption per vehicle, how that trend is going to unfold. But I can share with you - now is common industry understanding that 8-inch is obviously tight.

So, although we can secure more, and also automotive unlike large panel or smartphone or tablet, which are more feasible in terms of introducing new capacities, when it is needed. For automotive it is notoriously hard as we all understand.

So rather than fighting to get the traditional discrete driver IC, moving into 12-inch, and having to deal with the barrier of qualification, and so on, right, it's almost not worth it. So, we are encouraging our customers to speed up their TDDI adoption. And guess what, TDDI is 12-inch.

And also, the kind of capacity pool we are targeting for TDDI, again we have entered into a sort of a certain contractual arrangement with our foundry partners. The 12-inch TDDI, our primary, for example, 80 to 55, which are basically occupied by smartphone and tablet, but they are all on track to migrate into 40 and 28 as we all know, right.

So - and, certainly, our total demand for automotive for TDDI would not - in terms of total amount is nothing compared to the demand for smartphone or tablet, right. So, I think, we will be pretty safe there in terms of 12-inch TDDI for automotive. So we are pretty well prepared for capacity over there as well. And so, that is the big trend.

I think a lot of customers and customers included agree with us. So, I'm seeing the whole industry be mobilized to speed up the adoption and qualification for TDDI automotive. That is one thing. And second thing is the displays inside your cars are larger in size.

With EV becoming more and more popular, the passenger space will be no more roomy, right? And when it's more roomy, you do need a larger screen for infotainments. And, when it's so - such large screen, typically you need your screen to be of the capability of freeform, meaning is not a stupid solid piece of flat glass, right.

So when it's freeform, then in-cell becomes a necessity in order to achieve a reasonable production year rate for displays.

And therefore, we are actually - again, we are the industry pioneer in terms of working with our panel makers, partners, selected partners, in introducing, hopefully very soon, the world's first large display - very large display TDDI for automotive.

And I think it's going to be a very important trend, because again, whether the - the display needs to be larger, because your passenger room is larger. And when display is larger, then it needs to have freeform. And when freeform is required, then you need to have - you need to have in-cell display. And for in-cell display you need TDDI.

But that requires a very special design as opposed to the ordinary small size display. So, we are leading the industry in terms of developing that kind of TDDI. So, we are - again, we are very happy with the progress.

And again, because of all the reasons I mentioned, I think in all likelihood, this penetration of such touch screen display into automotives will also get speed up. So, overall, automotive, I think it's the most exciting business for us. We have industry-leader. We are leading in technology. And we are seeing the high growth potential.

And we are now very deeply engaged with tier 1 and end-customers. All these are very good signs for us long term. So, thank you. Thank you, Donnie, for the questions..

Yeah, thank you so - yeah, thank you so much, Jordan. Congratulations again..

Thank you..

There are no further questions in queue. I will now hand the conference back over to Mr. Jordan Wu for closing remarks..

As a final note, Eric Li, our Chief IR/PR Officer, who have maintained investor and 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..

Ladies and gentlemen, thank you for participating. This concludes today's conference call. You may now disconnect..