Himax Technologies, Inc. 2026 Q2 Earnings Call

Welcome everyone. My name is Karen Tiao, Head of IR/PR at Himax. Joining me today are Jordan Wu, President and Chief Executive Officer, and Jessica Pan, Chief Financial Officer. After the company's prepared comments, we have allocated time for our questions in the Q&A section. If you have not yet received a copy of today's press release, please email himax_ir@himax.com.tw or himx@mcgroup.us or download a copy from Himax website. Before we begin the formal remarks, I would like to remind everyone that some of the statements in this conference call, including statements regarding expected future financial results and industry growth, are forward-looking statements that involve a number of risks and uncertainties that could cause the actual event or results to differ materially from those described in the conference call.

A list of risk factors can be found in the company's latest SEC filings or in 20-F in the section titled "Risk Factors," as may be amended. Except for the company's full year of 2025 financials, which were provided in the company's 20-F and filed with the SEC on March 27, 2026. 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 and may vary materially from the audited consolidated financial information for the same period. On today's call, I will first review Himax consolidated financial performance for the second quarter 2026, followed by our third quarter outlook. Jordan will give an update on the status of our business, and after which we will take questions.

You can submit your questions online through the webcast or by phone. We will review our financials on an IFRS basis. The rapid rise in AI demand is placing unprecedented strain on memory chip supply and affecting many non-AI applications, creating a more challenging cost and capacity environment across the industry. Against this backdrop, we are pleased to report that our second quarter revenues, gross margin, and profits all exceeded the guidance we provided on May 7, 2026. Second quarter revenues registered $227.4 million, representing a sequential increase of 14.2% and up 5.9% compared to the same period last year. Q2 revenues exceeded our guidance range of a 10%-13% increase, primarily driven by better than expected automotive IC sales. Gross margin was 33.1%, substantially exceeding the guidance of around 32%, up from 30.4% in the previous quarter and 31.2% a year ago.

This is primarily due to a more favorable product mix, which increased the sales for higher margin automotive IC products. Q2 profits for diluted ADS was $0.114, significantly exceeding the guidance range of $0.086-$0.103. Up from $0.046 in the previous quarter and $0.095 a year ago. Revenue from large display driver came in at $19.2 million, representing a decline of 21.0% from the previous quarter, attributable to panel makers pulling forward their inventory purchases for high-end TV ICs in prior quarters. In contrast, sales for both the monitor and notebook IC products increased quarter-over-quarter due to higher legacy product shipment to key customers. Sales of large panel driver IC accounted for 8.4% of total revenues for the quarter, compared to 12.2% last quarter and 11.6% a year ago.

Revenue from small and medium-sized display driver IC segment totaled $162.3 million, reflecting an increase of 19.6% sequentially. Q2 automotive driver sales, including both traditional DDIC and TDDI, increased by double digits quarter-over-quarter, primarily driven by broad-based customer replenishment of TDDI and DDIC following seasonally lower shipments during the Lunar New Year in Q1. New TDDI and DDIC projects for our leading panel customer also contributed to a sequential increase. Customers continue to operate under a make to order model while maintaining lean inventory levels. Our automotive business, comprising DDIC, TDDI, TCON and OLED IC sales, remained our largest revenue contributor in the second quarter, representing well over 50% of total revenues.

Second quarter tablet IC sales, covering both LCD and OLED products, also increased sequentially, attributable to customers' early pull-in demand against the backdrop of the rising memory price sentiment in the market, together with the continued shipment for a customer's premium OLED model. In contrast, smartphone IC sales decreased sequentially following the initial ramp-up of an OLED IC for a leading smartphone brand's mainstream model in Q1. The small and medium-sized driver IC segment accounted for 71.4% of total sales for the quarter, compared to 68.2% in the previous quarter and 67.3% a year ago. Q2 non-driver sales reached $45.9 million, a 17.7% increase from the previous quarter, attributable to robust automotive TCON shipment supported by replenishment across the board customer base. TCON business accounted for over 10% of the total sales, with more than half contributed by automotive TCON.

As the market leader in automotive TCON, particularly in solution featuring local dimming functionality, we expect strong growth momentum to continue into next year. Non-driver products accounted for 20.2% of total revenues as compared to 19.6% in the previous quarter and 21.1% a year ago. Second quarter operating expenses were $15.7 million, an increase of 0.8% from previous quarter and 3.6% compared to the same period last year. The year-over-year increase was mainly attributable to higher manpower expenses. We remain disciplined in managing costs while continuing to invest strategically in select non-driver IC business with compelling long-term growth potential. Second quarter operating income was $24.6 million, representing an operating margin of 10.8% compared to 5.1% in the previous quarter and 8.4% for the same period last year.

Both the quarter-over-quarter and year-over-year changes were primarily driven by higher revenues and gross margin. Second quarter after tax profit was $19.9 million or $0.114 per diluted ADS, compared to $8.0 million or $0.046 per diluted ADS last quarter and up from $15.5 million or $0.095 in the same period last year. Turning to the balance sheet. We had $298.7 million of cash equivalents and other financial assets as of June 13th, 2026. This compared to $332.8 million at the same time last year and $287.6 million a quarter ago.

The sequential increase was mainly driven by operating cash flow of then $17.5 million in the second quarter. Before moving on, I would like to highlight one point regarding this quarter's cash flow. As is our usual practice, income tax payments are made in the second quarter. Under a new Taiwan government policy, we are entitled to defer approximately $11.0 million of this payment for one year without interest. Excluding this deferral, second quarter operating cash flow would have been approximately $6.5 million. Looking ahead to Q3, we anticipate a decline in cash equivalent and other financial assets, primarily due to the payment of the $44 million for the annual dividend to shareholders made on July 10th.

In addition, subject to the final board decision, we will distribute around $11.7 million, the immediately vested portion of this year's employee bonus award at the end of the Q3. On our quarter end inventory as of June 13th, 2026 were $151.5 million, about the same as the $151.7 million last quarter, but higher than the $134.6 million in the same period last year. After maintaining lean inventory levels for several years, we proactively adjusted our inventory strategy about a year ago, selectively building inventory in anticipation of the tightening supply across the industry. Accounts receivable at the end of the June was $220.3 million, $219.0 million a year ago.

DSO was 93 days at the quarter end as compared to 86 days last quarter and 92 days a year ago. Second quarter capital expenditure, primarily for R&D related equipment for our IC design business, was $4.3 million versus $2.9 million last quarter and $4.6 million a year ago. As of June 13th, 2026, Himax had 174.4 million ADSs outstanding, unchanged from last quarter. On a fully diluted basis, the total number of ADSs outstanding for the second quarter was 174.4 million. During the quarter, on July 1st, we announced the proposed divestiture of investment in one of our equity method investees. Based on the information provided by the said investee company, we expect to recognize a pre-tax gain of approximately $23 million-$24 million upon closing. The transaction is expected to close in the fourth quarter of this year, subject to customary closing conditions and regulatory approval.

We will provide more updates as appropriate as the transaction progresses. Now turning to our third quarter 2026 guidance. We expect Q3 revenue to increase 7%-11% sequentially. Gross margin is expected to be around 34%, depending on the product mix. Q3 profit attributable to shareholder is estimated to be in the range of $0.08 to $0.10 per fully diluted ADS. As we have done historically, we will grant employees annual bonus, including RSUs and cash awards, on or around September 13th this year. The third quarter guidance for profit per diluted ADS has taken into account the expected 2026 annual bonus, which, subject to board approval, is now estimated to be around $13 million, out of which $11.7 million will be vested and expensed immediately on a grant date.

As a reminder, the total annual bonus amount and immediately vested portion are our current best estimate only, and the actual amount could vary materially depend on, among other things, our cumulative profit expectation and the final board decision for the total bonus amount and the vesting scheme. It is also worth noting that the $13 million expected annual bonus does not yet include the above-mentioned gain on investment from divestiture of an equity method investee, as the transaction is pending regulatory approval and has not yet closed. As is the case for previous years, we expect the annual bonus grant in 2026 to lead to higher third quarter operating expenses compared to the other quarters of the year. In comparison, the annual bonus for 2025 and 2024 were $7.7 million and $12.5 million respectively, of which $7.5 million and $11.2 million vested immediately.